Bergs Timber Annual Report 2020

Plain-text annual report

BREVILLE GROUP LIMITED Annual Report 2020 Breville Group Limited Annual report 2020 Contents:Chairman’s review1CEO’s review3Strategy and brands5Financial report13Shareholder information114Company information116Annual general meeting:Thursday 12 November 2020 at 10amVirtual AGM.(this page and outside covers)the 3X Bluicer™ ProChairman’s review “The Group successfully navigated an unprecedented FY20 and has come out even stronger” In the 2020 Financial year the Group continued up the curve of our acceleration program with double- digit sales and EBIT growth, on a normalised1 basis, in the face of a series of challenging events including the global pandemic. The Board increased the full year dividend for the year by 10.8% to 41.0 cents from 37.0 cents in the prior year, with a fully underwritten Dividend Reinvestment Plan (DRP) activated to preserve cash and to allow future ﬂexibility. The Group delivered total sales revenue of $952.2m, a 25.3% growth on prior year with the core Global Product segment growing by 24.9%, or 20.1% on a constant currency basis, to $764.4m. The Distribution segment revenue for the year also grew 26.9% to $187.8m. Normalised1 Group EBIT for the year of $113.1m, represented a 16.2% increase on the prior year (or 14.3% excluding the beneﬁt from adopting AASB 16). Normalised1 Net proﬁt after tax increased by 11.2% to $75.0m. In May and June we moved to strengthen our balance sheet with a net capital raise of $101m and the extension of our available debt facilities. We were delighted with the support that we received from both institutional and retail shareholders, as well as our banking partners. The overall reﬁnance allowed us to continue investing in the growth of the Group whilst building a cushion against any future turbulence. Under the leadership of our CEO Jim Clayton, the Group continued to successfully innovate and geographically expand, launching the Sage® brand into Spain, France and the Middle East. The Group’s business trajectory is healthy, and the balance sheet is strengthened to provide resilience against near term turbulence as well as funds for growth. On behalf of the Board, I would like to take this opportunity to express our gratitude to Jim Clayton and to his talented, motivated and passionate team members who have shown exceptional nimbleness, and resilience, in these unprecedented times. We are privileged to have such an exceptional group on the Breville team. Finally, I would like to express my appreciation to my fellow Board colleagues and our shareholders, customers and suppliers for their continued support. I encourage all shareholders to attend our virtual annual general meeting (AGM) in November. With thanks, Steven Fisher Non-executive chairman 1 EBIT and NPAT have been normalised for the impact of abnormal expenses (doubtful debt provisioning and IoT platform write down) and abnormal cost savings (compensation and marketing). Net impact on EBIT of $12.2m; NPAT $8.8m. Breville Group Limited annual report 2020 1 the Creatista™ Pro CEO’s review “Another good year for Breville in the face of many challenges, including Brexit uncertainty, exchange rate volatility, US tariffs and COVID-19. We emerge from FY20 with momentum and a hardened foundation to build upon over the next ﬁve years.” Operationally we faced, and navigated, a number of challenges in 2020 while continuing to grow strongly and to reinvest in innovation and our brands. We took the Sage® brand into Spain, France and the Middle East; we integrated our ChefSteps acquisition; we mitigated the impact of US-Sino tariffs; we continued to invest in new product development (NPD); and, we began the roll out of our Global IT 2.0 Platform. Overall, I am encouraged by the way our team and processes have responded, how our strategic projects have progressed, and by how we have strengthened our balance sheet against any future shocks. We go into FY21 and beyond with good momentum and a hardened foundation to build upon over the next ﬁve years. I thank the Breville | Sage team for their professionalism, spirit, and sheer hard work during these trying times. Finally, I would like to express my appreciation to the Board for their ongoing support and counsel. Jim Clayton Chief executive ofﬁcer 1 EBIT has been normalised for impact of abnormal expenses (doubtful debt provisioning and IoT platform write down) and abnormal cost savings (compensation and marketing). Net impact on EBIT $12.2m. In FY20, Breville Group delivered strong revenue growth of 25.3% against a turbulent backdrop of US tariffs, Brexit uncertainty, exchange rate volatility, and COVID-19. Our top line growth included the successful expansion into Spain and France as well as the continued translation impact of a stronger US Dollar. The Global Product segment revenue grew by 24.9%, or 20.1% in constant currency, with solid growth across all geographies. On a constant currency basis, North America grew by 11.3%, ANZ by 18.3%, Europe by 54.8%, and ROW by 25.6%. Our Global Product segment revenue delivered 20% constant currency growth in both the ﬁrst and second half of the ﬁnancial year. Once COVID hit in March, our products proved relevant to the new working-from-home reality facing many of our consumers, and we saw the expected migration to online purchasing. Our sales by geography varied region to region depending on the nature of government action, as well as individual retailer behaviors. Our sell-out, or sales to end consumers, remained resilient across all markets. The Distribution segment revenues of $187.8m were 26.9% higher than the previous ﬁnancial year, driven by strong Breville local sales in ANZ, including the successful launch and performance of the Breville Air™ range. After factoring out signiﬁcant abnormal expenses and sizable abnormal cost savings, normalised1 Group EBIT continued to accelerate, growing by 16.2% against the 2019 ﬁnancial year (or 14.3% after excluding the one-year beneﬁt of adopting AASB 16), compared with an EBIT growth of 12.0% in the prior year. The Distribution segment continued to fulﬁl its strategic role and grew EBIT by $4.4m, which was reinvested in the Global Product segment marketing and R&D. The overall Group EBIT margin reduced to 11.9% from 12.8% primarily because of the strong US dollar translation, and partially by the impact of US tariffs. Breville Group Limited annual report 2020 3 the Combi Wave™ 3 in 1 Strategy and brands Breville Group’s primary strategy is the design and development of the world’s best kitchen appliances together with expanding distribution and dynamic marketing on a global scale. The Breville® and Sage® brands are at the core of this strategy, representing the majority of the Group’s revenues and marketing activities. There are, however, a number of additional company- owned brands and brand partners in different geographies that assist in the delivery of the business strategy. In line with its global strategy, the Group is focused on the design, development and sale of Breville-branded and Sage-branded products supplied in currently 80 countries to the premium kitchen segment of the market (‘Global Product’). The Distribution segment sells products that are distributed pursuant to a license or distribution agreement, or they are sourced directly from manufacturers. Products in this segment may be sold under a brand owned by Breville® (Breville®, Kambrook®, Aquaport®, Cli-mate®), Sage®, or they may be distributed under a third-party brand (Nespresso®). North America In North America, the Group distributes its range of internally designed and developed kitchen products under the Breville® brand through premium channels and its own direct-to-consumer e-commerce platform. From the second half of the 2018 ﬁnancial year, the Breville® brand included a range of Breville® co-branded Nespresso coffee machines as one of Nespresso’s machine partners in North America. North American revenues also include a USA based culinary division – PolyScience®, one of the world’s market leaders in premier sous vide cooking in both the commercial and professional markets. Australia and New Zealand In Australia and New Zealand, the Group primarily trades under its company owned brands (Breville®, Kambrook®, Aquaport® and Cli-mate®). The Kambrook® brand extends to categories beyond the kitchen; offering not just a full range of kitchen appliances, but also irons, vacuums, heating and cooling products, all at an affordable price point without any compromise on quality and performance. Europe In the United Kingdom and Europe, the Group markets and distributes its premium designed and developed global kitchen products under the company owned brand, Sage®. It is also a supplier for Sage® branded goods to certain distributors located throughout Europe and the Middle East. In Europe the Breville® brand is not owned or operated by the Breville Group. Rest of the World In the Asia Paciﬁc region and the Middle East, the Group markets its premium designed and developed kitchen products under the Breville® brand as well as selected products under the Kambrook® brand in parts of Asia and Africa. Distribution in these regions is managed using local third-party distributors supplied via the Group’s Hong Kong ofﬁce. A History of Innovation On Melbourne Cup day in 1932, two Australian entrepreneurs, Bill O’Brien and Harry Norville, combined their surnames together to form the name ‘Breville’ and founded a company manufacturing radios out of Sydney. During the 1960’s, Bill’s son John focused the organisation on solving common kitchen problems and founded the Breville small appliance research and development centre, which led to the invention of the now iconic Breville toasted sandwich maker. The toasted sandwich maker kick-started a long list of award-winning innovative Breville products developed in Australia and distributed throughout the world. From the original Kitchen Wizz™ food processor and High-Wall Wok, to the launch of the world’s ﬁrst wide feed chute Juicer, Breville has become synonymous with ground-breaking innovation in the kitchen. Breville Group Limited annual report 2020 5 the Sear & Press™ Grill Strategy and brands continued Growth of the Brand In 2000, Breville embarked on a project to expand its design and innovation capabilities, building a much larger internal team that has today become Australia’s leading product development team. This investment culminated in the 2003 launch of its premium range of products into the United States and other international markets. In 2009, Breville combined its design and development capabilities with a more focused marketing, recruitment and cultural initiative entitled “Food Thinking”. As a part of this strategy, internal teams work closely with professional chefs and consumers to develop insight and an integrated approach to product development: • Deeper understanding of food, friction points, and the challenges consumers face; • Innovation to solve these challenges, protectable as IP; marketed as “Simple Moments of Brilliance”; and • Superior quality and engaging design. Breville’s ethos of “Food Thinking” and creativity remains as relevant today as it did then and continues to gain momentum and win over a new generation of consumers, driving accelerated innovation and increased product development. Furthermore, the Group’s appreciation for food science and culinary trends has led to the fostering of relationships with high proﬁle food thinkers, including world renowned baristas and chefs, some of whom have directly helped the Group in a product development capacity. The Consumer at the Core of the Business The Group focuses on driving consumer understanding of, and engagement with, the Group’s product and proposition. The Group believes that consumers should be able to produce and enjoy a perfect result every time, and that they should never have to settle or compromise just because they are making it at home. Through “Food Thinking”, the Group provides consumers with “Mastery in a Box” - innovative products which simplify and make the process of creation more of a pleasure, and the end result more perfect, each and every time. At the heart of this proposition lies a passionately- held belief that consumers should feel empowered to share these results with those who are most important to them; their family and friends. After all, the opportunities to make everyday moments an occasion exist in the tens of thousands, and Breville believes that use of its products will help consumers “Master Every Moment” and enjoy life to the fullest extent. Sage® In the United Kingdom and Europe, the Group distributes its premium designed and developed products under the Group owned brand, Sage®. The brand identity and positioning of Sage® is aligned closely to the global Breville® brand identity, “Food Thinking” approach, and “Master Every Moment” empowerment strategy. The Sage® distribution strategy is also very similar to that of Breville® in North America, with distribution limited primarily to premium retailers and its own direct to consumer e-commerce platform. The Group continues to invest in engaging marketing activity for the Sage® brand to drive targeted expansion and accelerate the brand’s presence in the premium channel across Europe, the United Kingdom and the Middle East. Additionally, since 2017, the Group also works with distribution partners who have decided to take advantage of the Group’s investment in the Sage® brand in their territories. Countries such as Denmark, Sweden, Norway, Finland, Estonia, Lithuania, Latvia, Czech Republic and Slovakia, amongst others, were the ﬁrst to transition. Kambrook® Kambrook® has become known for quality, durable products at an affordable price point. The ever- expanding product range encompasses appliances for the kitchen, living room, laundry and bedroom. Kambrook® continues to highlight the durability of its appliances and the rigorous testing process that each new product undergoes. Products are subjected to extensive laboratory and quality testing before receiving the Kambrook® seal of approval. To help emphasise that aspect of the brand, a new logo incorporating the “inﬁnity symbol” in place of the two letter “o”s in the Kambrook® name was introduced during FY17 and continues to ﬁnd some success and recognition in the marketplace as a mark for quality assurance. Breville Group Limited annual report 2020 7 the Smart Oven™ Air Fyer Strategy and brands continued PolyScience® The PolyScience® brand (culinary division) is distributed around the world under one of the following two names as locally relevant; 1) Breville | PolyScience and 2) Sage | PolyScience. The PolyScience culinary division includes the world’s premier immersion cooking circulators (for sous vide cooking), as well as various specialty cooking accessories such as the Smoking Gun™ (for rapid food smoking), the Control Freak™ (for precision cooktop applications), vacuum sealers, cold plates and vacuum evaporations systems. ChefSteps.com In July 2019, the Group completed the acquisition of ChefSteps, incorporating both the connected IoT Joule sous vide immersion circulator, as well as taking over the ChefSteps.com web property. The Joule immersion circulator has been fully incorporated into the Breville brand through the introduction of a new version 1.5 of the product, and the website property has been re-invigorated, and a new editorial product placed behind a paywall, Studio Pass, was successfully introduced by the team. Innovation and product development The core driving the Group’s growth continues to be investment in product development and a focus on design and innovation. Breville has further deepened its understanding of food, and how the consumer interacts with it, applying this to solving problems in ways that are both valuable to people, and differentiated from competitors. Breville actively protects this customer value through increased investment in intellectual property protection and via the development of a portfolio of patented innovative products for future sustainable growth. People – creative food thinkers Breville enjoys the beneﬁts of highly experienced talent across all departments and geographies. Integrated throughout its food thinking culture, the passion, creativity and insight of staff has helped to consistently bring world class innovative products to consumers around the world. The team continues to be awarded both domestically and internationally, with multiple design awards, and recognition through mainstream media. Breville Group invests in the training and education of its team; building strong, collaborative links with world experts in food thinking and technology. The Group is also involved in several consumer facing and chef liaison activities. Strongly committed to its core values of creativity, simplicity, insight and excellence in all departments, Breville recruits, trains, assesses and rewards employees on this basis. With a team anchored around these common values, the business is able to foster a workplace that stimulates idea generation, a passion for learning, and the continuous search for new and better solutions. During the 2020 ﬁnancial year, the Group continued to grow its highly talented and experienced team, bringing on board additional experience and expertise, particularly in the areas of marketing, product design, research and development, IT and logistics. Processes built for the future With an aligned calendar setting process, within both Breville itself and its external manufacturing and retail channel partners, the Group seeks to fully leverage an increasing number of new product introductions to continue to drive its business and iconic brands forward. By ensuring that the ‘go-to-market’ process is aligned functionally, regionally and with its external partners, the Group launches product, with impact, across a number of markets under the global distribution footprint in order to ensure that the Group will reap the full potential of its innovation and design excellence. The Group has established this process in the 2019 ﬁnancial year, and has continued to build off its initial impact and success, most recently with the successful global introductions of the 3X Bluicer™ series, the Smart Oven™ Air Fryer, and the Combi- wave™ 3 in 1 Microwave oven (with air frying functionality). Breville Group Limited annual report 2020 9 the Luxe Collection in Damson Blue the Luxe Collection in Damson Blue Accolades 2019 BTM700 the Tea Maker Compact 2019 BBL920 the Super Q 2018 BES880 the Barista Touch 2017 BES990 the Oracle Touch 2017 BFS800 the Steam Zone 2016 CMC800 Control Freak Cooker Red Dot Design Award - Best of the Best 2017 BNE800 Creatista Plus Red Dot Design Award 2020 BJB815 the 3x Bluicer Pro 2016 BEM825 the Bakery Boss 2020 BNE900 the Creatista Pro IDSA Design Award – USA IDEA International Design Excellence Awards Silver Award 2019 BES878 the Barista Pro 2015 BMO700 Quick Touch 2020 CSV750/700 Hydro Pro 2017 BES990 the Oracle Touch Bronze Award 2019 BTM700 the Tea Maker Compact 2019 BOV860the Smart Oven Air Fryer 2017 BES990 the Oracle Touch 2017 BNE800 Creatista Plus 2017 BSM600 the Smoking Gun 2014 BES980 the Oracle Espresso 2013 BES900 Dual Boiler Espresso Finalists 2019 BPZ800 the Smart Oven Pizzaiolo 2019 BES500 the Bambino Plus 2018 BES880 the Barista Touch 2018 BDC450 the Precision Brewer Thermal 2018 BJE830 the Juice Fountain Cold XL 2018 BFP820 the Kitchen Wizz Peel and Dice 2017 BOV900 the Smart Oven Air 2014 BWM640 the Smart Wafﬂe 