AAC Clyde Space
Annual Report 2020

Plain-text annual report

Manager ASX Market Announcements Australian Securities Exchange Attached is the Company’s Annual Report for the 12 month period ended 31 March 2020 in the form in which it will be distributed to shareholders of the Company. This version will be mailed to those shareholders who have elected to receive a printed copy of the Annual Report as at 24 June 2020. Shareholders who have elected to receive the Annual Report electronically will receive an email on or about 24 June 2020 providing a link to the report on the Company’s website. AACo has released its inaugural Sustainability Benchmarking Report, you can find it on our website: https://aaco.com.au/about-us/environment-sustainability. This announcement is authorised to be given to the ASX by the AACo Board. Issued by: Bruce Bennett Company Secretary and General Counsel T H E A R T O F A U S T R A L I A N B E E F 2 0 2 0 A N N U A L R E P O R T Key Highlights Positive Statutory EBITDA result: +$80.1M Positive operating profit and operating cash flow delivered despite adverse seasonal conditions experienced during FY20. An increase of $262.8M v pcp driven by favourable livestock valuation movements year-on-year and positive operating profit result. +19.7% Strong wagyu meat sales achieved, up 19.7%, driven by positive price and volume growth. Operational efficiencies being realised through supply chain simplification and cost reduction programme. Strong sales growth across all key regions: +34% North America +17% Europe/ Middle East +19% Asia +16% Australia AACo has released its inaugural Sustainability Benchmarking Report, you can find it on our website: https://aaco.com.au/about-us/environment-sustainability SUSTAINABILITYAACO ANNUAL REPORTContents 02 Chairman’s Letter Page 02 03 Letter from the MD & CEO Page 04 04 Directors’ Report Page 08 05 Financial Report Page 40 06 ASX Information Page 90 07 Company Information Page 91 1 CONTENTSChairman’s Letter Dear Fellow Shareholders, Your company made solid progress during the financial year as our branded beef strategy gained momentum at home and in our export markets where our products have built a strong reputation amongst consumers for superior quality. We recorded double-digit wagyu meat sales growth across every region we operate as the company launched the brand across major cities globally. AACo has a proven ability to produce the highest quality beef at scale and we secure a premium price for it because our brands and our products are so well regarded internationally. Australian agricultural products generally have long been sought after in export markets because of our tough regulations which demand adherence to the highest safety and hygiene standards in farming practices and food processing. These high standards which permeate our supply chain, have given Australian food products an enviable reputation around the world. We see this sentiment play out in our export markets year after year with strong demand for AACo’s wagyu beef, particularly coming from Asia and the United States . The Asian market is an important one for AACo as it accounted for 66 percent of our total wagyu meat sales in FY20. Our market in North America made the biggest gains, recording a 34 percent increase year-on-year in wagyu meat sales revenue. As a branded beef business, the customer is central to our operations. In the past year Asian consumer trends towards the purchase of beef became increasingly influenced by several factors “While provenance is important to consumers, increasingly they are also demanding to know more about the sustainability practices of the companies from which they source their food.” D O N A L D M C G A U C H I E AO , C H A I R M A N 2 AACO ANNUAL REPORTincluding a growing middle class, changing diets and a protein deficiency brought on by the impact to Asia’s pork industry by African Swine Fever. Beef is widely accepted as more nutritious than other forms of protein. Consumer research by Meat and Livestock Australia found safety, freshness and origin ranked highest for customers in developing countries, while in more mature markets consumers care about quality, source and a point of difference. Customers tend to gravitate towards brands and sources that they trust. In the current uncertain global environment trust is especially important as we adapt our business to meet the demands of consumers who seek high quality beef from paddock to plate supply chains. Sustainability Report While provenance is important to consumers, increasingly they are also demanding to know more about the sustainability practices of the companies from which they source their food. Following the release of AACo’s sustainability policy, the Board has approved the release of AACo’s inaugural sustainability benchmarking report which details the measures we will adopt towards making the company and the industry become more sustainable. The report outlines the environmental, social and economic activities we will undertake as a company to meet our goals. The report focuses on four key areas around Animal Health and Welfare, Environmental Stewardship, People and Culture and Livestock Transport. With almost one percent of Australia’s land mass under our stewardship, we have an enormous responsibility to ensure that it is protected and maintained well. Sustainable practices will maintain our social licence to operate through continuous improvements using innovation, creativity and best practice so that we can continue to produce the best beef in the world. Portfolio of Assets Our world class pastoral properties increased by a net $63.6 million over the prior year, demonstrating the quality of the assets. Our operations spanning more than 26 stations, farms and feedlots provide pristine pastures and grow natural grasses, herbage and grains for our herd to graze on. During the year, we added Rewan Station in Central Queensland on a 10-year lease from Rural Funds Management. Rewan is a cattle backgrounding and finishing property about 200 kilometres south of Emerald. The property spans 17,500 hectares and benefits from high average rainfall which provides AACo extra capacity to background on reliable high performing country. Board of Directors The Board has not declared a dividend for AACo shareholders in FY20. We feel it is prudent in times of uncertainty to preserve cash and use all available resources to rebuild and invest in the company. On July 31, 2019 we welcomed Marc Blazer as a non- executive director, following the retirement of long serving non-executive director David Crombie AM . Marc brings a background in the global food and hospitality industry as well as a career in capital markets and understands how to build brands around people and products. As co-founder and director of several brand and hospitality related businesses, Marc is Chairman of the board of Noma Holdings, the parent company of two Michelin-starred restaurant “noma” in Copenhagen. Looking ahead Finally, I would like to commend the entire team led by Managing Director and CEO Hugh Killen for a pleasing result this year. The team showed resilience and commitment in overcoming the several obstacles facing the business to produce a positive set of financial and operating results. The company’s response to the challenges presented by COVID-19 showed strength and leadership in the industry. The speed at which all employees adapted their way of working and supported each other throughout the uncertainty is commendable. While the COVID-19 pandemic has presented unprecedented challenges, AACo sees this as an opportunity to examine everything we do as a company and ensure that we emerge as a stronger business. We are protecting our brands as we pivot deeper into retail and expand our presence in this channel. As we navigate through the uncertainty created by COVID-19, the company is focusing on controlling costs across the business. Yours sincerely, Donald McGauchie AO Chairman Australian Agricultural Company Limited 3 CHAIRMAN’S LETTER Letter from the MD & CEO Dear Fellow Shareholders, It is a pleasure to present you with AACo’s Fiscal Year 2020 Annual Report as the leader of a company as resilient as it is rich in history. Throughout the 196 years which AACo has been operating, we have survived drought, floods, wars and now a global pandemic. One thing which has been a constant throughout these challenges, is AACo’s ability to produce high quality beef at scale. We started the financial year continuing the enormous clean up and rebuild of our Gulf infrastructure after the devastating floods in February 2019 and ended the final few weeks of the financial year managing the fallout from COVID-19. In between these two challenging events and while still battling drought, AACo’s strategy to produce and supply high-quality branded beef for the global food service and retail sectors continued to deliver growth for your company and I thank each member of the AACo team for their loyalty and flexibility to adapt under challenging conditions. “Our solid first half performance continued into the second half of the year delivering a healthy operating profit...” H U G H K I L L E N , M A N A G I N G D I R E C T O R A N D C E O 4 AACO ANNUAL REPORTBranded beef strategy Our integrated supply chain helps us connect our product to our customers around the world. The targeted marketing strategy saw our premium brand Westholme launched in dozens of cities where the product features on the menus of top fine dining restaurants. Westholme now accounts for 11 percent of the total wagyu sales for the company. Throughout FY20, with our sales and marketing teams embedded around the world, AACo focused on cementing its presence in existing markets while establishing and growing others. This resulted in a 19.7 percent increase in wagyu beef sales for the year. This growth not only meant more volume of product was sold, but also at a higher price. We sold our wagyu products at 8 percent per kilogram higher this year than the previous year. In each of the regions which we sell into, we experienced double-digit sales growth. All of the beef which is part of AACo’s meat sales programme is wagyu beef, most of our products are branded and some are non-branded. A stand-out performer out of our regions was North America which delivered 34 percent revenue growth on wagyu meat sales and now accounts for 7 percent of our overall meat sales. In FY20 we made positive progress in rebuilding our presence in the US and Canada through the food service and retail channels and executed distribution partnerships across seven key cities in the US. We predominantly sell into food service in the US and Canada, however we are also growing our retail presence there targeting gourmet butchers, large supermarket chains and online retailers. Asia accounts for 66 percent of AACo’s total wagyu meat sales. South Korea is AACo’s largest market and we enjoy a long-established business and retail relationship going back more than 15 years. AACo is proud of the business we have built up in South Korea and we have a deep brand presence there which is supported through in-store promotions and demonstrations. Darling Downs Wagyu is a household name in South Korea and can be found on the shelves of the country’s largest supermarket chain. Other significant Asian markets in which we operate are China, Taiwan, Singapore, Hong Kong and Indonesia. Asia is a big and important market. We are noticing a trend in the Asia region whereby consumers are increasing their focus on provenance and clean, safe-farming and processing standards. Our business in Europe and Middle East saw good growth in FY20, with sales increasing 17 percent and the region accounting for about 12 percent of overall sales of wagyu beef for the company. We continued to restructure our distribution partnerships throughout Europe and the UK and launched Westholme in London. AACo’s retail presence in Europe and the Middle East is also set to be expanded. In our home market of Australia which accounts for 15 percent of overall wagyu meat sales, we revitalised our distribution partnerships in the three major eastern seaboard cities of Melbourne, Sydney and Brisbane. We focused on allocating our products into the high-end food service sector and gourmet butchers. The sales growth we achieved in Australia for FY20 was 16 percent. Financial Performance Our solid first half performance continued into the second half of the year contributing to the delivery of a healthy full year operating profit of $15.2 million. In addition, AACo recorded the highest operating cash flow in three years of $20.1 million despite absorbing approximately $42 million in elevated costs for feed and transport associated with the drought. These results were driven by our strong improvements across meat sales in FY20 while exercising discipline over costs which reduced by $31 million. Our Statutory EBITDA of $80.1 million was boosted by gains in the value of our herd and was a $262.8 million improvement on FY19 which recorded a loss of $182.7 million. AACo recorded a net profit after tax in FY20 of $31.3 million. There is still more work to be done on reducing AACo’s costs and continuing our focus on efficient uses of our assets through prudent capital and financial management. We have comfortable headroom in our banking covenants and secured an additional $50 million borrowing capacity during the year. Operations In FY20, AACo’s operations spanned more than 26 properties across stations, feedlots and farms in Queensland and the Northern Territory. We are focusing on streamlining our processes and simplifying our supply chain. We still have a lot of work to do to make AACo a more efficient business. Our farms which produce some of the feed for our cattle had a good year with average rainfall, although because of drought elsewhere, 5 LETTER FROM THE MD & CEOwe were hit by high freight costs. As the year wore on and the weather improved, our costs for feed and transport reduced significantly. In the first half of the year the elevated costs of feed and transport was about $36 million, while the second half of the year the extra cost was just $6 million. Our Livingstone Beef Operations in the Northern Territory remains suspended. Gulf Rebuild One of the biggest challenges to the business was the rebuild of the Gulf infrastructure after inundation in February 2019. The rebuild was completed before deadline and under budget in October 2019. All credit to the team who replaced sheds, tanks, troughs, a homestead, laid kilometres of pipe and constructed 572 kilometres of fence to replace those which were destroyed. The capital investment by the business was approximately $9 million. We lost a significant number of cattle as a result of the flood event and it was a very emotional time for the team involved and I commend them for the resilience they’ve demonstrated. Herd AACo’s herd ended the year 19 percent lower than in FY19, finishing just shy of 350,000 head. This reduced herd size is due to the losses of cattle in the Gulf floods and strategic destocking in response to drought and changes to the supply chain. Our breeding herd remains protected. People Our people are central to the operations and their safety and welfare