AAC Clyde Space
Annual Report 2019

Plain-text annual report

Your Directors submit their report for the year ended 31 March 2019. The names and details of the Company’s Directors in office during the financial period and until the date of this report are set out in the following section. All of the Directors were in office for the entire period unless otherwise stated. Mr McGauchie was appointed a Director on 19 May 2010 and subsequently Chairman on 24 August 2010. Mr McGauchie is the Chairman of the Nomination Committee and a member of the Staff and Remuneration Committee. Mr McGauchie is currently Chairman of Nufarm Limited and Director of GrainCorp Limited. His previous roles with public companies include Chairman of Telstra Corporation Limited, Deputy Chairman of Ridley Corporation Limited, Director of National Foods Limited, Chairman of Woolstock, Chairman of the Victorian Rural Finance Corporation (statutory corporation), Director of James Hardie Industries plc, and also President of the National Farmers Federation. During 2011 he retired as a member of the Reserve Bank Board. In 2001 Mr McGauchie was named the Rabobank Agribusiness Leader of the Year, was later awarded the Centenary Medal for services to Australian society through agriculture and business and in 2004 was appointed an Officer of the Order of Australia. During the past three years, Mr McGauchie has served as a Director of the following listed companies: > > > James Hardie Industries plc – resigned August 2016 Nufarm Limited* – appointed December 2003 GrainCorp Limited* – appointed December 2009 *Denotes current Directorship Mr Killen was appointed Managing Director and Chief Executive Officer in February 2018. Prior to this, he held the position of Chief Commercial Officer in a consulting capacity assisting AACo’s operations and finance functions. Mr Killen is a highly experienced senior executive with over 25 years’ experience in global financial markets and has worked in London, New York and Sydney. Before joining AACo, Mr Killen spent 15 years at Westpac Institutional Bank. He held several senior executive roles which included managing Westpac Banking Corporation’s North American business throughout the global financial crisis, and finally as the Managing Director of Fixed Income, Currency and Commodities. Mr Killen has also served as a board member of the Association for Financial Markets Global Foreign Exchange Division, sat on the Reserve Bank of Australia’s (RBA) Australian Foreign Exchange Committee, and has represented Australia internationally as the RBA appointed member of the BIS Working Group developing the Global Code of Conduct for foreign exchange markets. Mr Killen is an alumni of the Kings School, Parramatta and Harvard Business School and a Member of the Australian Institute of Company Directors. Mr Killen has a lifelong association with agriculture having being raised on pastoral properties in northern NSW and south-west Queensland, and has retained strong personal involvement in the industry through private investments in farming. 2 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Mr Black was appointed a Director on 5 October 2011. Mr Black is Chairman of the Audit and Risk Management Committee and a member of the Nomination Committee. Mr Black has extensive experience in agribusiness. He is a current non-executive director of NetComm Wireless Limited and TPI Enterprises Ltd, a former director of Coffey International Limited and Country Education Foundation of Australia Limited, and a past President of the Institute of Chartered Accountants of Australia. He was the inaugural Chair and is a past Board Member of the Australian Accounting Professional and Ethical Standards Board. Mr Black is Chairman of the Chartered Accountants Benevolent Fund Limited. In 2012 he was appointed a Member of the Order of Australia for services to the profession of accounting, to ethical standards, as a contributor to professional organisations and to the community. During the past three years Mr Black has served as a Director of the following listed companies: > > NetComm Wireless Limited* – appointed March 2013 TPI Enterprises Ltd* – appointed June 2016 *Denotes current Directorship Mr Crombie was appointed a Director on 5 October 2011. Mr Crombie is a member of the Staff and Remuneration Committee and is a member of the Audit and Risk Management Committee and the Nomination Committee. Mr Crombie is a Director of Alliance Aviation Services Limited and Barrack Street Investments Limited. He was a founding Partner and former Non-executive Director of the Palladium Group (formerly GRM International). He is former Commissioner of the Australian Centre for International Agricultural Research (ACIAR) and a Director of Foodbank (QLD). Mr Crombie is a former President of the National Farmers Federation, former Chairman of MLA and a former Director of Grainco Australia, the Meat Industry Council and Export Finance Insurance Corporation. Mr Crombie operates family properties, breeding cattle and farming in southern Queensland. During the past three years Mr Crombie has served as a Director of the following listed companies: > > Alliance Aviation Services Limited* – appointed October 2011 Barrack Street Investments Limited* – appointed June 2014 *Denotes current Directorship Mr Keene was appointed a Director on 5 October 2011. Mr Keene is a member of the Audit and Risk Management Committee, the Nomination Committee and Chair of the Staff and Remuneration Committee. Mr Keene has had an extensive career in agriculture and is the former Managing Director of GrainCorp Limited, and is currently a Director of the leading Australian wood fibre exporter, Midway Limited. He is also the former Chairman of Grain Trade Australia Limited and a former Director of Cotton Seed Distributors Limited. In 2007, Mr Keene was named the NAB Agribusiness Leader of the Year. During the past three years Mr Keene has served as a Director of the following listed companies: > Midway Limited* – appointed August 2008 *Denotes current Directorship 3 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Dr Shehan Dissanayake was appointed a Director on 27 April 2012 and appointed an Executive Director on 11 April 2017. Dr Dissanayake is a senior Managing Director and member of the Board of Directors of the Tavistock Group, a privately held investment company. He has responsibility for portfolio strategy across 200 companies in 15 countries, and is CEO of Tavistock Life Sciences, an operating unit of the Tavistock Group. Before joining Tavistock Group in 2002, Dr Dissanayake was a Managing Partner of Arthur Andersen with responsibility for strategy and business planning for the global legal, tax and HR Consulting Divisions of the firm, encompassing 1,600 partners and 15,000 professionals. Earlier in his career, Dr Dissanayake was involved in the medical research and technology industries. He holds a Ph.D. in Pharmacological and Physiological Sciences from the University of Chicago. During the past three years Dr Dissanayake has not served as a Director of any other listed company. Mr Abraham was appointed a Director on 7 September 2014. Mr Abraham is a member of the Nomination Committee. Mr Abraham enjoyed 21 years in investment banking with the Macquarie Group gaining extensive experience in the finance sector. In 2003 Mr Abraham established Macquarie’s agricultural funds management business and led the business until he departed in 2011, at which time it had grown into a significant operation both in Australia and Brazil. Mr Abraham holds a range of continuing non-executive directorships with companies within the Macquarie Group, acts as a consultant to the Clean Energy Finance Corporation and works with ROC Partners, a private equity fund manager where he focused on food and agricultural investments. During the past three years Mr Abraham has not served as a Director of any other listed company. Mr Reisman was appointed a Director on 10 May 2016. Mr Reisman is a member of the Audit and Risk Management Committee, the Nomination Committee and a Managing Director and member of the Board of Directors of the Tavistock Group. Since joining the firm in 2004, he has held multiple roles including chairing Tavistock Group’s Investment Committee and having the General Counsel and Chief Financial Officer report into him. Mr Reisman spends most of his time working with portfolio companies within the Tavistock Group. He has more than 30 years of business experience with emphasis on operations, legal, tax and finance. Previously, Mr Reisman worked at various multinational companies, including Arthur Andersen and Amoco Corporation. He received his juris doctor in 1986 from the University of Pennsylvania Law School and his bachelors of science in Accountancy in 1983 from the University of Illinois. During the past three years Mr Reisman has served as a Director of the following listed companies: > Mirati Therapeutics – resigned December 2018 4 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Ms Rudd was appointed a director on 15 November 2017. Ms Rudd is founder of Jessica’s Suitcase, an e-commerce retail platform which offers high quality Australian products direct to Chinese consumers through online cross-border channels. In 2018, Ms Rudd announced the sale of Jessica’s Suitcase to eCargo Holdings (ASX:ECG), on whose board she serves as non-executive director. Beginning her career as a media and intellectual property lawyer, Ms Rudd later worked in London as a crisis management consultant for a global communications firm before moving to Beijing, where she lived and worked for five years. Ms Rudd serves as Australia and New Zealand Lifestyle Ambassador for the Alibaba Group. Ms Rudd holds a Bachelor of Laws (Hons)/Bachelor of Commerce from Griffith University and was admitted to the Supreme Court of Queensland as a solicitor in 2007. She was awarded the Griffith University Arts, Education and Law Alumnus of the Year in 2013. During the past three years Ms Rudd has served as a Director of the following listed companies: > eCargo Holdings* – appointed January 2018 *Denotes current Directorship Mr Bennett was appointed Company Secretary and General Counsel in November 2006. Before joining the Company, he had held positions including partner and special counsel in leading law firms, where he specialised in company and property law, mergers and acquisitions and other commercial contracts. He has over 25 years’ experience in legal practice, having practised in both Queensland and New South Wales. Mr Bennett is a Chartered Secretary and a member of the Australian Institute of Company Directors. 5 Australian Agricultural Company Limited | ANNUAL REPORT 2019 As at the date of this report, the interests of the Directors in the shares, options and performance rights of the Company were: CURRENT DIRECTORS D. McGauchie H. Killen S. Black D. Crombie T. Keene Dr. S Dissanayake A. Abraham N. Reisman J. Rudd EARNINGS PER SHARE Basic loss per share Diluted loss per share ORDINARY SHARES 1,120,774 113,800 40,000 60,000 75,000 2,025,000 30,000 45,000 Nil OPTIONS OVER ORDINARY SHARES Nil Nil Nil Nil Nil Nil Nil Nil Nil PERFORMANCE RIGHTS Nil 2,042,476 Nil Nil Nil Nil Nil Nil Nil 31 MAR 2019 CENTS (24.9) (24.9) 31 MAR 2018 CENTS (17.4) (17.4) No final or interim dividends were declared or paid during the current and prior financial periods. 6 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The Australian Agricultural Company (AACo) is an Australian beef company with a heritage dating back to 1824. AACo is Australia’s largest integrated cattle and beef producer, and is the oldest continuously operating company in Australia. AACo owns a strategic balance of properties, feedlots, farms and a processing facility comprising around 6.4 million hectares of land, which equates to roughly 1% of Australia’s land mass. AACo specialises in grassfed beef and grainfed beef production. AACo employed 424 employees calculated on a full time equivalent basis as at 31 March 2019 (31 March 2018: 601). AACo is a fully integrated branded beef business with three principal activities: > > > Sales and marketing of high quality branded beef into global markets; Ownership, operation and development of pastoral properties; and Production of beef including breeding, backgrounding, feedlotting and processing of cattle. AACo operates an integrated cattle production system across 19 owned cattle stations, 2 leased stations, 5 agisted properties, 2 owned feedlots, and 2 owned farms located throughout Queensland and the Northern Territory. AACo distributes branded beef to a range of customers across the world, tailoring its route-to-market model by country to capitalise on regional opportunities. Despite having one of the largest cattle herds in the world, AACo produces less than 1% of beef consumed globally. The Company is therefore large enough to obtain production efficiencies but small enough to target key markets and customers. Meat sales Cattle sales Administration and selling costs Statutory EDITDA loss(1) Statutory EBIT loss Net loss after tax Net cash inflow/(outflow) from operating activities Underlying Operating Profit/(Loss)(2) 31 MAR 2019 $000 246,244 117,837 (41,200) (182,709) (194,083) (148,396) 12,990 23,720 31 MAR 2018 $000 Restated* 332,658 47,021 (41,413) (35,325) (127,967) (102,559) (39,864) (13,481) MOVEMENTS $000 (86,414) 70,816 213 (147,384) (66,116) (45,837) 52,854 37,201 Operating Profit/(Loss)(1) (1) The measure of Operating Profit is a key indicator which is used to monitor and manage the Company. It eliminates the potential distraction (22,922) (13,481) (9,441) caused by unrealised cattle valuation adjustments being recorded in the financial results, and is a better reflection of actual financial performance under the control of management. Hence the Company believes that external stakeholders benefit from this metric being reported. Operating Profit is unaudited, non-IFRS financial information. Whilst Statutory EBITDA was a loss of $182.7 million in FY19 (loss of $35.3 in FY18), Operating Loss was $22.9 million ($13.5 million in FY18). Operating Profit/Loss does not include unrealised livestock gains or losses, while Statutory EBITDA does include these. (2) Underlying Operating Profit/(Loss) represents the Operating Profit achieved by the Company, excluding $45.6 million in livestock write-offs and $1.0 million in emergency operating expenditure due to the Gulf flooding event in February 2019. Refer to note A1 for further details. * Previously disclosed amounts for administration and selling costs have been restated, to account for meat sales freight previously included in cost of meat sold. Additionally, to provide greater transparency on operating performance, Operating Profit replaces the previously reported Operating EBITDA metric. Operating Profit values inventory movement at a cost of production rather than at various standard costs. Refer to note G3 (c) and note A5 for further details. 7 Australian Agricultural Company Limited | ANNUAL REPORT 2019 In FY19, Luxury/Prestige revenues and volumes were up on FY19, consistent with the Company’s branded beef strategy. Luxury/prestige beef revenue – $ mil Luxury/prestige beef kgs sold – mil kg CW(1) Luxury/prestige beef sold – $/kg CW Premium beef revenue – $ mil Premium beef kgs sold – mil kg CW Premium beef sold – $/kg CW Livingstone beef revenue - $ mil Livingstone beef kgs sold – mil kg CW Livingstone beef sold - $/kg CW Cattle sales – mil kg LW(1) Cattle revenue – $mil (1) CW – carton weight containing saleable boxed meat, LW – Live animal weight. 31 MAR 2019 187.3 14.0 13.35 20.3 2.3 8.70 28.9 5.2 5.60 46.2 117.8 31 MAR 2018 176.9 12.2 14.45 63.7 6.5 9.75 92.1 21.0 4.39 13.2 47.0 Kilograms produced is a measure of the number of kilograms of live weight of cattle grown throughout the breeding, backgrounding and feedlot operations of the Company during the year. Historically, kilograms produced included offsets for attrition kilograms occurring during the period. The prior year has been restated to exclude the offsetting impact of attrition kilograms, which has the effect of increasing kilograms produced. Cost of production is a measure of the operating costs incurred to produce a kilogram of live weight of cattle throughout the breeding, backgrounding and feedlot operations of the Company during the year. Restatements to the prior year are a result of removing the offsetting impact of attrition from the number of kilograms produced. Reducing kilograms produced by attrition kilograms reduces the transparency of production costs. The Company therefore believes that measuring production costs against kilograms gained, without attrition offsets, is a better measure of production efficiency. The impact of attrition is disclosed in note A3. The cost of production increased by 46% in FY19 which is a reflection of drought conditions increasing feeding and transport costs as we moved a significant number of cattle to leverage our diverse property portfolio. Kilograms produced – mil Kg LW Cost of production – $/kg LW 31 MAR 2019 68.9 2.88 31 MAR 2018 Restated 77.0 1.97 8 Australian Agricultural Company Limited | ANNUAL REPORT 2019 During FY19, the Company has continued to make progress implementing its premium branded beef strategy, which has been unaffected by extreme seasonal impacts. The Westholme brand was launched in UAE in October 2018 and the Company is well progressed on plans for future launches in larger scale markets. Further, the Company has driven growth across key markets in Asia. During the year, the appointment of several key executive roles has completed our world class executive team which is driving cultural and business transformation across the organisation. Key decisions have been made by management which have simplified the business and created a more efficient AACo. During FY19: > > Operations at the Livingstone Beef processing facility were suspended. Management continues to review strategic options around the facility The 1824 program was discontinued FY19 saw unparalleled challenging seasonal conditions, with extreme drought stretching across Queensland and the Northern Territory. Management actively managed the drought, selling non-wagyu livestock to focus resources on investing heavily in feed and transport costs in order to protect the Wagyu herd. During this challenging period, the Company was able to increase Wagyu numbers by 3%. This increase is considered vital to ensuring the future success of the premium branded beef strategy and leaves the Company with a potential strategic supply advantage over many wagyu producers. Further, in February of 2019, the Gulf of Carpentaria region of North Queensland experienced a flood event that for some of the Company’s properties was the worst flood on record. The flood resulted in a tragic loss of livestock life that no amount of preparation could have prevented. Management has estimated that approximately 43,000 head were lost in this event. Livestock Movements Livestock balances have declined from the prior year due to headcount reductions of the non-wagyu animals and reduced market values of both the wagyu and non-wagyu herd. As a result of the Livingstone and 1824 decisions, a lower reliance on non-wagyu herd numbers has led to a decline in the non-wagyu headcount. Further, the drought conditions have resulted in an increase in sales of these non-wagyu animals and the 43,000 cattle lost in the Gulf flood were almost exclusively non-wagyu cattle. Due to Management’s strategic investment in the wagyu herd during these tough conditions, this herd has seen a 3% increase in headcount year on year. Reflecting the tough season, market values of these animals have however declined over the past year, leading to a significant decline in the value of cattle held at year end. The Company’s ability to realise it’s premium branded beef strategy has not been impacted by these movements. Property Although it’s been a historically challenging season, property values have increased year on year. This increase is a reflection of Management’s active investment in improving property infrastructure and carrying capacity, and also due to a market increase seen in comparable property sales. The FY19 results include a Statutory EBITDA loss of $182.7 million, driven by market value movements in the value of the closing herd of $89.0 million and Gulf flood write-offs and emergency expenses of $46.6 million. In summary: > > Underlying Operating Profit for FY19 was $23.7 million after adjusting Operating Loss for the $46.6 million impact of the Gulf flood livestock write-offs and related emergency expenditure Operating Loss of $22.9 million, compared with a loss of $13.5 million in FY18 9 Australian Agricultural Company Limited | ANNUAL REPORT 2019 > > > > > > Statutory EBITDA loss of $182.7 million, compared with a loss of $35.3 million for FY18 Total sales revenue of $364.1 million, compared with $379.7 million in FY18, with lower volumes due to the Livingstone and 1824 decisions. Wagyu meat sales revenue was up 4.5% compared to FY18. Cost of production increased by 46% in FY19, which is a reflection of drought conditions increasing feeding and transport costs for the wagyu herd Net tangible assets per share was $1.42 as at 31 March 2019, compared to $1.62 as at 31 March 2018, driven by reductions in the livestock balance but offset by improvements in the property portfolio The Company maintains a robust balance sheet, despite livestock declines, with comfortable headroom under existing bank covenants Positive net operating cash flows of $13.0 million, compared with negative operating cash flows of $39.9 million in FY18 Gulf Flooding Event In February 2019, a significant flood event swept through the Gulf of Carpentaria Region of North Queensland. At its peak, flood waters extended 400km from the Gulf to Julia Creek, and reached approximately 70km wide in many areas. For much of the region that experienced this event, flood waters reached unprecedented levels. The floods, running nearly half the length of the Flinders river, impacted four of AACo’s stations in the gulf region. Canobie, Wondoola, Carrum and Dalgonally experienced infrastructure and livestock losses. Approximately 82,000 head of cattle were exposed to this event, with total losses estimated at 43,000 head. Additionally, fencing and water infrastructure on all four properties, as well as buildings at Wondoola station, were damaged. Due to the significant nature and materiality of the event, Management have recorded estimates for the losses incurred on these properties. Determining the extent of livestock losses, across these four stations’ 860,000 hectares of land, is inherently challenging. The losses recorded were therefore based on the best available information of the event and Management’s best estimates and judgement. These estimates were performed on a station by station basis, using a combination of observations of surviving animals and damaged infrastructure, as well as applying expected survival rates by paddock against pre-event paddock records. Estimated survival rates were based on Management’s understanding of livestock vulnerabilities in these events, knowledge of the land’s topography, as well an in-depth understanding of how the event unfolded and how individual paddocks were impacted. Livestock losses were estimated to be 43,000 head for a value of $45.6 million and recorded in the Income Statement as fair value losses on cattle due to attrition – gulf flood write-off (see note A3). The Company is committed to the identification, measurement and management of material business risks. The Company’s breeding and sales programs to date have produced a herd with the right genetic and age profile to deal with the current and future geographic, weather and market conditions. Day-to-day production risks are managed by management at stations and overseen by relevant General Managers. Appropriate insurance coverage is maintained in respect of the business, properties and assets. Price risks are managed, where possible, through forward sales of branded beef and over-the-counter foreign exchange derivatives. The Company’s net tangible assets per share was $1.42 as at 31 March 2019, compared to $1.62 as at 31 March 2018. Net tangible assets of the Company includes leasehold land assets. The Board has reiterated its commitment to increasing shareholder value through incremental improvements to Return on Capital Employed (ROCE) over time. The goal is to improve the quantity and quality of the Company’s earnings by increasing the Company’s exposure to premium branded beef prices which are underpinned by rising incomes in both the developed and developing world. The medium term strategy will focus on optimising our supply chains, implementing a differentiated branding strategy and investing in innovation and technology. 