2014 BTA720/730 the Lift and Look Pro 2013 BFP800 Kitchen Wizz Food Processor 2013 BBL 605 Kinetix Control Blender 2013 BDC600 You-Brew Drip Coffee Machine Good Design Award Chicago Anthenaeum 2019 BOV860the Smart Oven Air Fryer 2019 BES878 the Barista Pro 2019 BTM700 the Tea Maker Compact 2019 BBL920 the Super Q Blender 2019 BPZ800 the Smart Oven Pizzaiolo Microwave 2015 BCP600 Citrus Press 2015 BBL405 the Kinetix Twist 2014 BES980 the Oracle Espresso 2013 BSG1974 the Original ‘74 Immersion Circulator 2020 BMO870/850 3 in 1 Combi Wave / Smooth Wave 2019 BES500 the Bambino Plus 2019 BES878 the Barista Pro 2012 BDC600 You-Brew Drip Coffee 2019 BTM700 the Tea Maker Compact Machine 2019 BBL920 the Super Q 2011 BFP800 Food Processor 2019 BPZ800 the Smart Oven BEST IN CATEGORY - Domestic Appliances 2016 BSM600 the Smoking Gun 2019 BPZ800 the Smart Oven Pizzaiolo 2019 BES878 the Barista Pro 2019 BES500 the Bambino Plus 2018 BDC450 the Precision Brewer Thermal Pizzaiolo 2018 BES880 the Barista Touch 2018 BDC450 the Precision Brewer Thermal 2018 BJE830 the Juice Fountain Cold XL 2018 BFP820 the Kitchen Wizz Peel and Dice 2017 BES990 the Oracle Touch 2017 BSG600 the Perfect Press 2017 BFS800 the Steam Zone 2017 BSM600 the Smoking Gun 2017 BOV900 the Smart Oven Air 2017 BTA735 the Toast Select Luxe 2018 BJE830 the Juice Fountain Cold 2017 BKE735 the Soft Top Luxe XL 2018 BNE500 Creatista Uno 2017 BOV900 the Smart Oven Air 2017 BTA735 the Toast Select Luxe 2017 BNE800 Creatista Plus 2016 CMC800 Control Freak Cooker 2016 BEM825 the Bakery Boss 2016 Thermal Pro Cookware 2016 BPB620 Boss To Go Personal Blender 2016 BPB620 Boss To Go Personal 2015 BMO700 Quick Touch Blender Microwave 2014 BBL910 the Boss Superblender 2015 BCP600 Citrus Press 2013 BRC600 the Multi Chef 2014 BES980 the Oracle Espresso 2013 BEF100 the Thermal Pro Grill 2014 BMO734 the Quick Touch 2012 BCI600 Smart Scoop Ice Cream 2014 BTA720/730 the Lift and Look Maker Pro 2012 BES900 Dual Boiler Espresso 2014 BWM640 the Smart Wafﬂe Machine 2011 2011 BCG800 Smart Grinder BTM800 Tea Maker 2013 BEF100 the Thermal Grill Pro 2013 BRC600 the Multi Chef 2012 BDC600XL You-Brew Drip Coffee Machine 2012 BFP800 Kitchen Wizz Pro Honourable Mention 2013 BBL605 Kinetix Control Blender 2011 BKE820 Kettle Honourable Mention 12 Breville Group Limited annual report 2020 Breville Group Limited Financial report 2020 Contents: Directors’ report Corporate governance statement Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of ﬁnancial position Consolidated statement of changes in equity Consolidated cash ﬂow statement Notes to the ﬁnancial statements Directors’ declaration Independent auditor’s report Auditor’s independence declaration 14 50 56 57 58 59 60 61 106 107 113 Breville Group Limited annual report 2020 13 Directors’ report The Board of Directors of Breville Group Limited (company) has pleasure in submitting its report in respect of the Group for the year ended 30 June 2020. Board of Directors The names and details of the company’s directors in ofﬁce during the year and until the date of this report are as below. Unless indicated otherwise, directors were in ofﬁce for this entire period. Steven Fisher Non-executive chairperson B.ACC, CA(SA) Mr Fisher has more than 30 years’ experience in general management positions in the wholesale consumer goods industry and was the former chief executive of the Voyager Group. Prior to entering into the consumer goods industry Mr Fisher was a practising chartered accountant having qualiﬁed in South Africa with a Bachelor of Accounting degree. During the last three years he has served as a director of the following other listed company: • Reject Shop Limited # # denotes current directorship Timothy Antonie Non-executive director BEcon Mr Antonie has more than 20 years’ experience in investment banking and formerly held positions of Managing Director from 2004 to 2008 and Senior Advisor in 2009 at UBS Investment Banking, with particular focus on large scale mergers and acquisitions and capital raisings in the Australian retail, consumer, media and entertainment sectors. Mr Antonie is currently a principal of Stratford Advisory Group. He holds a Bachelor of Economics degree from Monash University and qualiﬁed as a Chartered Accountant with Price Waterhouse. During the last three years he has served as a non-executive director of the following other listed companies: • Premier Investments Limited # • Village Roadshow Limited • Netwealth Group Limited # # denotes current directorship Peter Cowan Non-executive director Mr Cowan has more than 30 years’ experience in leading and building globally respected organisations and brands in the FMCG sector. He served as both Chairperson of the Board and CEO in key developing markets for Unilever and has held Managing Director roles at Lion Nathan and New Zealand Dairy Board (Fonterra). Mr Cowan also held Regional Vice President positions at Alberto Culver and Johnson & Johnson. During the last three years he has not served as a director of any other listed company. Sally Herman Non-executive director BA, GAICD Ms Herman is an experienced non-executive director sitting on both public and private company Boards in ﬁnancial services, retailing, property and consumer goods. She had a long career in ﬁnancial services in both Australia and the United States, including 16 years with the Westpac Group, running business units in most operating divisions of the Group. Ms Herman is based in Sydney and is actively involved in the community, with a particular interest in education, the arts and social justice. She is a member of Chief Executive Women. During the last three years she has served as a non-executive director of the following other listed companies: • Suncorp Group Limited # • Premier Investments Limited # • Evans Dixon Limited # • Investec Property Limited (the responsible entity of listed trust Investec Australia Property Fund) # # denotes current directorship Dean Howell Non-executive director FCA, CTA Mr Howell has had an extensive career in accounting, spanning over 40 years, and accordingly has a wealth of commercial and advisory experience. He was the former senior partner of a Melbourne ﬁrm of chartered accountants and also served on that ﬁrm’s national and international Boards. He is also a director of Peter MacCallum Cancer Foundation Ltd. During the last three years he has not served as a director of any other listed company. Lawrence Myers Non-executive director B.Acct, CA, CTA Mr Myers has over 20 years’ experience as a practising Chartered Accountant. He is the Managing Director and founder of MBP Advisory Pty Limited, a high end Sydney ﬁrm of Chartered Accountants. Mr Myers sits on numerous private company and not-for-proﬁt Boards, including the Foundation Board of the Art Gallery of New South Wales and acts as a trusted advisor and mentor on business and ﬁnancial matters. He is a registered auditor and his specialist areas of practice include business and corporate advisory as well as mergers and acquisitions. Mr Myers is Chairperson of the audit and risk committee (A&RC) and is the company’s lead independent director. During the last three years he has served as a director of the following other listed companies: • VGI Partners Global Investments Limited # • VGI Partners Asian Investments Limited # # denotes current directorship 14 Breville Group Limited annual report 2020 Board of directors continued Operating and ﬁnancial review Kate Wright Non-executive director BA Ms Wright has more than 30 years’ experience in the consumer industry across Australia, the South Paciﬁc and the USA. Her career has spanned manufacturing operations, sales, marketing, human resources and general management within the consumer sector. Ms Wright has held the positions of Managing Director, Australia and South Paciﬁc region at Philip Morris from 2001 to 2004 and Head of Korn Ferry Australia’s Consumer and Retail Practice from 2005 to 2016. Ms Wright holds a Bachelor of Arts degree from the University of New South Wales. Ms Wright is chair of the people, performance, remuneration and nominations committee (PPR&NC). During the last three years she has not served as a director of any other listed company. Company secretaries The names and details of the company secretaries in ofﬁce during the year and until the date of this report are as below. Unless indicated otherwise, the company secretaries were in ofﬁce for this entire period. Sasha Kitto LLB, FCA Ms Kitto is a chartered accountant and has over 20 years’ experience as a practising chartered accountant and in senior ﬁnance roles. Craig Robinson BA, ACMA Mr Robinson is a Chartered Management Accountant with over 20 years’ commercial ﬁnance experience. He has worked in FMCG, Medical Diagnostics and Sales Service industries in the UK, Australia, Switzerland and the USA. Reporting currency and rounding The ﬁnancial report is presented in Australian dollars and all amounts have been rounded to the nearest thousand dollars ($’000) unless otherwise stated 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 the instrument applies. Performance indicators Management and the Board monitor the ﬁnancial performance of the Group by measuring actual results against expectations as developed through an annual business planning and budgeting process. Appropriate key performance indicators (KPI’s) are used to monitor operating performance and management effectiveness. The operating and ﬁnancial review has been designed to enhance the periodic ﬁnancial reporting and provide shareholders with additional information regarding the Group’s operations, ﬁnancial position, business strategies and prospects. This review complements the ﬁnancial report and has been prepared in accordance with the guidance set out in ASIC Regulatory Guide 247. Company overview and principal activities The Group’s principal activities, and underlying strategy, is the design and development of innovative world class, small electrical kitchen appliances and the effective marketing of these products across multiple geographies to drive growth in sales and proﬁts. In line with this strategy, the Group has: • A strong, competitive and growing product portfolio with proven success across the globe; • An innovative, committed, high-quality team; • A R&D culture that focuses on consumer value and emerging food and beverage technologies when developing new products, enabling the Group to maintain its premium product and market positioning; • A track record of successfully expanding into new geographies; • A strong balance sheet which provides a platform to take advantage of future opportunities. During the year, the Group has continued to reﬁne its strategic direction, continued the execution of its acceleration program, and strengthened its balance sheet through a capital raise with net proceeds of $101m and the securing of increased, and longer tenure, bank debt facilities. The Group operates a global centralised business structure with two business segments and geographic sales regions as described below: • The Global Product segment sells premium products designed and developed by Breville, which are sold globally (currently 80 countries). Products included in this segment may be sold directly or through third parties, and may be branded Breville®, Sage®, or other Group owned brands. • The Distribution segment sells products that are designed and developed by a third party. Products are distributed pursuant to a license or distribution agreement, or they are sourced directly from manufacturers. Products in this business unit may be sold under a brand owned by the Group (e.g. Breville®, Kambrook®), or they may be distributed under a third party brand (e.g. Nespresso®). Breville Group Limited annual report 2020 15 Directors’ report continued Operating and ﬁnancial review continued Company overview and principal activities continued For both business segments, the geographic regions execute the sales and distribution functions, supported by centralised functions (including product development, marketing, operations, IT, Finance and HR). The centralised functions, speciﬁcally marketing and product development are part of the global, innovation driven product business and thus form part of the Global Product segment. • • • In Australia and New Zealand, the Group principally trades under its company owned brands, Breville®, Kambrook® and also distributes products under a machine partnership with Nespresso® and Nestlé® Dolce Gusto®. In North America, the Group markets and distributes Breville® and Polyscience® branded products and distributes Nespresso® products, under a machine partnership. In Europe, the Group markets and distributes Breville® designed products under the company owned brand, Sage®. The region also supplies Sage® branded goods to certain distributors located in Europe. The Group’s Hong Kong ofﬁce performs the functions of a group procurement and quality assurance centre and is also, a supplier of Breville® designed products to distributors outside of the Group’s principal markets including the Asia Paciﬁc region, the Middle East and South America. Group operating results AUDm1 Revenue EBITDA EBIT NPAT Normalised EBIT2 Normalised EBIT2 growth (excluding AASB16 impact) Normalised NPAT2 Normalised EPS2 (cents) Dividend per share - ordinary (cents) Franked (%) Net cash ($m) FY20 952.2 126.5 100.9 66.2 113.1 FY19 % Growth 760.0 25.3% 114.0 11.0% 97.3 67.4 97.3 3.7% (1.8)% 16.2% 14.3%3 75.0 67.4 11.3% 57.3 51.8 10.6% 10.8% 41.0 60% 128.5 37.0 60% 9.8 1 Minor differences may arise due to rounding. 2 EBIT, NPAT and EPS shown normalised for impact of abnormal expenses (doubtful debt provisioning and IoT platform write down) and abnormal cost reductions (compensation and marketing). Net impact on EBIT $12.2m; NPAT $8.8m; EPS 6.8c. 3 Adoption of AASB16 in FY20 beneﬁted EBIT by $2.0m over FY19. Growth is shown on a like-for-like basis, on a reported basis EBIT growth is 16.2%. Net beneﬁt at NPAT level minimal at $254k. Results Highlights • A strong year of delivery, in line with initial expectations, but delivered against a turbulent backdrop of US tariffs, Brexit uncertainty and latterly COVID-19. • Group revenue increased by +25.3% (FY19 +17.5%) with strong growth in both the Global Product and Distribution segments, partly boosted by the strength of the USD (contributed ~5% to reported growth). • 1H20 and 2H20 saw similar revenue growth with the second half boosted by the relevance of our products to the “working from home” environment faced by many of our consumers. • • In constant currency, the Global Product segment delivered a +20.1% increase in revenue (FY19 +12.0%) driven by continued European expansion and strong ANZ sales, especially in the second half. In 2H20 the Group incurred two sizable abnormal expenses and equally, made some sizable cost savings. We have looked through both these pluses and minuses to normalise proﬁt for the basis of dividend declaration for FY20 and setting budgets for FY21. Furthermore reported FY20 EBIT beneﬁted from the adoption of AASB16 which has been stripped out when reporting like-for-like EBIT growth of +14.3%. • Normalised Group EBIT2 growth accelerated to +14.3% (FY19 +12.0%) whilst EBIT margin at 11.9% was lower than FY19 at 12.8%. This year- over-year margin decrease reﬂects the translation impact of the strengthening USD and impact of US tariffs on products from China. Statutory EBIT grew by +3.7%. • Normalised NPAT2 grew +11.3% year-on-year, whereas statutory NPAT declined by (1.8)%. • Total dividends for the year increased by +10.8% to 41.0 cents per share, 60% franked. A fully underwritten DRP has been activated to preserve cash and balance sheet strength and ﬂexibility. • Net cash strengthened during the year to $128.5m due to the net proceeds of the capital raise ($100.7m) completed in June and a temporary reduction in working capital. The unwind of tactical inventory positions held in FY19 and the impact of COVID-19 on supply, and demand, temporarily reduced inventory and working capital below equilibrium. • Good progress was made in the implementation of our Acceleration Strategy with a ﬁrst full year of Benelux and Switzerland sales and entry into Spain and France. 16 Breville Group Limited annual report 2020 Operating and ﬁnancial review continued Results Highlights continued • COVID-19: The pandemic temporarily slowed the normal ramp up of production from suppliers after Chinese New Year (CNY), but tactically high inventories held in the northern hemisphere provided some buffer. Our products proved relevant to consumers “working from home” and sell-out held up well. Sell-in across different geographies was impacted by different lock-down implementations and individual retailer reactions, but across the portfolio sell-in remained robust. Faced with the uncertainty of the trading outlook in April the Group pulled back hard on all expenses including employee compensation and marketing investment. The Group strengthened its balance sheet via a capital raise and the reﬁnancing of its debt facilities. • The combination of expense control, a resilient sales demand and balance sheet strengthening means the Group enters FY21 with momentum and in a good position to invest in sustained growth and to navigate future turbulence. Segment results REVENUE EBIT EBIT MARGIN (%) AUDm1 Global Product Distribution TOTAL FY20 764.4 187.8 952.2 FY19 % Change 612.0 148.0 760.0 24.9% 26.9% 25.3% Global Product segment revenue Normalised FY20 2 90.2 22.9 113.1 FY19 % Change 78.8 18.5 97.3 14.5% 23.8% 16.2% Normalised FY20 2 11.8% 12.3% 11.9% FY19 12.9% 12.5% 12.8% AUDm1 North America Australia and New Zealand (ANZ) Europe Rest of World (ROW) TOTAL 1 Minor differences may arise due to rounding. GLOBAL PRODUCT SEGMENT REVENUE FY20 420.4 157.4 143.3 43.3 764.4 FY19 357.4 132.9 89.6 32.1 612.0 % Change AUD % Change Constant Currency 17.6% 18.4% 60.1% 34.8% 24.9% 11.3% 18.3% 54.8% 25.6% 20.1% 2 EBIT and EBIT Margin % shown normalised for impact of abnormal expenses (doubtful debt provisioning and IoT platform write down) and abnormal cost reductions (compensation and marketing). Net impact on EBIT $12.2m. Global Product Segment The Global Product segment revenue grew by +24.9% to $764.4m (FY19: $612.0m). In constant currency, revenue grew +20.1% driven by European expansion and the relevance of our products to a working-from- home environment in 2H20. Our ”sell-out” performance remained solid across all geographies whereas our reported “sell-in” patterns reﬂected local lock down patterns and retailer behaviours. In North America, the Group achieved +11.3% constant currency revenue growth with 2H20 sell- in impacted by retailer lock downs and the delay of Amazon Prime Day, which shifted some orders to 1H21. In ANZ, the Group saw strong growth in 2H20 with increasing online adoption and delivered +18.3% constant currency full year growth despite some stock shortages late in the year, again shifting some orders into early 1H21. In Europe, the Group delivered +54.8% constant currency revenue growth with strong performance in existing markets and a further roll out to Spain and France. The fast-growing region ﬁnished the year at 91% of the size of the Global segment in ANZ. The ROW segment is by nature lumpy, and this year revenue grew strongly against a weaker FY19 baseline. The Global Product segment normalised EBIT2 for the year was $90.2m (FY19: $78.8m), representing a +14.5% increase. The segment’s normalised EBIT margin2 of 11.8% compares to 12.9% in FY19 with a strong USD