is the priority at AACo. We are committed to improving our safety standards for our 423 full-time employees. AACo has a focus on creating a strong safety culture at AACo but more needs to be done. During the year, we implemented a number of safety initiatives to educate employees about risks which exist within their workplace and roles and their responsibilities with regards to keeping themselves and their colleagues safe. Key indicators of success in this space have been a significant increase in reporting of near misses and minor incidents, increases in safety meeting and toolbox talks and a 6-point improvement in safety engagement across the business. Ensuring our people understand AACo’s strategy and are committed to our values and goals helps to build a positive culture for our business. Chief Marketing Officer Appointment I am delighted to announce the appointment of Rosemary Scott as AACo’s Chief Marketing Officer. Rose will join the company in July 2020 and drive our global marketing strategy. With more than two decades of experience in marketing and sales domestically and internationally, Rose joins us from the beverage sector where she has worked with some of the top brands in the industry. Sustainability AACo has recently published its inaugural sustainability benchmarking report and we are taking every opportunity to integrate sustainable practices across our business. From people, livestock, land and communities we are adjusting our operations in an effort to become a better corporate citizen. Some examples are building a diverse workforce, supporting regional and remote communities through offering traineeships, best practice animal welfare including mandatory pain relief in all potentially painful surgical procedures on livestock and a switch to renewable energy where it is possible on our stations. We will give regular updates as to how we are progressing against our goals. COVID-19 Our response to the COVID-19 pandemic was swift and decisive. AACo immediately put in place management plans early to protect our people, communities and the company. We shared our plans with our industry peers and worked with the state and territory governments so that our people and livestock could continue to cross borders to ensure our operations were not disrupted. The impact of COVID-19 had a negligible impact on the FY20 results. As a business we are pivoting our sales strategy towards greater retail presence into the markets in which we operate after almost all of our food service export markets were disrupted by COVID-19. This is still very much a work in progress and the impact of the pandemic on the business remains uncertain. 6 AACO ANNUAL REPORT“Our response to the COVID-19 pandemic was swift and decisive. AACo put in place management plans early to protect our people, communities and the company.” Finally, I would like to thank the AACo team which has put in a tremendous effort in one of the most challenging years in the company’s recent history. Again, thank you to the Board for their guidance and to the shareholders for your ongoing support as we transform AACo into a branded beef business. Yours sincerely, Hugh Killen Managing Director and CEO Australian Agricultural Company Limited 7 LETTER FROM THE MD & CEODirectors’ Report DDIIRREECCTTOORRSS’’ RREEPPOORRTT Your Directors submit their report for the year ended 31 March 2020. DIRECTORS 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 Directors were in office for the entire period unless otherwise stated. Donald McGauchie AO, FAICD (Non-executive Chairman) 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 and Brand & Marketing 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: > > Nufarm Limited* – appointed December 2003 GrainCorp Limited* – appointed December 2009 *Denotes current Directorship Hugh Killen GMP (Harvard Business School) 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 | FINANCIAL REPORT 2020 8 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT DIRECTORS (continued) Stuart Black AM, FCA, FAICD, BA (Accounting) 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 Palla Pharma Limited, a former director of NetComm Wireless Limited, Coffey International Limited, 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 – resigned June 2019 Palla Pharma Limited* – appointed June 2016 *Denotes current Directorship Tom Keene BEc, FAICD Mr Keene was appointed a Director on 5 October 2011. Mr Keene is Chairman of the Staff and Remuneration Committee and a member of the Nomination Committee. Mr Keene has had an extensive career in agriculture; he 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 Dr Shehan Dissanayake Ph.D. Dr Shehan Dissanayake was appointed a Director on 27 April 2012, and was an Executive Director from 11 April 2017 to 20 November 2019. 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. 3 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 9 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT DIRECTORS (continued) Anthony Abraham BEc LLB (Accountancy and Law) Mr Abraham was appointed a Director on 7 September 2014. Mr Abraham is a member of the Audit and Risk Management Committee and 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. Neil Reisman JD Mr Reisman was appointed a Director on 10 May 2016. Mr Reisman is a member of the Audit and Risk Management Committee and the Nomination Committee. Mr Reisman was a Managing Director and member of the Board of Directors of the Tavistock Group, holding multiple roles including chairing Tavistock Group’s Investment Committee and having the General Counsel and Chief Financial Officer report into him. Mr Reisman 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 Bachelor 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 Jessica Rudd BCom LLB (Hons) Ms Rudd was appointed a director on 15 November 2017. Ms Rudd is a member of the Staff and Remuneration Committee, Nomination Committee and Brand & Marketing Committee. 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 served as a non-executive director. consultant for a global communications firm before moving to Beijing, where she lived and worked for five years. Beginning her career as a media and intellectual property lawyer, Ms Rudd later worked in London as a crisis management 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 – resigned 22 January 2020 4 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 10 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT DIRECTORS (continued) Marc Blazer MSc (LSE), BA (UMD) Appointed 31 July 2019 Mr Blazer was appointed a director on 31 July 2019. Mr Blazer is Chairman of the Brand & Marketing Committee. Mr Blazer is a leader in the international tourism and hospitality sector. Mr Blazer is currently the Chairman and CEO of Overture Holdings, a consumer, hospitality and brand investment group. He is also Chairman of the Board of Noma Holdings, the parent company of world renowned restaurant noma based in Copenhagen; co-founder and Executive Chairman of New York based PRIOR, a global hospitality and travel company; and Co-founder and Director of Ahimsa Partners, a venture that licenses, owns, and operates Le Pain Quotidien in India. In addition to his consumer and hospitality business activities, Mr Blazer has also had an extensive career in capital markets. Before becoming Chairman of Overture Holdings, he was a partner and the global head of investment banking at Cantor Fitzgerald. During his tenure, he was named one of Investment Dealer’s Digests 40-under-40 in 2006. Prior to joining Cantor Fitzgerald, Mr. Blazer spent six years at ChaseMellon Financial Corp. (now Bank of New York Mellon), a joint venture between Chase Manhattan Corporation and Mellon Financial Group LLC. Earlier in his career, Mr Blazer was an advisor to members of Congress in both the US House of Representatives and Senate on tax matters, banking and securities legislation, international trade policy, and foreign relations. Mr Blazer earned a graduate degree from the London School of Economics in 1992, and a BA from the University of Maryland in 1990. During the past three years Mr Blazer has not served as a Director of any other listed company. David Crombie AM, BEc (UQ) Retired 30 July 2019 Mr Crombie was appointed a Director on 5 October 2011 and retired on 30 July 2019. 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 COMPANY SECRETARY Bruce Bennett BCom, LLB Mr Bennett was appointed Company Secretary and General Counsel in November 2006. Before joining the Company, he 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 | FINANCIAL REPORT 2020 11 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT INTERESTS IN THE SHARES AND OPTIONS OF THE COMPANY AND RELATED BODIES CORPORATE 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 T. Keene Dr. S Dissanayake A. Abraham N. Reisman J. Rudd M. Blazer ORDINARY SHARES OPTIONS OVER ORDINARY SHARES PERFORMANCE RIGHTS 1,120,774 198,361 40,000 75,000 2,025,000 30,000 45,000 Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil Nil 253,681 Nil Nil Nil Nil Nil Nil Nil DIVIDENDS AND EARNINGS PER SHARE EARNINGS PER SHARE Basic earnings/(loss) per share Diluted earnings/(loss) per share No final or interim dividends were declared or paid during the current and prior financial periods. 31 MAR 2020 CENTS 31 MAR 2019 CENTS 5.25 5.25 (24.9) (24.9) 6 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 12 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT OPERATING AND FINANCIAL REVIEW About AACo 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’s Business Activities 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 423 employees calculated on a full time equivalent basis as at 31 March 2020 (31 March 2019: 424). AACo’s Business Model AACo is a fully integrated branded beef business with three principal activities: > > > Sales and marketing of high quality branded beef into global markets; Production of beef including breeding, backgrounding, feedlotting and processing of cattle; and Ownership, operation and development of pastoral properties. AACo operates an integrated cattle production system across 19 owned cattle stations, 3 leased stations, 3 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. The Company is large enough to obtain production efficiencies but small enough to target key markets and customers. Key Financial Indicators Used by Management The following table summarises financial indicators used by management to monitor and manage the Company. Operating Profit is one of the key performance metrics of the Company, as Management believe it is a better reflection of actual financial performance under the control of management. It 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 livestock at market value with the movement at cost of production. Management therefore believe that external stakeholders benefit from this metric being reported. Operating Profit is unaudited, non-IFRS financial information. Discussion on drivers of movements in key financial indicators are included in the Sales & Marketing, Production and Statutory Financial Results sections below. Meat sales Cattle sales Administration and selling costs Statutory EBITDA profit/(loss) Statutory EBIT profit/(loss) Net profit/(loss) after tax Net cash inflow/(outflow) from operating activities Underlying Operating Profit/(Loss) Operating Profit/(Loss) 31 MAR 2020 $000 31 MAR 2019 $000 MOVEMENTS $000 229,607 104,539 (37,572) 80,129 62,063 31,317 20,120 15,194 15,194 246,244 117,837 (41,200) (182,709) (194,083) (148,396) 12,990 23,720 (22,922) (16,637) (13,298) 3,628 262,838 256,146 179,713 7,130 (8,526) 38,116 Statutory EBITDA was a profit of $80.1 million in FY20 ($182.7 million loss in FY19), while Operating Profit was $15.2 million ($22.9 million loss in FY19, with an Underlying Profit of $23.7m after removing impacts of the Gulf Flood losses). Operating Profit/Loss does not include unrealised livestock gains or losses, while Statutory EBITDA does include these. This report is the first set of annual financial statements in which AASB 16 Leases has been applied by the Company. Under the transition method chosen, comparative information has not been restated, with the cumulative impact of adoption recognised as an improvement to the opening balance of retained earnings at 1 April 2019. The 31 March 2020 results are therefore not directly comparable with prior periods. Changes to significant accounting policies and the impact of applying this new standard are described in Note F2 and Note G3. 7 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 13 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT OPERATING AND FINANCIAL REVIEW (continued) Key Operational Indicators Used by Management Sales and Marketing In FY20, Luxury/Prestige revenues, volumes and $/kg 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 31 MAR 2020 31 MAR 2019 224.5 15.6 14.44 0.9 0.1 15.53 - - - 34.2 104.5 187.3 14.0 13.35 20.3 2.3 8.70 28.9 5.2 5.60 46.2 117.8 (1) CW – carton weight containing saleable boxed meat, LW – Live animal weight. Production 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 period, excluding the offsetting impact of attrition kilograms. Kilograms produced has reduced 21% on the previous corresponding period, due to strategic destocking, with continued cattle sales and lower cattle purchases in response to adverse seasonal conditions. 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 period. The cost of production increased by 17% on the previous corresponding period, due to a lower breeding herd, as well as a shift to a greater proportion of Wagyu production. Kilograms produced – mil Kg LW Cost of production – $/kg LW 31 MAR 2020 31 MAR 2019 54.1 3.38 68.9 2.88 8 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 14 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT OPERATING AND FINANCIAL REVIEW (continued) Operating Review During FY20, the Company has continued to make progress implementing its premium branded beef strategy. By leveraging off embedded sales and marketing capabilities in key markets, AACo has been able to achieve its highest Wagyu sales revenue to date: up 20% on FY19. Execution of brand transition has improved Westholme sales by over 50% over the prior year, with product launches driving increased brand awareness and demand. Further, the Company has driven growth across key markets in Asia and North America. During the year, the continuation and collaboration of our world-class executive team has driven cultural and business improvements across the organisation. A simplified business model and focus on the Wagyu supply chain has enabled a rationalisation of resources and operational expenditure. FY20 saw continued 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. Due to the drought conditions and loss of breeding cattle in the 2019 Gulf flood event, both Wagyu and Non- Wagyu head count has reduced. Despite the reduced herd numbers, the Company continues to be able to execute its branded beef strategy at an improved operating margin. Livestock Movements Livestock values as recorded on the Balance Sheet have improved from the prior year due to price improvements on Non-wagyu and Wagyu livestock, offset by headcount reductions. As the Company no longer retains composite cattle for boxed beef, there continues to be a lower reliance on non-wagyu herd numbers, which has led to a decline in the non-wagyu headcount. Further, the impact of the Gulf flood losses has impacted brandings during FY20, resulting in a decline in Wagyu headcount. Market values of Non-Wagyu and Wagyu animals have however improved over the past year, leading to a significant increase in the value of cattle held at year end. The Company’s ability to deliver against its premium branded beef strategy has not been impacted by these movements. Property Although it has continued to be a 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. Impacts of Coronavirus (COVID-19) The Company continues to monitor developments in the Novel Coronavirus (COVID-19) pandemic and the measures being implemented on the economy to control and slow the outbreak. Given the dynamic nature of these circumstances and the significant increase in economic uncertainty, the related impact on the Company's go forward consolidated results of operations, cash flows and financial condition cannot be reasonably estimated at this stage and will be reflected in the Company's 2021 interim and annual financial statements. 