10 Australian Agricultural Company Limited | ANNUAL REPORT 2019 In July 2018, the Company suspended processing operations at Livingstone Beef. Regular upkeep and maintenance of the facility and its supporting assets continues, whilst the Board and management continue to review various strategic options for Livingstone Beef. There have been no other significant changes in the state of affairs of the Company during the financial year. There have been no significant events after the balance date which require disclosure in the financial report. > > > > > > > > Some regulated areas of operation are: The operations of Goonoo and Aronui Feedlots are regulated by licences issued under the Environmental Protection Act 1994 (Qld) and administered by the Queensland Department of Agriculture and Fisheries (DAFF). Each feedlot is required to report to the National Pollution Inventory each year with respect to water, air and soil quality. DAFF conducts audits of compliance with licence requirements at regular intervals. The Company recorded no breaches of licence requirements in the year to 31 March 2019. The pumping of water from the Comet River for irrigation and feedlot use at Goonoo Station is subject to licensing under the Sustainable Planning Act 1997 (Qld) and the Water Act 2000 (Qld). Regulations specify minimum water flows and heights in the river to allow sufficient environmental flows. Goonoo Station and Wylarah Station have licences to harvest water for irrigation purposes. The pumping of underground water for the prescribed purpose of ‘Livestock Intensive’ requires licensing, and regular reporting and monitoring. The Company has several licences allowing this pumping subject to these regulations and conditions being met. Stock watering facilities which utilise bores, require licensing in Queensland and registration in the Northern Territory. Stock water facilities shared with Queensland Stock Routes are administered by local governments, guided by legislation and framework developed by the Queensland Government. Shared water facilities need to comply with registered Stock Route water agreement requirements. A Permit to Occupy is also required if this facility is unfenced within a station grazing area. Vegetation Clearing Permits are sought under the Vegetation Management Act 1999 (Qld) for any clearing required for ongoing operations including but not limited to the development of areas for land use change and the installation of infrastructure such as fence lines and water development. The Company continues to be involved in consultation processes; for example, in the areas of Water Resource Planning, Wild Rivers legislation and the conversion of land titles in relevant areas. The Company must abide by environmental and other obligations contained in Queensland’s State Rural Leasehold Land Strategy in respect of the Company’s pastoral leasehold interests in Queensland. The State Rural Leasehold Land Strategy is a framework of legislation, policies and guidelines supporting the environmentally sustainable, productive use of rural leasehold land for agribusiness. Northern Australian Beef Limited (NABL), a wholly owned subsidiary of the Company, owns the Livingstone Beef Processing Facility and land at Livingstone Farm, Noonamah, Stuart Highway, Northern Territory. NABL holds, and must comply with an Environmental Protection Licence (EPL) under the Waste Management and Pollution Control Act (NT) for the storage, treatment, recycling and disposal of waste in connection with the facility. The EPL contains stringent and detailed environmental requirements overseen by the Northern Territory Environment Protection Authority (NT EPA). NABL and the NT EPA continue to work together constructively to monitor compliance with the EPL. 11 Australian Agricultural Company Limited | ANNUAL REPORT 2019 As at the date of this report, there were 5,882,736 unissued ordinary shares under performance rights. An Executive Option Plan previously existed, for which no further grants will be made. The last options under this plan expired on 1 January 2019. Option holders did not, and performance rights do not, have any right, by virtue of the option or performance right, to participate in any share issue of the Company or any related body corporate or in the interest issue of any other registered scheme. During the financial period and since the end of the financial period, there were no options exercised to acquire shares in the Company. The Company’s Performance Rights Plan has been in place since 2011 and has taken the place of the option plan for future incentive awards comprising performance rights. There will be no further grants of options under the option plan in the future. The performance rights will remain until such time as they are either exercised or the rights lapse. There were no performance rights exercised under the AACo Performance Rights Plan during the year to 31 March 2019. Under the Company’s Constitution, each of the Company’s Directors, the Company Secretary and every other person who is an officer is indemnified for any liability to the full extent permitted by law. The Company’s Constitution also provides for the Company to indemnify each of the Company’s Directors, the Company Secretary and every other person who is an officer to the maximum extent permitted by law, for legal costs and expenses incurred in defending civil or criminal proceedings. Each Director has entered into a Deed of Access, Insurance and Indemnity, which provides for indemnity against liability as a Director, except to the extent of indemnity under an insurance policy or where prohibited by statute. The Deed also entitles the Director to access Company documents and records, subject to confidentiality undertakings. The Company maintains Director’s and Officer’s insurance policies, to insure the Company’s Directors, Company Secretary and those Directors and others of its subsidiaries. The Company has paid or has agreed to pay the premium for these policies. The terms of the insurance contracts prohibit the Company from disclosing the level of premium paid and the nature of the liabilities insured. 12 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The Company’s Corporate Governance Statement sets out the corporate governance framework adopted by the Board of Australian Agricultural Company Limited. This statement is publically available on the Company’s external website: www.aaco.com.au/investors-media/corporate- governance. The aim of the Board Skills Matrix is to set out the mix of skills that the Board currently has and is looking to achieve. It is a summary of the Company’s internal assessments of the Board. Information is obtained from a Director review of skills and competencies completed for each Director. This information is summarised into the Board Skills Matrix. The board recognises that each Director will not necessarily possess experience in all areas relevant to the Company’s operations and therefore seeks to ensure that its membership includes an appropriate mix of directors with skills, knowledge and experience in agriculture, other relevant industry sectors, general management and finance. A summary of the Board’s skills, knowledge and experience is set out in the table below: SKILL/KNOWLEDGE/EXPERIENCE Leadership and Governance Organisational Governance Strategy Government Relations Previous ASX NED Experience Previous ASX CEO Experience Operations Environment, Health and Safety Work Health and Safety Committee Experience Agribusiness Farmer or Producer Innovation Information Technology Sectoral Experience Livestock Beef Manufacturing Sales Branding and Marketing Finance, Capital Management and Risk Formal Accounting and Finance Qualifications (CPA or CA) Capital Restructuring Audit Committee Experience Legal People People and Culture Remuneration Committee Experience Geographic Experience International Markets Asian Markets USA Markets OUT OF 9 DIRECTORS 9 9 8 5 1 7 6 7 3 7 5 6 3 4 5 3 6 8 4 9 5 8 7 6 13 Australian Agricultural Company Limited | ANNUAL REPORT 2019 This remuneration report for the year ended 31 March 2019 outlines the remuneration arrangements of the Company in accordance with the requirements of the Corporations Act 2001 (the Act) and its regulations. This information has been audited as required by section 308(3C) of the Act. The remuneration report details the remuneration arrangements for key management personnel (KMP) of the Company, who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any Director (whether executive or otherwise) of the Company. For the purposes of this report, the term ‘executive’ encompasses the Managing Director/Chief Executive Officer (MD/CEO), senior executives and Company Secretary of the Company and the Group. The remuneration report is presented under the following sections: 1. Individual Key Management Personnel (KMP) disclosures 2. Remuneration at a glance 3. Board oversight of remuneration 4. Non-executive Director (NED) remuneration arrangements 5. 6. 7. 8. 9. Executive remuneration arrangements Executive contractual arrangements Link between remuneration and performance Equity instruments disclosures Loans to KMP and their related parties 10. Other transactions and balances with KMP and their related parties 14 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Details of KMP of the Company are set out in the following sections. (i) Directors D. McGauchie H. Killen Dr S. Dissanayake N. Reisman A. Abraham S. Black D. Crombie T. Keene J. Rudd (1) Dr S. Dissanayake was appointed an Executive Director on 11 April 2017. (2) The following Directors of the Company during the period were determined to be non-independent: Chairman, Non-executive Director Managing Director and Chief Executive Officer Executive Director(1) Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Independent Non-Independent(2) Non-Independent(2) Non-Independent(2) Independent Independent Independent Independent Independent Appointed 19 May 2010 Appointed 1 February 2018 Appointed 27 April 2012 Appointed 10 May 2016 Appointed 7 September 2014 Appointed 5 October 2011 Appointed 5 October 2011 Appointed 5 October 2011 Appointed 15 November 2017 H. Killen Dr S. Dissanayake Mr H. Killen is not considered independent by virtue of his executive office as Managing Director and Chief Executive Officer. Dr S. Dissanayake is not considered independent as he is an officer of Tavistock Group which controls the AA Trust which is a major 44.85% shareholder of the Company and was appointed an Executive Director on 11 April 2017. N. Reisman Mr N. Reisman is not considered independent as he is an officer of Tavistock Group which controls the AA Trust which is a major 44.85% shareholder of the Company and was appointed 10 May 2016 (ii) Directors who resigned or retired during the period Nil (iii) Executives B. Bennett Company Secretary/General Counsel Appointed 20 November 2006 S. Grant A. Speer N. Simonsz A. O’Brien Head of People & Culture Chief Operating Officer Chief Financial Officer Chief Commercial Officer Appointed 20 September 2017 Appointed 30 July 2018 Appointed 1 August 2018 Appointed 17 December 2018 (iv) Executives who resigned, retired or otherwise ceased employment during the period T. McCormack D. FitzGibbon Chief Operating Officer Head of Strategy Ceased employment 2 April 2018 Ceased employment 14 December 2018 There were no other changes to KMP after the reporting date and before the date the financial report was authorised for issue. 15 Australian Agricultural Company Limited | ANNUAL REPORT 2019 CEO and Key Management Personnel (KMP) Consistent with contemporary Corporate Governance standards, the Company’s remuneration strategy and policies aim to set employee and executive remuneration that is fair, competitive and appropriate for the markets in which it operates whilst being mindful of internal relativities. The Company aims to ensure that the mix and balance of remuneration is appropriate to reward fairly, attract, motivate and retain senior executives and other key employees. Appropriate remuneration policy settings will be achieved by consistently applying a clear remuneration strategy directed at supporting the Board approved business strategy with appropriate and flexible processes, policies and procedures established by the Board from time to time. Specific objectives of the Company’s remuneration policies include the following: > > > > > > > > > Provide competitive total rewards to attract and retain high calibre employees and executives Provide fair and competitive fixed remuneration for all positions, under transparent policies and review procedures Have a meaningful portion of remuneration “at risk”, dependent upon meeting pre-determined performance benchmarks Link MD/CEO and senior executive rewards to achieving short, medium and long term key performance criteria Establish appropriate and demanding performance hurdles for any executive incentive remuneration Payment of cash bonus short term incentives (STI), which in the case of the MD/CEO are determined at the discretion of the Board after assessing the performance of the Company and the MD/CEO against agreed performance hurdles Offer participation in the long term incentives (LTI) plan to the MD/CEO and KMP Provide Deferred Equity Awards (DEA), in the form of grants of performance rights to the MD/CEO and other senior executives with deferred vesting of two years (50%) and three years (50%) The actual DEA awarded to an executive is generally set at 50% of the amount of any STI actually paid to the executive 16 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The following table illustrates the structure of the Company’s executive remuneration arrangements for the year ended 31 March 2019: REMUNERATION COMPONENT Total fixed remuneration (TFR) MECHANISM Comprises base salary, superannuation contributions and any ‘packaged’ benefits including FBT grossed-up on a Total Employment Cost (TEC) basis. PURPOSE To reward executives with competitive remuneration with reference to role, market and experience and internal relativities. Short term incentive (STI) component Paid in cash Other payments Paid in cash Deferred Equity Award (DEA) component Deferred Equity (Performance rights) Long Term Incentive (LTI) component Deferred Equity (Performance rights) LINK TO PERFORMANCE No link to Company performance although it is reviewed annually and consideration is given to the performance of the Company and business unit in the remuneration review. STI for executives is generally calculated based on 80% Company financial performance metrics and 20% individual performance metrics. No link to Company performance although consideration is given to the performance of the Company and business unit prior to awarding this. Generally 50% of the actual amount of the STI cash bonus earned and subject to two-year (50%) and three-year (50%) service vesting conditions. Rewards executives for their contribution to achievement of Company and business unit outcomes, as well as individual key performance indicators (KPIs). To incentivise the sign-on of new KMP or reward for successful project completion. Rewards executives for their contribution to achievement of Company and business unit outcomes, as well as individual key performance indicators (KPIs). To better align remuneration of the Company’s senior executives with the long-term strategic goals of the Company, as well as for retention. Linked to achievement of the Company’s targeted market capitalisation as well as meeting individual service conditions. The current executive remuneration strategy can be represented broadly, as follows: TOTAL FIXED REMUNERATION % 51 44-62 MD/CEO Key Management (1) 50% of cash bonus actually paid Board remuneration SHORT TERM INCENTIVES % 25 22-29 DEA INCENTIVE(1) % 13 12-15 LONG TERM INCENTIVE % 11 0-18 TOTAL TARGETED REWARD % 100 100 The Board seeks to set aggregate remuneration at a level for the non-executive directors that provides the Company with the ability to attract and retain directors of the highest calibre, whilst incurring a cost that is acceptable to the shareholders. Board remuneration is tested on a regular basis by independent benchmark assessments. During the year ended 31 March 2019, Crichton & Associates, Rimfire Resources, Willis Towers Watson and Allens Linklaters have provided assistance to the Company covering a range of remuneration matters, including the following: > > > > > Remuneration Strategy Review Chief Executive Officer, Chairman, and non-Executive Director Remuneration Senior Executive remuneration Deferred Equity Award (DEA) benefit recommendations for the CEO and senior executives Long Term Incentive (LTI) Plan administration The independent assistance confirmed that Board and Executive remuneration at the Company were within market expectations and were reasonable at that time. No recommendations have been made by these external parties as a result of the remuneration assistance. In the year ended 31 March 2019, services provided by third parties totalled $186,992 (excluding GST and out-of-pocket expenses). 17 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Staff and Remuneration Committee The Staff and Remuneration Committee currently comprises three independent non-executive Directors (Mr D. Crombie, Mr D. McGauchie and Mr T. Keene (Committee Chairman)). The Staff and Remuneration Committee is responsible for making recommendations to the Board on the remuneration arrangements of non- executive directors (NEDs) and executives. The Staff and Remuneration Committee assesses the appropriateness of the nature and amount of remuneration of NEDs and executives on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of high performing Directors and an executive team. In determining the level and composition of executive remuneration, the Staff and Remuneration Committee may also seek external advice as set out above. Mr H. Killen (MD/CEO) attends certain Staff and Remuneration Committee meetings by invitation but is not present during any discussions relating to his own remuneration arrangements. Remuneration approval process The Board is responsible for and approves the remuneration arrangements for the MD/CEO and executives, and all awards made under any deferred equity award (DEA) and long term incentive (LTI) plan. The Staff and Remuneration Committee provide recommendations for these remuneration arrangements and obtain independent remuneration advice as necessary. In the case of the MD/CEO, these arrangements are then subject to shareholder approval. The Board also sets the aggregate remuneration of NEDs, which is then subject to shareholder approval. The Board oversees the MD/CEO’s recommendations for remuneration of senior executives with the assistance of the Staff and Remuneration Committee and independent remuneration advice, where necessary. The Board approves, having regard to the recommendations made by the Staff and Remuneration Committee, the level of any Company short- term incentive (STI) payments to employees, including KMP’s and therefore the amount of any DEA entitlement. The level of STI payments to the MD/CEO are determined separately by the Board. Any DEA entitlement resulting in an issue of securities for the MD/CEO must be approved by shareholders. Voting and comments made at the company’s 31 July 2018 Annual General Meeting (‘AGM’) The Company received 84% of ‘for’ votes in relation to its remuneration report for the year-ended 31 March 2018. 18 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Remuneration policy The Board seeks to set aggregate remuneration at a level that provides the Company with the ability to attract and retain Directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders. The amount of aggregate remuneration sought to be approved by shareholders and the fee structure is reviewed annually against fees paid to NEDs of comparable companies. The Board considers advice from external consultants when undertaking the annual review process. The Company’s Constitution and the ASX Listing Rules specify that the aggregate remuneration of NEDs shall be determined, from time to time, by general meeting. An amount not exceeding the amount determined is then divided between the Directors as agreed. The latest determination was at the AGM held on 23 August 2017, when shareholders approved an aggregate remuneration of $1,250,000 per year. Structure The remuneration of NEDs consists of Directors’ fees and committee fees. NED’s do not receive retirement benefits other than superannuation, nor do they participate in any incentive programs. Each NED receives a base fee for being a Director of the Company. An additional fee is also paid for each Board committee on which a Director sits, with a higher fee paid if the Director is a Chairman of a Board committee. The payment of additional fees for serving on a committee recognises the additional time commitment required by NEDs who serve on one or more committees. The Board may also establish specialist subcommittees from time to time, comprised of directors, to oversee and report back to the Board on any identified large or otherwise important projects. Generally, directors are not separately remunerated for membership of such subcommittees. NED’s are encouraged to hold shares in the Company. Any shares purchased by the Directors are purchased on market, which is in line with the Company’s overall remuneration philosophy and aligns NEDs with shareholder interests. The remuneration of NEDs for the years ended 31 March 2019 and 31 March 2018 is detailed in the table on page 27. Structure Remuneration is determined as part of an annual performance review process, having regard to market factors, relevant comparative data, a performance evaluation process and independent remuneration advice, where necessary. In the year ended 31 March 2019, the executive remuneration framework consisted of the following components: > > Fixed remuneration Variable or ‘at risk’ STI remuneration including a Cash Bonus, the Deferred Equity Award (DEA), and the Long Term Incentive (LTI) Total Fixed Remuneration (TFR) Executives may receive their fixed remuneration as cash, or cash with non-monetary benefits such as health insurance, car allowances and tax advisory services. Total fixed remuneration comprises cash and other benefits and entitlements to provide a base level of remuneration which is both appropriate to the role and responsibilities, reflects current market conditions, the individual’s seniority and overall performance of the Company and the relevant business units. For most executives, superannuation is included in TFR. Executive contracts of employment do not include any guaranteed base pay increases. Senior executives are given the opportunity to receive a portion of their fixed remuneration in forms other than cash, such as motor vehicles, under a framework that ensures the Company does not incur additional cost. The fixed component of executives’ base fixed remuneration is detailed in the tables on pages 27 to 28. 