accounting for two thirds of the decline and the impact of US tariffs also moderating the % margin. Breville Group Limited annual report 2020 17 Directors’ report continued Operating and ﬁnancial review continued Segment results continued Distribution Product Segment The Distribution segment grew revenue strongly increasing sales by +26.9% (against a FY19 +18.8%) driven by strong Breville local sales in ANZ, including the successful launch of the Breville Air™ range. Importantly, the segment fulﬁlled its strategic role by delivering an incremental $4.4m in EBIT which was reinvested into Global segment marketing and R&D. Normalised EBIT and NPAT In 2H20 the Group incurred two sizable abnormal expenses and equally, made some sizable cost savings. As the Group decided its dividend payout for FY20, and set budgets for FY21, it looked through both these pluses and minuses to base its decisions off a normalised FY20 EBIT of $113.1m. In terms of speciﬁcs: • Since COVID-19 impacted our markets, credit risk has heightened with some retailers at the same • • time as global insurers are reducing coverage limits. This combination led to the judgement to recognise a step change in the doubtful debt provision of $13.6m in 2H20. In 2H20 the Group made the strategic decision to consolidate onto a single, standards-based platform, triggering the write down of our proprietary IoT platform, developed over three years, at a cost of $9.6m. In the face of COVID-19 uncertainty, the Group aggressively cut back expenses in Q420 to create an expense buffer, and explicitly to protect jobs. The cuts included temporary base salary, and directors’ fees, reductions (ranging from 40% to 10%) and the suspension of the FY20 short-term incentive program. Neither of these savings, together worth $7.7m, are planned to repeat in FY21. • The Group cut back on marketing spend below normal levels in Q420 by $3.3m. All four impacts are regarded as abnormal and are added back to calculate the Group’s normalised proﬁt performance. FY19 FY20 % Growth Normalisation FY20 % Growth Statutory Statutory Statutory 760.0 271.2 952.2 320.6 25.3% 18.2% Doubtful debt provision 1 IoT impair- ment 2 Compens- ation reduction 3 Reduced marketing spend 4 Normal- ised 952.2 320.6 Normal- ised 25.3% 18.2% (32.2) (35.1) 8.9% (3.3) (38.4) 19.1% AUD $m Revenue Gross Proﬁt Mktg Expenses Other Expenses EBITDA (125.0) (159.0) 27.2% 114.0 126.5 11.0% 13.6 13.6 Depn/Amort (16.6) (25.6) 54.1% EBIT Finance Costs Tax Expenses NPAT Basic EPS (cents) 97.3 (3.0) (26.9) 67.4 100.9 3.7% 13.6 (8.2) 173.3% (26.6) (1.3%) 66.2 (1.8%) (3.9) 9.7 51.8 50.5 (2.5%) 9.6 9.6 9.6 (2.8) 6.9 (7.7) (7.7) (143.4) (3.3) 138.8 (25.6) 14.8% Growth excluding 21.7% AASB 16 impact 5 54.1% (7.7) (3.3) 113.1 16.2% 14.3% 2.2 (5.5) 0.9 (2.4) (8.2) 173.3% (30.1) 75.0 11.8% 11.2% 57.3 10.6% Minor differences may arise due to rounding 1 Step change in doubtful debt provision to reﬂect heightened credit risk with retailers weakened by changes in consumer patterns and physical lock downs. 2 One off impairment charge arising as a result of strategic decision to move to a standards-based IoT platform and to write off development work on our proprietary IoT platform. 3 Temporary compensation reductions. Base salary cut by an average of 20% in May and June 2020. Cuts ranged from 40% for directors’ fees and 30% to 10% of base salary. The FY20 STI scheme was suspended. These savings are considered abnormal with salaries reverting to normal levels as of July 2020 and a STI scheme planned for FY21. 4 In response to uncertainty in the COVID-19 environment, marketing spend was reduced across April-June. Spend would normally grow at least in line with gross proﬁt. The $3.3m add back reﬂects speciﬁc abnormal cuts made in April-June. After adding this amount, growth in marketing spend is at a more normal level. 5 FY20 beneﬁted by $2m at EBIT level from adoption of AASB 16 but is stripped out for a like-for-like comparison to FY19. Net beneﬁt to NPAT is minimal at $254k. 18 Breville Group Limited annual report 2020 Operating and ﬁnancial review continued Dividends Financial Position The Group’s total working capital decreased in FY20 by $22.3m primarily driven by an unwind in previous tactical investments in inventory, with strong demand in 2H20 reducing stock balances, and the take up of the doubtful debt provision. With the business growing at +25% pa, this decrease was larger than planned with working capital below equilibrium. In FY19, tactical inventory builds were made in the USA (timing of tariff price increases), the UK (a buffer against Brexit disruption), and in Europe where we ran an unconstrained stock position to support aggressive growth. In FY20, these were planned to unwind, and they did; however, a slower ramp up of supply post Chinese New Year, combined with unexpectedly strong sell-in in some markets, has driven inventory below equilibrium with replenishment expected throughout FY21. Reported receivables were ﬂat on prior year despite +25% sales growth partly because of the take up of the doubtful debt provision and partly due to the pattern of sales late in 2H20 with some orders being pushed into 1H21 given inventory supply constraints and the delay of Amazon Prime day from July to October. Flat inventory and receivable balances combined with payables growing in line with the business resulted in reduction in working capital below an equilibrium level. The growth in intangibles to $160.2m (or 17% of sales) an increase of $37m, reﬂects the recognition of goodwill associated with the ChefSteps acquisition ($28m) and the ongoing investment in new product development as well as the Group IT platform. Net Cash Net cash at 30 June 2020 was $128.5m compared to $9.8m at 30 June 2019 including the net proceeds of the capital raise completed in June 2020 of $100.7m. A ﬁnal dividend of 20.5 cents per share (60% franked) has been declared (FY19: 18.5 cents, 60% franked) bringing the total dividends for the year to 41.0 cents per share. The Group has established a new Dividend Reinvestment Plan (“DRP”) for its shareholders, replacing its previous inactive DRP. The DRP will apply to the ﬁnal dividend for the year ending 30 June 2020 and will remain in place until further notice. Participation in the DRP is optional and available to eligible shareholders of fully paid ordinary shares in BRG with a registered address in Australia or New Zealand as at the record date of 15 September 2020. Eligible shareholders may participate for all or part of their shareholding, however a holder must elect a minimum of 150 shares to participate. To participate in the DRP for the FY20 ﬁnal dividend, shareholders will need to ensure their election is made by 5:00pm (AEST) on 16 September 2020. Shareholders who successfully elect to participate in the DRP will be able to reinvest all or part of their dividends to obtain additional fully paid ordinary shares in BRG, without having to pay brokerage, commission or other transaction costs in respect of the shares acquired. Once a shareholder elects to participate, either in part or in full, that election will continue to apply to subsequent dividends where the DRP is active, unless a shareholder advises otherwise. Elections under the previous inactive DRP will be disregarded. Shareholders who successfully participate in the DRP for the ﬁnal FY20 dividend will be issued shares at a share price determined in accordance with the DRP Rules based on the average daily volume weighted average price (“VWAP”) during the period of ten trading days, commencing on 17 September 2020. Shares issued under the DRP will rank equally with existing fully paid ordinary BRG shares. Material business risks The material business risks that may impact the achievement of the Group’s strategy and its future ﬁnancial prospects are summarised below, together with key actions intended to mitigate these risks: Risk Nature of risk Key actions to mitigate risk Product development and innovation Insufﬁcient investment in product development and innovation may result in loss of competitive advantage. Strategic reallocation of funds to increase investment in product development and marketing functions and their associated resources and technology. Securing of world class leadership for product development and go to market functions. Annual investment has doubled over 4 years from FY15 to FY19 with spend increasing from 8% of revenue to 11%. Marketing spend was temporarily held back in 2H20 but the Group retains the target of investing at least 12% of Group revenue in marketing and new product development. Breville Group Limited annual report 2020 19 Directors’ report continued Operating and ﬁnancial review continued Material business risks continued Margin risk The competitive nature of the small domestic appliance market together with changes in manufacturing costs, including commodity prices, will have an impact on the Group’s ﬁnancial results Active protection and management of the Group’s intellectual property arising from Product development protects uniqueness of range. Focused brand building initiatives enhancing strength of brand awareness and desirability. Adverse global economic and geopolitical conditions Adverse changes to the general global economic and geopolitical conditions and the retail landscape as well as consumer sentiment in the principal markets in which the Group operates will impact its ﬁnancial results. Geopolitical tension such as Sino- American tariff esclation and threat of Brexit may speciﬁcally impact consumer demand as well as our ability to supply markets. The impact of COVID-19 pandemic may continue to impact supply ex- China, demand from key retailers, and in key consumer markets, and heighten credit risk On going variabilisation of key elements of cost structure and strengthening of long term supplier relationships helps to buffer cost increases. Focus on communication with consumers to gain ever greater insight into the changing world of food and beverage trends. As well as monitoring global economic and consumer data and key industry trends. Increasingly broad regional footprint mitigates impact of any speciﬁc market on Group results. With regard to speciﬁc Brexit risk extra inventory holdings have been built in the UK to mitigate against disruption to borders and supply. With regard to tariff tensions, speciﬁc negotiations with suppliers are in play alongside communications and strategies with retailers to protect consumer demand. With regard to COVID-19 supply risks, inventory buffers in key markets are being rebuilt to provide resilience in the face of supply interruptions. With regard to COVID-19 retailer demand risk, digital marketing to consumers is used to stimulate pull through or sell-out from retailers. Furthermore, by supplying to a wide range of premium retailers, as well as a growing direct to consumer channel, the consumer has freedom to ﬁnd our products in alternative channels when stock runs low in a particular retailer. With regard to COVID-19 end consumer demand, during the pandemic our products have proved relevant to the working-from-home experience of many of our consumers. Digital marketing, direct to the consumer, is used to sustain this demand. Sell out trends and weekly data are monitored to predict future consumer demand. With regard to COVID-19 credit risk the Group works with insurers to sustain receivable insurance. Where this is not possible the Group has lessened credit risk by shortening trading terms with certain customers and taking up an appropriate doubtful debt provision as at 30 June 2020. Foreign exchange exposures Transactional exposure as product purchases are primarily paid for in US dollars. The transactional and translational USD exposures are considered to result in a partial natural hedge from a Group perspective. Translational exposure as international earnings contains a large portion denominated in US dollars and Euros, which are translated into Australian dollars for reporting purposes. A weak Australian dollar is likely to have an adverse impact on ANZ earnings (as a result of higher landed costs) but a positive impact on the translation of non-Australian dollar denominated results. Treasury policy requires hedging of a portion of expected purchases up to 12 months in advance giving forward visibility of the effective exchange rate for 12 months allowing the business to manage costs and pricing. 20 Breville Group Limited annual report 2020 Operating and ﬁnancial review continued Group strategic acceleration program update ﬂexibility and scalability; an ERP and a point of sale module giving access to sell-out data for better decision making. During FY20, the Group has continued to progress its acceleration program, the impacts of which have helped drive the FY20 operational and ﬁnancial performance. Through FY17-19 the Group moved from speciﬁc new product development innovation to the commercialisation of a range within a category. During FY20 the Group has moved up the curve to Solution Thinking, providing not only a product, but a product, connected via a standards-based IoT platform to speciﬁc content designed to make the product deliver excellent results for the consumer – recipes, instructional videos and machine instructions. The user will be able to execute a recipe through an app on their phone or via smart home devices to deliver outstanding results. Our commitment to sustainability People and social responsibility Talent attraction and retention Diversity and inclusion Reward and recognition Workplace health and safety Training and development The Group is committed to ethical, responsible and sustainable conduct across the entire business and acknowledges the importance of respecting all our stakeholders, including employees, shareholders, customers and suppliers. In order to ensure this commitment is being met, the Group has a sustainability committee and a sustainability co-ordinator to drive important initiatives. The Group’s overall goal is to embed an Environmental, Social and Governance (ESG) framework into the business agenda incorporating key ESG risks and opportunities. Community Community engagement People The Joule Sous Vide, acquired as part of the ChefSteps acquisition, is the Group’s ﬁrst integrated solution offering. Leveraging the outstanding content, also acquired with ChefSteps, combined with Breville content, the Joule Oven Air Fryer Pro will be the next solution offering – to be launched in FY21. Because the products are connected the customers will continue to be served added content and features throughout the lifetime of the product. A real solution. In terms of geographic expansion we launched the Sage® brand into Spain in September 2019 and in May 2020 expanded into France. As the Group continues to make progress on its strategy of unifying Europe under the Sage® brand, existing European Sage® Distributors have been buying product directly from our European warehouse instead of Hong Kong since FY19. Continuing this strategy the Middle East will now transition from the Breville® brand to the Sage® brand allowing the distributor to draw from the UK warehouse rather than Hong Kong. Healthy nutrition Talent attraction and retention Breville remains one of the largest employers of industrial designers in Australia. To ensure that we continue to attract these and other key professionals, we offer career development opportunities within a nurturing yet challenging work environment. Environment Energy and emissions Packaging stewardship Waste and recycling Life cycle analysis Business Ethical sourcing Modern slavery Vendor audits Product responsibility Anti-bribery and corruption The Group enjoys the beneﬁts of a highly experienced and talented team across all departments and geographies. Underpinning Breville’s food thinking culture, the passion, creativity and insight of employees is critical to consistently delivering world-class, innovative products to consumers. The Breville team continues to be acknowledged, both domestically and internationally, with multiple design awards and recognition through mainstream media. During FY20, Breville introduced an online employee survey tool which allows for real-time tracking of our employees’ level of engagement across several engagement metrics. The tool also allows for comparisons against industry benchmarks and during FY20 Breville exceeded the industry benchmark in each of the engagement metrics. Tracking employee engagement allows the company and individual managers to target the speciﬁc The Group has made signiﬁcant progress, and investment, during FY20 in delivering a centralised scalable global IT platform to allow accelerated growth. The platform is live in Europe and will next be rolled out to the USA. The platform includes a third party logistics model; a product information management (PIM) system to centralise all product related data; a middle-ware platform improving areas of focus for future initiatives which will improve the engagement and ultimately the performance of our employees and our company. Breville Group Limited annual report 2020 21 Directors’ report continued Operating and ﬁnancial review continued Our commitment to sustainability and social responsibility continued People continued Diversity Our diversity is represented in many ways including gender, age, origin, race, cultural heritage, language and location. Some examples include; • Gender: Breville complies with the (Australian) Workplace Gender Equality Act which requires the submission of an annual report on gender diversity practices and metrics. In FY20 our Board remained at 29% female representation and the percentage of women across the organisation remained at 45%. The percentage of women in managerial roles increased from 30% in FY19 to 32% in FY20 and within senior and executive roles, the percentage of women increased from 25% in FY19 to 30% in FY20. • Global Diversity: Our 610 employees are spread across 9 countries and speak a variety of languages. Over half of our employees and half of our executive leadership team are located outside of Australia. • Global Policies and Practices: Noting the changing demographics above, Breville consistently reviews its policies to ensure that they are applicable in every country where we operate. Recognising the many business beneﬁts that a diverse workforce can deliver, Breville continues to seek out ways to further increase our diversity and to this end; • Our Diversity Committee has undertaken various activities recognising our employee diversity and ensuring that our business represents our diverse customer base and the communities in which we operate and encourages all our people irrespective of race, language, ethnic origin or ability to contribute to our success. • Policies were reviewed with a focus on identifying more ﬂexible employment practices sympathetic to work-life balance. To this point, during the impact of COVID-19, our businesses in each geography successfully adopted working-from-home arrangements in order to meet Breville’s needs and the personal safety of our employees and their families. • Anti-discrimination and anti-bullying training is conducted every 2 years to ensure that our values are consistently translated into appropriate working behaviours. Reward and recognition Breville’s reward philosophy aims to attract, motivate and retain staff through monetary and non-monetary means. This includes establishing competitive salary and beneﬁt levels and the design of variable pay plans for relevant employee groups. During FY20, the Group reviewed key performance management practices and introduced changes with the intention to strengthen the alignment between performance and reward across the Group. Currently over 50% of all Breville employees participate in some form of incentive program and our intention is to ensure that all our people are recognised through the appropriate monetary and/or non-monetary means. Recognition is encouraged across the Group throughout the year both informally and formally acknowledging individuals’ and teams’ behaviours and contributions. Workplace health and safety Ensuring a safe workplace is a key area of focus and the Group strives for continuous improvement and consistency in safety practices across all geographies. As an indication of Breville’s commitment to ensuring the safety of all employees, in FY20 a Group Health, Safety and Environment (HSE) Manager was appointed to assist in further embedding our global HSE systems, procedures and compliance activities. All safety policies are now available on a common SharePoint site accessible to all Breville employees. The Workplace Health & Safety Committee (WHSC) worked closely with the Sustainability Committee to ensure environmental initiatives were aligned within Breville. The WHSC is focussed on ensuring employees’ health and safety at work and does this by developing standards, rules and procedures. In FY21 the Committee will continue to raise awareness on health and safety via targeted campaigns and staff communication initiatives. During FY20, Breville took pre-emptive steps to manage the potential risks associated with the COVID-19 epidemic. These were co-ordinated globally and included temporary ofﬁce closures, regular employee communication, the establishment of a company COVID-19 SharePoint page, work-from-home guidelines, temperature-testing and deep-cleaning of ofﬁces. In addition, the company ran several global activities focussed on employees’ mental and physical health including online yoga, mental-health sessions, team trivia events and music evenings. Training and development The Group invests in the training and education of its people, building strong, collaborative links with world experts in food thinking and technology. Strongly committed to our core values of creativity, simplicity, insight and excellence across our business, the Group recruits, trains, assesses and rewards employees on this basis. With a team anchored around these common values, the business strives to foster a learning culture that stimulates idea generation, a passion for learning, and the continuous search for new and better solutions. To further support Breville’s training and development initiatives, a new online learning channel was introduced in FY19 and continued through FY20. 