9 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 15 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT OPERATING AND FINANCIAL REVIEW (continued) Statutory Financial Results The FY20 results include a Statutory EBITDA profit of $80.1 million, driven primarily by positive market value movements in the value of the closing herd of $104.1 million. In summary: > > > > > > > Operating Profit of $15.2 million, compared with a loss of $22.9 million in FY19 Statutory EBITDA profit of $80.1 million, compared with a loss of $182.7 million for FY19 Total sales revenue of $334.1 million, compared with $364.1 million in FY19, with lower volumes due to the decision to cease Livingstone and 1824 production. Wagyu meat sales revenue was up 20% compared to FY19. Cost of production $/kg Live Weight increased by 17% in FY20, which is a reflection of lower volumes due to a lower breeding herd, as well as a shift to a greater proportion of Wagyu production Net tangible assets per share was $1.53 as at 31 March 2020, compared to $1.42 as at 31 March 2019, driven by improvements in the livestock market values and in the property portfolio The Company maintains a robust balance sheet, with comfortable headroom under existing bank covenants Positive net operating cash flows of $20.1 million, compared with $13.0 million in FY19 Risk Management 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 Regional 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. Net Tangible Assets The Company’s net tangible assets per share was $1.53 as at 31 March 2020, compared to $1.42 as at 31 March 2019. Net tangible assets of the Company include leasehold land assets. Business Strategies, Likely Developments and Expected Results 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. The impact of COVID-19 on the Company's go forward consolidated results of operations, cash flows and financial condition cannot be reasonably estimated at this stage and will be reflected in the Company's 2021 interim and annual financial statements. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS There have been no significant changes in the state of affairs of the Company during the financial year. Changes due to the impacts of COVID-19 which occurred after balance date, have been disclosed in the Significant Events after Balance Date note. 10 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 16 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT SIGNIFICANT EVENTS AFTER BALANCE DATE COVID-19 was declared a global pandemic by the World Health Organisation on 11 March 2020. The impact of the virus has seen an unprecedented global response by governments, regulators and numerous industry sectors. The Company’s financial results for FY20 have not been materially impacted by COVID-19, due to changes in the Company’s supply chain and sales falling after the end of financial year. Following the financial year-end, the Company has taken several steps to manage impacts of COVID-19, including accelerating our allocation of products to the retail markets, modifying sales and marketing priorities and reducing salaries of Directors, Executives and corporate staff for a period of time. Valuations included in the financial report such as the valuation of Pastoral property and improvements and Livestock are based on information available and relevant as at 31 March 2020, which is the Company’s balance date. As market conditions are changing daily, the values of these assets may have changed after the financial year-end. The Company continues to monitor developments in the COVID-19 pandemic and the measures being implemented on the economy to control and slow the outbreak. Given the dynamic nature of these circumstances and the significant increase in economic uncertainty, the related impact on the Company's go forward consolidated results of operations, cash flows and financial condition cannot be reasonably estimated at this stage and will be reflected in the Company's 2021 interim and annual financial statements. There have been no other significant events after the balance date which require disclosure in the financial report. ENVIRONMENTAL REGULATION AND PERFORMANCE > > > > > > > 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 2020. 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. 11 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 17 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT ENVIRONMENTAL REGULATION AND PERFORMANCE (continued) > 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. There have been no breaches of compliance with environmental regulations during the year ended 31 March 2020. SHARE OPTIONS Unissued Shares As at the date of this report, there were 567,810 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. Shares Issued as a Result of the Exercise of Options During 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. The performance rights will remain until such time as they are either exercised or the rights lapse. There were 202,510 shares issued on exercise of performance rights under the AACo Performance Rights Plan during the year. INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS 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 officers 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 | FINANCIAL REPORT 2020 18 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT CORPORATE GOVERNANCE STATEMENT The Company’s Corporate Governance Statement sets out the corporate governance framework adopted by the Board of Australian Agricultural Company Limited. This statement is publicly available on the Company’s external website: www.aaco.com.au/investors-media/corporate- governance. Board Skills Matrix 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 OUT OF 9 DIRECTORS 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 9 9 8 5 1 7 6 6 2 7 5 5 2 5 6 3 6 7 4 9 5 8 7 7 13 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 19 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) This remuneration report for the year ended 31 March 2020 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. Executive remuneration arrangements 6. Executive contractual arrangements 7. Link between remuneration and performance 8. Equity instruments disclosures 9. Loans to KMP and their related parties 10. Other transactions and balances with KMP and their related parties 14 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 20 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 1. Individual Key Management Personnel Details of KMP of the Company are set out in the following sections. (i) Directors Independent D. McGauchie H. Killen Dr S. Dissanayake N. Reisman A. Abraham S. Black T. Keene J. Rudd M. Blazer (1) Dr S. Dissanayake ceased being an Executive Director on 20 November 2019 but continued as a Non-executive Director (2) These directors of the Company were determined to be non-independent. Chairman, Non-executive Director Managing Director and Chief Executive Officer Non-executive Director (1) Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director 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 15 November 2017 Appointed 31 July 2019 Non-Independent Non-Independent Non-Independent Independent Independent Independent Independent Independent (2) (2) (2) (ii) Non-independent Directors 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 48.06% shareholder of the Company N. Reisman Mr N. Reisman is not considered independent as during the year he was an officer of Tavistock Group which controls the AA Trust which is a major 48.06% shareholder of the Company (iii) Directors who resigned or retired during the period D. Crombie Non-executive Director Independent Retired effective 30 July 2019 (iv) 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 (v) Executives who resigned, retired or otherwise ceased employment during the period None 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 | FINANCIAL REPORT 2020 21 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 2. Remuneration at a Glance Remuneration strategy and policy 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 is at the discretion of the Board after assessing the performance of the Company and the MD/CEO and other senior executives against agreed performance hurdles Offer participation in the long term incentives (LTI) plan to the MD/CEO and other senior executives 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 | FINANCIAL REPORT 2020 22 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 2. Remuneration at a Glance (continued) The following table illustrates the structure of the Company’s executive remuneration arrangements for the year ended 31 March 2020: 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 with a balance across financial, non-financial and 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 % 53 50-63 MD/CEO Key Management (1) 50% of cash bonus actually paid Board remuneration SHORT TERM INCENTIVES % 26 25-29 DEA INCENTIVE(1) % 13 13-15 LONG TERM INCENTIVE % 8 0-12 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. Use of Remuneration Consultants During the year ended 31 March 2020, PwC and Willis Towers Watson have provided assistance to the Company covering a range of remuneration matters, including the following: > > > Remuneration Strategy Review Senior Executive remuneration Long Term Incentive (LTI) Plan Assistance from external parties was limited to a review of the above remuneration matters. No changes have been recommended or made to the remuneration for directors or executives as a result of this remuneration assistance. In the year ended 31 March 2020, services provided by third parties totalled $43,302 (excluding GST and out-of-pocket expenses). 17 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 23 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 3. Board Oversight of Remuneration Staff and Remuneration Committee The Staff and Remuneration Committee currently comprises three independent non-executive Directors (Ms J. Rudd, 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 2019 Annual General Meeting (‘AGM’) The Company received 85.81% of ‘for’ votes in relation to its remuneration report for the year-ended 31 March 2019. 18 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 24 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 4. Non-Executive Director (NED) Remuneration Arrangements 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 Board identified large or otherwise important projects. Generally, Directors are not separately remunerated for membership in 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 2020 and 31 March 2019 is detailed in the table on page 33. 5. Executive Remuneration Arrangements 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. During the year ended 31 March 2020, 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 all Australian based 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 remuneration is detailed in the tables on pages 33 to 34. 19 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 25 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 5. Executive Remuneration Arrangements (continued) 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 an 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 in which the executive’s performance is being measured. In addition, Executives who are paid an STI cash bonus will 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 | FINANCIAL REPORT 2020 26 AACO ANNUAL REPORT CCOOMMPPAANNYY IINNFFOORRMMAATTIIOONN REMUNERATION REPORT (AUDITED) (continued) 5. Executive Remuneration Arrangements (continued) The structure of the short-term incentive plan is as follows: FEATURE Maximum opportunity Minimum opportunity Performance metrics 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 The STI metrics align with the strategic priorities at both a Company and business unit level. The general performance metrics for the KMP are as follows: METRIC Primary financial performance metrics of Operating Profit and Operating cash flow, in conjunction with Customer, Operations and People performance indicators. 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 targets for the MD/CEO and key executives were largely met and in certain cases exceeded the Board approved STI targets. In the uncertain and unprecedented environment created by COVID-19, the Board have exercised their discretion to not offer any STI bonus or DEA entitlement in relation to FY20 performance. The STI cash bonus paid or accrued for the MD/CEO or any other executive in respect of performance for the year to 31 March 2020 therefore amounts to $nil (31 March 2019: $nil). Consistent with the position on STI cash bonuses, a DEA was not offered in respect of performance for the year to 31 March 2020 (31 March 2019: $nil). 27 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 5. Executive Remuneration Arrangements (continued) 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 attempts to align 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 | FINANCIAL REPORT 2020 28 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 5. Executive Remuneration Arrangements (continued) 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) The performance condition for the first grant round of targeted market capitalisation of $1 billion was achieved on 5 June 2017. The rights associated with 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, offered during FY19, was forfeited in FY20 by all recipients as the performance condition of target market capitalisation was not met by 30 June 2019. 