19 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Short-term incentives The Company operates an annual STI program that is available to executives and employees and awards a cash bonus subject to the attainment of Company, business unit and individual measures which are set at the commencement of the performance period. The aim of the STI is to link the achievement of the Company’s annual and/or immediate financial and broader operational targets with the remuneration received by the executives and senior employees responsible for achieving those targets. The total potential STI is set at a level so as to provide sufficient incentive to executives to achieve the operational targets and at a cost to the Company that is reasonable in the circumstances. Actual STI payments awarded to each executive depend on the extent to which specific targets prescribed in the performance agreement for a financial year are met. The targets consist of a number of key performance indicators covering financial and non-financial, corporate and individual measures of performance. These measures were chosen as they represent the key drivers for the short term success of the business and provide a framework for delivering long-term value. Under the arrangements approved by the Board the general principles that will apply are that the executive will receive a STI in the form of a cash bonus that is generally set at a maximum of 40 to 50% of the executive’s total fixed remuneration. The STI will be paid within three months of the financial year end on which the executive’s performance is being measured. Executives who are paid an STI cash bonus will in addition receive a Deferred Equity Award (DEA) which is generally equal to 50% of the amount of the STI cash bonus actually earned. The DEA is in the form of a grant of performance rights under the performance rights plan and is subject to two- year (50%) and three-year (50%) service vesting conditions i.e. vesting of the DEA is subject to the executive still being employed by the Company at the relevant vesting date. The Company has a Good Leaver and a Bad Leaver Policy. If an executive ceases employment with the Company, then any unvested DEA will be automatically forfeited. If the executive was a Good Leaver, then the Board will consider the circumstances of the cessation of employment and may exercise its discretion to allow some or all of the unvested DEA to vest (and be exercised). The Board assesses the performance of the MD/CEO against targets and determines actual STI payment based upon the recommendation of the Staff and Remuneration Committee. The senior executives have a maximum STI set as a percentage of their respective TFR. The MD/CEO assesses the performance of other senior executives against their targets and determines the actual STI with oversight by the Board through the Chairman and the Staff and Remuneration Committee. 20 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The structure of the short-term incentive plan is as follows: FEATURE Maximum opportunity Minimum opportunity DESCRIPTION Short-term incentives (STI) CEO: 50% of fixed remuneration Other executives: 40-50% of fixed remuneration Deferred equity award (DEA) CEO: 50% of short-term incentive cash bonus Other executives: Generally 50% of short-term incentive cash bonus Short-term incentives (STI) CEO: 0% of fixed remuneration Other executives: 0% of fixed remuneration Deferred equity award (DEA) CEO: 0% of short-term incentive cash bonus Other executives: 0% of short-term incentive cash bonus Performance metrics The STI metrics align with the strategic priorities at both a Company and business unit level. The general performance metrics and weightings for the KMP are as follows: METRIC Operating Profit Operating Cash Flow Individual performance metrics WEIGHTING 40% 40% 20% Delivery of STI Board discretion The STI is paid in cash generally in the next financial year. The DEA is subject to two-year (50%) and three-year (50%) service vesting conditions. This encourages retention and shareholder alignment. The Board has discretion to adjust remuneration outcomes up or down to prevent any inappropriate reward outcomes, including reducing (down to zero, if appropriate) any deferred STI award. DEAs are provided to the MD/CEO and Senior Executives based on the level of STI earned each year. The last offer under this plan was made on 3 July 2017 and subject to two (50%) and three (50%) year service vesting conditions. There is also a tax exempt share plan that may be utilised at the discretion of the Board for general employee equity participation. An Executive Option Plan, for which no further grants were made, had a series of grants outstanding, the last of which expired on 1 January 2019. The Board reviewed the incentive arrangements for executives and the MD/CEO in the current period. The STI cash bonus for the MD/CEO or any other executive in respect of performance during the year to 31 March 2019 amounts to $nil (31 March 2018: $nil). A DEA will not be issued in respect of performance during the year to 31 March 2019 (31 March 2018: $nil). 21 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Long-term incentives Following an extensive review of its remuneration practises for employees and executives, the Board approved the Company’s adoption of a Long Term Incentive (LTI) Plan on 9 May 2017 (LTI Plan Implementation Date). The LTI Plan better aligns remuneration of the Company’s senior executives with the long-term strategic goals of the Company. The introduction of an LTI Plan is consistent with the Company’s objectives for remuneration, which include providing competitive total rewards to attract and retain high calibre senior executives, having a meaningful portion of remuneration “at risk” and, above all, creating value for shareholders. Performance rights under the LTI Plan will be granted in a number of rounds. The number of performance rights granted to eligible persons in each grant round and the performance conditions applying to the vesting of those performance rights will be determined at the discretion of the Board. It is currently contemplated by the Board that there will be four grant rounds in total. The following summary reflects the key features of the first and second grant round and what is currently contemplated by the Board with respect to subsequent grant rounds: FEATURE Timing of grant DESCRIPTION Grants of performance rights in a grant round will not be made unless and until the specific ‘commencing’ market capitalisation of the Company for that grant round is achieved. Performance condition The commencing market capitalisation of the Company for the first grant round was the market capitalisation of the Company on the LTI Plan Implementation Date. The performance condition which applies to the vesting of performance rights in a grant round is the achievement of the specific ‘target’ market capitalisation of the Company during the performance period for that grant round. The performance condition for the first grant round was satisfied on 5 June 2017. Performance period The performance period for each grant round is calculated by reference to the target market capitalisation of the Company for that grant round and an assumed annualised growth rate of 20%. Determination of market capitalisation of the Company for the purposes of the LTI Plan For the purposes of calculating the market capitalisation of the Company in order to determine if the commencing market capitalisation of the Company or the target market capitalisation of the Company for each grant round has been achieved, the twenty day volume weighted average price (VWAP) of ordinary shares in the capital of the Company will be used. Vesting period In respect of each grant round, there is a four-year staggered vesting period for performance rights in that grant round which commences on satisfaction of the performance condition for that grant round. Number of available performance rights In each grant round, eligible persons may be offered a percentage of the “Total Available Performance Rights” for that grant round (rounded down to the nearest whole number). In respect of each grant round, the number of “Baseline Shares” will be the number of ordinary shares in the Company acquired on market by the AACo Employee Share Trust in respect of that grant round having an aggregate share acquisition price of $5 million. In respect of each grant round, the number of “Total Available Performance Rights” will be (a) the number of Baseline Shares for that grant round; plus (b) the number of any Total Available Performance Rights for previous grant rounds which, at the time of completion of acquisition of all of the Baseline Shares for that grant round and all previous grant rounds, are not notionally allocated to a previous grant round. 22 Australian Agricultural Company Limited | ANNUAL REPORT 2019 FEATURE Lapsing conditions DESCRIPTION Holders of performance rights will be entitled to exercise those performance rights if they have vested and have not otherwise lapsed. The circumstances in which performance rights may lapse include non-satisfaction of performance conditions or ceasing employment with the Company group. If the holder of performance rights ceases to be an employee as a result of an “Uncontrollable Event” (e.g. death, permanent disablement, retirement, retrenchment, or such other circumstances which the Board determines is an Uncontrollable Event), any unvested performance rights held by that person are expected to continue to be subject to the requirements for vesting and exercise applying to those performance rights, unless the Board determines that the vesting conditions applying to some or all of those performance rights will be waived or that some or all of those performance rights will lapse. If a change of control event for the Company occurs, the treatment of any unvested performance rights will be within the discretion of the Board to determine. The requirement to deliver shares in the Company upon the vesting and exercise of performance rights under the LTI Plan must be satisfied by way of on market acquisition of shares in the Company. Change of control event On market acquisition of shares The applicable commencing market capitalisation of the Company, performance condition and performance period for each contemplated grant round are as set out in the following table: FIRST GRANT ROUND COMMENCING MARKET CAPITALISATION OF THE COMPANY The market capitalisation of the Company on the LTI Plan Implementation Date PERFORMANCE CONDITION (TARGETED MARKET CAPITALISATION OF THE COMPANY) $1 billion SECOND GRANT ROUND $1 billion $1.5 billion THIRD GRANT ROUND $1.5 billion $2 billion FOURTH GRANT ROUND $2 billion $2.5 billion PERFORMANCE PERIOD (CALCULATED USING AN ASSUMED ANNUALISED GROWTH RATE OF 20%) Within 2 quarters of the LTI Plan Implementation Date (i.e. performance period ends 30 September 2017) Within 9 quarters of the LTI Plan Implementation Date (i.e. performance period ends 30 June 2019) Within 16 quarters of the LTI Plan Implementation Date (i.e. performance period ends 31 March 2021) Within 22 quarters of the LTI Plan Implementation Date (i.e. performance period ends 30 September 2022) During the period the total number of shares purchased for the LTI Plan grant rounds one and two was 6,764,848 at an average price per share of $1.478. The performance condition for the first grant round of targeted market capitalisation of $1 billion was achieved on 5 June 2017. The rights associated to the first grant round have been granted to the relevant senior executives at a fair value per right of $1.07. The second grant round was granted to relevant senior executives on 11 January 2019 and are subject to a performance condition of target market capitalisation of $1.5 billion by 30 June 2019. The fair value per right of $0.055 was based on the Company’s share price on grant date and the expectation the market condition would be reached. 23 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Remuneration arrangements for KMP are formalised in employment agreements. Details of these contracts are provided below. Company employees are employed by the subsidiary company A.A. Company Pty Ltd. Total fixed remuneration CEO DESCRIPTION $600,000 including superannuation (subject to annual review by Board) SENIOR EXECUTIVE DESCRIPTION Range between $303,000 and $550,000 Short Term Incentive (STI) Cash Bonus Deferred Equity Award Maximum opportunity of $300,000 (50% of TFR) Maximum opportunity between 40 – 50% of TFR Generally 50% of the actual amount of the STI cash bonus earned Generally, 50% of the actual amount of the STI cash bonus earned Long Term Incentive Subject to Company performance conditions being satisfied and the service conditions being met Subject to Company performance conditions being satisfied and the service conditions being met Contract duration Ongoing Ongoing The MD/CEO’s termination provisions are as follows: NOTICE PERIOD PAYMENT IN LIEU OF NOTICE TREATMENT OF STI ON TERMINATION TREATMENT OF PERFORMANCE RIGHTS ON TERMINATION Employer-initiated termination 6 months Termination for serious misconduct Nil Employee-initiated termination 6 months Part or all of 6 months Nil Part or all of 6 months Not eligible Not eligible Not eligible Unvested performance rights lapse unless Good Leaver and Board exercises discretion to allow Unvested performance rights lapse Unvested performance rights lapse unless Good Leaver and Board exercises discretion to allow Upon termination, the MD/CEO is subject to 12 months’ restriction for competition, employee inducement and client solicitation. Other Key Management Personnel The executive service agreements for other senior executives generally reflect that of the MD/CEO. Standard Key Management Personnel termination provisions are as follows: NOTICE PERIOD PAYMENT IN LIEU OF NOTICE TREATMENT OF STI ON TERMINATION TREATMENT OF PERFORMANCE RIGHTS ON TERMINATION Employer-initiated termination 3 to 6 months Part or all of 3 to Not eligible Termination for serious misconduct Nil 6 months Nil Unvested performance rights lapse unless Good Leaver and Board exercises discretion to allow Not eligible Unvested performance rights lapse Employee-initiated termination 3 to 6 months Part or all of 3 to Not eligible 6 months Unvested performance rights lapse unless Good Leaver and Board exercises discretion to allow FY19 performance and impact on remuneration The Company’s performance for the 12 months to 31 March 2019 in relation to the metrics for the payment of short term incentives for KMP, being Operating Profit and Operating Cash Flow, were below the Board approved thresholds. As a result, no STI cash bonus payments have been accrued or DEA issued with respect to the 2019 financial year. 24 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The following table provides an overview of the STI achievements against actual performance: METRICS Operating Profit Operating Cash Flow Statutory performance indicators IMPACT ON INCENTIVE AWARD Below target Below target The table below shows measures of the Company’s financial performance over the last five years. However, these are not necessarily consistent with the measures used in determining the variable amounts of remuneration to be awarded to KMPs. As a consequence, there may not always be a direct correlation between the statutory key performance measures and the variable remuneration awarded. MEASURE Profit/(loss) for the year attributable to owners ($000) Basic earnings/(loss) per share (cents) Dividend payments ($000) Dividend payout ratio (%) Increase/(decrease) in share price (%) Operating cash flow ($000) Additional statutory information 2019 (148,396) (24.9) 2018 (102,559) (17.4) - - - - 2017 71,586 13.2 - - 2016 67,807 12.7 - - 2015 9,623 1.8 - - (14%) 12,990 (31%) (39,864) 28% 29,260 (19%) 30% 21,789 (75,881) The table below shows the relative proportions of remuneration that are linked to performance and those that are fixed, based on the amounts disclosed as statutory remuneration expense (refer to tables on pages 27 to 28). FIXED REMUNERTATION AT RISK – STI – CASH AT RISK – STI – DEA(1) AT RISK – LTI 2019 2018 2019 2018 2019 2018 2019 2018(2) Directors H. Killen Dr S. Dissanayake Executives B. Bennett S. Grant N. Simonsz A. Speer A. O’Brien 84% 100% 70% 99% 99% 99% 100% 85% 100% 74% 100% - - - Former Executives T. McCormack(3) 100% 100% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% - - - 0% 0% 0% 3% 0% 0% 0% 0% 0% 100% D. FitzGibbon(4) (1) Based on the share based payment expense incurred by the Company in relation to a prior year award. (2) Percentages disclosed are the fair value of rights to be granted under the LTI plan. (3) T. McCormack ceased employment with the Company on 2 April 2018. (4) D. FitzGibbon ceased employment with the Company on 14 December 2018. 84% 0% 0% 0% 0% 0% 2% 0% - - - 0% 0% 16% 0% 27% 1% 1% 1% 0% 0% 0% 15% 0% 24% 0% - - - 0% 16% 25 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Performance based remuneration granted and forfeited during the year For each STI cash bonus and grant of rights to deferred shares (refer to tables on pages 27 to 28), the percentage of the available bonus or grant that was paid, or that vested, in the financial year, and the percentage that was forfeited because the person did not meet the service and performance criteria is set out below. The minimum value of the rights yet to vest is nil, as the rights will be forfeited if the key management persons fail to satisfy the vesting condition. The maximum value of the rights yet to vest has been determined as the amount of the grant date fair value of the rights that is yet to be expensed. CURRENT YEAR STI ENTITLEMENT (CASH BONUS AND DEA) Total Opportunity ($) Awarded % Forfeited % Directors H. Killen Executives B. Bennett S. Grant N. Simonsz(1) A. Speer(1) A. O’Brien(1) Former Executives T. McCormack(2) 450,000 253,011 197,100 273,493 248,203 105,781 5,513 0% 6% 0% 0% 0% 0% 0% 100% 94% 100% 100% 100% 100% 100% D. FitzGibbon(3) (1) The above opportunity has been adjusted for the number of days of employed as KMP during the year, for each of the relevant employees. (2) T. McCormack ceased employment with the Company on 2 April 2018. (3) D. FitzGibbon ceased employment with the Company on 14 December 2018. 270,232 100% 0% 26 Australian Agricultural Company Limited | ANNUAL REPORT 2019 SHORT TERM POST- EMPLOYMENT LONG-TERM BENEFIT TERMINATION SHARE BASED PAYMENT CASH BONUS $ NON- MONETARY BENEFITS SUPER- ANNUATION LONG SERVICE LEAVE(1) $ $ $ SHORT TERM INCENTIVE (DEA)(2) $ PERFORMANCE RIGHTS (LTI)(3) TOTAL $ BENEFITS $ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 23,750 21,474 11,875 10,762 12,350 11,237 9,500 8,387 13,300 12,187 - - 10,149 3,592 - - 12,964 - 20,089 3,341 12,964 101,013 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 273,750 247,519 136,875 124,046 142,350 129,521 109,500 96,671 153,300 140,471 115,000 103,284 109,500 41,400 239,800 224,447 129,919 811,481 18,708 122,961 129,919 2,091,556 SALARY & FEES $ DIRECTORS Non-executive Directors D. McGauchie 31/03/2019 250,000 31/03/2018 226,045 S. Black 31/03/2019 125,000 31/03/2018 113,284 D. Crombie 31/03/2019 130,000 31/03/2018 118,284 A. Abraham 31/03/2019 100,000 31/03/2018 88,284 T. Keene 31/03/2019 140,000 31/03/2018 128,284 N. Reisman 31/03/2019 115,000 31/03/2018 103,284 J. Rudd 31/03/2019 31/03/2018 99,351 37,808 Executive Directors Dr S. Dissanayake 31/03/2019 239,800 31/03/2018 224,447 H. Killen 31/03/2019 648,509 31/03/2018 100,912 Total Remuneration: Directors 31/03/2019 1,847,660 1,140,632 31/03/2018 (1) Long service leave balances are only accrued from 5 years’ service onwards, and this is not applicable to the directors. (2) The STI expense amounts to the value expensed by the Company for the period. (3) The LTI expense in 2018 was based on estimates of the expected value of rights to be granted under the LTI plan. 70,980 - - - - - 18,708 1,230,320 27 Australian Agricultural Company Limited | ANNUAL REPORT 2019 SHORT TERM SALARY & FEES OTHER PAYMENTS NON- MONETARY BENEFITS POST- EMPLOYMENT LONG-TERM BENEFIT SUPER- ANNUATION LONG SERVICE LEAVE(1) EXECUTIVES Other KMP B. Bennett 31/03/2019 $ 310,523 31/03/2018 292,088 $ - - S. Grant 31/03/2019 381,225 40,000(4) 31/03/2018 172,705 N. Simonsz(5) 31/03/2019 31/03/2018 A. Speer(6) 31/03/2019 31/03/2018 A. O’Brien(8) 31/03/2019 31/03/2018 397,508 - - 147,585 Former Other KMP T. McCormack(9) 31/03/2019 - - - - - - - - - - 31/03/2018 356,519 D. FitzGibbon(10) 31/03/2019 358,034 100,000(4) 31/03/2018 250,249 - Total Remuneration: Other KMP $ - - 4,200 2,275 $ 20,049 19,940 31,707 15,127 2,800 19,317 - - - - - - - - - - 4,200 39,818 2,975 3,500 15,278 23,355 362,235 100,000(7) 1,976 13,753 TERMINATION SHARE BASED PAYMENT SHORT TERM INCENTIVE (DEA)(2) $ PERFORMANCE RIGHTS (LTI)(3) TOTAL $ BENEFITS $ - - - - - - - - - - - 270,749 - - - 15,599 11,625 125,524 471,695 105,411 445,158 - - - - - - - - - - - - 1,465 - 458,597 190,107 2,832 422,457 - - 2,637 480,601 - - - - - - 147,585 - - 671,286 62,030 52,705 538,317 329,809 15,599 194,488 2,519,252 $ - 16,094 - - - - - - - - - - - - - 31/03/2019 1,957,110 240,000 11,951 100,104 - 9,975 16,094 98,240 270,749 1,071,561 31/03/2018 (1) Long service leave balances are only accrued from 5 years’ service onwards. (2) The STI expense amounts to the value expensed by the Company for the period. (3) The LTI expense in 2018 was based on estimates of the expected value of rights to be granted under the LTI plan. (4) Other payments to S. Grant and D. FitzGibbon during FY19 relate to discretionary cash bonuses for successful project completion. (5) N. Simonsz was appointed Chief Financial Officer on 1 August 2018 and became a member of KMP on the same date. (6) A. Speer was appointed Chief Operating Officer on 30 July 2018 and became a member of KMP on the same date. (7) Other payments to A. Speer during FY19 relate to a sign-on bonus. (8) A. O’Brien was appointed Chief Commercial Officer on 17 December 2018 and became a member of KMP on the same date. (9) T. McCormack ceased employment with the Company on 2 April 2018. (10) D. FitzGibbon ceased employment with the Company on 14 December 2018. 158,116 11,625 1,636,360 No STI cash incentives were granted during the 12-month period ended 31 March 2019. 