22 Breville Group Limited annual report 2020 Operating and ﬁnancial review continued Our commitment to sustainability and social responsibility continued Environment Energy, packaging and waste are our key environmental impact areas. The Group is striving to incorporate sustainable decisions into operational facilities and has a number of energy efﬁcient features to reduce energy usage including movement and light sensors to minimise use of lighting, limitations/timers on plant use (air conditioning, heating) and measurement of power usage. The Group has been a committed signatory to the Australian Packaging Covenant Organisation for over 9 years, a voluntary agreement between government and industry which provides a framework for the reduction of the potential impact of products, packaging and warehouse operations on the environment. The Group integrates actions and goals into existing business systems so that sustainable packaging considerations become ‘just how we do business’. Success is being achieved via cross functional teams working together to implement the Group’s Sustainability Policy. The Group has implemented improved waste reduction and recycling practices including enhanced recycling of cardboard, paper, plastics, electronics, appliances, expanded polystyrene (EPS) and organic waste. Employing the use of streamlined bins, each waste stream now has its own disposal outlet, ensuring minimal contamination of recyclable waste and increasing the recovery yield. Business Ethical sourcing The Group is committed to conducting business in a socially responsible manner and managing its business to reﬂect high ethical and moral values. The Group expects its supply partners to uphold and respect the same core values and commitment in the operation and management of their businesses. The code speciﬁes compliance in areas such as: • wages, beneﬁt policies (including transparent record keeping) • child labour • working hours • forced and bonded labour • discrimination • harassment and abuse • freedom of association • health and safety • environmental practices • business integrity. The company has zero tolerance for the use of child labour, prison labour or forced labour in the manufacture of its products. Suppliers are required to contractually recognise the code and acknowledge their acceptance of its requirements. New key suppliers are required to undergo an independent audit to verify that they are in compliance with local laws and safety conditions. The Group recognises the difﬁculties in dealing with a large and complex supply chain and therefore is dedicated to integrating ethics into its core business practices and continuously investing in its ethical sourcing program. Modern slavery and human trafﬁcking We respect universal principles regarding human rights and labour practices worldwide, including the Universal Declaration of Human Rights, through sound business activities. We are taking steps during the ﬁnancial year to ensure that modern slavery and human trafﬁcking is not taking place in any of our supply chains or in any part of our business. We are updating our corporate policies, including our ethical sourcing policy, employee handbooks and codes of conduct. We require our suppliers to be bound by our ethical sourcing policy and we are working with our main suppliers to mitigate supply chain risks and ensure their compliance with applicable laws and our policy. The Group expects that its supply partners will not be a party to any violation of basic Human Rights including: Vendor audits • • • • • freedom from discrimination freedom from slavery or servitude freedom of movement freedom of expression freedom of thought. The Group will not do business with vendors that do not share and demonstrate commitment to compliance with local and internationally accepted labour and employment laws. The Group has an ethical sourcing policy which includes an ethical sourcing requirements code (‘code’) which sets out the minimum requirements and expectations that all vendors, including sub-contractors engaged by vendors, must comply with. The Group conducts factory visits to vendors by senior management on a regular basis, as well as using internationally recognised independent audit ﬁrms to verify compliance with local laws and safety conditions as well as the Breville Group ethical sourcing policy. When an independent audit ﬁrm is engaged, an ethical trade audit report is issued, which is to an industry recognised standard. This year the Group has engaged the services of a collaborative platform designed for the sharing of responsible ethical sourcing data, on supply chains. The Group in still in the process of completing the onboarding of all our current vendors into the platform. Once this is complete, we will have access to a larger number of vendor audits as well as being able to assess the inherent risk of each of our vendors to ensure vendors are selected for audit in accordance with the Group’s internal risk assessment framework. Breville Group Limited annual report 2020 23 Directors’ report continued Operating and ﬁnancial review continued Our commitment to sustainability and social responsibility continued Vendor audits continued The audits which are performed by independent audit ﬁrms are 4-pillar audits and assess the following areas; • Labour Standards • Health and Safety • Environment • Business Ethics The scope of the vendor audits provides coverage (using a sample-based method) of all workers at each site, including direct employees, agency workers and workers employed by service providers or provided by other contractors, in order to determine compliance by the vendor. Vendor compliance is assessed and determined according to the following compliance metrics: • • the Ethical Trading Initiative (ETI) Base Code the Group’s ethical sourcing policy • assessment of management systems • assessment of entitlement to work and immigration • assessment of sub-contracting • assessment of environment and • assessment of business ethics. 30 June 2020 30 June 2019 Target for June 2023 direct result of lower occurrences and severity of non- compliances found in the audit. Gold Silver Bronze Below standard BASELINE The severity of each non-compliance, and hence the rating of the vendor, is decided by the Group’s sustainability committee. Vendors who do not meet the Group’s internal ‘baseline’ standard are categorised into a ‘below standard’ category and are actively monitored to ensure all remedial action is taken against identiﬁed non-compliance in the most effective and efﬁcient method possible. Evidence of corrective action to remediate non-compliance is collated through inquiry, inspection and follow-up observation. Where the Group requires zero tolerance or where the vendor or factory does not demonstrate a willingness to comply, the Group will discontinue doing business with the vendor/ factory. Product responsibility The Group takes pride in the quality of its products. The Group has extensive compliance processes in place to ensure that its products are safe and compliant with labelling and safety requirements in relevant markets. Annual vendor audits completed 8 6 10 Anti-bribery and corruption The Group has a target to increase vendor audits from 5 to 10 per annum over a 5-year period to June 2023 starting in June 2018. This ﬁnancial year, the Group conducted and received audits on 8 individual vendors. Each year, the vendors selected for audit will be based on the Group’s internal risk assessment framework which takes into consideration the size of the vendor, levels of purchases made and results from previous audits conducted. Vendors are audited on a rotational basis over a multi-year period taking these factors into consideration. For those vendors which have been audited, a rating system has been applied and based on the results of the audit, each vendor is given a vendor audit rating. Based on the vendor compliance metrics above, the Group has deﬁned an internal ‘baseline’ standard which deﬁnes the minimum level of compliance expected from any vendor. This baseline is subsequently used to benchmark the results of vendor audits to determine the outcome of the rating awarded. Vendors who meet, exceed or greatly exceed the Group’s internal ‘baseline’ standard can be rated bronze, silver or gold (gold being the highest rating). Higher ratings are awarded as a The Group is committed to operating in a manner consistent with the laws of the jurisdictions in which its businesses operate, including those relating to anti- bribery and corruption. Honesty, integrity and trust are considered integral to the ethos of the Group, its products and its brands. Conduct associated with bribery and corruption is inconsistent with these values. Accordingly, the Group adopts a “zero tolerance” approach in relation to these matters. The Group has an anti-bribery policy which, in conjunction with the code of conduct and whistleblowing policy, sets out the responsibilities of all the Group’s employees (including contractors) and directors with regard to dealing with outside parties and prohibits all Group personnel in all jurisdictions in which the company operates or conducts commercial activities, from engaging in any activity that constitutes bribery or corruption and other improper inducements and/or payments. In order to ensure that these values and the policy are properly adhered to, the Group has appointed an Anti-Bribery Compliance Ofﬁcer who is responsible for monitoring the application of this policy. 24 Breville Group Limited annual report 2020 Risk management The company’s risk management is discussed in the corporate governance statement on page 54. Dividends The following dividends have been paid, declared or recommended since the end of the preceding year. Signiﬁcant changes in the state of affairs There were no signiﬁcant changes in the state of affairs of the consolidated entity that occurred during the year that have not otherwise been disclosed in this report or the consolidated ﬁnancial statements. Annual General Meeting (AGM) and Director Nominations Cents per ordinary share $’000 The Group will hold its Annual General Meeting (AGM) virtually on 12th November 2020. Final FY20 dividend recommended: Dividends paid in the year: Interim FY20 dividend paid Final FY19 dividend paid 20.5 27,992 20.5 18.5 26,728 24,121 In accordance with our constitution and ASX requirements, the closing date for the receipt of Director Nominations from persons wishing to be considered for election is 16th September 2020 (40 business days prior to AGM). Should the nomination of a person for election be made by a Director, the closing date for the receipt of nomination is 21st October 2020 (15 business days prior to AGM). Directors’ interests As at the date of this report, the interests of the directors in the shares or other instruments of Breville Group Limited were: S. Fisher T. Antonie P. Cowan S. Herman D. Howell L. Myers K. Wright Ordinary shares 127,764 43,791 10,968 42,484 139,264 100,000 21,764 The Group has established a new Dividend Reinvestment Plan (“DRP”) for its shareholders, replacing its previous inactive DRP. The DRP will apply to the ﬁnal dividend for the year ending 30 June 2020 and will remain in place until further notice. Participation in the DRP is optional and available to eligible shareholders of fully paid ordinary shares in BRG with a registered address in Australia or New Zealand as at the record date of 15 September 2020. Eligible shareholders may participate for all or part of their shareholding, however a holder must elect a minimum of 150 shares to participate. To participate in the DRP for the FY20 ﬁnal dividend, shareholders will need to ensure their election is made by 5:00pm (AEST) on 16 September 2020. Shareholders who successfully elect to participate in the DRP will be able to reinvest all or part of their dividends to obtain additional fully paid ordinary shares in BRG, without having to pay brokerage, commission or other transaction costs in respect of the shares acquired. Once a shareholder elects to participate, either in part or in full, that election will continue to apply to subsequent dividends where the DRP is active, unless a shareholder advises otherwise. Elections under the previous inactive DRP will be disregarded. Shareholders who successfully participate in the DRP for the ﬁnal FY20 dividend will be issued shares at a share price determined in accordance with the DRP Rules based on the average daily volume weighted average price (“VWAP”) during the period of ten trading days, commencing on 17 September 2020. Shares issued under the DRP will rank equally with existing fully paid ordinary BRG shares. The DRP for the ﬁnal FY20 dividend will be fully underwritten. Breville Group Limited annual report 2020 25 Directors’ report continued Remuneration report (audited) Section 1 Introduction Section 2 Overview of Remuneration Approach and FY20 Outcomes Section 3 Key Management Personnel Table 1 KMP details Section 4 Remuneration Framework Table 2 Target Remuneration mix Section 5 Linking Remuneration to Performance Table 3 Five Year Group Performance Section 6 Executive Remuneration – detailed elements Table 4 Fixed Deferred Remuneration Included in Remuneration tables 6 & 7 Table 5 LTI plans Included in the Remuneration tables 6 & 7. Section 7 Non-Executive Director Remuneration Section 8 Statutory Remuneration Tables Table 6 & 7 KMP Remuneration FY20 and FY19 Table 8 KMP STI Cash Bonuses and LTI Performance Rights Vesting Table 9 KMP Shareholdings Table 10 KMP Performance Rights Granted and Fair Value Table 11 KMP Fixed Deferred Remuneration Rights Granted and Fair value Table 12 KMP Performance Rights Held Section 9 Peer Group Appendix Table 13 ASX200 Consumer Staples, Consumer Discretionary and Industrials Peer Group used for Relative TSR Measurement 1. Introduction The Directors are pleased to present the Group’s remuneration report for the ﬁnancial year ended 30 June 2020 which has been prepared in accordance with section 300A of the Corporations Act 2001 and has been audited by PricewaterhouseCoopers as required by section 308(3c) of the Corporations Act 2001. The report sets out the Group’s remuneration strategy, framework and compensation arrangements in place for the Key Management Personnel (KMP), deﬁned as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group. The report also sets out the link between performance and remuneration outcomes for FY20. This report is made in the context of a strong FY20 performance delivered against a turbulent backdrop of Brexit uncertainty, US-Sino tariffs and latterly COVID-19. FY20 Performance Highlights • Sales increased to $952.2m + 25.3% growth • Statutory EBIT increased to $100.9m + 3.7% growth • Normalised EBIT increased to $113.1m + 14.3% growth • Normalised NPAT increased to $75.0m + 11.3% growth • DPS increased to 41.0 cents + 10.8% growth • Share price1 increased to $22.76 + 39.3% growth • One-year TSR1 was + 41.5% 1 30th June 2020 compared to 30th June 2019 26 Breville Group Limited annual report 2020 Remuneration report (audited) continued 1. Introduction continued The Board is pleased with how management has executed against a difﬁcult backdrop, but, recognising that signiﬁcant future uncertainty remains, the Board chose to take a prudent approach to remuneration for the year and speciﬁcally: • Suspended the FY20 STI scheme • Implemented an all employees compensation, and directors’ fees, reduction in May and June 2020 between 10% - 40% • Issued deferred share rights to the CEO as part of Deferred Base Remuneration • Maintained the LTI incentive scheme to reward sustained shareholder value creation During FY21 the Board will review and decide if a discretionary short-term bonus recognising delivery over an 18-month period should be awarded. This will be gauged against a longer period of trading under COVID-19 conditions than the current 4 months currently available to judge performance. The parameters of the FY21 scheme will also be reviewed to ensure that they continue to incentivise executives to deliver superior shareholder outcomes in the current unusual and volatile market conditions. 