23 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 29 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 6. Executive Contractual Arrangements 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, AACo Singapore Holdings Pty Ltd Singapore Branch and AACo Operations (US) LLC. Total fixed remuneration CEO DESCRIPTION $600,000 including superannuation (subject to annual review by Board) SENIOR EXECUTIVE DESCRIPTION Range between $377,775 and $656,529 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 6 months Unvested performance rights lapse unless Good Leaver and Board exercises discretion to allow Termination for serious misconduct Nil Nil 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 FY20 performance and impact on remuneration In relation to the performance metrics for the payment of short-term incentives for KMP, being Operating Profit and Operating Cash Flow, in conjunction with Customer, Operations and People performance indicators, the Company largely achieved and in certain cases exceeded, the Board approved thresholds. In the uncertain and unprecedented environment created by COVID-19, the Board have exercised their discretion to not offer any STI bonus or DEA entitlement in relation to FY20 performance. Therefore, no STI cash bonuses have been paid or accrued nor DEA offered with respect to the 2020 financial year. 24 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 30 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 7. Link between Remuneration and Performance 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 Achieved Achieved 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 2020 31,317 5.25 - - 10% 20,120 2019 (148,396) 2018 (102,559) (24.9) (17.4) - - - - (14%) 12,990 (31%) (39,864) 2017 71,586 13.2 - - 28% 29,260 2016 67,807 12.7 - - (19%) 21,789 The table below shows the relative proportions of remuneration that were linked to performance and those that were fixed, based on the amounts disclosed as statutory remuneration expense (refer to tables on pages 33 to 34). Directors H. Killen Executives B. Bennett S. Grant N. Simonsz A. Speer A. O’Brien FIXED REMUNERTATION AT RISK – STI – CASH AT RISK – STI – DEA(1) AT RISK – LTI 2020 2019 2020 2019 2020 2019 2020 2019(2) 89% 84% 80% 100% 100% 100% 100% 70% 99% 99% 99% 100% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 2% 0% 0% 0% 0% 0% 3% 0% 0% 0% 0% 11% 16% 18% 27% 0% 0% 0% 0% 1% 1% 1% 0% (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. 25 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 31 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 7. Link between Remuneration and Performance (continued) Performance based remuneration granted during the year During FY20, Management has largely achieved the performance targets and thresholds approved by the Board to be eligible for STI cash bonuses and DEA entitlement. In the uncertain and unprecedented environment created by COVID-19, the Board have exercised their discretion to not offer any STI bonus or DEA entitlement in relation to FY20 performance. Therefore, no STI cash bonuses have been paid or accrued nor DEA offered with respect to the 2020 financial year. For each STI cash bonus and grant of rights to deferred shares (refer to tables on pages 33 to 34), the percentage of the available bonus or grant that was paid, or that vested, in the financial year, and the percentage that was forfeited as a result of the Board’s discretionary decision is set out below. Directors H. Killen Executives B. Bennett S. Grant N. Simonsz A. Speer A. O’Brien CURRENT YEAR STI ENTITLEMENT (CASH BONUS AND DEA) Total Opportunity ($) Awarded % Forfeited % 450,000 261,771 226,665 412,500 371,287 418,548 0% 0% 0% 0% 0% 0% 100% 100% 100% 100% 100% 100% 26 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 32 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 7. Link between Remuneration and Performance (continued) Remuneration of Key Management Personnel – Directors SHORT TERM SALARY & FEES CASH BONUS NON- MONETARY BENEFITS POST- EMPLOYMENT LONG-TERM BENEFIT TERMINATION SHARE BASED PAYMENT SUPER- ANNUATION LONG SERVICE LEAVE(1) BENEFITS SHORT TERM INCENTIVE (DEA) PERFORMANCE RIGHTS (LTI)(2) DIRECTORS Non-executive Directors $ $ $ $ $ $ $ 250,000 250,000 125,000 125,000 105,753(3) 100,000 D. McGauchie 31/03/2020 31/03/2019 S. Black 31/03/2020 31/03/2019 A. Abraham 31/03/2020 31/03/2019 T. Keene 31/03/2020 31/03/2019 Dr S. Dissanayake(4) 31/03/2020 31/03/2019 N. Reisman 31/03/2020 31/03/2019 J. Rudd 31/03/2020 31/03/2019 M. Blazer(5) 31/03/2020 134,247 140,000 189,625 239,800 115,000 115,000 105,507(3) 99,351 83,562 Executive Directors 643,498 648,509 H. Killen 31/03/2020 31/03/2019 Former Directors D. Crombie(6) 31/03/2020 31/03/2019 Total Remuneration: Directors 43,096 130,000 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 - - - - - - - - - - - - - - - 23,750 23,750 11,875 11,875 10,047 9,500 12,753 13,300 - - - - 10,023 10,149 - - - 19,445 12,964 25,664 20,089 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 N/A - - N/A N/A - - 4,094 12,350 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 N/A - - N/A N/A TOTAL $ 273,750 273,750 136,875 136,875 115,800 109,500 147,000 153,300 189,625 239,800 115,000 115,000 115,530 109,500 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 83,562 85,603 129,919 774,210 811,481 N/A N/A 47,190 142,350 - - 19,445 12,964 98,206 101,013 1,795,288 1,847,660 31/03/2020 31/03/2019 (1) Long service leave balances are only accrued from 5 years’ service onwards, and this is not applicable to non-executive directors (2) The LTI expense is based on estimates of the expected value of rights to be granted under the LTI plan at that point in time (3) A. Abraham was appointed as a member of the Audit and Risk Committee on 12 November 2019 and J. Rudd was appointed as a member of the Staff and Remuneration Committee on 18 November 2019. (4) Dr S. Dissanayake ceased being an Executive Director on 20 November 2019 but continued as a Non-executive Director (5) M. Blazer was appointed as a Non-executive Director on 31 July 2019 (6) D. Crombie retired as a Non-executive Director on 30 July 2019 1,998,542 2,091,556 85,603 129,919 - - - - - - 27 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 33 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 7. Link between Remuneration and Performance (continued) Remuneration of Key Management Personnel – Other KMP SHORT TERM POST- EMPLOYMENT LONG-TERM BENEFIT TERMINATION SHARE BASED PAYMENT NON- MONETARY BENEFITS SUPER- ANNUATION LONG SERVICE LEAVE(1) BENEFITS SHORT TERM INCENTIVE (DEA)(2) PERFORMANCE RIGHTS (LTI)(3) $ $ $ $ TOTAL $ SALARY & FEES OTHER PAYMENTS $ $ EXECUTIVES Other KMP B. Bennett 31/03/2020 359,194 31/03/2019 310,523 S. Grant 31/03/2020 405,664 - - - 31/03/2019 381,225 40,000 N. Simonsz 31/03/2020 594,013 31/03/2019 397,508 - - A. Speer $ - - 4,200 4,200 4,200 2,800 31/03/2020 532,223 25,000(4) 12,435 31/03/2019 362,235 100,000 1,976 A. O’Brien 31/03/2020 676,201 70,000(5) 31/03/2019 147,585 - Total Remuneration: Other KMP - - 20,828 20,049 18,483 31,707 21,434 19,317 20,764 13,753 - - 3,136 - - - - - - - - - - - - - - - - - - - - 7,162 15,599 85,603 475,923 125,524 471,695 - - - - - - - - - 1,465 428,347 458,597 - 2,832 619,647 422,457 - 2,637 590,422 480,601 - - 746,201 147,585 7,162 85,603 2,860,540 31/03/2020 2,567,295 95,000 20,835 81,509 3,136 8,976 1,599,076 140,000 31/03/2019 - (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 is based on estimates of the expected value of rights to be granted under the LTI plan at that point in time (4) Other payments to A. Speer during FY20 relates to an anniversary payment (5) Other payments to A. O’Brien during FY20 relates to a relocation assistance package 84,826 15,599 - 132,458 1,980,935 No STI cash incentives were granted during the 12-month period ended 31 March 2020. 28 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 34 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 8. Equity Instruments Disclosures Nil performance rights under the LTI plan and Nil DEA performance rights were granted during the twelve months to 31 March 2020 (31 March 2019: 5,948,897 performance rights under the LTI plan and nil DEA performance rights). 178,834 shares were distributed to key management personnel during the year-ended 31 March 2020, as a result of exercising vested performance rights granted during 2018 (31 March 2019: 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 F8 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 GRANTED AS REMUNERATION EXERCISED DURING THE YEAR NET CHANGE OTHER (1) BALANCE AT END OF PERIOD NOT VESTED AND NOT EXERCISABLE VESTED AND EXERCISABLE VALUE YET TO VEST (2) NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER NUMBER FISCAL YEAR GRANTED $ 271,440 288,969 - - - 2020 Executives H. Killen B. Bennett S. Grant N. Simonsz A. Speer 2018, 2019 2,042,476 2018, 2019 783,724 2019 2019 2019 426,059 823,713 766,905 - - - - - (84,561) (1,704,234) 253,681 253,681 (94,273) (426,059) 263,392 263,392 - - - (426,059) (823,713) (766,905) - - - - - - - - - - - A. O’Brien (1) Represents the second grant round that was forfeited due to the market cap performance condition not being met on 30 June 2019. (2) The maximum value of the deferred shares yet to vest has been determined as the amount of the grant date fair value of the rights that is yet to - - - - - - - - - be expensed. The minimum value of deferred shares yet to vest is nil, as the shares will be forfeited if the vesting conditions are not met. No other Directors or executives held options or performance rights during the period. 29 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 35 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT REMUNERATION REPORT (AUDITED) (continued) 8. Equity Instruments Disclosures (continued) 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. 2020 Directors D. McGauchie H. Killen S. Black T. Keene A. Abraham Dr S. Dissanayake N. Reisman J. Rudd M. Blazer Executives B. Bennett S. Grant N. Simonsz A. Speer A. O’Brien Total BALANCE AT BEGINNING OF PERIOD NUMBER GRANTED AS REMUNERATION EXERCISE OF OPTIONS/RIGHTS NET CHANGE OTHER BALANCE AT END OF PERIOD NUMBER NUMBER NUMBER NUMBER 1,120,774 113,800 40,000 75,000 30,000 2,025,000 45,000 - - 97,142 - - - - 3,546,716 - - - - - - - - - - - - - - - - 84,561 - - - - - - - 94,273 - - - - 178,834 - - - - - - - - - - - - - 1,120,774 198,361 40,000 75,000 30,000 2,025,000 45,000 - - 191,415 - - - 50,000 50,000 50,000 3,775,550 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. 9. Loans to key management personnel and their related parties There are no loans outstanding with the key management personnel at 31 March 2020 (31 March 2019: nil), nor have there been any transactions that would be considered a loan throughout the period. 10. Other transactions and balances with key management personnel and their related parties There have been no other transactions with key management personnel or their related parties during the financial year to 31 March 2020 (31 March 2019: nil). 30 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 36 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT DIRECTORS’ MEETINGS 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 BRAND & MARKETING COMMITTEE(1) A 9 9 9 3 9 9 9 9 9 7 B 9 9 9 3 9 8 9 9 9 7 A 10 10 10 4 10 10 10 10 10 7 B 10* 10* 10(2) 4 10 6* 10(3) 9 8* 5* A 7 7 7 3 7 7 7 7 7 5 B 7 7* 7 3 7* 5* 7* 7* 6(4) 5* A 1 1 1 1 1 1 1 1 1 0 B 1 1* 1 1 1 1* 1 1 1 0* A 2 2 2 0 2 2 2 2 2 2 B 2 2* 0* 0 0* 0* 0* 0* 1 2 D. McGauchie H. Killen¥ T. Keene D. Crombie S. Black Dr S. Dissanayake A. Abraham N. Reisman J. Rudd M. Blazer A = Number of meetings held during the time the Director held office 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 (1) The Brand & Marketing Committee was formed by the Board on 5 February 2020 (2) Mr. Keene retired as a member of the Audit & Risk Management Committee on 11 November 2019 (3) Mr. Abraham was appointed as a member of the Audit & Risk Management Committee on 12 November 2019 (4) Ms. Rudd was appointed as a member of the Staff & Remuneration Committee on 18 November 2019 Committee Membership As at the date of this report, the Company had an Audit and Risk Management Committee, Staff and Remuneration Committee, Nomination Committee and a Brand & Marketing Committee. Rounding 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 | FINANCIAL REPORT 2020 37 DIRECTORS’ REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT AUDITOR INDEPENDENCE We have obtained the following independence declaration from our auditors KPMG. Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Australian Agricultural Company Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Australian Agricultural Company Limited for the financial year ended 31 March 2020 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Simon Crane Partner Brisbane 20 May 2020 32 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 38 AACO ANNUAL REPORT DDIIRREECCTTOORRSS’’ RREEPPOORRTT NON AUDIT SERVICES 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 Training workshop Review of draft sustainability report Signed in accordance with a resolution of the Directors 31 MAR 2020 $ - 19,600 19,600 31 MAR 2019 $ 23,150 - 23,150 Donald McGauchie Chairman Brisbane 20 May 2020 Hugh Killen Managing Director Brisbane 20 May 2020 33 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 39 DIRECTORS’ REPORT Financial Report CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS Consolidated Income Statement For the year ended 31 March 2020 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 (Loss)/gain on equity investments Depreciation and amortisation Profit/(Loss) before finance costs and income tax Finance costs Profit/(Loss) before income tax Income tax (expense)/benefit Net profit/(loss) after tax PROFIT/(LOSS) PER SHARE ATTRIBUTABLE TO THE ORDINARY EQUITY HOLDERS OF THE PARENT Basic profit/(loss) per share Diluted profit/(loss) per share NOTE 31 MAR 2020 $000 31 MAR 2019 $000 229,607 104,539 334,146 285,810 619,956 (199,779) (99,428) (130,001) 190,748 246,244 117,837 364,081 58,389 422,470 (226,549) (108,858) (142,082) (55,019) 4,174 1,888 (47,903) (37,572) (25,756) (3,562) (172) (17,894) 62,063 (14,935) 47,128 (15,811) 31,317 CENTS 5.25 5.25 (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) A3 A2 F4 F4 F4 F3 C5 C5 The above Consolidated Income Statement should be read in conjunction with the accompanying notes. 