28 Australian Agricultural Company Limited | ANNUAL REPORT 2019 5,948,897 performance rights under the LTI plan and nil DEA performance rights were granted during the twelve months to 31 March 2019 (31 March 2018: nil). No shares were issued to key management personnel during the year-ended 31 March 2019 (31 March 2018: nil). Rights to shares The fair value of rights is determined based on the market price of the Company’s shares at the grant date, with an adjustment made to take into account the two and three year vesting period (where applicable, i.e. on the issue of DEA) and expected dividends during that period that will not be received by the employees. A summary of the outstanding performance rights relating to key management personnel is provided below, with a full listing provided in note F7 Share-based Payments. Details on rights over ordinary shares in the Company that were granted as compensation or vested during the reporting period to each key management person during the reporting period are as follows: BALANCE AT BEGINNING OF PERIOD (1) GRANTED AS REMUNERATION EXERCISED DURING THE YEAR NET CHANGE OTHER (2) BALANCE AT END OF PERIOD NOT VESTED AND NOT EXERCISABLE VESTED AND EXERCISABLE NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER YEAR GRANTED 2019 Executives H. Killen B. Bennett S. Grant N. Simonsz A. Speer A. O’Brien 2018, 2019 2018, 2019 348,236 367,659 2019 2019 2019 - - - - - - Former Executives T. McCormack(4) - D. FitzGibbon(5) 2018 174,118 1,704,234 426,059 426,059 823,713 766,905 - - - - - - - - - - - (9,994) (9,994) - - - - - (174,118) 2,042,476 2,042,476 783,724 783,724 426,059 426,059 823,713 823,713 766,905 766,905 - - - - - - - - - - - - - - VALUE YET TO VEST (3) $ 455,652 420,411 23,433 45,304 42,180 - - - (1) The rights disclosed for 2018 included rights under the LTI plan, which were based on best estimates of the expected number of rights to be granted. (2) Represents changes to the 2018 estimates of rights to be offered under the first grant round to adjust to the actual number granted during 2019. For former executives, the person’s holding at the date of termination is shown as a reduction in their holding. (3) The maximum value of the deferred shares yet to vest has been determined based on the share price of the Company at 31 March 2019. The minimum value of deferred shares yet to vest is nil, as the shares will be forfeited if the vesting conditions are not met. (4) T. McCormack ceased employment with the Company on 2 April 2018. (5) D. FitzGibbon ceased employment with the Company on 14 December 2018. No other Directors or executives held options or performance rights during the period. 29 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Shareholdings The table below summarises the movements during the period in the shareholdings of key management personnel, including their personally related parties, in the Company for the period. 2019 Directors D. McGauchie H. Killen S. Black D. Crombie T. Keene A. Abraham Dr S. Dissanayake N. Reisman J. Rudd Executives B. Bennett S. Grant N. Simonsz A. Speer A. O’Brien Former Executives T. McCormack D. FitzGibbon Total BALANCE AT BEGINNING OF PERIOD NUMBER 1,120,774 - 40,000 60,000 75,000 30,000 2,025,000 45,000 - 97,142 - - - - - - 3,492,916 GRANTED AS REMUNERATION EXERCISE OF OPTIONS/RIGHTS NET CHANGE OTHER BALANCE AT END OF PERIOD NUMBER NUMBER NUMBER NUMBER - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 113,800 1,120,774 113,800 - - - - - - - - - - - - - - 40,000 60,000 75,000 30,000 2,025,000 45,000 - 97,142 - - - - - - 113,800 3,606,716 All equity transactions with Directors and executives other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the entity would have adopted if dealing at arm’s length. There are no loans outstanding with the key management personnel at 31 March 2019 (31 March 2018: nil), nor have there been any transactions that would be considered a loan throughout the period. There have been no other transactions with key management personnel or their related parties during the financial year to 31 March 2019 (31 March 2018: nil). 30 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The number of Meetings of Directors (including meetings of Committees of Directors) held during the year and the number of meetings attended by each Director is as follows: DIRECTORS’ MEETINGS AUDIT & RISK MANAGEMENT COMMITTEE STAFF & REMUNERATION COMMITTEE NOMINATION COMMITTEE A 7 7 7 7 7 7 7 7 7 B 7 7 7 7 7 6 7 7 7 A * * 6 6 6 * * 6 * B 6 6 6 5 6 4 6 6 5 A 5 * 5 5 * * * * * B 5 5 5 5 5 5 5 5 4 A 1 * 1 1 1 * 1 1 * B 1 1 1 1 0 1 1 1 1 D. McGauchie H. Killen¥ T. Keene D. Crombie S. Black Dr S. Dissanayake A. Abraham N. Reisman J. Rudd A = Number of meetings held during the time the Director held office or was a member of the committee during the year B = Number of meetings attended * Not a member of the relevant committee ¥ Mr. Killen is invited to all Committee meetings but as an executive is not a member of those Committees As at the date of this report, the Company had an Audit and Risk Management Committee, Staff and Remuneration Committee and a Nomination Committee. Amounts contained in this report and in the financial report have been rounded to the nearest thousand dollars for presentation where noted ($000). This has been completed under the option available to the Company under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. The Company is an entity to which this legislative instrument applies. 31 Australian Agricultural Company Limited | ANNUAL REPORT 2019 We have obtained the following independence declaration from our auditors KPMG. 32 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The following non-audit services were provided by the entity’s lead auditor, KPMG. The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. The lead auditor received or are due to receive the following amounts for the provision of non-audit services: METRICS Non-audit services Signed in accordance with a resolution of the Directors 31 MAR 2019 $ 23,150 23,150 31 MAR 2018 $ 15,840 15,840 Donald McGauchie Chairman Brisbane 22 May 2019 Hugh Killen Managing Director Brisbane 22 May 2019 33 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Consolidated Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Financial Position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to the Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directors’ Declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Independent Audit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ASX Additional Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Company Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 36 37 38 39 40 80 81 87 88 34 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Meat sales Cattle sales Cattle fair value adjustments Cost of meat sold Cost of live cattle sold Cattle and feedlot expenses Gross margin Other income Employee expenses Administration and selling costs Other operating costs Property costs Gain/(loss) on equity investments Depreciation and amortisation Impairment Onerous contract (impairment related to Livingstone) Loss before finance costs and income tax Finance costs Loss before income tax Income tax benefit Net loss after tax LOSS PER SHARE ATTRIBUTABLE TO THE ORDINARY EQUITY HOLDERS OF THE PARENT Basic loss per share Diluted loss per share 31 MAR 2019 $000 31 MAR 2018 $000 Restated* NOTE 246,244 117,837 364,081 58,389 422,470 (226,549) (108,858) (142,082) (55,019) 332,658 47,021 379,679 162,971 542,650 (304,054) (45,589) (102,788) 90,219 1,888 2,822 (51,787) (41,200) (29,631) (6,960) 620 (11,994) - - (194,083) (15,773) (209,856) 61,460 (148,396) CENTS (24.9) (24.9) (54,080) (41,413) (27,059) (5,814) (303) (17,394) (69,502) (5,443) (127,967) (17,418) (145,385) 42,826 (102,559) CENTS (17.4) (17.4) A3 A2 F3 F3 A1 A1 F3 F2 C5 C5 The above Consolidated Income Statement should be read in conjunction with the accompanying notes. * Refer to note G3 (c) regarding restated comparative figures. 35 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Loss for the year Other Comprehensive Income Items not to be reclassified to profit or loss: Fair value revaluation of land and buildings, net of tax Items to be reclassified subsequently to profit or loss: Changes in the fair value of cash flow hedges, net of tax Other comprehensive income for the year, net of tax Total comprehensive loss for the year, net of tax 31 MAR 2019 $000 31 MAR 2018 $000 (148,396) (102,559) 21,942 18,421 (4,628) 17,314 2,155 20,576 (131,082) (81,983) The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 36 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Current Assets Cash Trade and other receivables Inventories and consumables Livestock Other assets Total Current Assets Non-Current Assets Livestock Property, plant and equipment Intangible assets Investments Other receivables Total Non-Current Assets Total Assets Current Liabilities Trade and other payables Provisions Borrowings Derivatives Total Current Liabilities Non-Current Liabilities Provisions Borrowings Deferred tax liabilities Total Non-Current Liabilities Total Liabilities Net Assets Equity Contributed equity Reserves Retained earnings/(losses) Total Equity NOTE 31 MAR 2019 $000 31 MAR 2018 $000 B1 B4 B3 A3 A3 A4 F5 B5 C1 C2 C1 F2 C3 F4 7,565 18,661 33,684 171,006 1,099 232,015 252,331 795,341 2,534 3,613 742 1,054,561 1,286,576 29,818 3,397 1,658 8,319 43,192 4,578 364,414 30,732 399,724 442,916 843,660 528,822 435,369 (120,531) 843,660 11,218 20,515 35,068 259,104 696 326,601 369,182 753,777 2,840 2,897 - 1,128,696 1,455,297 27,525 3,445 3,025 457 34,452 5,215 353,363 84,747 443,325 477,777 977,520 531,937 417,718 27,865 977,520 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 37 Australian Agricultural Company Limited | ANNUAL REPORT 2019 At 1 April 2017 Loss for the year Other comprehensive income Total comprehensive loss for the year Transactions with owners in their capacity as owners: Issue of share capital, net of transaction costs Treasury shares acquired Cost of share-based payment At 31 March 2018 At 1 April 2018 Loss for the year Other comprehensive income Total comprehensive loss for the year Transactions with owners in their capacity as owners: Issue of share capital, net of transaction costs Treasury shares acquired Revaluation of foreign currency operations Cost of share-based payment At 31 March 2019 CONTRIBUTED EQUITY (NOTE C3) $000 490,713 RESERVES (NOTE F4) $000 396,606 RETAINED EARNINGS/(LOSSES) $000 130,424 TOTAL EQUITY $000 1,017,743 - - - 48,109 (6,885) - 531,937 531,937 - - - - (3,115) - - - 20,576 20,576 - - 536 417,718 417,718 - 17,314 17,314 - - (10) 347 (102,559) (102,559) - (102,559) - - - 20,576 (81,983) 48,109 (6,885) 536 27,865 977,520 27,865 (148,396) - (148,396) - - - - 977,520 (148,396) 17,314 (131,082) - (3,115) (10) 347 528,822 435,369 (120,531) 843,660 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 38 Australian Agricultural Company Limited | ANNUAL REPORT 2019 NOTE 31 MAR 2019 $000 31 MAR 2018 $000 Cash Flows from Operating Activities Receipts from customers Payments to suppliers, employees and others Interest received Net operating cash inflow/(outflow) before interest and finance costs Payment of interest and finance costs Net cash inflow/(outflow) from operating activities B2 Cash Flows from Investing Activities Payments for property, plant and equipment and other assets Proceeds from sale of property, plant and equipment Investments in associates Net cash outflows from investing activities Cash Flows from Financing Activities Proceeds from borrowings, net of transaction costs Repayment of borrowings Acquisition of treasury shares Net cash inflow from financing activities Net decrease in cash Cash at the beginning of the year Cash at the end of the year B1 378,285 (352,742) 108 25,651 (12,661) 12,990 (25,967) 426 (487) (26,028) 37,000 (24,500) (3,115) 9,385 (3,653) 11,218 7,565 376,013 (395,558) 144 (19,401) (20,463) (39,864) (19,720) 380 (2,100) (21,440) 41,874 (5,000) (6,885) 29,989 (31,315) 42,533 11,218 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 39 Australian Agricultural Company Limited | ANNUAL REPORT 2019 A FINANCIAL PERFORMANCE A1 Significant Matters A2 Operating Margin A3 Livestock A4 Property A5 Segment Information B WORKING CAPITAL B1 Net Working Capital B2 Cash B3 Inventory and Consumables B4 Trade and Other Receivables B5 Trade and Other Payables C FUNDING AND CAPITAL MANAGEMENT C1 Borrowings C2 Derivatives C3 Equity C4 Capital Management C5 Earnings Per Share C6 Dividends D FINANCIAL RISK MANAGEMENT D1 Interest Rate Risk D2 Foreign Currency Risk D3 Commodity Price Risk D4 Credit Risk D5 Liquidity Risk E UNREGONISED ITEMS E1 Commitments E2 Contingencies F OTHER F1 Property, Plant and Equipment at Cost F2 Tax F3 Other Earnings Disclosures F4 Reserves F5 Investments F6 Related Parties F7 Share-based Payments F8 Controlled Entities F9 Parent Entity F10 Auditor’s Remuneration F11 Significant Events After Balance Date G POLICY DISCLOSURES G1 Corporate Information G2 Basis of Preparation G3 Accounting Policies 40 Australian Agricultural Company Limited | ANNUAL REPORT 2019 PAGE 41 43 44 47 49 52 52 52 53 53 54 54 55 56 56 56 57 58 58 59 59 61 61 62 63 64 64 65 65 66 69 71 71 71 72 72 73 In February 2019, a significant flood event swept through the Gulf of Carpentaria Region of North Queensland. At its peak, flood waters extended 400km from the Gulf to Julia Creek, and reached approximately 70km wide in many areas. For much of the region that experienced this event, flood waters reached unprecedented levels. The floods, running nearly half the length of the Flinders river, impacted four of AACo’s stations in the gulf region. Canobie, Wondoola, Carrum and Dalgonally experienced infrastructure and livestock losses. Approximately 82,000 head of cattle were exposed to this event, with total losses estimated at 43,000 head. Additionally, fencing and water infrastructure on all four properties, as well as buildings at Wondoola station, were damaged. Due to the significant nature and materiality of the event, Management have recorded estimates for the losses incurred on these properties. Determining the extent of livestock losses, across these four stations’ 860,000 hectares of land, is inherently challenging. The losses recorded were therefore based on the best available information of the event and Management’s best estimates and judgement. These estimates were performed on a station by station basis, using a combination of observations of surviving animals and damaged infrastructure, as well as applying expected survival rates by paddock against pre-event paddock records. Estimated survival rates were based on Management’s understanding of livestock vulnerabilities in these events, knowledge of the land’s topography, as well an in-depth understanding of how the event unfolded and how individual paddocks were impacted. Livestock losses were estimated to be 43,000 head for a value of $45.6 million and recorded in the Income Statement as fair value losses on cattle due to attrition – gulf flood write-off (see note A3). Costs to replace damaged infrastructure to a state that supports the externally assessed long-term carrying capacity of the properties were estimated to be $5.0m. This was adjusted against the Asset Revaluation Reserve in the equity section of the Balance Sheet. The estimate of losses recorded in the FY19 results is materially consistent with those announced to the market on 11 March 19. In FY19, AACo continues to maintain an ongoing focus on operational leadership, skills training, and the continued development of a strong safety culture, finishing the year with a Lost Time Injury Frequency Rate (LTIFR) of 23. The Company recorded a $36.4 million increase in the value of the Company’s pastoral property and improvements, following a directors’ assessment of fair value at 31 March 2019. In assessing fair value, the directors utilised information provided by an independent valuation performed by CBRE during FY19. The revaluation reflects value increases resulting from capital investments made to actively manage our properties, and increased activity and prices for recent comparable property sales. The above increase was offset by a $5.0 million decrement due to damaged infrastructure in the Gulf following the flooding event, as noted above. The rebuild of damaged infrastructure is underway and the Company is committed to repairing and improving these properties. See note A4 for further details. The closing herd numbers are 32.6% lower than prior year, due to increased composite cattle sales following the 1824 and Livingstone decisions. Dry seasonal conditions have also lead to an increased sell-off of these composite herd animals, as the Company focuses resources on our core Wagyu herd assets. Wagyu herd numbers have marginally increased by 3% from the prior year. The Gulf flood event resulted in approximately 43,000 head written off, as well as a reduced accrual for unbranded calves due to the gulf flood event. 41 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Market value adjustments arising from market price changes to the herd values at the close of the period resulted in an unrealised cattle price loss of $89.0 million driven by a decrease in cattle market prices. Livingstone Beef is considered to be a single Cash-generating Unit (CGU). During FY18, the CGU experienced adverse market conditions due to high cattle procurement costs and a lower than average meat sales demand. As indicators of impairment existed, the Company tested the CGU for impairment. The recoverable amount of the CGU was calculated to be $40.2 million, which was lower than the carrying value by $69.5 million. The carrying value prior to this assessment was $109.7 million, representing $104.8 million of property, plant and equipment and $4.9 million of working capital. The Company therefore recognised an impairment loss of $69.5 million with respect to buildings, improvements, plant and equipment, and decreased the carrying values of these assets in the CGU by this amount. There was an additional $5.4 million impairment provision recorded for an onerous contract in relation to Livingstone Beef. During H1FY19 operations were suspended at Livingstone Beef. At 30 September 2018, management recalculated the recoverable amount of the CGU based on the updated conditions, using Level 3 fair value inputs per AASB 13 Fair Value Measurement. The calculated recoverable amount was materially consistent with the current carrying value of the CGU and as such no adjustment was made to the carrying value of Livingstone Beef at 30 September 2018. At 31 March 2019, consideration was given to internal and external factors impacting the CGU, noting no indications of a material change to the carrying value of Livingstone Beef at year-end. Regular upkeep and maintenance of the facility and its supporting assets continues, whilst the Board and management continue to review various strategic options for Livingstone Beef. 42 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Operating margin represents value added through the production chain. Margin is achieved through sales of meat products and cattle, as well as cattle production (pastoral and feedlot). Meat Sales Sales Cost of meat sold(1) Operating margin Cattle Sales Sales Cost of cattle sold(2) Operating margin Cattle Production Fair value adjustments Cattle expenses Feedlot expenses Operating margin Gross Operating Margin NOTE 31 MAR 2019 $000 246,244 (226,549) 19,695 117,837 (108,858) 8,979 58,389 (69,448) (72,634) (83,693) A3 31 MAR 2018 $000 Restated* 332,658 (304,054) 28,604 47,021 (45,589) 1,432 162,971 (47,897) (54,891) 60,183 (55,019) 90,219 (1) Includes the transfer of cattle at the applicable fair value at the time they leave the property gate en route to a processing plant. (2) Represents the fair value of the cattle at the time of live sale. At that time, the cost of cattle sold equates to the recorded fair value less costs to sell and hence margin apart from selling costs is earned through the cattle production process. * Refer to note G3 (c) regarding restated comparative figures. Refer to note A3 for financial information and accounting policies related to Livestock. 43 Australian Agricultural Company Limited | ANNUAL REPORT 2019 31 MAR 2019 $000 171,006 252,331 423,337 31 MAR 2019 HEAD 148,565 279,340 427,905 CATTLE AT FAIR VALUE Current Non-Current Total livestock LIVESTOCK MOVEMENT Opening carrying amount Changes in fair value Purchases of livestock External sale of livestock less selling expenses Transfers for meat sales Closing carrying amount CATTLE FAIR VALUE ADJUSTMENTS Market value movements(1) Biological transformation(2) Natural increase Attrition Gulf flood write-off(3) Other 31 MAR 2018 $000 259,104 369,182 628,286 31 MAR 2019 $000 628,286 58,389 24,564 (108,858) (179,044) 423,337 31 MAR 2019 $000 (88,994) 157,214 58,262 (22,163) (45,648) (282) 31 MAR 2018 HEAD 183,394 379,075 562,469 31 MAR 2018 $000 662,482 162,971 103,254 (45,589) (254,832) 628,286 31 MAR 2018 $000 (71,145) 157,976 106,072 (29,571) - (361) Total cattle fair value adjustments (1) As a biological asset, AASB 141 Agriculture requires the livestock to be valued at fair value at all times prior to sale or harvest. As such, 58,389 162,971 value increases occur through change in fair values rather than sales margin. (2) Biological transformation in accordance with Australian Accounting Standard AASB 141 Agriculture, includes reclassification of an animal as it moves from being a branded calf and progresses through the various stages to become a trading animal and then as it ages. All these changes occur and are measured before the ultimate sale (cash realisation). (3) Due to the Gulf flooding event in February 2019, the Company recognised an additional attrition reflecting livestock lost in this unprecedented natural disaster. Livestock is measured at fair value less costs to sell, with any change recognised in the income statement. Costs to sell include all costs that would be necessary to sell the assets, including freight and direct selling costs. The fair value of livestock is based on its present location and condition. If an active or other effective market exists for livestock in its present location and condition, the quoted price in that market is the appropriate basis for determining the fair value of that asset. Where the Company has access to different markets, then the most relevant market is used to determine fair value. The relevant market is defined as the market “that access is available to the entity” to be used at the time the fair value is established. If an active market does not exist, then one of the following is used in determining fair value in the below order: > the most recent market transaction price, provided that there has not been a significant change in economic circumstances between the date of that transaction and the end of the reporting period > market prices, in markets accessible to us, for similar assets with adjustments to reflect differences > sector benchmarks In the event that market determined prices or values are not available for livestock in its present condition, the present value of the expected net cash flows from the asset discounted at a current market determined rate may be used in determining fair value. 