2. Overview Remuneration Approach and FY20 Outcomes FY20 special circumstances When the potential economic impact of COVID-19 started to emerge in March and April 2020, with a resulting uncertainty over future trading, the business introduced broad based cost cutting measures designed to protect performance and employment. These cost cuts impacted employee remuneration. • Base cash salaries and directors’ fees were reduced by between 10% and 40% on a progressive basis with the highest cuts for the Board of Directors. These reductions were implemented for May and June 2020. The salary reductions were then suspended in July 2020 due to stronger trading. Future reductions remain under review. • The FY20 STI was suspended. Sales and gross proﬁt performed strongly both before, and after the pandemic arose, however two large abnormal expenses (doubtful debt provision and the impairment of a proprietary IoT platform) reduced statutory EBIT. With increased trading uncertainty the Board prudently decided to suspend the STI scheme for FY20. • The Board considers that management has performed strongly during the COVID crisis, but only 4 months have passed under these unusual trading conditions. In FY21 the Board may review management performance over a longer period and may issue a discretionary bonus to reward performance since COVID impacted the business. • The LTI scheme for FY21 has been reviewed, and revised, to increase the chance that it continues to effectively reward and incentivise superior performance, aligned to shareholder interests. Given the current turbulence in the majority of consumer and industrial ASX 200 share prices, the scheme will adopt an absolute, rather than a relative, TSR target, calculated over a three year performance period from 30th June 2020 to June 30th 2023. 50% of the performance rights will vest on achieving a minimum three year TSR target, and 100% will vest on achieving a stretch TSR target. No lock up period will apply after vesting. TSR targets are set in light of current market conditions and will be disclosed in the remuneration report for FY23. The Board is aware that it may need to exercise its discretion to equitably reward management’s performance given the expected turbulence in the upcoming 3-year performance period. Breville Group Limited annual report 2020 27 Directors’ report continued Remuneration report (audited) continued 2. Overview Remuneration Approach and FY20 Outcomes continued FY20 special circumstances continued CEO: The CEO’s remuneration package is designed to reward, motivate and retain a high performing international CEO, whilst maximising alignment with shareholder interest. Jim Clayton has been with the Group for 5 years as CEO and has delivered sustained strong business growth and shareholder returns. The CEO’s package has steadily moved towards more variable, share based and longer-term remuneration rather than ﬁxed short-term cash-based rewards. This trend continued in FY20. In FY20 the CEO’s short term cash remuneration was reduced by the temporary salary reduction in May and June (30% reduction for the CEO) and the suspension of the FY20 STI scheme. The LTI scheme and award level was left unchanged at FY19 levels. The CEO’s overall package was enhanced by an expansion of the ﬁxed deferred remuneration scheme. This remuneration rewards share price appreciation and tenure. Deferred remuneration grants for the FY20 service period (equivalent to $275,000 of Fixed Cash Salary for FY20) were made. Grants relating to future service periods, FY21-24, were also made. These grants will only vest when the speciﬁed period of employment has been delivered. The CEO’s reported total remuneration for FY20 increased by 13% or $267k over FY19 to $2.31m. The Board considers this appropriate to reward and retain a high performing international CEO for the globally expanding Group. The Board is also conscious that over the last few years the weakness of the USD has continued to diminish the value of AUD based remuneration packages in an international context. The Board has moved to ensure that Jim Clayton’s package is comparable to those offered by both similar, and larger, international groups. The CEO reports to the Board and is not a Director of the Group. This delineation of responsibilities and reporting lines has been chosen deliberately and works well with a clear split between executive and non-executive roles. In line with this choice, the Board continues to choose not to take the CEO’s package to the AGM for separate shareholder approval. The CEO’s remuneration package is put up for shareholder scrutiny, alongside other key executives’ remuneration details, as part of the Group’s remuneration report. KMPs: KMP executives also experienced a ﬁxed salary cut in May and June (30%) and a zero STI award for FY20. LTI performance right grants were made to KMP’s for FY20 based on 65% of base salary, an increase from 50% in FY19. This increases the weighting of share based, longer term incentives in KMP packages in line with the desired alignment of KMP and shareholder interests. Against this backdrop the following remuneration arrangements were approved and implemented for the year. Remuneration Component Fixed Cash Remuneration Purpose & Execution FY20 Outcomes Aims to provide competitive salary, including superannuation and non-monetary beneﬁts, to attract and retain a high performing team. • No base cash salary increases were awarded to the CEO in FY20 • Temporary reductions in base salaries Fixed cash remuneration is reviewed annually, with outside assistance where needed, and set with reference to: - • Size and complexity of role • Market benchmarks (relevant international and domestic peers) • Experience, skills and competencies. were implemented in May and June on a progressive basis ranging from 40% to 10% with an average reduction of ~20%. Total salary saving across all staff was $1.5m per month across May and June • Based on positive trading, 1H21 salaries have been restored to normal levels as of July 2020 28 Breville Group Limited annual report 2020 Remuneration report (audited) continued 2. Overview Remuneration Approach and FY20 Outcomes continued Remuneration Component Fixed Deferred Remuneration Purpose & Execution FY20 Outcomes Delivers ﬁxed deferred remuneration to the executive in the form of SBP that aligns the executive’s interests with shareholders’ by increasing individual potential future shareholdings in the Group. Supports the retention of high performing international executives. As part of their ﬁxed remuneration the executive may receive grants of deferred share rights vesting, and exercisable, when employment services for a speciﬁc period have been provided. • One share right entitles the executive to one fully paid ordinary share on vesting and exercise • No consideration is payable by the executive on granting or exercise of the share rights as the rights satisfy part of the executive’s base remuneration • All unvested rights lapse if the speciﬁc service period is not commenced by the executive • No disposal restrictions apply to the shares received when the rights have vested The number of rights granted is calculated as a base salary amount divided by the relevant share price at the time that the grant is agreed. This aligns the executive’s and shareholders’ interest in sustained share price appreciation. The Board believes that this instrument may prove particularly attractive as an incentive and retention tool in times of uncertainty and increased share price volatility. The following grants have been made to the CEO for FY20, and beyond, in lieu of a base salary: • FY20 Grant: 16,467 share rights which will vest and be exercisable when, and if, the service period 26 Aug 2019 – 25 Aug 2020 is completed. • FY21 Grant: 29,940 share rights which will vest and be exercisable when, and if, the service period 26 Aug 2020 – 25 Aug 2021 is completed. • FY22 Grant: 29,940 share rights which will vest and be exercisable when, and if, the service period 26 Aug 2021 – 25 Aug 2022 is completed. • FY23 Grant: 29,940 share rights which will vest and be exercisable when, and if, the service period 26 Aug 2022 – 25 Aug 2023 is completed. • FY24 Grant: 29,940 share rights which will vest and be exercisable when, and if, the service period 26 Aug 2023 – 25 Aug 2024 is completed The number of rights issued was calculated to give an equivalent base salary increase of $275,000 for the FY20 grant based on a fair value of $16.70 per share which was was in line with the YTD VWAP when the grants were agreed in January 2020. The grants for subsequent years were increased to account for existing rights that vest, and expire, in August 2020 and if not replaced would constitute a base remuneration reduction for the CEO. These grants form part of the CEO’s short-term employment beneﬁts shown in table 6 with the value shown calculated according to AASB 2 which attribute some of the value of future service periods to the current year even though the grant lapses if the future employment period is not completed. Breville Group Limited annual report 2020 29 Directors’ report continued Remuneration report (audited) continued 2. Overview Remuneration Approach and FY20 Outcomes continued Remuneration Component Purpose & Execution FY20 Outcomes Short term incentives (STI) Aims to reward and incentivise executives for over achieving stretch company targets and is paid in cash each year. A maximum Group bonus pool is calculated as the sum of maximum STI % opportunities of ﬁxed cash remuneration for each participant. The CEO has a maximum STI opportunity of 50%, other KMPs 35% and other staff in a range of 5-35%. A stretch EBIT target is set by the Board in advance of the ﬁnancial year. No bonus pool is awarded until this pre-bonus EBIT is exceeded. As pre-bonus EBIT exceeds the pre-bonus target the STI bonus pool is funded until the maximum is reached. The pool is distributed based on each individual’s maximum opportunity % and the achievement of targets which include Group EBIT, divisional performance, and, in some cases, personal targets. • The FY20 base pre-bonus EBIT target was $110.2m (on a pre AASB16 basis or $112.2m on a post AASB16 basis) representing a +13.2% EBIT growth over FY19. • In FY20 the STI scheme was suspended as part of cost cutting measures introduced to protect the business during a period of increased uncertainty. In FY21 the Board may review management performance over a longer period and may issue a discretionary bonus to reward performance since COVID-19 impacted the trading environment. 30 Breville Group Limited annual report 2020 Remuneration report (audited) continued 2. Overview Remuneration Approach and FY20 Outcomes continued Remuneration Component Long term incentives (LTI) Purpose & Execution FY20 Outcomes Aims to reward and incentivise executives to deliver sustained shareholder value. Annual performance right grants are made to the CEO, KMPs and other managers based on a % of their ﬁxed remuneration. The number of rights issued is based on the value of shares in the company using a 20 trading day trailing volume weighted average price (VWAP) up to date of ﬁnancial year end. The percent of ﬁxed cash remuneration ranges from 20% up to 125% for the CEO. Vesting • A gate of absolute positive TSR must be met for rights to vest. • If this gate is met then the % vesting is determined on relative TSR achieved against a peer Group of approximately 60 companies within the ASX200 Consumer Staples, Consumer Discretionary and Industrials indices (the peer group appendix is shown in Table 13). • Grants vest on the following scale - 0% vests below 50% TSR relative percentile - 50% vests at 50% TSR relative percentile In Year grants • In FY20 the CEO received an LTI performance rights grant of 125% of ﬁxed remuneration in line with FY19. • Other KMP’s received a grant of 65% of ﬁxed remuneration (an increase from 50% in FY19 ) with other managers in a range from 20-50%. In Year LTI Vesting • During FY20 72,800 rights vested in the CEO’s favour under the below schemes and 102,910 rights vested in favour of the other KMPs. 2016 Performance Rights • 10,000 shares vested to the CEO and 17,760 to other KMPs as part of third tranche of the 2016 performance-based grant. 100% of the potential rights in the tranche vested based on 4-year positive TSR of 194% which was above the 75th percentile of the peer Group. 2016 Performance Rights (time bound) • 44,350 shares vested to other KMPs based on continuing employment as part of a 2016-time bound grant. - Rising in a straight line to 100% at 75% 2017 Performance Rights • 31,100 shares vested to the CEO and 24,000 to other KMPs as part of the second tranche of the 2017 performance- based grant. 100% of the potential rights in the tranche vested based on 3-year positive TSR of 143% which was above the 75th percentile of the peer Group. 2018 Performance Rights • 31,700 shares vested to the CEO and 16,800 to other KMPs as part of the second tranche of the 2017 performance- based grant.100% of the potential rights in the tranche vested based on 2-year positive TSR of 65% which was above the 75th percentile of the peer Group. relative TSR percentile. The performance period for the LTI is an average of 3 years with the grants are split into 3 equal tranches with 2, 3 and 4-years performance periods to give a three-year average, three tranches are used to to smooth volatility and maintain incentive whilst still yielding a three year average. After vesting shares are subject to a two-year trading lock which may be waived at Board discretion in exceptional circumstances. • The features of the LTI scheme for FY21 have been reviewed and revised to ensure that they continue to provide a proper reward and incentive framework during the expected upcoming period of potential trading and stock market volatility. The process for granting performance rights will remain unchanged, but performance will be judged against an absolute, rather than a relative, TSR target with a minimum and stretch hurdle. The Board is aware that it may need to exercise its discretion to equitably reward management’s performance given the expected turbulence in the upcoming 3-year performance period. Breville Group Limited annual report 2020 31 Directors’ report continued Remuneration report (audited) continued 2. Overview Remuneration Approach and FY20 Outcomes continued Remuneration Component Non-Executive Director Fees Purpose & Execution FY20 Outcomes Aims to attract, reward and retain high calibre Directors suitable for a fast-growing international business. Each Director receives a fee or base remuneration as a Director of the Group with an additional fee for acting as Chairperson or Chairperson of a Board committee recognising the additional time commitment required. • Non-Executive Director remuneration is reviewed annually within the aggregate compensation pool of $1,400,000 per annum approved by the AGM held in November 2016. • The fees received by Kate Wright and Lawrence Myers for chairing the People, Performance Remuneration and Nominations Committee (PPR&NC), and the Audit and Risk Committee (A&RC), respectively was increased from $15,000pa to $30,000pa in August 2019 to reﬂect the increased complexity and workload for the rapidly growing and internationalising Group. • All Directors took a 40% fee cut in the months of May and June 2020 as part of the company wide salary reduction programme. • The total fees paid of $1,015,730 represent 72.6% of the approved fee cap. 3. Key Management Personnel KMPs are the persons with authority and responsibility for planning, directing and controlling the activities of the Group and comprises the Directors of the Group and the Executives listed below. All KMPs served for a full year. Table 1: Key Management Personnel (KMP) Name Position Term as KMP Non-Executive Directors Steven Fisher Tim Antonie Peter Cowan Sally Herman Dean Howell Non-Executive Chairperson Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director (a),(b) Lawrence Myers Non-Executive Director (c),(b) Kate Wright Executives Jim Clayton Scott Brady Non-Executive Director (a),(d) Group Chief Executive Ofﬁcer Global Product Ofﬁcer Martin Nicholas Group Chief Financial Ofﬁcer Mark Payne Cliff Torng Chief Operating Ofﬁcer Global Go-to-Market Ofﬁcer (a) Member of Audit and Risk Committee (b) Member of People, Performance, Remuneration and Nominations Committee (c) Chair of Audit and Risk Committee (d) Chair of People, Performance, Remuneration and Nominations Committee Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year Full Year 32 Breville Group Limited annual report 2020 Remuneration report (audited) continued 4. Remuneration Framework The People, Performance, Remuneration and Nominations Committee (PPR&NC) of the Board reviews and recommends executive and employee remuneration arrangements within an annually reviewed framework that is designed to support the achievement of strategic goals, sustainable ﬁnancial performance and sustained growth in shareholder value. From time to time the committee may engage external remuneration consultants to assist with this review and in FY20 engaged Godfrey Remuneration Group Pty Limited to assist with the design of the Fixed Deferred Remuneration scheme. Key principles that guide the remuneration framework include: • Fair and Competitive Provide appropriate rewards to attract and retain high calibre employees for an • Simple international and growing business. Market benchmarks are used and may include domestic and international peers depending on the role being evaluated and location of the role Clear, visible and calculable reward linked to sustained company performance and shareholder value creation. Wherever possible executives will be aware of the status of their incentive achievement mid-period • Aligned to Strategy Reward linked to achievement of strategic goals and sustainable performance of the company • Shareholder aligned Reward explicitly linked to short and long-term shareholder value creation • Sustained delivery Reward balanced to optimise long, medium and short term, performance. In implementing its remuneration framework and ensuring proper oversight the committee: • Designs compensation to motivate and retain a high performing global CEO and executive team in line with shareholder interests • Encourages increasing level of executive shareholdings • Aligns interest of shareholders and executives via increasing payments in equity • Grants equity rights based on value • Retrospectively discloses performance hurdles and calculation of award and payments made to ensure transparency • Encourages increased variabilisation of pay linked to short and long-term performance • Limits executive termination packages to less than 12 months’ pay plus accrued leave • Rewards sustained long term performance, not just single year peak performance • Utilises measurable, shareholder relevant targets • Retains Board discretion over level of award. In establishing the remuneration arrangements each year, the Board speciﬁcally reviews the proportion of the ﬁxed compensation and variable compensation (potential short term and long-term incentives). The Board aims to steadily increase the proportion of variable, and speciﬁcally share based and longer term performance related, remuneration. The Target Remuneration Mix for FY20 is shown in table 2 below. The percentages are distorted by the suspension of FY20 STI scheme, but the year-on-year comparison clearly shows an increase in the weight of variable, share- based, LTI as well as the expansion of the Fixed Deferred Remuneration scheme for the CEO. The value of the LTI performance rights granted are shown as the full value as of the grant date. Table 2: Target Remuneration Mix of CEO and other KMPs for FY20 compared to FY19 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% CEO FY20 CEO FY19 Other KMPs FY20 Other KMPs FY19 29% 34% 60% 54% 24% 0% 48% 8% 17% 0% 0% 42% 40% 0% 19% 27% Fixed Cash Remuneration Fixed Deferred Remuneration STI cash LTI Shares Breville Group Limited annual report 2020 33 Directors’ report continued Remuneration report (audited) continued 4. Remuneration Framework continued • Contracts – Employment contracts are entered with executives designed to attract and retain the employees whilst safeguarding the Group’s interests. None of the KMPs have ﬁxed term contracts. Amounts payable on termination vary from a minimum statutory entitlement to a maximum of 12 months of ﬁxed pay plus accrued leave balances. In accordance with the terms of the LTI performance rights plan any performance rights not vested at the date of termination will be forfeited and will lapse, unless otherwise determined by the Board. Rights under the ﬁxed deferred remuneration scheme will lapse on resignation but will be pro-rated for time served in the case of termination without cause. • Hedging Prohibited – The Group has a policy that prohibits KMPs and their closely related parties from entering into an arrangement that has the effect of limiting the exposure to risk relating to an element of that member’s compensation. The policy complies with the requirements of s.206J of the Corporations Act 2001. • Measurement – The PPR&NC is responsible for assessing performance against KPIs and determining the STI and LTI to be awarded. To assist in this assessment, the committee receives detailed reports on performance from management which are based on independently veriﬁable data. From time to time the committee may also engage external remuneration consultants to assist with this review. An external specialist is always used to calculate and report on TSR and relative TSR performance against a peer group for use in LTI evaluation. In the event of fraudulent or dishonest misconduct, the Board reserves the right to deem any unvested rights to have lapsed. 