35 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 40 AACO ANNUAL REPORT CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS Consolidated Statement of Comprehensive Income For the year ended 31 March 2020 Profit/(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 profit/(loss) for the year, net of tax 31 MAR 2020 $000 31 MAR 2019 $000 31,317 (148,396) 44,528 21,942 (6,305) 38,223 69,540 (4,628) 17,314 (131,082) The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 36 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 41 FINANCIAL REPORT CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS Consolidated Statement of Financial Position As at 31 March 2020 NOTE 31 MAR 2020 $000 31 MAR 2019 $000 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 Right-of-use assets Investments Other receivables Total Non-Current Assets Total Assets Current Liabilities Trade and other payables Provisions Lease liabilities Derivatives Total Current Liabilities Non-Current Liabilities Provisions Borrowings Lease liabilities Derivatives Deferred tax liabilities Total Non-Current Liabilities Total Liabilities Net Assets Equity Contributed equity Reserves Retained earnings/(losses) Total Equity B1 B4 B3 A3 A3 A4 F2 F6 B5 F2 C2 C1 F2 C2 F3 C3 F5 18,125 9,907 26,571 186,995 2,895 244,493 285,974 870,652 1,995 28,159 3,402 867 7,565 18,661 33,684 171,006 1,099 232,015 252,331 795,341 2,534 - 3,613 742 1,191,049 1,435,542 1,054,561 1,286,576 22,358 2,962 7,600 8,941 41,861 2,891 379,768 25,791 7,324 64,518 480,292 522,153 913,389 528,822 473,085 (88,518) 913,389 29,818 3,397 1,658 8,319 43,192 4,578 361,632 2,782 - 30,732 399,724 442,916 843,660 528,822 435,369 (120,531) 843,660 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 37 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 42 AACO ANNUAL REPORT CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS Consolidated Statement of Changes in Equity For the year ended 31 March 2020 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 At 1 April 2019 Adjustment to opening retained losses for AASB16 (Note F2) Adjusted opening balances Profit for the year Other comprehensive income Total comprehensive income 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 2020 CONTRIBUTED EQUITY (NOTE C3) $000 531,937 RESERVES (NOTE F5) $000 417,718 RETAINED EARNINGS/(LOSSES) $000 27,865 - - - - (3,115) - - - 17,314 17,314 - - (10) 347 TOTAL EQUITY $000 977,520 (148,396) 17,314 (131,082) (148,396) - (148,396) - - - - - (3,115) (10) 347 528,822 435,369 (120,531) 843,660 528,822 - 528,822 - - - - - - - 435,369 - 435,369 - 38,223 38,223 - - (762) 255 (120,531) 696 (119,835) 31,317 - 31,317 - - - - 843,660 696 844,356 31,317 38,223 69,540 - - (762) 255 528,822 473,085 (88,518) 913,389 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 38 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 43 FINANCIAL REPORT CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS Consolidated Statement of Cash Flows For the year ended 31 March 2020 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 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, net of transaction costs Acquisition of treasury shares Principal repayments of leases Net cash inflow from financing activities Net increase/(decrease) in cash Cash at the beginning of the year Cash at the end of the year NOTE 31 MAR 2020 $000 31 MAR 2019 $000 359,182 (324,339) 68 34,911 (14,791) 20,120 378,285 (352,742) 108 25,651 (12,661) 12,990 (22,666) (25,967) 748 (148) 426 (487) (22,066) (26,028) 37,000 (19,000) - (5,494) 12,506 10,560 7,565 18,125 37,000 (24,500) (3,115) - 9,385 (3,653) 11,218 7,565 B2 B1 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 39 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 44 AACO ANNUAL REPORT IINNDDEEXX –– NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS 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 Right-of-use Assets and Lease Liabilities F3 Tax F4 Other Earnings Disclosures F5 Reserves F6 Investments F7 Related Parties F8 Share-based Payments F9 Controlled Entities F10 Parent Entity F11 Auditor’s Remuneration F12 Significant Events After Balance Date G POLICY DISCLOSURES G1 Corporate Information G2 Basis of Preparation G3 Accounting Policies 40 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 45 PAGE 46 41 47 42 48 43 51 46 53 48 56 51 56 51 56 51 57 52 57 52 53 58 53 58 54 59 55 60 55 60 55 60 61 56 62 57 62 57 63 58 63 58 65 60 65 60 65 60 66 61 67 62 68 63 68 63 69 64 69 64 70 65 73 68 75 70 75 70 76 71 76 71 76 71 77 72 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 A FINANCIAL PERFORMANCE A1 Significant Matters Property Revaluation The Company recorded a $63.6 million increase in the value of the Company’s pastoral property and improvements, following a Directors’ assessment of fair value at 31 March 2020. In assessing fair value, the Directors utilised information provided by an independent valuation performed by CBRE during FY20. The revaluation reflects value increases resulting from capital investments made to our properties, and increased prices for recent comparable property sales. See note A4 for further details. Herd Numbers The closing herd head count is 19.1% lower than prior year, as Management responded to continued dry seasonal conditions and changes to the supply chain through strategic destocking. Herd Valuation Improvements in cattle market prices since 31 March 2019 have resulted in an unrealised gain in the fair value of the herd of $104.1 million. Livingstone Beef At 31 March 2020, consideration was given to internal and external factors that may impact the recoverable value of the Cash-Generating Unit, noting no indications of a material change to the recoverable 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 monitor and review various strategic options for Livingstone Beef. Impacts of Coronavirus (COVID-19) Valuations included in the financial report such as the valuation of Pastoral property and improvements and Livestock are based on information available and relevant as at 31 March 2020, which is the Company’s balance date. As market conditions are changing daily particularly due to the uncertainty surrounding COVID-19, the values of these assets may have changed after the financial year-end and the related impact on the Company's FY21 results cannot be reasonably estimated at this stage. 41 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 46 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 A2 Operating Margin 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 2020 $000 31 MAR 2019 $000 229,607 (199,779) 29,828 104,539 (99,428) 5,111 285,810 (62,145) (67,856) 155,809 246,244 (226,549) 19,695 117,837 (108,858) 8,979 58,389 (69,448) (72,634) (83,693) 190,748 (55,019) A3 (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. Refer to note A3 for financial information and accounting policies related to Livestock. 42 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 47 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 A3 Livestock CATTLE AT FAIR VALUE Current Non-Current Total livestock LIVESTOCK MOVEMENT Opening carrying amount Changes in fair value Purchases of livestock 31 MAR 2020 $000 186,995 285,974 472,969 31 MAR 2020 HEAD 104,197 241,888 346,085 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 Total cattle fair value adjustments 31 MAR 2019 $000 171,006 252,331 423,337 31 MAR 2020 $000 423,337 285,810 22,345 (99,428) (159,095) 472,969 31 MAR 2020 $000 104,144 150,752 42,436 (11,250) - (272) 285,810 31 MAR 2019 HEAD 148,565 279,340 427,905 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) 58,389 (1) As a biological asset, AASB 141 Agriculture requires the livestock to be valued at fair value less costs to sell at all times prior to sale or harvest. As such, value increases occur through changes in fair value 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, grows, ages, and progresses through the various stages to become a trading or production animal. (3) Due to the Gulf flooding event in February 2019, the Company recognised additional attrition reflecting livestock lost in this unprecedented natural disaster. Accounting Policies – Livestock Livestock is measured at fair value less costs to sell, with any change recognised in the profit or loss. 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. 43 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 48 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 A3 Livestock (continued) Livestock fair value At the end of each reporting period, we measure livestock at fair value less costs to sell. The fair value is determined through price movements and movements in the weight of the herd due to growth, attrition, natural increase, harvest or sale. The net increments or decrements in the market value of livestock are recognised as either gains or losses in the profit or loss, 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 2020 $000 31 MAR 2020 HEAD 31 MAR 2019 $000 31 MAR 2019 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 - 262,150 80,912 18,474 111,433 472,969 - - 197,463 235,387 70,740 42,721 35,161 346,085 $1,367 86,406 13,835 87,709 423,337 - 218,918 111,323 58,956 38,708 427,905 $989 44 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 49 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 A3 TYPE Livestock (continued) 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 animal 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 2020 $000 31 MAR 2020 HEAD 31 MAR 2019 $000 31 MAR 2019 HEAD 13,835 4,639 18,474 58,956 (16,235) 42,721 $432 36,021 (22,186) 13,835 86,716 (27,760) 58,956 $235 (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 2020 $000 31 MAR 2020 HEAD 31 MAR 2019 $000 31 MAR 2019 HEAD 87,709 99,613 (134,249) (1,381) 59,741 111,433 38,708 54,044 (57,035) (556) - 35,161 $3,169 117,208 104,227 (134,973) (831) 2,078 87,709 44,859 50,369 (56,202) (318) - 38,708 $2,266 45 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 50 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 A4 Property 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 2020 $000 31 MAR 2019 $000 810,560 738,462 F1 F1 F1 30,998 26,084 3,010 31,278 24,380 1,221 870,652 795,341 Pastoral property and improvements at fair value 31 MAR 2020 Opening balance Additions Disposals Net revaluation increment/(decrement) recognised in asset revaluation reserve (Note F5) Depreciation Closing balance 31 MAR 2019 Opening balance Additions Disposals Net revaluation increment/(decrement) recognised in asset revaluation reserve (Note F5) Depreciation Closing balance TOTAL $000 738,462 14,199 (243) 63,611 (5,469) 810,560 TOTAL $000 698,207 14,410 (402) 31,346 (5,099) 738,462 Accounting policies – Pastoral property and improvements at fair value Freehold pastoral property and improvements, and pastoral property and improvements held under statutory leases with government bodies, are carried at 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 profit or loss. Any revaluation decrement is recognised in the profit or loss 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 profit or loss as incurred. Pastoral landholdings are generally held under a leasehold agreement with the Crown. Leasehold properties in Queensland are mainly pastoral holdings which are rolling term leases. In the Northern Territory, the pastoral leases held have been granted on a perpetual basis by the Northern Territory Government. We treat statutory leases held with government bodies as perpetual leases. Perpetual leases are specifically excluded from measurement under AASB 16 Leases. This accounting policy excludes Right-of-use Assets disclosed in Note F2. 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. 46 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 51 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 A4 Property (continued) Fair value 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 2020 $000 31 MAR 2019 $000 VALUATION TECHNIQUE 692,460 629,162 Direct Comparison (Productive Unit Approach) SIGNIFICANT UNOBSERVABLE INPUTS Number of adult equivalents 48,000 43,850 Direct Comparison (Hectare Rate Approach) 70,100 65,450 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 2020 RANGE/(AVERAGE) 31 MAR 2019 RANGE/(AVERAGE) 5,350 – 89,200 25,553 $1,050 - $5,500 $1,856 5,350 – 89,200 25,406 $1,000 - $4,500 $1,669 18 $1,410 $1,410 1 18 $1,289 $1,289 1 $3,611 - $3,771 $3,691 $3,521 - $3,528 $3,525 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 2020. 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 FY20 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. 47 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 52 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 A4 Property (continued) 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 A5 Segment Information Identification of reportable segments 31 MAR 2020 $000 357,921 (62,979) 294,942 31 MAR 2019 $000 343,722 (57,510) 286,212 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. Reportable segments 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. Accounting policies and inter-segment transactions 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 movement in livestock and inventory volume at cost of production, whilst Statutory EBITDA results include revaluations based on market prices for livestock movements. 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 2020 and 31 March 2019. Segment assets and liabilities are not reported to the MD/CEO and therefore segment assets and liabilities are not separately disclosed. 48 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 53 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 A5 Segment Information (continued) 31 MAR 2020 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 profit/(loss) Depreciation and amortisation Loss on equity investments Statutory EBIT profit/(loss) Net finance costs Income tax expense Net profit after tax 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 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 $000 334,146 - 334,146 21,027 17,067 (1,764) 49,632 85,962 (16,994) (172) 68,796 - - - (5,833) - - - (5,833) (900) - (6,733) - - - -- - - - -- - - -- 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 - -- - - - - - - -- - - -- TOTAL $000 334,146 - 334,146 15,194 17,067 (1,764) 49,632 80,129 (17,894) (172) 62,063 (14,935) (15,811) 31,317 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) 49 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 54 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 A5 Segment Information (continued) Revenues from external customers MEAT SALES REVENUES South Korea China Australia USA Other countries Total meat sales revenue per Income Statement 31 MAR 2020 $000 31 MAR 2019 $000 68,873 34,005 33,476 14,177 79,076 229,607 65,876 25,860 47,592 19,860 87,056 246,244 Meat sales revenues of $87.1 million were derived from two of the Company’s major external customers (31 March 2019: $58.9 million from one 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 2020 $000 104,539 104,539 31 MAR 2019 $000 117,837 117,837 50 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 55 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 B WORKING CAPITAL B1 Net Working Capital Cash Inventory and consumables Trade and other receivables Trade and other payables Net working capital B2 Cash NOTE B3 B4 B5 31 MAR 2020 $000 31 MAR 2019 $000 18,125 26,571 9,907 (22,358) 32,245 7,565 33,684 18,661 (29,818) 30,092 RECONCILIATION OF NET PROFIT/(LOSS) AFTER TAX TO NET CASH FLOWS FROM OPERATIONS Net profit/(loss) after income tax Adjustments for: Depreciation and amortisation (Gain)/loss on equity investments 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 inflow from operating activities B3 Inventory and Consumables Meat inventory Feedlot commodities Bulk stores Other inventory 31 MAR 2020 $000 31,317 31 MAR 2019 $000 (148,396) 17,894 172 (748) (317) 255 (49,632) (17,677) (7,238) 7,113 8,629 (1,797) 33,786 (7,460) 7,946 (2,123) 20,120 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 31 MAR 2020 $000 31 MAR 2019 $000 8,304 10,632 6,088 1,547 26,571 13,917 10,275 7,964 1,528 33,684 51 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 56 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 B4 Trade and Other Receivables Trade receivables Provision for impairment of receivables Other receivables 31 MAR 2020 $000 31 MAR 2019 $000 9,402 (896) 8,506 1,401 9,907 17,143 (319) 16,824 1,837 18,661 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 2020 $000 9,041 14 347 9,402 31 MAR 2019 $000 