44 Australian Agricultural Company Limited | ANNUAL REPORT 2019 At the end of each reporting period, we measure livestock at fair value. The fair value is determined through price movements, natural increase and the weight of the herd. The net increments or decrements in the market value of livestock are recognised as either revenue or expense in the income statement, determined as: > > The difference between the total fair value of livestock recognised at the beginning of the financial year and the total fair value of livestock recognised as at the reporting date; less Costs expected to be incurred in realising the market value (including freight and selling costs). Fair Value Inputs are summarised as follows: Level 1 Price Inputs – are quoted prices (unadjusted) in active markets for identical assets or liabilities that can be accessed at the measurement date. Level 2 Price Inputs – are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 Price Inputs – are inputs for the asset or liability that are not based on observable market data (unobservable inputs). FAIR VALUE INPUT CATTLE TYPE 31 MAR 2019 $000 31 MAR 2019 HEAD 31 MAR 2018 $000 31 MAR 2018 HEAD Level 1 Level 2 Level 2 Level 2 Level 3 None Commercial & stud breeding herd Trading cattle Unbranded calves Feedlot cattle Average value per head - 235,387 86,406 13,835 87,709 423,337 - 218,918 111,323 58,956 38,708 427,905 $989 - 328,595 146,462 36,021 117,208 628,286 - 290,659 140,235 86,716 44,859 562,469 $1,117 45 Australian Agricultural Company Limited | ANNUAL REPORT 2019 TYPE LEVEL VALUATION METHOD Commercial & Stud Breeding Herd 2 Trading Cattle 2 Unbranded Calves Feedlot Cattle 2 3 The value of these cattle (comprising principally females and breeding bulls) is determined by independent valuations with reference to prices received from representative sales of breeding cattle similar to the Company’s herd. Prices for these cattle generally reflect a longer term view of the cattle market. Independent valuations were undertaken by Elders Limited. In performing the valuation, consideration is given to the class, age, quality and location of the herd. Direct comparisons are made to recent sales evidence in relevant cattle markets. Relevant market indicators used include Roma store cattle prices, MLA over-the hook market indicators, and cattle prices received/quoted for the Company’s cattle at the reporting date. Prices for these cattle generally reflect the shorter term spot prices available in the market place and vary based on the weight and condition of the animal. Live export cattle (Victoria River Group, Anthony Lagoon & Darwin Group) are valued based on market quotes available at each reporting date. Wagyu trading cattle are valued on the basis of an independent valuation by Elders Limited. In performing the valuation, consideration is given to class, age, quality, genetics, recent comparable sales evidence and current market conditions for Crossbred Wagyu cattle. The value of unbranded calves is determined with reference to Roma store calf prices at the Company’s reporting date. The number of calves is determined by applying the percentage of branding assessed each year to the number of productive cows and the results of pregnancy testing. Feedlot cattle are valued internally by the Company as there is no observable market for them. The value is based on the estimated entry price per kilogram and the value changes for the weight of each animal as it progresses through the feedlot program. The key factors affecting the value of each beast are price/kg and average daily gain of weight. The average daily gain of weight is in the range of 0.7kgs to 1.9kgs. The value is determined by applying the average weight gain per day by the number of days on feed from induction to exit at which point the cattle are delivered to market. The value per animal is based on the breed and specifications of the animal and the market it is destined for. Significant increases (decreases) in any of the significant unobservable valuation inputs for feedlot cattle in isolation would result in a significantly higher (lower) fair value measurement. UNBRANDED CALVES Calf accrual opening Movement(1) Calf accrual closing Average value per head 31 MAR 2019 $000 31 MAR 2019 HEAD 31 MAR 2018 $000 31 MAR 2018 HEAD 36,021 (22,186) 13,835 86,716 (27,760) 58,956 $235 40,826 (4,805) 36,021 99,898 (13,182) 86,716 $415 (1) Unbranded calves are assessed at each reporting date based on information available at the time. The Company does not track individual calves until such time as they have been branded and recorded in the livestock management system. FEEDLOT CATTLE Opening values Inductions Sales Attrition and rations Fair value adjustments recognised Closing values Average value per head 31 MAR 2019 $000 31 MAR 2019 HEAD 31 MAR 2018 $000 31 MAR 2018 HEAD 117,208 104,227 (134,973) (831) 2,078 87,709 44,859 50,369 (56,202) (318) - 38,708 $2,266 131,126 152,151 (181,508) (1,015) 16,454 117,208 47,566 67,136 (69,492) (351) - 44,859 $2,613 46 Australian Agricultural Company Limited | ANNUAL REPORT 2019 PROPERTY PLANT AND EQUIPMENT Pastoral property and improvements at fair value Industrial property and improvements at cost Plant and equipment at cost Capital work in progress Total property, plant and equipment NOTE 31 MAR 2019 $000 31 MAR 2018 $000 738,462 698,207 F1 F1 F1 31,278 24,380 1,221 31,443 22,602 1,525 795,341 753,777 31 MAR 2019 Opening balance Additions Disposals Net revaluation increment/(decrement) recognised in asset revaluation reserve Depreciation Closing balance 31 MAR 2018 Opening balance Additions Disposals Net revaluation increment/(decrement) recognised in asset revaluation reserve Depreciation Closing balance TOTAL $000 698,207 14,410 (402) 31,346 (5,099) 738,462 TOTAL $000 667,860 8,899 - 26,315 (4,867) 698,207 Pastoral property and improvements are carried at a revalued amount, which is the fair value at the date of the revaluation, less any subsequent accumulated depreciation on buildings and accumulated impairment losses. Fair value is determined by the Directors with reference to work performed by external independent valuers and performed on an annual basis with reference to market-based evidence, which is the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. Any revaluation increment is credited to the asset revaluation reserve included in the equity section of the Statement of Financial Position, unless it reverses a revaluation decrement of the same asset previously recognised in the Income Statement. Any revaluation decrement is recognised in the Income Statement unless it directly offsets a previous increment of the same asset in the asset revaluation reserve. In addition, any accumulated depreciation as at revaluation date is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset. Upon disposal of property and improvements, any revaluation reserve relating to the particular asset being sold is transferred to the capital profits reserve. All initial lump sum payments in respect of pastoral and perpetual property leases have been classified as land. The remaining lease payments are nominal and are therefore expensed to the Income Statement as incurred. Refer to note F1 and note G3 for the financial information and accounting policies as they relate to property, plant and equipment at cost respectively. 47 Australian Agricultural Company Limited | ANNUAL REPORT 2019 In determining the fair value of pastoral property and improvements, the Directors initiate periodic independent valuations through registered property valuers. Once these valuations have been considered and reviewed by the Directors they are then adopted as Directors’ valuations. The following valuation techniques and key inputs are used for the level 3 (there are no level 1 and level 2) property and improvement valuations: 31 MAR 2019 $000 31 MAR 2018 $000 VALUATION TECHNIQUE 629,162 604,507 Direct Comparison (Productive Unit Approach) SIGNIFICANT UNOBSERVABLE INPUTS Number of adult equivalents 43,850 33,100 Direct Comparison (Hectare Rate Approach) 65,450 60,600 Direct Comparison (Hectare Rate and Standard Cattle Unit Approach) Dollar per adult equivalents Number of properties Dollar per hectare Number of properties Dollar per hectare Standard cattle units 31 MAR 2019 RANGE/(AVERAGE) 31 MAR 2018 RANGE/(AVERAGE) 5,350 – 89,200 25,406 $1,000 - $4,500 $1,669 5,350 - 81,500 24,585 $1,000 - $4,500 $1,644 18 $1,289 $1,289 1 18 $973 $973 1 $3,521 - $3,528 $3,525 $3,467 - $3,518 $3,493 16,000 – 45,000 30,500 16,000 – 45,000 30,500 Number of properties 2 2 An independent valuation was performed by valuers CBRE to determine the fair value using the market based direct comparison method. One of three direct comparison method techniques were utilised, being either a Productive Unit Approach, Hectare Rate Approach or a Summation Approach using Standard Cattle Units and Hectare Rate. Valuation of the assets was determined by analysing comparable sales and allowing for size, location, rainfall, water supply, seasonal conditions, structural capital works and other relevant factors specific to the property and improvements being valued. From the sales analysed, an appropriate rate per adult equivalent or hectare has been applied to the subject property and improvements. The effective date of the valuation is 31 March 2019. Under the Productive Unit Approach, a dollar per Adult Equivalent is adopted inclusive of all structures. This method takes into consideration the type and mix of land types, rainfall, extent of water, fencing and structural improvements, current carrying capacity and potential, and location relative to markets and services. An external expert, Dr Steve Petty of Spektrum, was engaged during FY19 as part of the valuation process to perform an independent assessment of adult equivalent carrying capacity using a consistent methodology based on scientific analysis of grazing distribution, land system analysis, station and paddock stocking history and published data for the relevant regions. Under the Hectare Rate Approach, a range of dollar per hectare rates are applied to land components exclusive of all structures. This method takes into consideration the land type composition of the property and therefore the proportion of land that lies outside the watered area and its potential or lack thereof. The basis of assessment is direct comparison with sales evidence on an analysed hectare rate, excluding structures. The improved market value is determined from the summation of land with the added value of structures, such as residences, sheds and yards. The Hectare Rate and Standard Cattle Unit Approach applies the same principles as the Hectare Rate Approach but includes a dollar per Standard Cattle Unit rate which is applied to feedlot infrastructure. The basis of assessment is direct comparison with sales evidence on an analysed Standard Cattle Unit rate. The improved market value is determined from the summation of land and feedlot infrastructure with the added value of structures, such as residences, sheds and yards. The derived valuation amount for the buildings and yards is obtained from analysis of comparable sales evidence. Significant increases (decreases) in any of the significant unobservable valuation inputs under the Productive Unit Approach, Hectare Rate Approach or Hectare Rate and Standard Cattle Units Approach in isolation would result in a significantly higher (lower) fair value measurement. Changes in seasonal conditions and rainfall would result in a significantly lower or higher carrying capacity, dollar per adult equivalent and dollar per hectare. 48 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Deemed Cost If freehold land, pastoral leases, buildings and improvements were measured using the deemed cost model (the fair value of the assets in 2005 plus subsequent acquisitions at cost) the carrying amounts would be as follows: Deemed cost Accumulated depreciation Net carrying amount Pastoral leases 31 MAR 2019 $000 343,722 (57,510) 286,212 31 MAR 2018 $000 329,312 (52,411) 276,901 Our cattle stations are generally held under a leasehold agreement with the Crown. Leasehold properties in Queensland are mainly pastoral holdings which are rolling term leases with a maximum period of 50 years. In the Northern Territory, the pastoral leases we hold have been granted on a perpetual basis by the Northern Territory Government. AASB 8 Operating Segments requires operating segments to be identified on the basis of internal reports about components of the Company, that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The Group has identified its operating segments based on the internal reports that are reviewed and used by the Managing Director/Chief Executive Officer (the chief operating decision maker) in assessing performance and in determining the allocation of resources. The operating segments are identified by management based on the nature of the product produced and the reporting structure within the Group. Discrete financial information for each of the operating segments is reported to the Managing Director/Chief Executive Officer (MD/CEO) on at least a monthly basis. Under the current internal reporting framework, the financial results of the Livingstone processing plant are disclosed separately in monthly management reports from the rest of the Company. This results in the following operating segments: > > Livingstone Beef processing plant AACo excluding Livingstone To get to a final segment result, the above two segments results include a corporate overheads expense allocation. The accounting policies used in reporting segments are the same as those contained in note G3 to the financial statements and in the prior period, except as follows: > Inter-entity sales Inter-entity sales are recognised based on arm’s length market prices. Operating Profit is the key indicator used to monitor and manage the Company. It eliminates the potential distraction caused by unrealised livestock and inventory valuation adjustments being recorded in the financial results, and is a better reflection of actual financial performance under the control of management. Operating Profit assumes all Livestock inventory is valued on a $/kg live-weight (LW) basis and is derived by adjusting statutory EBITDA to substitute the movement in inventory at market value with the movement in inventory at cost of production. To provide greater transparency on operating performance, Operating Profit replaces the previously reported Operating EBITDA metric. Operating Profit values inventory movement at a cost of production rather than at various standard costs. The following table presents the revenue and profit information regarding operating segments (incorporating a reconciliation of Operating Profit/(Loss) to Statutory NPAT) for the twelve months to 31 March 2019 and 31 March 2018. Segment assets and liabilities are not reported to the MD/CEO and therefore segment assets and liabilities are not separately disclosed. 49 Australian Agricultural Company Limited | ANNUAL REPORT 2019 31 MAR 2019 Segment revenue Inter-segment revenue Revenue from external customers Underlying Operating Profit/(Loss) Gulf flood livestock attrition Gulf flood emergency expenses Operating Loss Reverse: Movement in inventory at cost of production Other income/expenses Change in livestock value Statutory EBITDA loss Depreciation and amortisation Impairment Onerous contract (impairment related to Livingstone) Gain on equity investments Statutory EBIT loss Net finance costs Income tax benefit Net loss after tax 31 MAR 2018 Segment revenue Inter-segment revenue Revenue from external customers Operating Profit/(Loss) Reverse: Movement in inventory at cost of production Other income/expenses Change in livestock value Statutory EBITDA loss Depreciation and amortisation Impairment Onerous contract (impairment related to Livingstone) Loss on equity investments Statutory EBIT loss Net finance costs Income tax benefit Net loss after tax AACO EX LIVINGSTONE $000 LIVINGSTONE BEEF $000 ELIMINATIONS $000 348,191 (16,342) 331,849 39,644 (45,648) (994) (6,998) (218) (2,941) (165,206) (175,363) (10,869) - - 620 (185,612) 32,232 - 32,232 (15,924) - - (15,924) 2,583 90 5,905 (7,346) (1,125) - - - (8,471) (16,342) 16,342 - - - - - - - - - - - - - - AACO EX LIVINGSTONE $000 LIVINGSTONE BEEF $000 ELIMINATIONS $000 307,062 (24,724) 282,338 9,779 8,279 2,774 (34,196) (13,364) (11,647) - - (303) (25,314) 97,341 - 97,341 (23,260) 660 639 - (21,961) (5,747) (69,502) (5,443) - (102,653) (24,724) 24,724 - - - - - - - - - - TOTAL $000 364,081 - 364,081 23,720 (45,648) (994) (22,922) 2,365 (2,851) (159,301) (182,709) (11,994) - - 620 (194,083) (15,773) 61,460 (148,396) TOTAL $000 379,679 - 379,679 (13,481) 8,939 3,413 (34,196) (35,325) (17,394) (69,502) (5,443) (303) (127,967) (17,418) 42,826 (102,559) 50 Australian Agricultural Company Limited | ANNUAL REPORT 2019 MEAT SALES REVENUES South Korea Australia China USA Other countries Total meat sales revenue per Income Statement 31 MAR 2019 $000 31 MAR 2018 $000 65,876 47,592 25,860 19,860 87,056 246,244 71,405 53,559 12,962 71,198 123,534 332,658 Meat sales revenues of $58.9 million were derived from one of the Company’s major external customers (31 March 2018: $101.5 million from two major external customers). No other customer contributed to more than 10% of the Company’s revenue. CATTLE SALES REVENUES Australia Total cattle sales revenue per Income Statement 31 MAR 2019 $000 117,837 117,837 31 MAR 2018 $000 47,021 47,021 51 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Cash Inventory and consumables Trade and other receivables Trade and other payables Net working capital RECONCILIATION OF NET LOSS AFTER TAX TO NET CASH FLOWS FROM OPERATIONS Net loss after income tax Adjustments for: Depreciation and amortisation Impairment (Gain)/loss on equity investments Change in fair value of property Loss/(gain) on disposal of property, plant and equipment Amortisation of borrowing costs Non-cash share based payment expense (Increment)/decrement in fair value of livestock Income tax expense reported in equity Derivative movement reported in equity Changes in assets and liabilities: (Increase)/decrease in inventories (Increase)/decrease in trade and other receivables (Increase)/decrease in prepayments and other assets (Decrease)/increase in deferred tax liabilities (Decrease)/increase in trade and other payables (Decrease)/increase in derivatives (Decrease)/increase in provisions Net cash (outflow)/inflow from operating activities Non-cash financing and investing activities Acquisition of assets by means of finance leases Meat inventory Feedlot commodities Bulk stores Other inventory NOTE B3 B4 B5 31 MAR 2019 $000 31 MAR 2018 $000 7,565 33,684 18,661 (29,818) 30,092 11,218 35,068 20,515 (27,525) 39,276 31 MAR 2019 $000 (148,396) 31 MAR 2018 $000 (102,559) 11,994 - (620) - 453 (315) 347 204,949 (7,445) (5,525) 1,384 1,112 (403) (54,015) 2,293 7,862 (685) 12,990 3,132 17,394 69,503 303 - (380) (379) 536 34,196 (9,402) 2,973 (6,494) (6,424) 710 (33,424) (3,717) (5,656) 2,956 (39,864) 3,810 31 MAR 2019 $000 13,917 31 MAR 2018 $000 18,488 10,275 7,964 1,528 33,684 6,732 7,853 1,995 35,068 52 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Trade receivables from others Trade receivables from individually not material associates Total trade receivables Provision for impairment of receivables Other receivables 31 MAR 2019 $000 17,143 31 MAR 2018 $000 15,347 - 17,143 (319) 16,824 1,837 18,661 561 15,908 - 15,908 4,607 20,515 Trade receivables are non-interest bearing. Provision for impairment of receivables is the loss allowance for trade receivables and is measured at an amount equal to lifetime expected credit losses. The ageing of trade receivables and the provision for impairment of receivables is outlined below: Trade receivables aging Current or past due under 30 days Past due 31-60 days Past due 61+ days Total trade receivables Provision for impairment of receivables aging Current or past due under 30 days Past due 31-60 days Past due 61+ days Total trade receivables 31 MAR 2019 $000 16,804 31 MAR 2018 $000 15,865 2 337 17,143 33 10 15,908 31 MAR 2019 $000 (253) 31 MAR 2018 $000 - - (66) (319) - - - Our maximum exposure to credit risk is the net carrying value of receivables. We do not hold collateral as security, nor is it our policy to transfer (on-sell) receivables to special purpose entities. Refer to note D for more information on the risk management policy of the Company. Trade payables Other payables Deferred revenue 31 MAR 2019 $000 22,398 31 MAR 2018 $000 20,738 4,023 3,397 29,818 4,691 2,096 27,525 Trade payables are non-interest bearing and are normally settled on agreed terms which are generally up to 30 days. Other payables are non- interest bearing. Deferred revenue relates to payments received in advance on sales. Trade payables includes amounts due to associates, as shown below. Refer to note F6 for further details. Trade payables Trade payables to others Trade payables to associate – Pyxle (Private) Limited Trade payables to other individually not material associates 31 MAR 2019 $000 21,712 31 MAR 2018 $000 19,782 686 - 22,398 296 660 20,738 53 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Current Obligations under finance leases Non-Current Obligations under finance leases Secured bank loan facility 31 MAR 2019 $000 31 MAR 2018 $000 1,658 3,025 2,782 361,632 364,414 4,547 348,816 353,363 Facility A loans are repayable on 8 September 2022 and Facility B loans are repayable on 8 September 2020. The interest on these facilities is charged at the applicable BBSY rate + Margin. The facility is currently drawn down by $362.7 million (31 March 2018: $350.2 million) and is offset in the Statement of Financial Position by a prepaid facility participation fee of $1 million (31 March 2018: $1.4 million). Financing facilities are provided on a secured basis, with security given over all fixed and floating assets. Financial covenants are in place over the Company’s Loan to Value Ratio (LVR). We have the following financing facilities available: Total available under Facility A and Facility B Guarantee facility Drawn-down (including bank guarantees - refer note C4) Unused Current Liabilities Interest rate swap contracts Foreign currency contracts 31 MAR 2019 $000 31 MAR 2018 $000 500,000 3,000 (364,154) 138,846 500,000 3,000 (351,654) 151,346 31 MAR 2019 $000 31 MAR 2018 $000 6,884 1,435 8,319 355 102 457 SELL FX/BUY AUD NOTIONAL AMOUNTS (AUD) 31 MAR 2019 $000 NOTIONAL AMOUNTS (AUD) 31 MAR 2018 $000 AVERAGE EXCHANGE RATE 31 MAR 2019 $000 AVERAGE EXCHANGE RATE 31 MAR 2018 $000 Sell USD Maturity 0-12 months 48,391 11,354 0.7339 0.7787 Foreign currency contracts are attributed to forecast meat sales. As these contracts are hedge accounted, the effectiveness was required to be assessed in terms of AASB 9 Financial Instruments from 1 April 2018 due to the Company’s decision to adopt AASB 9 rather than electing to continue applying AASB 139 Financial Instruments. The effective portion of the movement has been accounted for in Other Comprehensive Income and the ineffective portion posted to the income statement. Forward currency contracts can have maturities of up to 36 months. These contracts are in US dollars. The total notional value of these contracts at 31 March 2019 was AUD $48.4 million (31 March 2018: AUD $11.4 million). There was no material impact from the implementation of AASB 9, and therefore no prior period adjustments have been recorded. The net fair value gain on foreign currency derivatives during the twelve months to 31 March 2019 was $1,435,000 with $1,358,000 effective and $77,000 ineffective (12 months to 31 March 2018: $102,000 gain with $84,000 effective and $18,000 ineffective). 