5. Linking Remuneration to Performance The Group’s remuneration principles and framework aim to align executive remuneration to the Group’s strategic and business objectives, sustained business performance and the creation of sustainable shareholder value. The key measures that are applied to Executive KMP incentive plans – EBIT and relative TSR – are both measurable, veriﬁable and well aligned to shareholder value creation. • EBIT – Earnings before interest and tax (EBIT) is a well-recognised measure of the Group’s performance and ability to generate cash to fund growth and distribute dividends. It is well deﬁned and measurable. • The STI pool is only funded when a stretch EBIT target, set by the Board at the beginning of the year, is delivered • The FY20 target was $110.2m (before AASB16 (representing 13.2% growth over FY19)) • EBIT is preferred to EBITDA given the strategic importance of investment in new product development and associated amortisation costs • Normalised EBIT, after removing signiﬁcant abnormal costs and savings, will be used for declaring the FY20 dividend and to set budgets for FY21. • Relative TSR – Total Shareholder Return (TSR) is a measure of share price appreciation, and dividends paid, expressed as a % of the opening share price. The Group measures its relative TSR against an index of approximately 60 peers within the S&P/ASX200 Consumer Staples, Consumer Discretionary and Industrials indices and rewards executives for outperforming the peer group. • 50% vesting is achieved if the Group’s TSR is in top half of the peer group, rising to 100% vesting if a 75th percentile performance is achieved. • The Group uses an average 3-year performance period. To incentivise sustained shareholder value delivery over multiple periods, rather than a single point, the LTI grant is split into three tranches and TSR performance is measured over a 2, 3 and 4-year period with an average performance period of 3 years. • No vesting occurs unless absolute TSR is positive in a performance period. TSR performance is calculated by an independent specialist at the end of each performance period • Relative TSR will be replaced by an absolute target for TSR in the FY21 LTI plan. Table 3 below shows the Group’s sales, proﬁt and share price performance over the last 5 years. The measures shown are consistent with the measures used in determining the variable amounts of remuneration to be awarded to executives. There is a strong alignment between executive reward and shareholder return as seen in the below table. 34 Breville Group Limited annual report 2020 Remuneration report (audited) continued 5. Linking Remuneration to Performance continued Table 3: Five Year Group Performance ($m) Year ended Group Revenue Revenue Growth Group EBIT EBIT Growth NPAT Earnings per share (cents) EPS Growth Total dividends per share (cents) Share price at 30 June ($) Share Price Change One Year TSR Average STI as % Maximum Opportunity Percentage of Executive LTI performance rights that vested related to schemes maturing in the year 30 June 2016 30 June 2017 30 June 2018 30 June 2019 30 June 2020 576.6 605.7 9.4% 73.7 5.9% 50.2 38.6 7.5% 28.5 7.49 20.6% 25.0% 39.6% 5.0% 79.0 7.2% 53.8 41.4 7.2% 30.5 10.45 39.5% 43.5% 39.7% 646.8 6.8% 86.9 10.0% 58.5 45.0 8.7% 33.0 11.62 11.2% 14.2% 78.0% 760.0 17.5% 97.3 12.0% 67.4 51.8 15.2% 37.0 16.36 40.8% 43.8% 76.0% 952.2 25.3% 100.9 3.7% 66.2 50.5 (2.5)% 41.0 22.76 39.3% 41.5% 0% 0% 100% 100% 100% 100% • The Group’s annual FY21 STI plan has a stretch ﬁnancial EBIT target based on growth on normalised Group EBIT for FY20 which will be retrospectively disclosed as a part of the FY21 remuneration report. • Since FY16 the LTI performance rights awarded have used relative TSR as the performance measure. TSR performance and associated rights vesting in FY21 will be retrospectively disclosed as part of the FY21 remuneration report. 6. Executive Remuneration - detailed elements There are four key components in Executive Remuneration: i) Fixed Cash Remuneration ii) Fixed Deferred Remuneration in Rights iii) Short Term Performance Incentive iv) Long Term Performance Incentive i) Fixed Cash Remuneration Executives receive their ﬁxed cash remuneration in cash or other non-cash beneﬁts. Fixed cash remuneration is reviewed annually by the PPR&NC, or on role change. The committee reviews company and individual performance, relevant comparative market compensation, considers internal relativities and, where appropriate, external advice on policies and practices. Breville increasingly competes in a global market for talent and employs both Australian and international managers, thus the Group increasingly benchmarks both domestically, and internationally, when reviewing suitability of remuneration. Details of ﬁxed cash remuneration by KMP is shown in the remuneration tables 6 and 7. ii) Fixed Deferred Remuneration in Share Rights Fixed remuneration may also be delivered by way of a deferred grant of share rights. These rights will vest, and are exercisable, at the completion of a speciﬁc period of employment service. The rights automatically lapse if the executive resigns before the vesting date, or is terminated with cause, and vest, on a pro rata basis, if the executive is terminated without cause. Details of ﬁxed deferred remuneration grants for which compensation has been included in the remuneration tables 4, 6 and 7. All grants are shown in table 11. Under AASB 2 accounting, although the rights relate to future speciﬁc periods of employment some of the cost is recognised in the current period. Breville Group Limited annual report 2020 35 Directors’ report continued Remuneration report (audited) continued 6. Executive Remuneration - detailed elements continued ii) Fixed Deferred Remuneration in Share Rights continued Table 4: Fixed Deferred Remuneration included in Remuneration tables 6 and 7 Fixed Deferred Remuneration – share rights year of issue FY18 FY20* Conditions • Issued for nil consideration • Exercise price is $0. • Participant (Jim Clayton) must be employed by the company on 30 June 2020. • 0% vested at 30 June 2020 as vesting date is 31 August 2020. • Issued for nil consideration • Exercise price is $0. • Participant (Jim Clayton) must complete the service period between: 16,467 rights: 26 August 2019 – 25 August 2020. 29,940 rights: 26 August 2020 – 25 August 2021 29,940 rights: 26 August 2021 – 25 August 2022. 29,940 rights: 26 August 2022 – 25 August 2023. 29,940 rights: 26 August 2023 – 25 August 2024. • 0% vested at 30 June 2020. Number outstanding 30 June 2020 Number outstanding 30 June 2019 Issue Price / Fair value $10.12 60,000 60,000 $16.70 136,227 - * material terms and conditions of the grant were agreed in January 2020. In line with AASB2, fair value was based on VWAP for H1 FY20. iii) Short term performance incentives (STI) The Group operates an annual STI program available to executives and other employees and awards a cash incentive subject to the attainment of clearly deﬁned business targets. Who participates? Executives and other employees How is STI delivered? Cash What is the STI opportunity? Executives and other employees are eligible for an annual maximum incentive of between 5% and 50% of ﬁxed cash remuneration. What are the performance conditions for each ﬁnancial year? The STI rewards executives and other employees for their contribution to achievement of Group ﬁnancial outcomes. The total Group incentive payment is based on the achievement of a stretch target pre-bonus EBIT set by the Board. No bonus pool is awarded or bonus payable to any employee until this pre-bonus EBIT is exceeded. As pre-bonus EBIT exceeds the target, the pool is funded until the maximum is reached. Actual STI payments are awarded to each executive or employee depending on the extent to which the bonus pool is funded, their maximum % achievable and the delivery of divisional and individual targets. 36 Breville Group Limited annual report 2020 Remuneration report (audited) continued 6. Executive Remuneration - detailed elements continued iii) Short term performance incentives (STI) continued How is performance assessed? After measurement and audit of Group EBIT • • the PPR&NC recommends the amount of STI to be paid to the Group Chief Executive Ofﬁcer for Board approval; and for the other executives and employees, PPR&NC will seek recommendations on total and individual pay outs from the Group Chief Executive Ofﬁcer based on Group EBIT, divisional proﬁts and, in some cases, personal targets. iv) Long term performance incentives (LTI) The Group operates an LTI scheme with an annual grant of LTI share rights that vest in the future reliant on sustained shareholder value creation. The objective of the LTI plan is to reward and incentivise executives in a manner that aligns with sustainable long-term value creation. Who participates? How is LTI delivered? What is the LTI opportunity? What are the performance hurdles for the FY20 LTI grant? The LTI plan is made available to executives who are able to inﬂuence the generation of shareholder value and have a direct impact on the company’s performance against long- term performance hurdles. LTI grants to participants (excluding the CEO) are recommended by the CEO to the PPR&NC. This recommendation, together with a recommendation by the PPR&NC of an LTI grant to the CEO, is then put to the Board for approval. Upon satisfaction of the performance hurdles, the performance rights will vest and convert into fully paid ordinary shares in the company. Depending upon their position and seniority in the organisation, executives and other employees are eligible for an annual LTI award of between 10% - 125% of their ﬁxed cash remuneration. The Group uses TSR as the performance measure for the LTI plan, applying both an absolute and relative test. The absolute test requires that over the testing period, the TSR needs to be positive. If the TSR is negative over the testing period, then the performance rights lapse. If the TSR is positive, the Group then uses a relative TSR compared to a deﬁned peer group of approximately 60 companies (in the S&P/ASX200 in the Consumer Staples, Consumer Discretionary and Industrials sectors) with percentile ranking to determine the percentage of rights that vest. The grant is split into three equal tranches with a 2, 3 and 4 year vesting period respectively with an average performance period of 3 years. The vesting schedule is as follows: The Group (BRG) TSR performance ranking relative to peer group Proportion of performance rights that will vest Below 50th percentile Above 50th percentile Between 51st and 75th percentile 0% 50% Pro rata between 50% and 100%, based on the relative TSR performance 75th percentile and above 100% Each of the three tranches will vest and are measured independently. If any tranche does not achieve its vesting conditions, that tranche lapses but this shall not preclude the other tranches from vesting if their respective performance conditions are met. As detailed above the proposed FY21 scheme has been redesigned to reﬂect expected turbulence in the upcoming performance period and will adopt an absolute, rather than a relative, TSR target. Breville Group Limited annual report 2020 37 Directors’ report continued Remuneration report (audited) continued 6. Executive Remuneration - detailed elements continued iv) Long term performance incentives (LTI) continued How is performance assessed? TSR performance is calculated by an independent external adviser at the end of each performance period. Table 12 provides details of the KMP performance rights granted under the FY20 plan. Please refer to Section 9: Appendix (table 13) for Peer Group of S&P/ASX200 in the Consumer Staples, Consumer Discretionary and Industrials sectors. When does the FY20 LTI vest? The performance rights will vest over a period of four years, with an average performance period of 3 years. Each tranche, which comprises one third of the total award, is required to meet its performance measures applying both an absolute test and a relative test as follows: Tranche 1: TSR from 30 June 2019 to 30 June 2021 Tranche 2: TSR from 30 June 2019 to 30 June 2022 Tranche 3: TSR from 30 June 2019 to 30 June 2023 If the performance hurdle is not met, any unvested performance rights will lapse unless otherwise determined by the Board. All outstanding unvested performance rights automatically lapse upon an executive ceasing to be employed by the Group unless otherwise determined by the Board. The participant cannot sell, dispose, encumber or trade in performance shares without the prior written consent of the Board until the earlier of: a) 2 years after the date of issue, transfer or allocation; b) 12 months after the date of cessation of employment; or c) Such other date as the Board determines. Notwithstanding the foregoing, any trading in performance shares is at all times subject to the company’s share trading policy. Participants do not receive distributions or dividends on unvested performance rights. In the event of a takeover bid where the bidder and its associates become entitled to at least 50% of the voting shares of the company, any performance rights granted will vest where the Board, in its absolute discretion, is satisﬁed that performance is in line with any performance condition applicable to those performance rights. Any performance rights which do not vest will immediately lapse, unless otherwise determined by the Board. How are grants treated on termination? Are there restrictions on disposal of performance shares following the vesting and exercise of FY20 performance rights? Do participants receive dividends on unvested performance rights? What happens if there is a change of control? 38 Breville Group Limited annual report 2020 Remuneration report (audited) continued 6. Executive Remuneration - detailed elements continued iv) Long term performance incentives (LTI) continued Table 5: LTI plans for which compensation is included in the remuneration tables 6 & 7. LTI Plan for the year ended FY16 Performance based LTI rights June 2016 FY16 Time based rights June 2016 FY17 Performance based LTI rights June 2017 FY18 Performance based LTI rights June 2018 Performance hurdles/conditions Issued for nil consideration. - Exercise price is $0. - Term of two to four years with vesting as follows, each representing 33% of the total number of performance rights: (a) Total shareholder return (TSR) from 30 June 2015 to 30 June 2017 applying both an Absolute Test and a Relative Test. (b) Total shareholder return (TSR) from 30 June 2015 to 30 June 2018 applying both an Absolute Test and a Relative Test. (c) Total shareholder return (TSR) from 30 June 2015 to 30 June 2019 applying both an Absolute Test and a Relative Test. 100% vested (91,840 shares) as at 30 June 2020 (16,860 lapsed1). (a) Issued for nil consideration to other KMPs - Exercise price is $0. - Participant must be employed by the company on 25 January 2020. 100% vested (44,350 shares) as at 30 June 2020 (nil lapsed). Issued for nil consideration. - Exercise price is $0. - Term of two to four years with vesting as follows, each representing 33% of the total number of performance rights: (a) Total shareholder return (TSR) from 30 June 2016 to 30 June 2018 applying both an Absolute Test and a Relative Test. (b) Total shareholder return (TSR) from 30 June 2016 to 30 June 2019 applying both an Absolute Test and a Relative Test. (c) Total shareholder return (TSR) from 30 June 2016 to 30 June 2020 applying both an Absolute Test and a Relative Test. 66% vested (110,500 shares) as at 30 June 2020 (22,500 lapsed1). Issued for nil consideration. - Exercise price is $0. - Term of two to four years with vesting as follows, each representing 33% of the total number of performance rights: (a) Total shareholder return (TSR) from 30 June 2017 to 30 June 2019 applying both an Absolute Test and a Relative Test. (b) Total shareholder return (TSR) from 30 June 2017 to 30 June 2020 applying both an Absolute Test and a Relative Test. (c) Total shareholder return (TSR) from 30 June 2017 to 30 June 2021 applying both an Absolute Test and a Relative Test. 33% vested (48,500 shares) as at 30 June 2020 (nil lapsed). Fair value per performance right at Grant date $ Number outstanding 30 June 2020 (Executive only) Number outstanding 30 June 2019 (Executive only) - 27,760 $1.90 $2.07 $2.15 $4.35 - 44,350 55,100 110,200 $3.43 $3.49 $3.51 $7.05 $6.81 $6.68 96,400 144,900 Breville Group Limited annual report 2020 39 Directors’ report continued Remuneration report (audited) continued 6. Executive Remuneration - detailed elements continued iv) Long term performance incentives (LTI) continued Table 5: LTI plans for which compensation is included in the remuneration tables 6 & 7 continued LTI Plan for the year ended FY19 Performance based LTI rights June 2019 FY20 Performance based LTI rights June 2020 Performance hurdles/conditions Issued for nil consideration. - Exercise price is $0. - Term of two to four years with vesting as follows, each representing 33% of the total number of performance rights: (a) Total shareholder return (TSR) from 30 June 2018 to 30 June 2020 applying both an Absolute Test and a Relative Test. (b) Total shareholder return (TSR) from 30 June 2018 to 30 June 2021 applying both an Absolute Test and a Relative Test. (c) Total shareholder return (TSR) from 30 June 2018 to 30 June 2022 applying both an Absolute Test and a Relative Test. 0% vested as at 30 June 2020 (nil lapsed). Issued for nil consideration. - Exercise price is $0. - Term of two to four years with vesting as follows, each representing 33% of the total number of performance rights: (a) Total shareholder return (TSR) from 30 June 2019 to 30 June 2021 applying both an Absolute Test and a Relative Test. (b) Total shareholder return (TSR) from 30 June 2019 to 30 June 2022 applying both an Absolute Test and a Relative Test. (c) Total shareholder return (TSR) from 30 June 2019 to 30 June 2023 applying both an Absolute Test and a Relative Test. 0% vested as at 30 June 2020 (nil lapsed). Fair value per performance right at Grant date $ Number outstanding 30 June 2020 (Executive only) Number outstanding 30 June 2019 (Executive only) 197,700 197,700 $7.07 $6.81 $6.58 $6.51 $6.81 $7.06 193,500 - 1 Performance-based LTI rights lapsed for June 2016 and June 2017 relate to resignation of M. Cohen on 17 November 2017. 