16,804 2 337 17,143 31 MAR 2020 $000 31 MAR 2019 $000 (717) (7) (172) (896) (253) - (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 section D for more information on the risk management policy of the Company. B5 Trade and Other Payables Trade payables Other payables Deferred revenue 31 MAR 2020 $000 31 MAR 2019 $000 15,380 6,265 713 22,358 22,398 4,023 3,397 29,818 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 F7 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 2020 $000 22,300 31 MAR 2019 $000 21,712 46 12 22,358 686 - 22,398 52 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 57 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 C FUNDING AND CAPITAL MANAGEMENT C1 Borrowings Non-Current Secured bank loan facility Secured bank loan facility 31 MAR 2020 $000 31 MAR 2019 $000 379,768 379,768 361,632 361,632 The Company has successfully secured access to an additional $50 million in borrowing capacity under the currently held debt facilities. This increase expands combined available capacity from $500 million to $550 million ($390m Facility A + $160m Facility B). The increase in borrowing capacity will ensure the company is well positioned to respond to any future adverse seasonal conditions. Cost of funds under the amended facility arrangement is materially consistent with prior arrangement. Facility A loans are repayable on 8 September 2022 and Facility B loans are repayable on 8 September 2021. The interest on these facilities is charged at the applicable BBSY rate + Margin. The facility is currently drawn down by $380.7 million (31 March 2019: $362.7 million) and is offset in the Statement of Financial Position by a prepaid facility participation fee of $0.9 million (31 March 2019: $1 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 C2 Derivatives Current Interest rate swap contracts Foreign currency contracts Non-Current Interest rate swap contracts Foreign currency contracts 31 MAR 2020 $000 31 MAR 2019 $000 550,000 3,000 (382,154) 170,846 500,000 3,000 (364,154) 138,846 31 MAR 2020 $000 31 MAR 2019 $000 4,629 4,312 8,941 6,943 381 7,324 6,884 1,435 8,319 - - - 53 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 58 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 C2 Derivatives (continued) Foreign currency contracts SELL FX/BUY AUD Sell USD Maturity 0-12 months Sell USD Maturity 12-24 months NOTIONAL AMOUNTS (AUD) 31 MAR 2020 $000 NOTIONAL AMOUNTS (AUD) 31 MAR 2019 $000 AVERAGE EXCHANGE RATE 31 MAR 2020 $000 AVERAGE EXCHANGE RATE 31 MAR 2019 $000 42,709 2,894 45,603 48,391 - 48,391 0.6790 0.6912 0.7339 - 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. 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 2020 was AUD $45.6 million (31 March 2019: AUD $48.4 million). The net fair value loss on foreign currency derivatives during the twelve months to 31 March 2020 was $4,693,000 with $4,381,000 effective and $311,000 ineffective (12 months to 31 March 2019: $1,435,000 loss with $1,358,000 effective and $77,000 ineffective). Interest rate swap contracts 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 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, swap floating rate debt for fixed, and have been designated as effective 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 2020 $000 - 235,000 31 MAR 2019 $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 the hedging reserve component of equity, 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 2020 the related loss recognised in profit or loss was $2.7 million (twelve months to 31 March 2019: $2.1 million). There was no hedge ineffectiveness in the current or prior year. C3 Equity Opening balance 596,001,899 598,430,888 528,822 531,937 31 MAR 2020 SHARES 31 MAR 2019 SHARES 31 MAR 2020 $000 31 MAR 2019 $000 Shares issued on exercise of performance rights 202,510 Shares issued on exercise of options Treasury shares acquired Total contributed equity - - (2,428,989) - - - - - 596,204,409 596,001,899 528,822 - - (3,115) 528,822 54 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 59 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 C4 Capital Management 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 remains between 20.0% to 35.0%, excluding any impacts of the adoption of AASB 16 Leases. We include within net debt, interest-bearing loans and borrowings. For the Company’s financial risk management objectives and policies refer to section D. ASSETS AND CAPITAL STRUCTURE Current debt Lease liabilities Non-current debt Lease liabilities Bank loan facility (1) Bank guarantees Cash Net debt Net equity Total capital employed Gearing (net debt/net debt+equity) 31 MAR 2020 $000 31 MAR 2019 $000 7,600 1,658 25,791 380,700 1,454 (18,125) 397,420 913,389 1,310,809 30.32% 2,782 362,700 1,454 (7,565) 361,029 843,660 1,204,689 29.97% Gearing (net debt/net debt+equity) pre-AASB 16 adoption (1) The gearing ratio is calculated utilising the drawn-down balance of the bank loan facility. This is not offset for $0.9 million of prepaid 28.79% 29.97% borrowing costs. C5 Earnings Per Share The following reflects the income used in the basic and diluted earnings per share computations: Net profit/(loss) attributable to ordinary equity holders of the parent (basic) Net profit/(loss) attributable to ordinary equity holders of the parent (diluted) 31 MAR 2020 $000 31,317 31,317 31 MAR 2019 $000 (148,396) (148,396) 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 2020 SHARES 596,346,436 31 MAR 2019 SHARES 596,690,028 567,810 - Weighted average number of ordinary shares (diluted) as at 31 March 596,914,246 596,690,028 C6 Dividends No final or interim dividends were declared and/or paid during the twelve months to 31 March 2020 (twelve months to 31 March 2019: nil). There are no franking credits available for the subsequent financial year (31 March 2019: nil). 55 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 60 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 D FINANCIAL RISK MANAGEMENT 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 2020 and 31 March 2019, 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. D1 Interest Rate Risk 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 unrealised fair value loss on interest rate swaps during the twelve months to 31 March 2020 was $11.6 million (31 March 2019: $6.9 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 2020, after taking into account the effect of interest rate swaps, approximately 61.7% (31 March 2019: 65%) 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 2020 $000 31 MAR 2019 $000 18,125 7,565 (145,700) (11,572) (139,147) (127,700) (6,884) (127,019) 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 2020 +1% (100 basis points) -1% (100 basis points) 31 MAR 2019 +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 (1,457) 1,457 (1,277) 1,277 5,875 (5,875) 8,225 (8,225) 56 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 61 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 D2 Foreign Currency Risk 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 $4,693,000 movement in other comprehensive income and a $311,000 movement in profit and loss in the twelve months to 31 March 2020 (31 March 2019: $1,435,000 movement in other comprehensive income and a $77,000 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. It also allows us to hedge between 0% and 50% of forecast sales for period 13 months to 24 months in advance. For the year ended 31 March 2020, approximately 74% and 48% of highly probable forecast sales were hedged for the periods 0-3 months in advance and 3-12 months in advance, 5% of highly probable forecast sales were hedged for the period 13-24 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 2020 USD $000 31 MAR 2019 USD $000 3,033 (4,693) (1,660) 531 (1,435) (904) At 31 March 2020, 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 2020 AUD/USD +10% AUD/USD -10% 31 MAR 2019 AUD/USD +10% AUD/USD -10% EFFECTS ON PROFIT BEFORE TAX $000 EFFECTS ON EQUITY $000 304 (371) 243 (298) 4,269 (5,217) 4,286 (5,239) D3 Commodity Price Risk 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 2020, we had forward purchased approximately 56% (31 March 2019: 51%) 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. 57 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 62 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 D4 Credit Risk 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. D5 Liquidity Risk 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 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 2020, 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 2020. 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. 58 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 63 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 D5 Liquidity Risk (continued) LESS THAN 6 MONTHS $000 6-12 MONTHS $000 1-2 YEARS $000 2-5 YEARS $000 TOTAL $000 CARRYING AMOUNT $000 31 MAR 2020 Financial assets Cash Trade and other receivables Derivatives Financial liabilities Trade and other payables Lease liabilities Borrowings Derivatives Net maturity 31 MAR 2019 Financial assets Cash Trade and other receivables Derivatives Financial liabilities Trade and other payables Lease liabilities Borrowings Derivatives Net maturity 18,125 9,907 - (22,358) (3,782) (4,604) (2,136) (4,848) 7,565 18,661 - (29,818) (950) (6,690) (607) (11,839) - - - - - - - - - - - - (3,761) (4,604) (2,136) (6,180) (164,207) (4,272) (19,613) (239,512) (6,407) (10,501) (174,659) (265,532) 18,125 9,907 - (22,358) (33,336) (412,927) (14,951) (455,540) 18,125 9,907 - (22,358) (33,391) (379,768) (16,265) (423,750) - - - - (707) (6,690) (607) (8,004) - - - - - - - - (1,301) (1,482) 7,565 18,661 - 7,565 18,661 - (29,818) (4,440) (29,818) (4,440) (128,380) (267,770) (409,530) (361,632) (1,214) (1,821) (4,249) (8,319) (130,895) (271,073) (421,811) (377,983) 59 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 64 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 E UNRECOGNISED ITEMS E1 Commitments We have entered into forward purchase contracts for $7.3 million worth of grain commodities as at 31 March 2020 (31 March 2019: $19.3 million) and forward purchase contracts for $39.5 million worth of cattle as at 31 March 2020 (31 March 2019: $15.8 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 2020 (31 March 2019: $nil). E2 Contingencies At 31 March 2020, 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. F OTHER F1 Property, Plant and Equipment at Cost 31 MAR 2020 Opening balance Additions and transfers Disposals Depreciation Closing balance Cost Accumulated depreciation and impairment 31 MAR 2019 Opening balance Additions and transfers Disposals Depreciation Closing balance Cost Accumulated depreciation and impairment INDUSTRIAL PROPERTY AND IMPROVEMENT $000 PLANT AND EQUIPMENT $000 CAPITAL WORK IN PROGRESS $000 31,278 120 - (400) 30,998 78,013 (47,015) 24,380 8,313 (206) (6,403) 26,084 159,550 (133,466) 1,221 1,789 - - 3,010 3,010 - 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 - TOTAL $000 56,879 10,222 (206) (6,803) 60,092 240,573 (180,481) TOTAL $000 55,570 8,005 (325) (6,371) 56,879 230,557 (173,678) Impairment of property, plant and equipment at cost The Livingstone Beef Cash-Generating Unit (CGU) is the only location with property and improvements measured under the cost model by the Company per AASB 116 Property, Plant and Equipment. Under the requirements of AASB 136 Impairment of Assets, at each reporting period an assessment of internal and external factors must be made to determine whether there are indicators of impairment. Where indicators exist, a formal estimate of the recoverable amount of these assets is undertaken. During FY20 operations continue to be suspended at Livingstone Beef. Management have 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 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 31 March 2020. The calculation of the recoverable amount for Livingstone Beef requires management to make key estimates with relation to a number of assumptions that are inherently uncertain. The recoverable amount is sensitive to changes in these key assumptions and accordingly the estimate of the recoverable amount could change in future reporting periods. 60 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 65 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 F2 Right-of-use Assets and Lease Liabilities Due to the adoption of AASB 16 Leases from 1 April 2019, the Company has recognised leases previously classified as operating leases on the balance sheet, and new leases entered into have been measured and disclosed in line with AASB 16. The associated balances due to adoption and application of this standard during the period are shown below. The Company has adopted AASB 16 using a modified retrospective approach. Therefore, the cumulative effect of adopting AASB 16 has been recognised as an improvement to the opening balance of retained earnings at 1 April 2019, as shown in the Statement of Changes in Equity, for $0.7 million. Right-of-use assets Non-current Lease liabilities Current Non-current Retained earnings Equity 1 APR 2019 $’000 31 MAR 2020 $’000 14,005 5,523 12,922 18,445 (696) 28,159 7,600 25,791 33,391 - When measuring lease liabilities for leases previously classified as operating leases, the Company discounted lease payments using its incremental borrowing rate at 1 April 2019. The average rate applied is 3.91%. Below is a reconciliation of operating lease commitments and finance lease liabilities previously disclosed, reconciled to lease liabilities on adoption of AASB 16 Leases. Operating lease commitments at 31 March 2019 as disclosed under AASB 117 Leases Operating leases discounted using the incremental borrowing rate at 1 April 2019 Finance lease liabilities recognised as at 31 March 2019 Recognition exemption for leases of low-value assets Extension options reasonably certain to be exercised Leases recognised under AASB 16 Leases 1 APR 2019 $’000 4,359 4,114 4,440 (86) 922 9,055 18,445 Reconciliations of movements in Right-of-use assets and amounts recognised in the Income Statement relating to lease are shown below. RIGHT OF USE ASSETS Balance at 1 April 2019 Depreciation charge for the year Additions to right-of-use assets AMOUNTS RECOGNISED IN THE INCOME STATEMENT RELATING TO LEASES Interest on lease liabilities Expenses relating to short term and low-value leases $’000 14,005 (5,082) 19,236 28,159 $’000 812 2,122 Right-of-use assets relate to buildings and property leased by the Company, excluding Pastoral property held under perpetual leases. During the period the Company entered into a 10-year lease of Rewan, a central Queensland cattle property. The Company has elected to expense short-term and low value leases on a straight-line basis over the lease term, as permitted under the recognition exemptions of AASB 16. The amount expensed during the period relating to short-term and low value lease assets was $2.1 million. 