54 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The Company has entered into interest rate swaps which are economic hedges. The Company fair values these contracts by comparing the contracted rate to the future market rates for contracts with the same length of maturity. Interest rate swaps are entered in order to manage the mix of borrowings between fixed and floating rates as per our Treasury Policy. The $235 million of swaps have been designated as effective interest rate swaps and therefore satisfy the accounting standard requirements for hedge accounting. The swaps expire on 8 September 2022 in line with the expiry date of the bank facility. As at the reporting date, the notional principal amounts and period of expiry of the interest rate swap contracts were as follows: 0-1 years 1-5 years 31 MAR 2019 $000 - 235,000 31 MAR 2018 $000 - 235,000 The gain or loss from remeasuring the interest rate swaps at fair value is recognised in other comprehensive income and deferred in equity in the hedging reserve, to the extent that the hedge is effective. It is reclassified into profit or loss when the hedged interest expense is recognised. In the twelve months to 31 March 2019 the loss recognised for interest rate swaps into profit or loss was $2.1 million (twelve months to 31 March 2018: $4.1 million). There was no hedge ineffectiveness in the current or prior year. 31 MAR 2019 SHARES 31 MAR 2018 SHARES 31 MAR 2019 $000 31 MAR 2018 $000 598,430,888 558,710,413 531,937 490,713 - - (3,115) - - - (6,885) 48,109 531,937 Opening balance Shares issued on exercise of performance rights Shares issued on exercise of options Treasury shares acquired - - 87,037 - (2,428,989) (4,335,859) Value of conversion rights – convertible notes - 43,969,297 Total contributed equity 596,001,899 598,430,888 528,822 55 Australian Agricultural Company Limited | ANNUAL REPORT 2019 When managing capital, our objective is to safeguard our ability to continue as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. We also aim to maintain a capital structure that ensures the lowest cost of capital. We monitor capital using the gearing ratio (net debt divided by total capital plus net debt) and our target gearing ratio is between 20.0% to 35.0%. We include within net debt, interest-bearing loans and borrowings. For the Company’s financial risk management objectives and policies refer to note D. ASSETS AND CAPITAL STRUCTURE Debt: Current interest-bearing loans and borrowings Non-current interest-bearing loans and borrowings Obligations under finance leases Bank loan facility (1) Bank guarantees Cash Net debt Net equity Total capital employed 31 MAR 2019 $000 31 MAR 2018 $000 1,658 3,025 2,782 362,700 1,454 (7,565) 361,029 843,660 4,547 350,200 1,454 (11,218) 348,008 977,520 1,204,689 1,325,528 Gearing (net debt/net debt+equity) (1) The gearing ratio is calculated utilising the drawn-down balance of the bank loan facility. This is not offset for $1 million of prepaid 29.97% 26.25% borrowing costs. The following reflects the income used in the basic and diluted earnings per share computations: Net (loss)/profit attributable to ordinary equity holders of the parent (basic) Interest expense on convertible notes, net of tax Net (loss)/profit attributable to ordinary equity holders of the parent (diluted) 31 MAR 2019 $000 (148,396) - (148,396) 31 MAR 2018 $000 (102,559) 388 (102,171) The following reflects the weighted average number of ordinary shares used in the basic and diluted earnings per share computations: Weighted average number of ordinary shares (basic) Adjustments for calculation of diluted earnings per share: Weighted average options and rights 31 MAR 2019 SHARES 596,690,028 31 MAR 2018 SHARES 589,060,929 - - Weighted average number of ordinary shares (diluted) as at 31 March 596,690,028 589,060,929 No final or interim dividends were declared and paid during the twelve months to 31 March 2019 (twelve months to 31 March 2018: nil). There are no franking credits available for the subsequent financial year (31 March 2018: nil). 56 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Exposure to key financial risks are managed in accordance with our financial risk management policy. The objective of the policy is to support the delivery of the Company’s financial targets while protecting future financial security. The Audit and Risk Management Committee under the authority of the Board hold primary responsibility for identification and control of financial risks. The Board reviews and agrees policies for managing each of the risks identified. Different methods are used to measure and manage the different types of risks to which the Company is exposed. The main risks arising from financial instruments are interest rate, foreign currency, commodity, credit and liquidity risk. As at 31 March 2019 and 31 March 2018, the only financial instruments recognised at fair value were interest rate swaps and forward foreign currency contracts. These are valued using a level 2 method (refer to note C2) which estimates fair value using inputs that are observable either directly (as prices) or indirectly (derived from prices). The carrying amount of all other financial assets and liabilities approximates the fair value. Our policy is to manage our finance costs using a mix of fixed and variable rate debt. In accordance with our Treasury Policy, we maintain at least 50% of our borrowings at fixed rates which are carried at amortised cost. It is acknowledged that fair value exposure is a by-product of our attempt to manage our cash flow volatility arising from interest rate changes. To manage this mix in a cost-efficient manner, we enter into interest rate swaps, in which we agree to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. We regularly analyse our interest rate exposure taking into consideration potential renewals of existing positions, alternative financing and the mix of fixed and variable interest rates. In 2018 the Company entered into interest rate swaps totalling $235 million. These swaps expire on 8 September 2022 in line with the expiry date of the bank facility. The swaps have been designated as effective interest rate swaps and therefore satisfy the accounting standard requirements for hedge accounting. The net fair value loss on interest rate swaps during the twelve months to 31 March 2019 was $6.9million (31 March 2018: $0.4 million). The Company fair values these contracts by comparing the contracted rate to the future market rates for contracts with the same length of maturity. At 31 March 2019, after taking into account the effect of interest rate swaps, approximately 65% (31 March 2018: 67%) of our borrowings are at a fixed rate of interest. At the reporting date, we had the following mix of financial assets and liabilities exposed to Australian variable interest rate risk: Financial assets: Cash assets Financial liabilities: Bank loan Interest rate swaps Net exposure 31 MAR 2019 $000 31 MAR 2018 $000 7,565 11,218 (127,700) (6,884) (127,019) (115,200) (355) (104,337) The following sensitivity analysis is based on reasonably possible changes in interest rates applied to the interest rate risk exposures in existence at the reporting date. Such a reasonably possible change is determined using historical interest rate movements for the preceding two-year period. JUDGEMENTS OF REASONABLY POSSIBLE MOVEMENTS: 31 MAR 2019 +1 (100 basis points) -1 (100 basis points) 31 MAR 2018 +1 (100 basis points) -1 (100 basis points) (1) Figures represent an increase/(decrease) in other components of equity. EFFECTS ON PROFIT BEFORE TAX $000 EFFECTS ON OTHER COMPONENTS OF EQUITY (1) $000 (1,277) 1,277 (1,152) 1,152 8,225 (8,225) 9,400 (9,400) 57 Australian Agricultural Company Limited | ANNUAL REPORT 2019 A significant portion of our revenue is received in US dollars and the prices received are influenced by movements in exchange rates, particularly that of the US dollar relative to the Australian dollar. We have transactional currency exposures (refer note C2) arising from sales of meat in currencies other than in Australian dollars. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the functional currency of the relevant group entity. The risk is measured through a forecast of highly probable US dollar sales. The risk is hedged with the objective of minimising the volatility of the Australian currency revenue of highly probable forecast US dollar denominated sales. In compliance with our Treasury Policy we have hedged our foreign exchange exposure arising from forecasted cash flows from sales, through forward currency contracts or foreign exchange contracts. These foreign exchange contracts have been designated as effective hedges and therefore satisfy the accounting standard requirements for hedge accounting. This resulted in a $1,435,000 movement in other comprehensive income and a $77,000 movement in profit and loss in the twelve months to 31 March 2019 (31 March 2018: $102,000 movement in other comprehensive income and a $18,000 movement in profit and loss). Our Treasury Policy is to hedge between 50% and 90% of forecast US dollar cash flows for sales up to one quarter in advance, and between 25% and 75% of forecast sales for the period three months to 12 months in advance. For the year ended 31 March 2019, approximately 60% and 50% of highly probable forecast sales were hedged for the periods 0-3 months in advance and 3-12 months in advance, respectively. At reporting date, we had the following mix of financial assets and liabilities exposed to foreign exchange risk. Financial assets Trade receivables Financial liabilities Derivatives Net exposure 31 MAR 2019 USD $000 31 MAR 2018 USD $000 531 (1,435) (904) 5,944 (102) 5,842 At 31 March 2019, had the Australian Dollar moved and all other variables held constant, profit before tax and equity would have been affected as illustrated in the table below. The sensitivity analysis is based on a reasonably possible movement using observations of historical spot rates for the preceding two-year period. JUDGEMENTS OF REASONABLY POSSIBLE MOVEMENTS: 31 MAR 2019 AUD/USD +10% AUD/USD -10% 31 MAR 2018 AUD/USD +10% AUD/USD -10% EFFECTS ON PROFIT BEFORE TAX $000 EFFECTS ON EQUITY $000 243 (298) 237 (290) 4,286 (5,239) 1,097 (1,341) We have transactional commodity price risk primarily in the sale of cattle and beef. Other commodity price exposures include feed inputs for our feedlot operations, and diesel. Purchases of commodities may be for a period of up to 12 months and partial hedging of these inputs may be for periods of up to 24 months. Our exposure to derivative commodity price risk is minimal. We do not currently apply hedge accounting to our beef commodity price exposures as the derivatives do not meet the accounting standard requirements for hedge accounting. However, we have a policy whereby we will forward sell a significant proportion of our feedlot cattle sales for a period of up to 6 months. These contracts are entered into and continue to be held for the purpose of delivery of feedlot cattle arising from our expected sale requirements; they are classified as non- derivative and are not required to be fair valued. We enter into forward purchase contracts for grain commodities. This practice mitigates the price risk for the Company. As at 31 March 2019, we had forward purchased approximately 51% (31 March 2018: 58%) of our expected grain usage for the coming 12 months. These contracts are entered into and continue to be held for the purpose of grain purchase requirements; they are classified as non-derivative and are not required to be fair valued. At the reporting date we had no commodity price exposures on forward sales and purchase contracts that are not designated as cash flow hedges. 58 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Credit risk arises from our financial assets, which comprise cash, trade and other receivables and derivative instruments. Our exposure to credit risk arises from potential default of the counterparty, with a maximum exposure equal to the carrying amount of the financial assets (as outlined in each applicable note). We do not hold any credit derivatives to offset our credit exposure. We manage our credit risk by maintaining strong relationships with a limited number of quality customers. The risk is also mitigated by paying an annual insurance premium in relation to certain sales overseas. In addition, receivable balances are monitored on an ongoing basis with the result that our experience of bad debts has not been significant. We have no significant concentrations of credit risk. Credit risk and expected credit loss relating to trade receivables is disclosed in note B4. Liquidity risk arises from our financial liabilities and our subsequent ability to repay the financial liabilities as and when they fall due. Our objective is to maintain a balance between continuity of funding and flexibility through the use of bank loans and finance leases. We manage our liquidity risk by monitoring the total cash inflows and outflows expected on a monthly basis. We have established comprehensive risk reporting covering our business units that reflect expectations of management of the expected settlement of financial assets and liabilities. The Company is exposed to counterparty credit risk from its operating activities (primarily from trade receivables) and from its financing activities. As at 31 March 2019, the mark-to-market value of derivative asset positions is net of a credit valuation adjustment attributable to derivative counterparty default risk. The changes in counterparty credit risk had no material effect on the hedge effectiveness assessment for derivatives designated in hedge relationships and other financial instruments recognised at fair value. The following liquidity risk disclosures reflect all contractually fixed repayments and interest resulting from recognised financial liabilities and derivatives as of 31 March 2019. The timing of cash flows for liabilities is based on the contractual terms of the underlying contract. However, where the counterparty has a choice of when the amount is paid, the liability is allocated to the earliest period in which we can be required to pay. When we are committed to make amounts available in instalments, each instalment is allocated to the earliest period in which we are required to pay. The risk implied from the values shown in the table below, reflects a balanced view of cash inflows and outflows of financial instruments. Leasing obligations, trade payables and other financial liabilities mainly originate from the financing of assets used in our ongoing operations such as property, plant and equipment and investments in working capital (e.g. inventories and trade receivables). These assets are considered in the Company’s overall liquidity risk. 59 Australian Agricultural Company Limited | ANNUAL REPORT 2019 31 MAR 2019 Financial assets Cash Trade and other receivables Derivatives Financial liabilities Trade and other payables Borrowings Derivatives Net maturity 31 MAR 2018 Financial assets Cash Trade and other receivables Derivatives Financial liabilities Trade and other payables Borrowings Derivatives Net maturity LESS THAN 6 MONTHS $000 6-12 MONTHS $000 1-2 YEARS $000 2-5 YEARS $000 TOTAL $000 CARRYING AMOUNT $000 7,565 18,661 - (31,569) (7,641) (607) (13,591) 11,218 20,515 - (27,525) (7,811) (628) (4,231) - - - - - - - - - 7,565 18,661 - 7,565 18,661 - - (7,397) (607) (8,004) - (129,681) (1,214) - (269,252) (1,821) (31,569) (413,971) (4,249) (31,569) (366,072) (8,319) (130,895) (271,073) (423,563) (379,734) - - - - - - - - - 11,218 20,515 - 11,218 20,515 - - (7,880) (526) (8,406) - (174,543) (1,053) - (224,691) (2,632) (27,525) (414,925) (4,839) (27,525) (356,388) (457) (175,596) (227,323) (415,556) (352,637) 60 Australian Agricultural Company Limited | ANNUAL REPORT 2019 ASSETS AND CAPITAL STRUCTURE Future minimum lease payments under non-cancellable operating leases for land and buildings are as follows: Not later than one year Later than one year but not later than five years Later than five years Total leased land and buildings Future minimum lease payments for motor vehicles under finance leases and hire purchase are as follows: Within one year After one year but not more than five years Total minimum lease payments Future minimum payments under equipment finance together with the present value of the net minimum lease payments are as follows: Within one year Later than one year but not later than five years Total equipment finance 31 MAR 2019 $000 31 MAR 2018 $000 1,559 2,800 - 4,359 536 1,581 2,117 1,122 1,201 2,323 1,994 3,075 18 5,087 1,141 1,934 3,075 1,884 2,613 4,497 We have entered into forward purchase contracts for $19.3 million worth of grain commodities as at 31 March 2019 (31 March 2018: $14.6 million) and forward purchase contracts for $15.8 million worth of cattle as at 31 March 2019 (31 March 2018: $21.5 million). The contracts are expected to be settled within 12 months from balance date. No capital expenditure has been contracted in respect of property, plant and equipment as at 31 March 2019 (31 March 2018: $0.5 million). At 31 March 2019 there are a number of long standing native title claims over our pastoral holdings. Settlement negotiations between the Government, claimants and pastoral interests are ongoing, and we do not expect any material impact on our operations to result from this. 61 Australian Agricultural Company Limited | ANNUAL REPORT 2019 31 MAR 2019 Opening balance Additions and transfers Disposals Depreciation Impairment Closing balance Cost Accumulated depreciation and impairment 31 MAR 2018 Opening balance Additions and transfers Disposals Depreciation Impairment Closing balance Cost Accumulated depreciation and impairment INDUSTRIAL PROPERTY AND IMPROVEMENT $000 PLANT AND EQUIPMENT $000 CAPITAL WORK IN PROGRESS $000 31,443 243 - (408) - 31,278 77,893 (46,615) 22,602 8,066 (325) (5,963) - 24,380 151,443 (127,063) 1,525 (304) - - - 1,221 1,221 - INDUSTRIAL PROPERTY AND IMPROVEMENT $000 PLANT AND EQUIPMENT $000 CAPITAL WORK IN PROGRESS $000 77,516 (7,220) - (1,795) (37,058) 31,443 75,618 (44,175) 40,562 22,760 (71) (10,237) (30,412) 22,602 143,702 (121,100) 6,435 (2,878) - - (2,032) 1,525 3,557 (2,032) TOTAL $000 55,570 8,005 (325) (6,371) - 56,879 230,557 (173,678) TOTAL $000 124,513 12,662 (71) (12,032) (69,502) 55,570 222,877 (167,307) Livingstone Beef is considered to be a single Cash-generating Unit (CGU). During FY18, the CGU experienced adverse market conditions due to high cattle procurement costs and a lower than average meat sales demand. As indicators of impairment existed, the Company tested the CGU for impairment. The recoverable amount of the CGU was calculated to be $40.2 million, which was lower than the carrying value by $69.5 million. The carrying value prior to this assessment was $109.7 million, representing $104.8 million of property, plant and equipment and $4.9 million of working capital. The Company therefore recognised an impairment loss of $69.5 million with respect to buildings, improvements, plant and equipment, and decreased the carrying values of these assets in the CGU by this amount. There was an additional $5.4 million impairment provision recorded for an onerous contract in relation to Livingstone Beef. During H1FY19 operations were suspended at Livingstone Beef. At 30 September 2018, management recalculated the recoverable amount of the CGU based on the updated conditions, using Level 3 fair value inputs per AASB 13 Fair Value Measurement. The calculated recoverable amount was materially consistent with the current carrying value of the CGU and as such no adjustment was made to the carrying value of Livingstone Beef at 30 September 2018. At 31 March 2019, consideration was given to internal and external factors impacting the CGU, noting no indications of a material change to the carrying value of Livingstone Beef at year-end. Regular upkeep and maintenance of the facility and its supporting assets continues, whilst the Board and management continue to review various strategic options for Livingstone Beef. 62 Australian Agricultural Company Limited | ANNUAL REPORT 2019 THE MAJOR COMPONENTS OF TAX ARE: Income statement Current income tax Current income tax charge/(benefit) Deferred income tax Relating to origination and reversal of temporary differences Under/(over) provision in prior years Research and development claims from prior years Income tax benefit in the income statement Statement of changes in equity Deferred income tax Net gain on cash flow hedges Net gain on revaluation of land and buildings Income tax expense reported in equity Tax reconciliation Accounting loss before tax At the statutory income tax rate of 30% Research and development offsets Other items (net) Income tax (benefit)/expense in the income statement Deferred income tax in the balance sheet relates to: Deferred tax liabilities Adjustments to land, buildings and improvements Revaluations of trading stock for tax purposes Other Offsetting deferred tax asset Deferred tax assets Accruals and other Capitalised expenses accelerated for book purposes Interest rate swaps Revaluations of trading stock for tax purposes Cash flow hedges Leave entitlements and other provisions Franking deficit tax Research and development offsets Carried forward losses Deferred income Individually insignificant balances Total deferred tax asset (offset against deferred tax liability) Deferred income tax in the income statement relates to: Revaluations of trading stock for tax purposes Accruals and other Capitalised expenses accelerated for book purposes Impairment of property, plant and equipment Other Total deferred tax (benefit)/expense 63 Australian Agricultural Company Limited | ANNUAL REPORT 2019 31 MAR 2019 $000 31 MAR 2018 $000 - - (61,419) (41) - (61,460) 1,928 9,404 11,332 (209,856) (62,957) - 1,497 (61,460) (71,137) - (6,948) 47,353 (30,732) 285 66 2,065 8,274 276 2,027 1,012 4,716 27,520 1,019 93 47,353 (68,458) 238 316 - 6,485 (61,419) (43,166) 340 - (42,826) 1,508 7,894 9,402 (145,385) (43,616) - 790 (42,826) (61,052) (30,307) (3,044) 9,656 (84,747) 523 382 137 - - 2,190 1,012 4,716 - 629 67 9,656 (23,357) (1,075) 769 (20,935) 1,432 (43,166) Other income Cropping income Total other income Interest expense Other finance costs Total finance costs Remuneration and on-costs Superannuation and post-employment benefits Other employment benefits Share-based payments expense Total employee expenses Other earnings information: Minimum lease payments – operating leases Commodity and foreign currency expense/(benefit) 31 MAR 2019 $000 1,749 139 1,888 31 MAR 2018 $000 2,822 - 2,822 15,456 317 15,773 42,616 3,398 5,426 347 51,787 5,752 960 16,366 1,052 17,418 46,315 3,831 3,398 536 54,080 4,725 241 At 1 April 2017 Revaluation of land and buildings Tax effect on revaluation of land and buildings Net movement in cash flow hedges, net of tax Share based payment At 31 March 2018 At 1 April 2018 Revaluation of land and buildings Tax effect on revaluation of land and buildings Net movement in cash flow hedges, net of tax Revaluation of foreign currency operations Share based payment At 31 March 2019 ASSET REVALUATION RESERVE $000 CAPITAL PROFITS RESERVE $000 CASH FLOW HEDGE RESERVE $000 309,894 84,762 (3,704) 26,315 (7,894) - - - - - - - - 2,155 - 328,315 84,762 (1,549) 328,315 84,762 (1,549) 31,346 (9,404) - - - - - - - - - - (4,628) - - 350,257 84,762 (6,177) FOREIGN CURRENCY TRANSLATION RESERVE $000 EMPLOYEE EQUITY BENEFITS RESERVE $000 TOTAL $000 - - - - - - - - - - (10) - (10) 5,654 396,606 - - - 536 26,315 (7,894) 2,155 536 6,190 417,718 6,190 417,718 - - - - 347 31,346 (9,404) (4,628) (10) 347 6,537 435,369 The asset revaluation reserve is used to record increments and decrements in the fair value of property and improvements to the extent that they offset one another. The reserve can only be used to pay dividends in limited circumstances. The capital profits reserve is used to accumulate realised capital profits. The reserve can be used to pay dividends. The cash flow hedge reserve is used to record the portion of movements in fair value of a hedging instrument in a cash flow hedge that is recognised in other comprehensive income. The foreign currency translation reserve is used to accumulate the net impact of translating our US denominated foreign currency balances and transactions into our functional currency, Australian dollars. The employee equity benefits reserve is used to record the value of equity benefits provided to employees and Directors as part of their remuneration. Refer to note F7 for further details of these plans. 