7. Non-Executive Director Remuneration In accordance with best practice corporate governance, the structure of non-executive director and executive compensation is separate and distinct. The Board seeks to set non-executive director compensation at a suitable level to attract and retain directors of high calibre whilst being commensurate with growing international companies of a similar size and type. The compensation of non-executive directors is reviewed annually. Each director receives a fee for being a director of the company. An additional fee is also paid to each director who also acts as chairperson of a Board committee recognising the additional time commitment required by the director to facilitate the running of the committee. In August 2019 the fee for chairing the People, Performance, Remuneration and Nominations Committee and the Audit and Risk committee were increased from $15,000 to $30,000pa to reﬂect the growing complexity and international nature of the Group. Directors’ fees were reduced by 40% during the months of May and June 2020 as part of the Group wide temporary salary reduction programme. The Group’s constitution and the ASX Listing Rules specify that the aggregate compensation of non-executive directors shall be determined from time to time by general meeting. The aggregate compensation of $1,400,000 per year was approved by shareholders at the annual general meeting held in November 2016. The compensation of non-executive directors for the year ended 30 June 2020 is detailed in Table 6 on page 41 with the total fees paid of $1,015,730 representing 72.6% of the approved fee cap. 40 Breville Group Limited annual report 2020 Remuneration report (audited) continued 8. Statutory Remuneration Tables Table 6: KMP Remuneration for the year ended 30 June 2020 (FY20) The following tables 6 and 7 set out the statutory KMP remuneration disclosures, prepared in accordance with the Corporations Act 2001 and Australian Accounting Standards. No termination beneﬁts were paid in FY20. Short-term employee beneﬁts Long- term em- ployee bene- ﬁts Post employ- ment beneﬁts Share- based payment Total Fixed remu- nera- tion Performance related Fixed deferred remu- nera- tion in shares (b) Total short term em- ployee beneﬁts Super- annua- tion Long service leave LTI Perfor- mance rights Salary & fees Cash bonus- es STI Other $ $ $ $ $ $ $ $ $ % Non- executive directors S. Fisher – Chairperson T. Antonie P. Cowan S. Herman D. Howell L. Myers K. Wright Sub-total non- executive directors Other key management personnel J. Clayton S. Brady M. Nicholas M. Payne (a) C. Torng Sub-total executive KMP Totals 252,897 104,110 104,110 104,110 104,110 129,136 129,136 927,609 889,293 513,431 525,498 596,137 488,263 3,012,622 3,940,231 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 252,897 24,025 104,110 104,110 9,890 9,890 104,110 9,890 104,110 9,890 129,136 12,268 129,136 12,268 927,609 88,121 - - - - - - - - - - - - - - - 276,922 100.0% 114,000 100.0% 114,000 100.0% 114,000 100.0% 114,000 100.0% 141,404 100.0% 141,404 100.0% - 1,015,730 - 757,707 1,647,000 25,000 10,519 625,691 2,308,210 72.9% 28,269 - 43,515 - - - - - 541,700 25,000 5,837 143,341 715,878 80.0% 525,498 25,000 8,016 108,256 666,770 83.8% 639,652 - - 133,983 773,635 82.7% 488,263 24,141 10,906 166,442 689,752 75.9% 71,784 757,707 3,842,113 99,141 35,278 1,177,713 5,154,245 71,784 757,707 4,769,722 187,262 35,278 1,177,713 6,169,975 STI % LTI % - - - - - - - - - - - - - - - - - - - 27.1% 20.0% 16.2% 17.3% 24.1% (a) M Payne salary is denominated in USD so reported numbers in AUD are subject to exchange rate ﬂuctuations. (b) Fixed Deferred Remuneration in shares, under AASB2, includes $490k relating to the FY20 service period and $268k relating to future service periods. The FY20 charge represents an increase of $276k over the $214k charge recognised in FY19. Breville Group Limited annual report 2020 41 Directors’ report continued Remuneration report (audited) continued 8. Statutory Remuneration Tables continued Table 7: KMP Remuneration for the year ended 30 June 2019 (FY19) Short-term employee beneﬁts Long- term em- ployee bene- ﬁts Post employ- ment beneﬁts Salary & fees Cash bonus- es STI Other Fixed deferred remu- nera- tion in shares Total short term em- ployee beneﬁts Super- annua- tion Long service leave Share- based pay- ment LTI Perfor- mance rights Fixed remu- nera- tion Total Performance related $ $ $ $ $ $ $ $ $ % STI % LTI % Non- executive directors S. Fisher – Chairperson T. Antonie P. Cowan (a) S. Herman D. Howell L. Myers K. Wright Sub-total non- executive directors Other key management personnel 273,972 112,785 93,987 112,785 112,785 126,484 126,484 959,282 - - - - - - - - - - - - - - - - - - - - - - - - 273,972 26,028 112,785 10,715 93,987 8,929 112,785 10,715 112,785 10,715 126,484 12,016 126,484 12,016 959,282 91,134 - - - - - - - - - - - - - - - 300,000 100.0% 123,500 100.0% 102,916 100.0% 123,500 100.0% 123,500 100.0% 138,500 100.0% 138,500 100.0% - - - - - - - - - - - - - - - 1,050,416 J. Clayton 915,385 357,991 - 214,036 1,487,412 25,000 17,676 511,532 2,041,620 57.4% 17.5% 25.1% S. Brady 522,235 156,167 30,000 M. Nicholas (b) 433,654 96,911 - M. Payne (c) 538,273 128,729 45,482 C. Torng 479,951 128,069 - - - - - 708,402 51,797 40,613 120,377 921,189 70.0% 17.0% 13.1% 530,565 20,236 7,359 44,022 602,182 76.6% 16.1% 7.3% 712,484 - - 116,389 828,873 70.5% 15.5% 14.0% 608,020 20,531 7,842 190,473 826,866 61.5% 15.5% 23.0% Sub-total executive KMP 2,889,498 867,867 75,482 214,036 4,046,883 117,564 73,490 982,793 5,220,730 Totals 3,848,780 867,867 75,482 214,036 5,006,165 208,698 73,490 982,793 6,271,146 (a) P. Cowan joined the Board on 1st September, 2018. (b) M. Nicholas joined on 10th September, 2018. (c) M Payne salary is denominated in USD so reported numbers in AUD are subject to exchange rate ﬂuctuations. 42 Breville Group Limited annual report 2020 Remuneration report (audited) continued 8. Statutory Remuneration Tables continued Table 8: KMP STI cash bonuses awards in FY20 and FY19 and LTI Performance rights vesting in FY20 Name J. Clayton S. Brady M. Nicholas M. Payne C. Torng STI Cash bonuses Financial Year % Earned % Forfeited Share-based LTI performance base compensation vesting in FY20 Financial Year Granted % Vested % Forfeited 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 0.0% 76.0% 0.0% 76.5% 0.0% 60.8% 0.0% 64.6% 0.0% 73.2% 100.0% 24.0% 100.0% 23.5% 100.0% 39.2% 100.0% 35.4% 100.0% 26.8% 2018 2017 2016 2018 2017 2016 2018 2017 2016 2018 2017 2016 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% Table 9: KMP shareholdings Ordinary shares held* in Breville Group Limited (number) 30 June 2020 Balance at 1 July 2019 On exercise of performance rights Net change other (a) Balance at 30 June 2020 Directors S. Fisher P. Cowan T. Antonie S. Herman D. Howell L. Myers K. Wright Other KMP J. Clayton S. Brady M. Nicholas M. Payne C. Torng Total (b) 118,000 5,000 36,349 36,000 127,500 250,000 20,000 260,700 398,067 20,578 30,485 59,485 1,362,164 - - - - - - - 72,800 22,065 - 19,530 61,315 175,710 9,764 5,968 7,442 6,484 11,764 (150,000) 1,764 1,764 (93,781) 12,257 - - 127,764 10,968 43,791 42,484 139,264 100,000 21,764 335,264 326,351 32,835 50,015 120,800 (186,574) 1,351,300 * Held directly, indirectly or beneﬁcially. (a) All equity transactions with key management personnel have been entered into under terms and conditions no more favourable than those the Group would have adopted if dealing at arm’s length. (b) 1% of total share capital is owned by KMPs (1% in FY19) Breville Group Limited annual report 2020 43 Directors’ report continued Remuneration report (audited) continued 8. Statutory Remuneration Tables continued Table 9: KMP shareholdings continued Ordinary shares held* in Breville Group Limited (number) 30 June 2019 Directors S. Fisher P. Cowan (c) T. Antonie S. Herman D. Howell L. Myers K. Wright Other KMP J. Clayton S. Brady M. Nicholas (d) M. Payne C. Torng Total Balance at 1 July 2018 On exercise of performance rights Net change other (a) Balance at 30 June 2019 100,288 - 28,286 30,000 120,000 200,000 15,000 170,100 359,502 - 16,655 3,670 1,043,501 - - - - - - - 71,400 16,565 - 13,830 55,815 157,610 17,712 118,000 5,000 8,063 6,000 7,500 50,000 5,000 19,200 22,000 20,578 - - 5,000 36,349 36,000 127,500 250,000 20,000 260,700 398,067 20,578 30,485 59,485 161,053 1,362,164 (c) P Cowan joined the Board on 1st September 2018. (d) M. Nicholas joined on 10th September 2018. Table 10: KMP Performance rights granted The terms and conditions of each grant of performance rights affecting remuneration of key management personnel in this ﬁnancial year or future reporting years are as follows: FY16 Performance based FY16 time based FY17 Performance based FY17 Performance based FY18 Performance based FY18 Performance based FY18 Performance based FY19 Performance based FY19 Performance based FY19 Performance based FY20 Performance based FY20 Performance based FY20 Performance based Grant Date 12 Feb 16 (a)* 12 Feb 16 (b) 9 Aug 16 (c)* 9 Aug 16 (c)* 13 Nov 17 (d)* 13 Nov 17 (d)* 13 Nov 17 (d)* 11 Sep 18 (e)* 11 Sep 18 (e)* 11 Sep 18 (e)* 11 Oct 19 (f)* 11 Oct 19 (f)* 11 Oct 19 (f)* First exercise date Last exercise date Expiry Date Exercise price Fair value per performance right at grant date ($) (Note 18) Vested and exercised in FY20 Number of Rights 29 Aug 19 3 Oct 19 3 Oct 19 25 Jan 20 31 Mar 20 31 Mar 20 29 Aug 19 3 Oct 19 3 Oct 19 31 Aug 20 2 Oct 20 2 Oct 20 29 Aug 19 1 Oct 19 1 Oct 19 28 Aug 20 1 Oct 20 1 Oct 20 27 Aug 21 1 Oct 21 1 Oct 21 28 Aug 20 1 Oct 20 1 Oct 20 27 Aug 21 1 Oct 21 1 Oct 21 29 Aug 22 3 Oct 22 3 Oct 22 28 Aug 20 1 Oct 21 1 Oct 21 27 Aug 21 3 Oct 22 3 Oct 22 29 Aug 22 2 Oct 23 2 Oct 23 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.15 4.35 3.49 3.51 7.05 6.81 6.68 7.07 6.81 6.58 6.51 6.81 7.06 Y Y Y Y 27,760 44,350 55,100 55,100 48,500 48,200 48,200 66,100 65,900 65,700 64,600 64,450 64,450 * In addition to the TSR performance hurdle, the participant must be employed by the company on the vesting date. 44 Breville Group Limited annual report 2020 Remuneration report (audited) continued 8. Statutory Remuneration Tables continued Table 10: KMP Performance rights granted continued (a) There were three equal tranches to be tested at 30 June 2017, 30 June 2018 and 30 June 2019 all with a total shareholder return hurdle (TSR) applying an absolute test and a relative test. (b) For this grant the affected executive needed to be employed on 25 January 2020. (c) There are three equal tranches to be tested at 30 June 2018, 30 June 2019 and 30 June 2020 all with a total shareholder return hurdle (TSR) applying an absolute test and a relative test. One tranche remains to be tested at 30 June 2020. (d) There are three equal tranches to be tested at 30 June 2019, 30 June 2020 and 30 June 2021 all with a total shareholder return hurdle (TSR) applying an absolute test and a relative test. Two tranches remain to be tested at 30 June 2020 and 30 June 2021 respectively. (e) There are three equal tranches to be tested at 30 June 2020, 30 June 2021 and 30 June 2022 all with a total shareholder return hurdle (TSR) applying an absolute test and a relative test. (f) There are three equal tranches to be tested at 30 June 2021, 30 June 2022 and 30 June 2023 all with a total shareholder return hurdle (TSR) applying an absolute test and a relative test. Table 11: Fixed Deferred Remuneration share rights holding of KMPs The terms and conditions of each grant of share rights issues as ﬁxed deferred remuneration affecting remuneration of key management personnel in this ﬁnancial year or future reporting years are as follows: Grant Date 13 Nov 17 (g) 29 Jan 20 (h)* 29 Jan 20 (i)* 29 Jan 20 (j)* 29 Jan 20 (k)* 29 Jan 20 (l)* First exercise date Last exercise date Expiry Date Exercise price Fair value at grant date ($) (Note 18) Number of rights Vested and exercised 30 June 2020 Vested and exercised 30 June 2019 31-Aug-20 1-Oct-20 1-Oct-20 25-Aug-20 1-Oct-20 1-Oct-20 25-Aug-21 1-Oct-21 1-Oct-21 25-Aug-22 3-Oct-22 3-Oct-22 25-Aug-23 2-Oct-23 2-Oct-23 25-Aug-24 1-Oct-24 1-Oct-24 0.00 0.00 0.00 0.00 0.00 0.00 10.12 60,000 16.70 16,467 16.70 29,940 16.70 29,940 16.70 29,940 16.70 29,940 - - - - - - - - - - - - * material terms and conditions of the grant were agreed in January 2020. In line with AASB2, fair value was based on VWAP for H1 FY20. (g) Participant, in this case the CEO must be employed by the company on 30 June 2020 for the rights to vest. Not vested yet as ﬁrst exercise date is 31 Aug 20. (h) Participant, in this case the CEO, must complete the service period between 26 August 2019 – 25 August 2020 for the rights to vest. (i) Participant, in this case the CEO, must complete the service period between 26 August 2020 – 25 August 2021 for the rights to vest. (j) Participant, in this case the CEO, must complete the service period between 26 August 2021 – 25 August 2022 for the rights to vest. (k) Participant, in this case the CEO, must complete the service period between 26 August 2022 – 25 August 2023 for the rights to vest. (l) Participant, in this case the CEO, must complete the service period between 26 August 2023 – 25 August 2024 for the rights to vest. Breville Group Limited annual report 2020 45 Directors’ report continued Remuneration report (audited) continued 8. Statutory Remuneration Tables continued Table 12: Performance rights holdings of KMP 30 June 2020 Other key management personnel J. Clayton S. Brady M. Nicholas M. Payne C. Torng Balance 30 June 2019 Granted as remuneration (a) Vested and exercised Other (b) Balance 30 June 2020 269,700 66,565 24,800 62,330 101,515 524,910 104,800 23,400 22,400 21,300 21,600 193,500 (72,800) (22,065) - (19,530) (61,315) (175,710) - - - - - - 301,700 67,900 47,200 64,100 61,800 542,700 (a) Performance awards granted during the year are subject to TSR performance hurdles and/or remaining in employment until date of vesting. (b) Includes forfeitures and lapses. 30 June 2019 Other key management personnel J. Clayton S. Brady M. Nicholas (c) M. Payne C. Torng Balance 30 June 2018 (d) Granted as remuneration (a) Vested and exercised Other (b) Balance 30 June 2019 238,700 57,230 - 53,160 135,730 484,820 102,400 25,900 24,800 23,000 21,600 197,700 (71,400) (16,565) - (13,830) (55,815) (157,610) - - - - - - 269,700 66,565 24,800 62,330 101,515 524,910 (a) Performance awards granted during the year are subject to TSR performance hurdles and/or remaining in employment until date of vesting. (b) Includes forfeitures and lapses. (c) M. Nicholas joined on 10 September 2018. (d) 60,000 Fixed Deferred Remuneration shown in closing balance in FY18, now shown separately so not included in FY19 opening balance. Refer to Table 11 46 Breville Group Limited annual report 2020 Remuneration report (audited) continued 9. Peer Group Appendix Table 13: ASX200 Consumer Staples, Consumer Discretionary and Industrials Peer Group used for Relative TSR Measurement Code Company Sector Code Company Sector The a2 Milk Company Consumer Staples Inghams Group Consumer Staples Bingo Industries Limited Industrials OML Ooh!Media Limited PMV Premier Investments A2M ALG ALQ ALX ARB ASB AZJ BAL BAP BGA BIN BKL BRG BXB CCL CGC CIM COL CTD Ardentleisuregrpltd ALL Aristocrat Leisure Als Limited Atlas Arteria ARB Corporation Austal Limited Consumer Discretionary Consumer Discretionary Industrials Industrials Consumer Discretionary Industrials Aurizon Holdings Limited Industrials Bellamy’s Australia Consumer Staples Bapcor Limited Consumer Discretionary Bega Cheese Limited Consumer Staples Blackmores Limited Consumer Staples Breville Group Limited Consumer Discretionary Brambles Limited Industrials Coca-Cola Amatil Consumer Staples Costa Group Holdings Consumer Staples Cimic Group Limited Industrials Coles Group Consumer Staples Corp Travel Limited CWN Crown Resorts Limited CWY Cleanaway Waste Limited DMP Domino PIZZA Enterpr DOW Downer Edi Limited EHL ELD FLT Emeco Holdings Elders Limited Flight Centre Travel GEM G8 Education Limited Consumer Discretionary Consumer Discretionary Industrials Consumer Discretionary Industrials Industrials Consumer Staples Consumer Discretionary Consumer Discretionary GNC Graincorp Limited Class A Consumer Staples GUD G.U.D. Holdings Consumer Discretionary GWA HVN Harvey Norman GWA Group Limited Industrials IEL Idp Education Limited ING IPH IVC MMS MND MTS NEA NEC NWH NWS QAN QUB RWC SEK SGR SIQ SKC SSM SUL SVW SXL SYD TAH TCL TGR TWE WEB IPH Limited Invocare Limited JBH JB Hi-Fi Limited Industrials Consumer Discretionary Consumer Discretionary Mcmillan Shakespeare Industrials Monadelphous Group Industrials Metcash Limited Consumer Staples Nearmap Limited Industrials Nine Entertainment Consumer Discretionary NRW Holdings Limited Industrials News Corp Consumer Discretionary Consumer Discretionary Consumer Discretionary Industrials Qantas Airways QUBE Holdings Limited Industrials Reliance Worldwide Seek Limited The Star Ent Group Industrials Industrials Consumer Discretionary Smartgrp Corporation Industrials Skycity Ent Group Limited Service Stream Super Ret Rep Limited Consumer Discretionary Industrials Consumer Discretionary Seven Group Holdings Industrials STHN Cross Media SYD Airport Consumer Discretionary Industrials Tabcorp Holdings Limited Consumer Discretionary Transurban Group Industrials Tassal Group Limited Consumer Staples Treasury Wine Estate Consumer Staples Webjet Limited Consumer Discretionary Consumer Discretionary WES Wesfarmers Limited Consumer Discretionary Consumer Discretionary WOW Woolworths Group Limited Consumer Staples Breville Group Limited annual report 2020 47 Indemniﬁcation of directors and ofﬁcers The directors and ofﬁcers of the company are indemniﬁed by the company against losses or liabilities which they may sustain or incur as an ofﬁcer of the company in the proper performance of their duties. During the ﬁnancial year, the company paid premiums in respect of contracts to insure the directors and ofﬁcers of the company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of liability and the amount of the premiums. Likely future developments and expected results Disclosure of information as to likely future developments in the operations of the consolidated entity and expected results of those operations would be prejudicial to the interests of the consolidated entity. Accordingly, such information has not been included in this report. Environmental regulations and performance The consolidated entity is not involved in any activities that have a marked inﬂuence on the environment within its area of operation. Corporate governance In recognising the need for the highest standards of corporate behaviour and accountability, the directors of Breville Group Limited support the principles of good corporate governance. The company’s corporate governance statement is on page 50. Directors’ report continued Directors’ meetings The number of meetings of directors (including meetings of committees of directors) held during the year and the number of Board meetings attended by each director or by each committee member, in the case of the audit and risk committee (A&RC) and the people, performance, remuneration and nominations committee (PPR&NC), was as follows: People, performance, remuneration & nominations (PPR&NC) Full board Audit & risk (A&RC) Number of meetings S. Fisher T. Antonie P. Cowan S. Herman D. Howell L. Myers K. Wright 19 19 (b) 18 19 19 19 19 19 4 (a) (a) (a) (a) 4 4 (b) 4 3 (a) (a) (a) (a) 3 3 3 (b) During FY20, an additional 7 Board Meetings were held during April to June 2020 to manage the COVID-19 crisis and subsequently to review and approve the Capital Raise and Bank Debt Reﬁnance. Notes (a) Not a member of the relevant committee. (b) Designates the current chairperson of the Board or committee. Committee membership As at the date of this report, the company had an audit and risk committee and a people, performance, remuneration and nominations committee. The details of the functions and memberships of the committees are presented in the corporate governance statement. The current members, as at the date of this report, of the A&RC are L. Myers (chairperson), D. Howell and K. Wright. The current members, as at the date of this report, of the PPR&NC are K. Wright (chairperson), D. Howell and L. Myers. All Chairs and members of the above committees are independent. All Board Members may attend A&RC and PPR&NC meetings by invitation. 