61 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 66 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 F3 Tax 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 expense/(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 profit/(loss) before tax At the statutory income tax rate of 30% Research and development offsets Other items (net) Income tax expense/(benefit) 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 Other Total deferred tax expense/(benefit) 62 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 67 31 MAR 2020 $000 31 MAR 2019 $000 - 15,837 (26) - 15,811 677 19,083 19,760 47,128 14,138 - 1,673 15,811 (90,387) (9,098) (7,212) 42,179 (64,518) 288 65 1,389 - - 3,080 1,012 4,610 29,434 214 2,087 42,179 - (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 15,456 (68,458) - 38 343 15,837 238 316 6,485 (61,419) FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 F4 Other Earnings Disclosures 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: Lease payments – short term and low value leases 31 MAR 2020 $000 31 MAR 2019 $000 4,174 - 4,174 14,556 379 14,935 40,745 2,976 3,927 255 47,903 1,749 139 1,888 15,456 317 15,773 42,616 3,398 5,426 347 51,787 2,122(1) 5,752 Commodity and foreign currency expense/(benefit) (1) Due to AASB16 Leases being adopted from 1 April 2019, this amount is not directly comparable with the prior year. Refer to Note F2. 2,295 960 F5 Reserves 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 At 1 April 2019 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 2020 ASSET REVALUATION RESERVE $000 CAPITAL PROFITS RESERVE $000 CASH FLOW HEDGE RESERVE $000 328,315 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) 6,190 417,718 - - - - 347 31,346 (9,404) (4,628) (10) 347 6,537 435,369 350,257 84,762 (6,177) (10) 6,537 435,369 63,611 (19,083) - - - - - - - - - - (6,305) - - - - - (762) - - - - - 255 63,611 (19,083) (6,305) (762) 255 394,785 84,762 (12,482) (772) 6,792 473,085 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 as part of their remuneration. Refer to note F8 for further details of these plans. 63 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 68 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 F6 Investments Equity accounted investments in associate – Pyxle (Private) Limited Other equity accounted investments in individually not material associates Other investments 31 MAR 2020 $000 31 MAR 2019 $000 1,765 1,271 366 3,402 2,072 1,175 366 3,613 The Company has a 31.82% interest in Pyxle (Private) Limited (2019: 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. F7 Related Parties COMPENSATION FOR KEY MANAGEMENT PERSONNEL Short-term employee benefits Post-employment benefits Share-based payment Termination benefits Long-term benefits Total compensation 31 MAR 2020 $000 31 MAR 2019 $000 4,498 180 178 - 3 4,859 4,070 201 340 - - 4,611 Transactions with other related parties 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 Dividends received from associates Other transactions with associates Transactions with other related parties Purchase of goods or services from other individually not material related parties 31 MAR 2020 $000 31 MAR 2019 $000 (1,572) (299) (1,871) (4,818) (1,436) (6,254) 31 MAR 2020 $000 31 MAR 2019 $000 - (486) 187 - (299) 470 (862) 135 (1,179) (1,436) 31 MAR 2020 $000 - 31 MAR 2019 $000 (804) 64 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 69 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 F8 Share-based Payments The share-based payment plans are described below. During 2020, expenses arising from equity settled share-based payment transactions were $255,000 (31 March 2019: $347,000). Executive Option Plan (EOP) 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 2019 and 2020. Performance rights plan (PRP) 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. 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. 65 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 70 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 F8 Share-based Payments (continued) 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 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) (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. Lapsing conditions Change of control event On market acquisition of shares 66 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 71 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 F8 Share-based Payments (continued) 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, it was forfeited on 30 June 2019 as the performance condition of target market capitalisation of $1.5 billion was not met. Equity settled awards outstanding: The table below shows the number (No.) and weighted average exercise prices (WAEP) of options under the Executive Option Plan (EOP) and performance rights outstanding under the Performance Right Plans (PRP). There have been no cancellations or modifications to any of the plans during the twelve months to 31 March 2020. EOP NO. - - - - - - - - - 31 MAR 2020 Outstanding at the beginning of the period Granted during the period Forfeited during the period Exercised during the period Outstanding at the end of the period Exercisable at the end of the period Weighted average remaining contractual life (days) Weighted average fair value at grant date Range of exercise prices ($) 31 MAR 2019 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. EOP NO. 300,000 - - (300,000) - - - - - 3.22 EOP WAEP $ - - - - - EOP WAEP $ 3.22 - - 3.22 - 3.22 PRP NO. 5,882,736 - (5,112,416) (202,510) 567,810 - 311 1.070 - PRP NO. 1,198,727 4,913,876 (126,345) (103,522) - 5,882,736 - 1,147 0.230 - 67 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 72 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 F9 Controlled Entities 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 AACo Singapore Holdings Pty Ltd NOTES COUNTRY OF INCORPORATION 31 MAR 2020 % OF SHARES HELD 31 MAR 2019 % 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 Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - (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 Right-of-use assets Investments Intercompany receivable Total Non-Current Assets Total Assets 68 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 73 31 MAR 2020 $000 31 MAR 2019 $000 Restated* 17,505 9,907 26,571 186,995 2,895 243,873 285,974 870,652 1,995 28,159 127 6,689 7,544 18,661 33,684 171,006 1,099 231,994 252,331 795,341 2,534 - 127 3,711 1,193,596 1,054,044 1,437,469 1,286,038 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 F9 Controlled Entities (continued) Current Liabilities Trade and other payables Provisions Lease liabilities Derivatives Total Current Liabilities Non-Current Liabilities Provisions Borrowings Lease liabilities Derivatives 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 Depreciation and amortisation Profit/(Loss) before finance costs and income tax expense Net finance costs Profit/(Loss) before income tax Income tax benefit Net profit/(loss) after tax 31 MAR 2020 $000 31 MAR 2019 $000 Restated* 14,536 2,962 7,600 8,941 34,039 2,891 379,768 25,791 7,324 64,518 480,292 514,331 923,138 526,964 473,859 (77,685) 923,138 24,716 3,397 1,658 8,319 38,090 4,578 361,632 2,782 - 30,732 399,724 437,814 848,224 526,964 435,369 (114,109) 848,224 31 MAR 2020 $000 31 MAR 2019 $000 Restated* 229,607 104,539 334,146 285,810 619,956 (199,779) (99,428) (130,001) 190,748 4,174 (45,044) (35,807) (25,756) (3,258) (17,894) 67,163 (14,928) 52,235 (15,811) 36,424 246,244 117,837 364,081 58,389 422,470 (226,549) (108,858) (142,082) (55,019) 1,888 (50,827) (40,596) (29,627) (6,960) (11,994) (193,135) (15,773) (208,908) 61,460 (147,448) *Previously disclosed amounts and balances have been restated to exclude results of entities outside of the Closed Group. 69 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 74 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 F10 Parent Entity 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 31 MAR 2020 $000 31 MAR 2019 $000 15,710 739,219 754,929 16,291 379,768 396,059 358,870 538,822 18,391 8,566 738,927 747,493 10,198 361,632 371,830 375,663 538,822 23,066 (198,343) (186,225) 358,870 (12,118) (20,053) 375,663 (49,878) (52,877) Australian Agricultural Company Limited and the wholly owned entities listed in note F9 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 2020. 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. F11 Auditor’s Remuneration 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 380,000 Training workshop Review of draft sustainability report Total - 19,600 399,600 410,000 23,150 - 433,150 31 MAR 2020 $ 31 MAR 2019 $ 70 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 75 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 F12 Significant Events After Balance Date COVID-19 was declared a global pandemic by the World Health Organisation on 11 March 2020. The impact of the virus has seen an unprecedented global response by governments, regulators and numerous industry sectors. The Company’s financial results for FY20 have not been materially impacted by COVID-19 due to changes in the Company’s supply chain and sales falling after the end of financial year. Following the financial year-end, the Company has taken several steps to manage impacts of COVID-19, including accelerating our allocation of products to the retail markets, modifying sales and marketing priorities, and reducing salaries of Directors, Executives and corporate staff. Valuations included in the financial report, such as the valuation of Pastoral property and improvements and Livestock, are based on information available and relevant as at 31 March 2020, which is the Company’s balance date. As market conditions are changing daily, the values of these assets may have changed after the financial year-end. The Company continues to monitor developments in the COVID-19 pandemic and the measures being implemented on the economy to control and slow the outbreak. Given the dynamic nature of these circumstances and the significant increase in economic uncertainty, the related impact on the Company's go forward consolidated results of operations, cash flows and financial condition cannot be reasonably estimated at this stage and will be reflected in the Company's 2021 interim and annual financial statements. There have been no other significant events after the balance date which require disclosure in the financial report. G POLICY DISCLOSURES G1 Corporate Information 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 2020 were authorised for issue in accordance with a resolution of the Directors on 20 May 2020. We recommend the financial statements be considered together with any public announcements made by the Company during the year ended 31 March 2020 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. G2 Basis of Preparation 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. (a) Terminology used in the financial statements 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. (b) Historical cost convention 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. 71 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 76 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 G2 Basis of Preparation (continued) (c) Compliance with IFRS The financial statements also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (d) Critical accounting estimates 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. (e) Rounding amounts in the financial statements 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. G3 Accounting Policies 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. (a) New accounting standards and interpretations (i) New and amended standards adopted > AASB 16 Leases adoption AASB 16 introduced 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. 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. LLeeaasseess iinn wwhhiicchh tthhee CCoommppaannyy iiss aa lleesssseeee From 1 April 2019, the Company has recognised new assets and liabilities for its operating leases of land, buildings and equipment. The nature of expenses related to these leases has also changed, as under AASB 16 Leases the Company recognises a depreciation charge for right-of-use assets and interest expense on lease liabilities. Previously, the Company recognised operating lease expenses on a straight-line basis over the term of the lease, and recognised assets and liabilities only to the extent there was a timing difference between actual lease payments and the expense recognised. The Company has adopted AASB 16 using a modified retrospective approach from 1 April 2019. Therefore, the cumulative effect of adopting AASB 16 has been recognised as an adjustment to the opening balance of retained earnings at 1 April 2019, with no restatement of comparative information as permitted under the specific transitional provisions in the standard. Lease liabilities are measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate as of 1 April 2019, and for leases entered into following this, the incremental borrowing rate at the commencement date of the lease arrangement. The average incremental borrowing rate applied to the lease liabilities on 1 April 2019 was 3.91%. 72 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 77 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 G3 Accounting Policies (continued) (a) New accounting standards and interpretations (continued) > AASB 16 Leases accounting policy The Company recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses, and adjusted for certain remeasurements of the lease liability. When a right-of-use asset meets the definition of investment property, it is presented in investment property. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group’s incremental borrowing rate is used as the discount rate. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payment made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised. Judgement has been used to determine the lease term for some lease contracts in which it is a lessee, that include renewal options. The assessment of whether it is reasonably certain the Company will exercise such options impacts the lease term, which can significantly affect the amount of lease liabilities and right-of-use assets recognised. (b) Basis of consolidation The consolidated financial statements comprise the financial statements of Australian Agricultural Company Limited, and its subsidiaries (as outlined in note F9) 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. (c) Significant accounting judgements, estimates and assumptions 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. 73 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 78 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 G3 Accounting Policies (continued) (d) Foreign currency translation (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. (e) Cash 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. (f) Trade and other receivables 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. (g) Inventories and consumables 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. 74 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 79 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 FOR THE TWELVE MONTHS TO 31 MARCH 2020 G3 Accounting Policies (continued) G3 Accounting Policies (continued) (h) Derivative financial instruments and hedge accounting (h) Derivative financial instruments and hedge accounting We use derivative financial instruments, such as forward currency contracts, interest rate swaps and forward commodity contracts, to hedge 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 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 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. 