64 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Equity accounted investments in associate – Pyxle (Private) Limited Other equity accounted investments in individually not material associates Other investments 31 MAR 2019 $000 2,072 31 MAR 2018 $000 1,230 1,175 366 3,613 1,539 128 2,897 The Company has a 31.82% interest in Pyxle (Private) Limited (2018: 31.82%). This entity is considered to be an associate due to the Company having significant but not controlling influence over the entity. Pyxle (Private) Limited is an IT support services company, which during the year provided special project and operational IT support services to AACo. The Company has interests in a number of other individually not material associates. All associates are accounted for using the equity method in accordance with AASB 128 Investments in Associates and Joint Ventures. During the year, one entity ceased to be an associate and at 31 March 2019 been recorded as a non-associated investment, held at fair value in accordance with AASB 9 Financial Instruments. COMPENSATION FOR KEY MANAGEMENT PERSONNEL Short-term employee benefits Post-employment benefits Share-based payment Termination benefits Long-term benefits Total compensation 31 MAR 2019 $000 4,070 201 340 - - 4,611 31 MAR 2018 $000 3,007 209 290 271 16 3,793 During the year, the Company transacted with associates and other related parties. Associates are entities considered to be related parties, due to the Company having significant but not controlling influence over the entity. Transactions with associates for the year ended 31 March Purchase of goods or services from associates – Pyxle (Private) Limited Other transactions with individually not material associates Transactions with individually not material associates for the year ended 31 March Sales of goods or services to associates Purchase of goods or services from other associates Interest paid on convertible notes Dividends received from associates Other transactions with associates 31 MAR 2019 $000 (4,818) (1,436) (6,254) 31 MAR 2018 $000 (2,279) 199 (2,080) 31 MAR 2019 $000 470 31 MAR 2018 $000 1,317 (862) - 135 (1,179) (1,436) (582) (536) - - 199 Transactions with other related parties Purchase of goods or services from other individually not material related parties 31 MAR 2019 $000 (804) 31 MAR 2018 $000 (213) 65 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The share-based payment plans are described below. During 2019, expenses arising from equity settled share-based payment transactions were $347,000 (31 March 2018: $536,000). The Company has one Executive Option Plan (EOP) for the granting of non-transferable options to the Managing Director/ Chief Executive Officer, senior executives and middle management with more than twelve months’ service at the grant date. There will be no further grants under this Plan, including none for 2018 and 2019. The Company’s Performance Rights Plan has been in place since 2011 and has taken the place of the option plan for future incentive awards comprising performance rights. There will be no further grants of options under the option plan in the future. The performance rights will remain until such time as they are either exercised or the rights lapse. The performance rights have a nil exercise price. Vesting of the performance rights is dependent on the satisfaction of a service vesting condition and/or a performance condition. Any performance rights which fail to meet the service condition on the vesting date will lapse immediately. Performance rights issued are subject to: external performance conditions (TSR outperformance of S&P/ASX Small Ordinaries Accumulated Index; ASX Code: AXSOA); internal performance conditions (EPS performance based on compound % growth rates over 3 financial years following issue of the performance rights); and termination/change of control provisions. Once the performance rights have vested, they are automatically exercised and shares in AACo issued to either the AACo Employee Share Scheme Trust (EST) or acquired on-market by the EST Trustee on behalf of the participant. Long-term incentives Following an extensive review of its remuneration practises for employees and executives, the Board approved the Company’s adoption of a Long Term Incentive (LTI) Plan on 9 May 2017 (LTI plan implementation date). The LTI Plan better aligns remuneration of the Company’s senior executives with the long-term strategic goals of the Company. The introduction of an LTI Plan is consistent with the Company’s objectives for remuneration, which include providing competitive total rewards to attract and retain high calibre senior executives, having a meaningful portion of remuneration “at risk” and, above all, creating value for shareholders. It is anticipated that performance rights under the LTI Plan will be granted in a number of rounds. The number of performance rights (if any) granted to eligible persons in each grant round and the performance conditions applying to the vesting of those performance rights will be determined at the discretion of the Board. 66 Australian Agricultural Company Limited | ANNUAL REPORT 2019 It is currently contemplated by the Board that there will be four grant rounds in total. The following summary reflects the key features of the first grant round and what is currently contemplated by the Board with respect to subsequent grant rounds: FEATURE Timing of grant Performance condition DESCRIPTION Grants of performance rights in a grant round will not be made unless and until the specific ‘commencing’ market capitalisation of the Company for that grant round is achieved. The commencing market capitalisation of the Company for the first grant round was the market capitalisation of the Company on the LTI Plan Implementation Date. The performance condition which applies to the vesting of performance rights in a grant round is the achievement of the specific ‘target’ market capitalisation of the Company during the performance period for that grant round. The performance condition for the first grant round was satisfied on 5 June 2017. Performance period The performance period for each grant round is calculated by reference to the target market capitalisation of the Company for that grant round and an assumed annualised growth rate of 20%. Determination of market capitalisation of the Company for the purposes of the LTI Plan For the purposes of calculating the market capitalisation of the Company in order to determine if the commencing market capitalisation of the Company or the target market capitalisation of the Company for each grant round has been achieved, the twenty day volume weighted average price (VWAP) of ordinary shares in the capital of the Company will be used. Vesting period Number of available performance rights Lapsing conditions Change of control event On market acquisition of shares In respect of each grant round, there is a four-year staggered vesting period for performance rights in that grant round which commences on satisfaction of the performance condition for that grant round. In each grant round, eligible persons may be offered a percentage of the “Total Available Performance Rights” for that grant round (rounded down to the nearest whole number). In respect of each grant round, the number of “Baseline Shares” will be the number of ordinary shares in the Company acquired on market by the AACo Employee Share Trust in respect of that grant round having an aggregate share acquisition price of $5 million. In respect of each grant round, the number of “Total Available Performance Rights” will be (a) (b) the number of Baseline Shares for that grant round; plus the number of any Total Available Performance Rights for previous grant rounds which, at the time of completion of acquisition of all of the Baseline Shares for that grant round and all previous grant rounds, are not notionally allocated to a previous grant round Holders of performance rights will be entitled to exercise those performance rights if they have vested and have not otherwise lapsed. The circumstances in which performance rights may lapse include non-satisfaction of performance conditions or ceasing employment with the Company group. If the holder of performance rights ceases to be an employee as a result of an “Uncontrollable Event” (e.g. death, permanent disablement, retirement, retrenchment, or such other circumstances which the Board determines is an Uncontrollable Event), any unvested performance rights held by that person are expected to continue to be subject to the requirements for vesting and exercise applying to those performance rights, unless the Board determines that the vesting conditions applying to some or all of those performance rights will be waived or that some or all of those performance rights will lapse. If a change of control event for the Company occurs, the treatment of any unvested performance rights will be within the discretion of the Board to determine The requirement to deliver shares in the Company upon the vesting and exercise of performance rights under the LTI Plan must be satisfied by way of on market acquisition of shares in the Company. 67 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The applicable commencing market capitalisation of the Company, performance condition and performance period for each contemplated grant round are as set out in the following table: FIRST GRANT ROUND COMMENCING MARKET CAPITALISATION OF THE COMPANY The market capitalisation of the Company on the LTI Plan Implementation Date PERFORMANCE CONDITION (TARGETED MARKET CAPITALISATION OF THE COMPANY) $1 billion SECOND GRANT ROUND $1 billion $1.5 billion THIRD GRANT ROUND $1.5 billion $2 billion FOURTH GRANT ROUND $2 billion $2.5 billion PERFORMANCE PERIOD (CALCULATED USING AN ASSUMED ANNUALISED GROWTH RATE OF 20%) Within 2 quarters of the LTI Plan Implementation Date (i.e. performance period ends 30 September 2017) Within 9 quarters of the LTI Plan Implementation Date (i.e. performance period ends 30 June 2019) Within 16 quarters of the LTI Plan Implementation Date (i.e. performance period ends 31 March 2021) Within 22 quarters of the LTI Plan Implementation Date (i.e. performance period ends 30 September 2022) The total number of shares purchased for the LTI Plan grant rounds one and two was 6,764,848 at an average price per share of $1.478. The performance condition for the first grant round of targeted market capitalisation of $1 billion was achieved on 5 June 2017. The rights associated to the first grant round have been granted to the relevant senior executives at a fair value per right of $1.07. The second grant round was granted to relevant senior executives on 11 January 2019 and are subject to a performance condition of target market capitalisation of $1.5 billion by 30 June 2019. The fair value per right of $0.055 was based on the Company’s share price on grant date and the expectation the market condition would be reached. The table below shows the number (No.) and weighted average exercise prices (WAEP) of options and performance rights outstanding. There have been no cancellations or modifications to any of the plans during the twelve months to 31 March 2019. 31 MAR 2019 Outstanding at the beginning of the period Granted during the period Granted during the period LTIP adjust prior year Forfeited during the period Exercised during the period Outstanding at the end of the period Exercisable at the end of the period Weighted average remaining contractual life (days) Weighted average fair value at grant date Range of exercise prices ($) 31 MAR 2018 Outstanding at the beginning of the period Granted during the period Granted during the period LTIP estimate(1) Forfeited during the period Exercised during the period Outstanding at the end of the period Exercisable at the end of the period Weighted average remaining contractual life (days) Weighted average fair value at grant date Range of exercise prices ($) (1) Expected number of rights to be granted under the LTIP, calculated based on our best estimates. 68 Australian Agricultural Company Limited | ANNUAL REPORT 2019 EOP NO. 300,000 - - (300,000) - - - - - 3.22 EOP NO. 590,625 - - (290,625) - 300,000 300,000 282 - 3.22 EOP WAEP $ 3.22 - - 3.22 - 3.22 EOP WAEP $ 2.64 - - 2.04 - 3.22 PRP NO. 1,198,727 4,913,876 (126,345) (103,522) - 5,882,736 - 1,147 1.095 - PRP NO. 87,037 102,271 2,023,248 (926,792) (87,037) 1,198,727 - 848 1.2 - The consolidated financial statements include the following controlled entities: NAME OF ENTITY Parent Entity Australian Agricultural Company Limited Controlled Entities A. A. Company Pty Ltd Austcattle Holdings Pty Ltd A. A. & P. Joint Holdings Pty Ltd Shillong Pty Ltd James McLeish Estates Pty Limited Wondoola Pty Ltd Waxahachie Pty Ltd Naroo Pastoral Company Pty Limited AACo Nominees Pty Limited Chefs Partner Pty Ltd Polkinghornes Stores Pty Limited Northern Australian Beef Limited AACo Innovation Pty Ltd AACo Innovation (US) Pty Ltd AACo Innovation (US) LLC AACo Operations (US) LLC NOTES COUNTRY OF INCORPORATION 31 MAR 2019 % OF SHARES HELD 31 MAR 2018 % OF SHARES HELD (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) (a) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia United States of America United States of America 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - (a) These companies have entered into a deed of cross guarantee dated 22 November 2006 (amended 1 April 2015) with Australian Agricultural Company Limited which provides that all parties to the deed will guarantee to each creditor payment in full of any debt of each company participating in the deed on winding-up of that company. As a result of a Class Order issued by the Australian Securities and Investments Commission, these companies are relieved from the requirement to prepare financial statements. The Consolidated Income Statement and consolidated Statement of Financial Position of all entities included in the class order “closed Group” are set out in (b). (b)Financial information for class order Closed Group: Current Assets Cash Trade and other receivables Inventories and consumables Livestock Other assets Total Current Assets Non-Current Assets Livestock Property, plant and equipment Intangible assets Investments Intercompany receivable Other receivables Total Non-Current Assets Total Assets 69 Australian Agricultural Company Limited | ANNUAL REPORT 2019 31 MAR 2019 $000 31 MAR 2018 $000 7,565 18,661 33,684 171,006 1,099 232,015 252,331 795,341 2,534 3,613 3,342 742 11,218 20,515 35,068 259,104 696 326,601 369,182 753,777 2,840 2,897 3,342 - 1,057,903 1,132,038 1,289,918 1,458,639 Current Liabilities Trade and other payables Provisions Borrowings Derivatives Total Current Liabilities Non-Current Liabilities Provisions Borrowings Deferred tax liabilities Total Non-Current Liabilities Total Liabilities Net Assets Equity: Contributed equity Reserves Retained earnings/(losses) Total Equity INCOME STATEMENT OF THE CLOSED GROUP Meat sales Cattle sales Cattle fair value adjustments Cost of meat sold Deemed cost of cattle sold Cattle and feedlot expenses Gross operating margin Other income Employee expenses Administration and selling costs Other operating costs Property costs Gain/(loss) on equity investments Depreciation and amortisation Impairment Onerous contract (impairment related to Livingstone) Loss before finance costs and income tax expense Net finance costs Loss before income tax Income tax benefit Net loss after tax 70 Australian Agricultural Company Limited | ANNUAL REPORT 2019 31 MAR 2019 $000 31 MAR 2018 $000 29,818 3,397 1,658 8,319 43,192 4,578 364,414 30,732 399,724 442,916 847,002 528,822 435,369 (117,189) 847,002 27,525 3,445 3,025 457 34,452 5,215 353,363 84,747 443,325 477,777 980,862 531,937 417,718 31,207 980,862 31 MAR 2019 $000 31 MAR 2018 $000 Restated* 246,244 117,837 364,081 58,389 422,470 (226,549) (108,858) (142,082) (55,019) 1,888 (51,787) (41,200) (29,631) (6,960) 620 (11,994) - - (194,083) (15,773) (209,856) 61,460 (148,396) 332,658 47,021 379,679 162,971 542,650 (304,054) (45,589) (102,788) 90,219 2,822 (54,080) (41,413) (27,059) (5,814) (303) (17,394) (69,502) (5,443) (127,967) (17,418) (145,385) 42,826 (102,559) Current assets Non-Current assets Total Assets Current liabilities Non-Current liabilities Total Liabilities Net Assets Contributed equity Reserves Accumulated losses Total Equity Profit/(Loss) of the parent entity Total comprehensive profit/(loss) of the parent entity * Refer to note G3 (c) regarding restated comparative figures. 31 MAR 2019 $000 8,566 738,927 747,493 10,198 361,632 371,830 375,663 538,822 23,066 31 MAR 2018 $000 Restated* 1,543 779,988 781,531 915 348,817 349,732 431,799 538,822 29,324 (186,225) (136,347) 375,663 (49,878) (52,877) 431,799 (60,467) (57,403) Australian Agricultural Company Limited and the wholly owned entities listed in note F8 are parties to a deed of cross guarantee as described in F8. The nature of the deed of cross guarantee is such that each Company which is party to the deed guarantees, to each creditor, payment in full of any debt in accordance with the deed of cross guarantee. No deficiency of net assets existed for the Company as at 31 March 2019. No liability was recognised by Australian Agricultural Company Limited in relation to these guarantees, as the fair value of the guarantees is immaterial. The accounting policies of the parent entity, which have been applied in determining the financial information shown above, are the same as those applied in the consolidated financial statements except for investments in subsidiaries are accounted for at cost in the financial statements of Australian Agricultural Company Limited. Remuneration received, or due and receivable, by KPMG for: An audit or review of the financial report of the entity and any other entity in the consolidated Group Other non-audit services Total 31 MAR 2019 $ 31 MAR 2018 $ 410,000 23,150 433,150 415,300 15,840 431,140 There have been no significant events after the balance date which require disclosure in the financial report. 71 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Australian Agricultural Company Limited is a company limited by shares, incorporated and domiciled in Australia. The Company’s shares are publicly traded on the Australian Securities Exchange (ASX). The consolidated financial statements of Australian Agricultural Company Limited (AACo, the Company or parent Company) for the year ended 31 March 2019 were authorised for issue in accordance with a resolution of the Directors on 22 May 2019. We recommend the financial statements be considered together with any public announcements made by the Company during the year ended 31 March 2019 in accordance with the Company’s continuous disclosure obligations arising under the Corporations Act 2001 and ASX listing rules. The nature of the operations and principal activities of Australian Agricultural Company Limited are described in the Directors’ Report. The financial statements are general purpose financial statements, prepared by a for-profit entity, in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. In these financial statements, any references to we, us, our, AACo, the Company and consolidated, all refer to Australian Agricultural Company Limited and the entities it controlled at the financial year end or from time to time during the financial year. Any references to subsidiaries or controlled entities in these financial statements refer to those entities that are controlled and consolidated by Australian Agricultural Company Limited. The financial statements have been prepared on a historical cost basis, except for land and buildings (with the exception of industrial land), livestock and derivative financial instruments, which have been measured at fair value. Under the historical cost basis, assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition. Liabilities are recorded at the amount of proceeds received in exchange for the obligation, or in some circumstances, at the amounts of cash expected to be paid to satisfy the liability in the normal course of business. The financial statements also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in the relevant notes. This has been completed under the option available to the Company under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. The Company is an entity to which this legislative instrument applies. 72 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (i) New and amended standards adopted A number of new or amended standards became applicable for the current reporting period and the group had to change its accounting policies as a result of adopting the following standards: > > AASB 9 Financial Instruments AASB 15 Revenue from Contracts with Customers The impact of adoption of AASB 9 Financial Instruments has not had a material impact on the recognition of financial assets or liabilities and therefore no transitional adjustment has been recognised in retained earnings upon adoption. In accordance with the transitional requirements, the Company has elected not to restate comparatives. The Company has adopted AASB 15 Revenue from Contracts with Customers from 1 April 2018 which resulted in a changes in accounting policies. This change in policy is relatively consistent with previous policy and has therefore not had a material impact. The Company has applied the modified retrospective application approach in which only the initial period of application applies AASB. No adjustments were made as a result of adopting AASB 15. (ii) Accounting Standards and Interpretations issued but not yet applied > AASB 16 Leases The Company is required to adopt AASB 16 Leases from 1 April 2019. The Company has assessed the estimated impact that initial application of AASB 16 will have on its consolidated financial statements, as described below. The actual impacts of adopting the standard on 1 April 2019 may change because the new accounting policies are subject to change until the Company presents its first financial statements that include the date of initial application. AASB 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard – i.e. lessors continue to classify leases as finance or operating leases. AASB 16 replaces existing leases guidance, including AASB 117 Leases, AASB Interpretation 4 Determining whether an Arrangement contains a Lease, AASB Interpretation-115 Operating Leases-Incentives and AASB Interpretation 127 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. Leases in which the Company is a lessee The Company will recognise new assets and liabilities for its operating leases of land, buildings and equipment. The nature of expenses related to those leases will now change because the Company will recognise a depreciation charge for right-of-use assets and interest expense on lease liabilities. Previously, the Company recognised operating lease expense on a straight-line basis over the term of the lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised. No significant impact is expected for the Company’s finance leases. Based on the information currently available, the Company estimates that it will recognise additional right of use assets and corresponding lease liabilities of $12.0m as at 1 April 2019. It is also estimated the application of this standard will improve Operating Profit and Statutory EBITDA by $3.8m and also improve Operating Cash Flows by $3.5m, due to the change in classification of where the expenses and cash flows are recorded under AASB 16. 73 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The consolidated financial statements comprise the financial statements of Australian Agricultural Company Limited, and its subsidiaries (as outlined in note F8) as at 31 March each year or from time to time during the year. All intra-group balances and transactions, income and expenses and profit and losses resulting from intra-group transactions have been eliminated in full. Subsidiaries are all those entities which we control as a result of us being exposed, or have rights, to variable returns from our involvement with the subsidiary and we have the ability to affect those returns through our power over the subsidiary. Such control generally accompanies a shareholding of more than one-half of the subsidiaries voting rights. We currently hold 100% of the voting rights of all our subsidiaries. We consolidate subsidiaries from the date on which control commences and up until the date on which there is a loss of control. We account for the acquisition of our subsidiaries using the acquisition method of accounting. The acquisition method of accounting involves recognising at acquisition date, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree. The identifiable assets acquired and the liabilities assumed are measured at their acquisition date fair values. Any excess of the fair value of consideration over our interest in the fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities is recognised as goodwill. The consolidated financial statements include restatements to previously disclosed amounts, where indicated, which represent reclassifications to more accurately align reported amounts with business activities. Previously disclosed amounts for administration and selling costs have been restated to account for meat sales freight previously included in cost of meat sold. Additionally, to provide greater transparency on operating performance, Operating Profit replaces the previously reported Operating EBITDA metric. Operating Profit values inventory movement at a cost of production rather than at various standard costs. The parent entity note disclosures have also been restated, to account for balances more appropriately as they relate to the parent. Additionally, the Cost of production has changed to remove the offsetting impact of attrition from the number of kilograms produced The preparation of the financial statements requires us to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. We continually evaluate our judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. We base our judgements and estimates on historical experience and on other various factors we believe are reasonable under the circumstances, the result of which form the basis of the carrying values of assets and liabilities that are not readily apparent from other sources. We have identified the following accounting policies for which significant judgements, estimates and assumptions have been made: > > > Fair value determination of pastoral property and improvements, refer to note A4 Fair value determination of livestock, refer to note A3 Impairment of non-financial and financial assets, refer to note F1 Actual results may differ from these estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods. Further details of the nature of these assumptions and conditions may be found in the relevant notes to the financial statements. (i) Functional and presentation currency The consolidated financial statements are presented in Australian dollars, which is the functional and presentation currency of Australian Agricultural Company Limited and all its subsidiaries. (ii) Transactions and balances Transactions in foreign currencies are converted into Australian dollars by applying the exchange rates applicable at the date of the transactions. Amounts payable and receivable in foreign currencies are converted into Australian dollars at the exchange rate ruling at the reporting date. All differences arising on settlement or translation of amounts payable and receivable in foreign currencies are taken to the statement of profit and loss. 74 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Cash in the Statement of Financial Position comprise cash at bank and in hand which are subject to an insignificant risk of changes in value. For the purposes of the Statement of Cash Flows, cash is as defined above, net of outstanding bank overdrafts. Bank overdrafts are included within interest-bearing loans and borrowings in current liabilities on the Statement of Financial Position. Trade and other receivables are considered financial assets. They are recognised initially at the fair value of the amounts to be received and are subsequently measured at amortised cost using the effective interest method, less an allowance for doubtful debts. These financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and we have transferred substantially all the risks and rewards of ownership. We review the collectability of trade receivables on an ongoing basis at the Company level. Individual debts that are known to be uncollectible are written off when identified. An allowance for doubtful debts is recognised to reduce the carrying amount of trade receivables when there is objective evidence that we will not be able to collect the receivable. Financial difficulties of the debtor, default payments or debts significantly overdue are considered indicators that the trade receivable may not be recoverable. The amount of the allowance for doubtful debts is the receivable carrying amount compared to the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The allowance for doubtful debts is recognised in the income statement within administration costs. When a trade receivable for which an allowance for doubtful debts had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against administration costs. Inventories and consumables held for use in our operations are valued at the lower of cost and net realisable value. Cost is determined on the average cost basis and comprises the cost of purchase including transport cost. 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. The quality of inventories is taken into account in the assessment of net realisable value. We use derivative financial instruments, such as forward currency contracts, interest rate swaps and forward commodity contracts, to hedge our foreign currency risks, interest rate risks and commodity price risks, respectively. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Any gains or losses arising from changes in the fair value of derivatives are taken directly to the income statement, except for the effective portion of cash flow hedges, which is recognised in other comprehensive income. For the purpose of hedge accounting, hedges are classified as: (a) Fair value hedges when hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment. (b) Cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognised firm commitment. At the inception of a hedge relationship, we formally designate and document the hedge relationship to which we wish to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how we will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Hedges that meet the strict criteria for hedge accounting are accounted for as described below: 75 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Cash flow hedges Policy that was in effect until 31 March 2018 The effective portion of the gain or loss on the hedging instrument is recognised directly in other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the income statement in other operating expenses. We utilise interest rate swaps to hedge our exposure to cash flow movements in loan movements. See note C2 for more details. We use forward currency contracts as hedges of our exposure to foreign currency risk in forecasted transactions and firm commitments. The ineffective portion relating to foreign currency contracts is recognised in finance costs and the ineffective portion relating to commodity contracts is recognised in other operating income. Refer to note C2 for more details. Amounts recognised as other comprehensive income are transferred to the income statement when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs. When the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognised as other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognised in equity is transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognised in other comprehensive income remains in other comprehensive income until the forecast transaction or firm commitment affects profit or loss. Policy that was in effect from 1 April 2018 Beginning 1 April 2018, the Company adopted AASB 9 Financial Instruments which addresses classification, measurement, and derecognition of financial assets and financial liabilities, sets out new rules for hedge accounting, and introduces a new expected-loss impairment model. All derivatives are recognised in the balance sheet at fair value and are classified as FVTPL except where they are designated as part of an effective hedge relationship and classified as hedging derivatives. The carrying value of a derivative is remeasured at fair value throughout the life of the contract. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. The method of recognising the resulting fair value gain or loss on a derivative depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Company designates its derivatives as hedges of highly probable future cash flows attributable to a recognised foreign currency asset or liability or a highly probably foreign currency forecast transaction (cash flow hedges). The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items, the risk being hedged and the Company’s risk management objective and strategy for undertaking these hedge transactions. The effectiveness of the cash flow hedge is measured throughout the life of the hedging relationship. Ineffectiveness arises in the event of over hedging, whereby the notional amount of the designated hedge instrument exceeds the notional amount of the hedged item attributable to the hedged risk, or timing mismatches. Where ineffectiveness is identified, any revaluation gains or loss on the ineffective portion of the hedging instrument are immediately recognised in the statement of profit or loss in foreign exchange gains or foreign exchange losses. The effective portion of changes in the fair value of derivatives that are designated as cash flow hedges are recognised in the cash flow hedge reserve within equity. Upon recognition of the forecast transaction (“hedged item”) the carrying value is not adjusted. Amounts accumulated in equity are transferred to the statement of profit or loss in the period(s) in which the hedged item affects the statement of profit or loss. (i) Recognition and measurement Refer to note A4 for the accounting policy note for Pastoral property and improvements held at fair value. Plant and equipment and industrial land and buildings are stated at historical cost less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of replacing parts that are eligible for capitalisation when the cost of replacing the parts is incurred. Similarly, when each major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement only if it is eligible for capitalisation. Directly attributable costs for the acquisition and construction of an asset are capitalised if the relevant recognition criteria are met. All other repairs and maintenance are recognised in the income statement as incurred. We review and adjust, if appropriate, the residual values, useful lives and amortisation methods of all property, plant and equipment at the end of each financial year. 76 Australian Agricultural Company Limited | ANNUAL REPORT 2019 (ii) Depreciation Depreciation is calculated on a straight line basis over the estimated useful life of the asset as follows: PROPERTY, PLANT AND EQUIPMENT Land (freehold lease, pastoral/perpetual lease, industrial) AVERAGE USEFUL LIFE Not depreciated Buildings Fixed improvements Owned plant and equipment Plant and equipment under lease (i) AACo as a lessee 40 years 30 years 3-10 years 2-5 years We determine whether an arrangement is or contains a lease based on the substance of the arrangement at inception date, whether fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. (ii) Pastoral and perpetual property leases Pastoral and perpetual property leases have been included in Property, Plant and Equipment (Refer note A4). (iii) Agistment agreements Agistment agreements give us the right to use land under a licence agreement to feed and pasture livestock for a fee. Agistment agreements are usually up to 12 months’ duration and may be renewed for further periods. Agistment rights are classified as operating leases and the costs are expensed as incurred. (iv) Other leases Finance leases, which transfer to us substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased asset or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised in finance costs in the income statement. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term if there is no reasonable certainty that we will obtain ownership by the end of the lease term. Operating lease payments are recognised as an operating expense in the income statement on a straight-line basis over the lease term. Operating lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments between rental expense and reduction of the liability. Trade and other payables are carried at amortised cost and due to their short-term nature they are not discounted. They represent liabilities for goods and services provided to us prior to the end of the financial year that are unpaid and arise when we become obliged to make future payments in respect of the purchase of these goods and services. Trade payables are unsecured and are usually paid within 30 days of recognition. Other payables are unsecured and are usually paid within 90 days of recognition. Borrowings are included as non-current liabilities except for those with maturities less than 12 months from the reporting date, which are classified as current liabilities. We recognise borrowings initially on the trade date, which is the date we become a party to the contractual provisions of the instrument. We derecognise borrowings when our contractual obligations are discharged or cancelled or expire. All borrowings are initially recognised at fair value plus any transaction costs that are directly attributable to the issue of the instruments and are subsequently measured at amortised cost. Any difference between the final amount paid to discharge the borrowing and the initial borrowing proceeds (including transaction costs) is recognised in the income statement over the borrowing period using the effective interest method. 77 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the effective interest rate. The effective interest rate amortisation is included in finance costs in the income statement. Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (i.e. an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) are capitalised as part of the cost of that asset. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that we incur in connection with the borrowing of funds. We provide benefits to our employees (including key management personnel) in the form of share based payments, whereby employees render services in exchange for shares or rights over shares (equity settled transactions). We recognise an expense for all share based remuneration determined with reference to the fair value at the grant date of the equity instruments. We calculate the fair value using the Black Scholes model or other applicable models. The fair value is charged to the income statement over the relevant vesting periods, adjusted to reflect actual and expected levels of vesting. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Australian Agricultural Company Limited (market conditions). Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. (i) Livestock and meat sales Policy that was in effect until 31 March 2018 Revenue from the sale of livestock and meat is recognised when: > > > > there has been a transfer of risks and rewards to the customer (through the execution of a sales agreement at the time of delivery of the goods to the customer); no further work or processing is required; the quantity and quality of the goods has been determined; and the price is fixed and generally title has passed (for shipped goods this is the bill of lading date). Policy that was in effect from 1 April 2018 The Company has adopted AASB 15 Revenue from Contracts with Customers from 1 April 2018 which resulted in a changes in accounting policies. Revenue is recognised to the extent that the Company has satisfied a performance obligation and the transaction price can be readily identified. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. Revenue from the sale of livestock and meat is recognised when: > the performance obligation of passing control of meat or livestock at an agreed upon delivery point to the customer has been satisfied (ii) Interest revenue We record interest revenue on an accruals basis. For financial assets, interest revenue is determined by the effective yield on the instrument. 78 Australian Agricultural Company Limited | ANNUAL REPORT 2019 The Company and its wholly-owned Australian resident entities are part of a tax-consolidated group. As a consequence, all members of the tax- consolidated group are taxed as a single entity. The Company is the head entity within the tax-consolidated group. Foreign entities are taxed individually within their respective tax jurisdictions. Income tax expense represents the sum of current tax and deferred tax. Current tax Current tax is calculated on accounting profit after allowing for non-taxable and non-deductible items based on the amount expected to be paid to taxation authorities on taxable profit for the period. Our current tax is calculated using tax rates that have been enacted or substantively enacted at the reporting date. Current income tax relating to items recognised directly in equity is recognised in equity and not in the income statement. Deferred tax Deferred income tax is provided on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred income tax liabilities are recognised for all taxable temporary differences except: > When the deferred income tax liability arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. > When the taxable temporary difference is associated with investments in subsidiaries and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilised, except: > When the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. > When the deductible temporary difference is associated with investments in subsidiaries, associates or interests in joint ventures, in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. (i) Basic earnings per share Basic earnings per share is calculated as net profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares outstanding during the period. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: > > The after tax effect of interest and other financing costs associated with dilutive potential ordinary shares that have been recognised as expenses The weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares 79 Australian Agricultural Company Limited | ANNUAL REPORT 2019 In accordance with a resolution of the Directors of the Australian Agricultural Company Limited, we state that: 1. In the opinion of the Directors: a. The financial statements, notes and remuneration report of Australian Agricultural Company Limited for the year ended 31 March 2019 are in accordance with the Corporations Act 2001, including: i. Giving a true and fair view of its financial position as at 31 March 2019 and of its performance for the year ended on that date. ii. Complying with Accounting Standards and Corporations Regulations 2001. b. c. The financial statements and notes also comply with International Financial Reporting Standards as disclosed in note G2. There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. 3. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the year to 31 March 2019. In the opinion of the Directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in note F8 will be able to meet any obligations or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee. On behalf of the Board Donald McGauchie Chairman Brisbane 22 May 2019 80 Australian Agricultural Company Limited | ANNUAL REPORT 2019 81 Australian Agricultural Company Limited | ANNUAL REPORT 2019 82 Australian Agricultural Company Limited | ANNUAL REPORT 2019 83 Australian Agricultural Company Limited | ANNUAL REPORT 2019 84 Australian Agricultural Company Limited | ANNUAL REPORT 2019 85 Australian Agricultural Company Limited | ANNUAL REPORT 2019 86 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Additional information required by the Australian Stock Exchange Ltd and not shown elsewhere in the annual report is as follows. The information is current as at 06 May 2019. Ordinary share capital 602,766,747 fully paid ordinary shares are held by 9,468 individual Shareholders. All ordinary shares carry one vote per share and carry the rights to dividends. The number of shareholders, by size of holding is: NUMBER OF SHARES 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and Over Total Unquoted equity securities NUMBER OF SHAREHOLDERS 2,138 3,514 1,537 2,091 188 9,468 As at 06 May 2019, there were 5,882,736 unlisted performance rights granted over unissued ordinary shares in the Company. The names of the twenty largest holders of quoted shares as shown in the Company’s Share Register are: NUMBER PERCENTAGE J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED BBRC INTERNATIONAL PTE LTD MEDICH PROPERTIES PTY LIMITES FORTE LAND PTY LTD BNP PARIBAS NOMS PTY LTD AACO NOMINEES PTY LIMITED NATIONAL NOMINEES LIMITED CUSTODIAL SERVICES LIMITED QUALITY LIFE PTY LTD NIZIN HOLDINGS PTY LTD BELL POTTER NOMINEES LTD BNP PARIBAS NOMINEES PTY LTD TASMAN SUPER PTY LIMITED UBS NOMINEES PTY LTD MR JOHN QIANE HE NEASHAM HOLDINGS PTY LTD MR BARRY MARTIN LAMBERT MR TROY CHRISTOPHER ANGUS 182,927,463 163,965,655 54,415,164 13.697,000 11,253,416 9,190,311 8,782,461 6,764,848 5,858,850 3,437,455 3,175,000 2,800,000 2,087,945 1,883,203 1,880,000 1,473,422 1,422,113 1,220,735 1,177,660 1,100,000 30.35% 27.20% 9.03% 2.27% 1.87% 1.52% 1.46% 1.12% 0.97% 0.57% 0.53% 0.46% 0.35% 0.31% 0.31% 0.24% 0.24% 0.20% 0.20% 0.18% The names of substantial shareholders who have notified the Company in accordance with section 671B of the Corporations Act 2001 are: ORDINARY SHAREHOLDERS Bryan Glinton as trustee of The AA Trust NUMBER 270,332,457 The number of security investors holding less than a marketable parcel of 439 securities ($1.140 on 06 May 2019) is 768 and they hold 131,402 securities. 87 Australian Agricultural Company Limited | ANNUAL REPORT 2019 Australian Agricultural Company Limited 15 010 892 270 Principal Place of Business Level 1, Tower A Gasworks Plaza 76 Skyring Terrace Newstead QLD 4006 Ph: (07) 3368 4400 Fax: (07) 3368 4401 www.aaco.com.au Link Market Services Limited Level 21, 10 Eagle Street Brisbane QLD 4000 Ph: 1300 554 474 www.linkmarketservices.com.au AACo shares are quoted on the Australian Securities Exchange under listing Code AAC. Allens Linklaters Level 26, 480 Queen Street Brisbane QLD 4000 KPMG Level 16, 71 Eagle Street Brisbane QLD 4000 The Annual General Meeting of Shareholders of the Australian Agricultural Company Limited will be held on Tuesday 31st July at 10:00am (Brisbane time) at Brisbane Convention and Exhibition Centre, Merivale & Glenelg Street, South Brisbane, Queensland 4101. 88 Australian Agricultural Company Limited | ANNUAL REPORT 2019 

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