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 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. portion of cash flow hedges, which is recognised in other comprehensive income. For the purpose of hedge accounting, hedges are classified as: 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 (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. 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 (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. 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 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 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 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 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 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 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: designated. Hedges that meet the strict criteria for hedge accounting are accounted for as described below: Cash flow hedges Cash flow hedges AASB 9 Financial Instruments addresses classification, measurement, and derecognition of financial assets and financial liabilities, sets out AASB 9 Financial Instruments 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. 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 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 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. 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 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. 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 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). 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 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 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 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 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 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. 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 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 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. 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. 75 75 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 80 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 G3 Accounting Policies (continued) (i) Plant and equipment (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. (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 (j) Leases (i) AACo as a lessee 30 years 30 years 3-10 years 2-5 years The accounting policy for arrangements in which the Company is a lessee is included in Note G3 (a). (ii) Pastoral and perpetual property leases Freehold pastoral property and improvements and pastoral property and improvements held under statutory leases with government bodies have been included in Property, Plant and Equipment (Refer note A4). (k) Trade and other payables 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. (l) Borrowings 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. 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. 76 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 81 FINANCIAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 G3 Accounting Policies (continued) (m) Share-based payment transactions 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). (n) Contributed equity 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. (o) Revenue recognition 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 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. (p) Income tax and other taxes 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. 77 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 82 AACO ANNUAL REPORT NNOOTTEESS TTOO TTHHEE CCOONNSSOOLLIIDDAATTEEDD FFIINNAANNCCIIAALL SSTTAATTEEMMEENNTTSS FOR THE TWELVE MONTHS TO 31 MARCH 2020 G3 Accounting Policies (continued) (p) Income tax and other taxes (continued) 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. (q) Earnings per share (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 78 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 83 FINANCIAL REPORT DDIIRREECCTTOORRSS’’ DDEECCLLAARRAATTIIOONN 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 2020 are in accordance with the Corporations Act 2001, including: i. Giving a true and fair view of its financial position as at 31 March 2020 and of its performance for the year ended on that date. ii. Complying with Australian 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 2020. 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 F9 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 20 May 2020 79 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 84 AACO ANNUAL REPORT IINNDDEEPPEENNDDEENNTT AAUUDDIITT RREEPPOORRTT Independent Auditor’s Report To the shareholders of Australian Agricultural Company Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of Australian Agricultural Company Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: • giving a true and fair view of the Group's financial position as at 31 March 2020 and of its financial performance for the year ended on that date; and The Financial Report comprises: • Consolidated Statement of Financial Position as at 31 March 2020; • Consolidated Income Statement, Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity, and Consolidated Statement of Cash Flows for the year then ended; • Notes, including a summary of significant accounting policies; and • Directors' Declaration. • complying with Australian Accounting Standards and the Corporations Regulations 2001. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. 80 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 85 FINANCIAL REPORT IINNDDEEPPEENNDDEENNTT AAUUDDIITT RREEPPOORRTT Key Audit Matters The Key Audit Matters we identified are: • quantity and valuation of livestock; and • valuation of pastoral property and improvements. Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Quantity and valuation of livestock ($472,969,000) Refer to Note A3 Livestock in the Financial Report. The key audit matter How the matter was addressed in our audit The quantity and valuation of livestock is considered a key audit matter due to: the size of the balance (being 32.9% of total assets); the significant audit effort as a result of the risk of error associated with quantifying livestock at year end. In quantifying livestock the Group uses estimates of birth rates, animal growth rates and rates of attrition; and • • • • the level of judgement required by us in evaluating the market prices for livestock used by the Group where there is no readily observable market price. The judgements made by the Group in assessing the quantity and value of livestock have a significant impact on the Group’s financial performance and financial position. In assessing this key audit matter, we involved senior audit team members who understand the industry and the complexities involved in quantifying and valuing livestock. Our procedures included: • visiting three of the Group’s cattle properties to test key controls in the livestock accounting process; testing the Group’s reconciliation of the number of livestock at the beginning of the year to the number recorded at the end of the year, including checking a sample of cattle purchases and sales transactions, and natural increase in the herd to various sources of evidence, for example, purchase invoices and sales documentation; • comparing estimates of birth rates, animal growth rates and rate of attrition to historical data and our industry understanding; • comparing a sample of livestock market prices adopted by the Group to a range of recent observable market prices, such as from the Meat and Livestock Australia Market Information reports and cattle sales transactions; • evaluating the competence, experience and objectivity of the external valuer used by the Group; and • evaluating the report of the external valuer for consistency with our understanding of the business, industry and environmental conditions, trends in historical livestock prices and other information available to us. 81 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 86 AACO ANNUAL REPORT IINNDDEEPPEENNDDEENNTT AAUUDDIITT RREEPPOORRTT Valuation of pastoral property and improvements ($810,560,000) Refer to Note A4 Property in the Financial Report. The key audit matter How the matter was addressed in our audit Our procedures included: • evaluating the competence, experience and objectivity of external valuers and other external experts used by the Group; • working with our valuation specialists, reading the reports of the external valuers and other external experts and evaluating their work regarding Adult Equivalent carrying capacity of each property and the dollar per Adult Equivalent, Standard Cattle Unit or hectare for consistency with our understanding of the properties, environmental conditions, recent comparable market transactions and other information available to us; and • using our valuation specialist to assess the valuation report and compare the valuation methodology for each property to accepted market practices, industry norms, and criteria in the accounting standards. The valuation of pastoral property and improvements is considered a key audit matter due to: • • the size of the balance (being 56.5% of total assets); and the level of judgement required by us in evaluating the Group’s assessment of the fair value of pastoral property and improvements. The Group’s assessment of the fair value of pastoral property and improvements involves significant judgements, including determination of: • • • the valuation methodology applied to each property; the Adult Equivalent carrying capacity of each property; and the corresponding dollar per Adult Equivalent, Standard Cattle Unit or hectare. The Group has appointed external valuers and other external experts to assist in the determination of these key valuation inputs. The judgements made by the Group in assessing the fair value of property and improvements have a significant impact on the Group’s financial position. In assessing this key audit matter, in particular the complex inputs involved, we involved senior audit team members, including valuation specialists, who understand the nature of the Group’s properties and recent comparable market transactions. 82 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 87 FINANCIAL REPORT IINNDDEEPPEENNDDEENNTT AAUUDDIITT RREEPPOORRTT Other Information Other Information is financial and non-financial information in Australian Agricultural Company Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors are responsible for the Other Information. The Other Information we obtained prior to the date of this Auditor’s Report was the Directors’ Report, including the Remuneration Report, ASX Additional Information and Company Information. The Chairman’s Message and CEO’s Message are expected to be made available to us after the date of the Auditor's Report. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001; • implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error; and • assessing the Group and Company's ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group and Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: • • to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. 83 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 88 AACO ANNUAL REPORT IINNDDEEPPEENNDDEENNTT AAUUDDIITT RREEPPOORRTT Report on the Remuneration Report Opinion In our opinion, the Remuneration Report of Australian Agricultural Company Limited for the year ended 31 March 2020, complies with Section 300A of the Corporations Act 2001. Directors’ responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in pages 20 to 36 of the Directors’ Report for the year ended 31 March 2020. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Simon Crane Partner Brisbane 20 May 2020 84 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 89 FINANCIAL REPORT ASX Information AASSXX AADDDDIITTIIOONNAALL IINNFFOORRMMAATTIIOONN Additional information required by the Australian Stock Exchange Ltd and not shown elsewhere in the Financial Report is as follows. The information is current as at 05 June 2020. (a) Distribution of equity securities Ordinary share capital 602,766,747 fully paid ordinary shares are held by 8,655 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 2,122 3,206 1,345 1,808 174 8,655 As at 05 June 2020, there were 567,810 unlisted performance rights granted over unissued ordinary shares in the Company. (b) Twenty largest holders of quoted equity securities The names of the twenty largest holders of quoted shares as shown in the Company’s Share Register are: 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 AACO NOMINEES PTY LIMITED BNP PARIBAS NOMS PTY LTD BNP PARIBAS NOMINEES PTY LTD NATIONAL NOMINEES LIMITED CUSTODIAL SERVICES LIMITED QUALITY LIFE PTY LTD TASMAN SUPER PTY LIMITED NEWECONOMY COM AU NOMINEES PTY LIMITED <900 ACCOUNT> MR JOHN QIANE HE NEASHAM HOLDINGS PTY LTD CS THIRD NOMINEES PTY LIMITED MR BARRY MARTIN LAMBERT BOND STREET CUSTODIANS LIMITED POSEIDON NOMINEES PTY LTD (c) Substantial shareholders NUMBER PERCENTAGE 188,306,520 167,978,561 62,660,452 13,697,000 11,253,416 8,230,000 6,405,275 6,296,864 5,050,060 4,999,833 3,697,253 3,175,000 2,411,920 1,581,159 1,422,113 1,220,735 1,214,732 1,177,660 1,030,000 1,000,000 31.24% 27.87% 10.40% 2.27% 1.87% 1.37% 1.06% 1.04% 0.84% 0.83% 0.61% 0.53% 0.40% 0.26% 0.24% 0.20% 0.20% 0.20% 0.17% 0.17% 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 (d) Marketable shares NUMBER 289,694,453 The number of security investors holding less than a marketable parcel of 463 securities ($1.080 on 05 June 2020) is 790 and they hold 136,102 securities. 85 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 90 AACO ANNUAL REPORT Company Information CCOOMMPPAANNYY IINNFFOORRMMAATTIIOONN Name of Entity Australian Agricultural Company Limited ABN 15 010 892 270 Registered Office 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 Share Registry 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. Solicitors Allens Linklaters Level 26, 480 Queen Street Brisbane QLD 4000 Auditors KPMG Level 16, 71 Eagle Street Brisbane QLD 4000 Annual General Meeting The Annual General Meeting of Shareholders of the Australian Agricultural Company Limited will be held on Wednesday 29th July 2020. 86 Australian Agricultural Company Limited | FINANCIAL REPORT 2020 91 FINANCIAL REPORT A ACO ANNUAL REPORT 92 AACO ANNUAL REPORTA ACO ANNUAL REPORT Our Properties La Belle Livingstone Beef Pell Delamere Montejinni Camfield Eva Downs Anthony Lagoon Brunette Downs Canobie Avon Downs Austral Downs Wondoola Dalgonally Carrum Headingly Gordon Downs Collie Blue Glentana Goonoo Feedlot Rewan South Galway Wylarah Aronui Feedlot Owned properties Leased properties Tennant CreekAlice SpringsBouliaTownsvilleWintonLongreachWindorahDalbyRockhamptonEmeraldBarkly HomesteadCamoowealMt IsaJulia CreekCloncurryKatherineNoonamahTop SpringsBroomePort HeadlandDarwinBorroloolaKarumbaRomaSuratBrisbaneNarrabriSydneyHayAdelaideMelbourneWagga WaggaCONTENTSKEY HIGHLIGHTS

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