48 Breville Group Limited annual report 2020 Performance rights Non-audit services Unissued shares As at the date of this report there were 1,380,127 potential unissued shares under the performance rights and ﬁxed deferred remuneration schemes (2019: 1,106,255). Refer to note 18 of the ﬁnancial report for further details of the performance rights outstanding and ﬁxed deferred remuneration rights. Neither performance right holders, nor ﬁxed deferred remuneration rights holders, have any right, by virtue of the performance right, to participate in any share issue of the company. Lapse of unvested performance rights During the year 7,600 unvested performance rights lapsed following the cessation of employment of employees or executives and no unvested performance rights lapsed as a result of performance hurdles not being met. (2019: 15,165 unvested performance rights lapsed following the cessation of employment of employees or executives and no unvested performance rights lapsed as a result of performance hurdles not being met). Auditor’s declaration of independence Attached on page 113 is a copy of the auditor’s declaration provided under section 307C of the Corporations Act 2001 in relation to the audit for the year ended 30 June 2020. This auditor’s declaration forms part of this directors’ report. During the ﬁnancial year ended 30 June 2020 the company’s auditor, PricewaterhouseCoopers, provided non-audit services to Breville Group entities. Details of the amounts paid to the auditor PricewaterhouseCoopers, for the provision of non-audit services during the year ended 30 June 2020 are set out in Note 20. These services primarily relate to tax compliance and advisory services. The increase in the Group’s audit fee between FY19 to FY20 is largely reﬂective of additional procedures and audit effort required over the expanded European geographies. For FY20, the ratio between audit and non-audit fees is 1.4 to 1.0. A portion of the non-audit fees associated with taxation and accounting advisory services in FY20 are non-recurring in nature, relating to ATO Top 1000 review, ChefSteps acquisition, impact of US tariffs and tax compliance in Europe. Refer to Note 20 on page 99. In accordance with the recommendation from the audit and risk committee of the company, the directors are satisﬁed that the provision of the non-audit services during the year is compatible with the general standard of independence imposed by the Corporations Act. Also, in accordance with the recommendation from the audit and risk committee, the directors are satisﬁed that the nature and scope of each type of non-audit service provided means that auditor independence was not compromised. The auditors have also provided the audit and risk committee with a report conﬁrming that, in their professional judgement, they have maintained their independence in accordance with the ﬁrm’s requirements, the provisions of APES 110 Code of Ethics for Professional Accountants and the applicable provisions of the Corporations Act. Signiﬁcant events after year end No matters or circumstances have arisen since the end of the year which signiﬁcantly affected or may affect the operations of the consolidated entity. Signed in accordance with a resolution of directors. Steven Fisher Non-executive Chairperson Sydney 13 August 2020 Breville Group Limited annual report 2020 49 Corporate governance statement The Board of directors is responsible for the corporate governance practices of the company and is committed to adhering to the Australian Securities Exchange (‘ASX’) Corporate Governance Council (‘council’) ‘Corporate Governance Principles and Recommendations (3rd Edition)’. The ASX principles that have been adopted are outlined below. The company’s corporate governance practices throughout the year ended 30 June 2020 were compliant with the council’s principles and recommendations, except for those differences disclosed and explained in this statement. The following documents are available in the corporate governance section of the company’s website brevillegroup.com • Audit and risk committee charter • Board charter • Anti-bribery and corruption • Diversity policy • Share trading policy • Code of conduct • People, performance, remuneration and nominations committee charter • Continuous disclosure policy • Selection and appointment of directors • Criteria for assessing independence of directors • Shareholder communications policy • Workplace gender equality agency report • Ethical sourcing policy Board skills matrix The skills, diversity and term in ofﬁce of the current directors as at the date of this annual report are as follows: Director Appointed Term in ofﬁce Qualiﬁcations Non-executive Independent Last elected Steven Fisher (Chairperson) Timothy Antonie Peter Cowan Sally Herman Dean Howell Lawrence Myers Kate Wright 2004 2013 2018 2013 2008 2013 2016 16 years B.ACC, CA (SA) 6 years 2 years 7 years 12 years BEcon Other BA, GAICD FCA, CTA 6 years B.Acct, CA, CTA 4 years BA Yes Yes Yes Yes Yes Yes Yes No No Yes No Yes Yes Yes 2018 2017 2018 2019 2017 2018 2019 The Board has a wide range of skills which are necessary for the effective management of the business including in the following areas: Principle 1: Lay solid foundations for management and oversight • Corporate strategy and executive leadership • Multinational businesses • Marketing • Consumer goods • Risk management • Banking • Compliance and governance • Accounting, tax, reporting, and ﬁnancial analysis • Mergers, acquisitions and capital raisings • Human resources and executive remuneration • Investor relations. Role of the Board and management The Board guides and monitors the business and affairs of the company on behalf of the shareholders, by whom it is elected and to whom it is accountable. The Board has adopted formal guidelines for Board operation and membership. These guidelines outline the roles and responsibilities of the Board and its members and establish the relationship between the Board and management. The Board is responsible for approving the strategic direction of the company, establishing goals for management, monitoring the achievement of those goals and establishing a sound system of risk oversight and management. The Board will regularly review its performance and the performance of its committees. The respective roles and responsibilities of the Board and management are outlined further in the Board charter. 50 Breville Group Limited annual report 2020 Principle 1: Lay solid foundations for management and oversight continued The proportion of women employees in the company at 30 June 2020 is shown in the below table: Women on the Board 1 Women in senior executive roles 2 Women in managerial roles 3 Women in company 30 June 2020 30 June 2019 29% 30% 32% 45% 29% 25% 30% 45% 1 The number of women on the Board remained at 2. 2 Senior and executive roles is comprised of all executive staff reporting to the CEO and their direct reports. 3 Managerial roles include all executive, senior and management roles. To assist the Board in fulﬁlling its responsibilities in relation to diversity, the implementation of these objectives is overseen by the people, performance, remuneration and nominations committee. The committee shall: • • report to the Board at least annually, on the company’s progress in achieving the objectives set for achieving gender diversity; regularly oversee a review of the relative proportion of women across the company and their relative positions; and • consider other initiatives to promote diversity in the workplace. Workplace equality In accordance with the requirements of the Workplace Gender Equality Act 2012 (Act), Breville Pty Limited lodged its annual compliance report with the Workplace Gender Equality Agency. This report is available on the company’s website at the corporate, corporate governance section. Evaluating the performance of the Board The Chairperson is responsible for evaluating the Board’s performance by way of an annual internal assessment. Each director provides written feedback in relation to the performance of the Board and directors against a set of agreed criteria. This feedback is reported by the Chairperson to the Board following the assessment. This performance assessment was completed by the Chairperson during the year. Appointment of Board members A detailed process is undertaken for the appointment of new Board members, including appropriate checks as to background, history and any potential conﬂicts of interest. As at the date of this annual report, all directors have a written agreement outlining their roles and responsibilities. New directors receive a comprehensive brieﬁng package prior to their appointment. Company secretaries The company secretaries are directly accountable to the Board on all matters relating to the proper functioning of the Board. Diversity policy The company is an equal opportunity employer and values differences such as gender, age, culture, disability, ethnicity and lifestyle choices. The company’s diversity policy aims to ensure a corporate culture that supports workplace diversity whilst providing access to equal opportunities at work based on merit. This policy is available on the company’s website at the corporate, corporate governance section and is subject to periodic review by, and may be changed by resolution of, the Board. The policy has no contractual effect. Diversity policy objectives The objectives set by the Board in accordance with the diversity policy and progress towards achieving them are: • Representation of women trained in recruitment and selection panels: Ongoing progress was made during the year with further women being trained; • Issuing the company equal opportunity statement to recruiting agencies: This continued during the year; • Explicit requirement of recruiting agencies to provide a gender balance of suitable, qualiﬁed, shortlisted candidates for interview: This initiative continued to progress during the year; • Promoting a safe workplace free from harassment or discrimination of any kind: Training and education programs which included topics on harassment, bullying, victimisation and discrimination were conducted during the year; • Enhancing the gender balance in career development in senior and managerial roles; and • Continue ﬂexible working arrangements where operationally appropriate. Breville Group Limited annual report 2020 51 Corporate governance statement continued Principle 1: Lay solid foundations for management and oversight continued Evaluating the performance of key executives The performance of key executives is reviewed against speciﬁc and measurable qualitative and quantitative performance criteria and includes: • ﬁnancial measures of the company’s performance; • development and achievement of strategic objectives; • development of management and staff; • compliance with legislative and company policy requirements; and • achievement of key performance indicators. Performance evaluation All key executives were subject to an annual performance review with their direct manager during the reporting period. directors of the company are those that are not involved in the day-to-day management of the company and are free from any real or reasonably perceived business or other relationship that could materially interfere with the exercise of their unfettered and independent judgement. In accordance with the deﬁnition of independence above, and the materiality thresholds outlined in the company’s policy ‘Criteria for assessing independence of directors’, it is the Board’s view that Mr Peter Cowan, Mr Dean Howell, Mr Lawrence Myers and Ms Kate Wright are independent directors. Mr Dean Howell’s independence was explicitly reviewed in light of his tenure with the Group and was reconﬁrmed. The following directors are not classiﬁed independent directors: • Mr Steven Fisher (non-executive Chairperson) ceased his employment by an entity associated with a substantial shareholder of the company during FY19. • Mr Timothy Antonie (non-executive director) is a non-executive director of Premier Investments Ltd, a substantial shareholder of the company; and Principle 2: Structure the Board to add value • Ms Sally Herman (non-executive director) is a non- executive director of Premier Investments Ltd, a substantial shareholder of the company. Board composition The company’s constitution states that there must be a minimum of three directors and contains detailed provisions concerning the tenure of directors. The Board currently comprises seven non-executive directors. The directors’ report, on pages 14 and 15, outlines the relevant skills, experience and expertise held by each director in ofﬁce at the date of this report. In accordance with good corporate governance, where the Chairperson of the Board is not an independent director, the Board considers it to be useful and appropriate to designate an independent director to serve in a lead capacity to co-ordinate the activities of the other independent directors, including acting as principal liaison between the independent directors and the Chairperson and representing the Board as the lead independent director when the Chairperson is unable to do so because of his non-independent status. As Mr Fisher is currently not classiﬁed as an independent director, the Board has appointed Mr Myers as its lead independent director. Director independence In considering whether a director is independent, the Board refers to the company’s “Criteria for assessing independence of directors” at the corporate governance section of the company’s website, which is consistent with the council’s recommendations. Independent Regardless of whether directors are deﬁned as independent, all directors are expected to bring independent views and judgement to Board deliberations. The majority of the Board members are independent directors. Material personal interest requirement The Corporations Act provides that unless agreed by the Board, where any director has a material personal interest in a matter, the director will not be permitted to be present during discussions, or to vote on the matter. Access to independent advice There are procedures in place to enable directors, in connection with their duties and responsibilities as directors, to seek independent professional advice at the expense of the company. Prior written approval of the Chairperson is required, which will not be unreasonably withheld. Board committees The Board has established the audit and risk committee and people, performance, remuneration and nominations committee to assist in the execution of its duties and to allow detailed consideration of complex issues. The composition of these committees is shown on page 48 and comprises only independent directors. 52 Breville Group Limited annual report 2020 Principle 3: Promote ethical and responsible decision making Code of conduct The Board has formally adopted a code of conduct (“code”) for all employees (including directors). The code aims at maintaining the highest ethical standards, corporate behaviour and accountability across the Group. These obligations are also consistent with the duties imposed on directors by the Corporations Act. In addition, directors are obliged to be independent in judgement and to ensure that all reasonable steps are taken to be satisﬁed as to the soundness of Board decisions. Principle 4: Safeguard integrity in ﬁnancial reporting Audit and risk committee The Board has an audit and risk committee (A&RC), which operates under a charter approved by the Board. It is the Board’s responsibility to ensure that an effective internal control framework exists within the consolidated entity. This includes internal controls to deal with both the effectiveness and efﬁciency of signiﬁcant business processes, the safeguarding of assets, the maintenance of proper accounting records and the reliability of ﬁnancial information. The Board has delegated the responsibility for monitoring and maintaining the framework of internal control and ethical standards of the company to the A&RC. Among its responsibilities, the A&RC: • ensures that company accounting policies and practices are in accordance with current and emerging accounting standards; • • reviews all accounts of the Group to be publicly released; recommends to the Board the appointment and remuneration of the external auditors; • reviews the scope of external audits; • assesses the performance and independence of the external auditors, including procedures governing partner rotation; • reviews corporate governance practices; • monitors and assesses the systems for internal compliance and control, legal compliance and risk management including operational and strategic risks; and • reviews and carries out an annual assessment of the company’s risk management framework. Composition of committee The members of the A&RC as at the date of this report are: • Mr Lawrence Myers (chairperson) • Mr Dean Howell • Ms Kate Wright The directors’ report, on page 48, outlines the number of A&RC meetings held during the year and the member’s attendance at those meetings. It also outlines the qualiﬁcations of A&RC members on pages 14 and 15. Board members, group chief executive ofﬁcer, company secretaries, group chief ﬁnancial ofﬁcer; the external auditors and any other persons considered appropriate may attend meetings of the A&RC by invitation. The committee also meets from time to time with the external auditors independent of management. In accordance with the council’s recommendation 4.2, the A&RC is structured so that it: • comprises only non-executive directors; • is chaired by an independent chair, who is not chair of the Board; and • has at least three members, in Breville’s case, all of whom are independent directors. In accordance with the council’s recommendation 4.2 the group chief executive ofﬁcer and group chief ﬁnancial ofﬁcer provided the Board with a written declaration conﬁrming that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system operated effectively in all material respects. Principle 5: Make timely and balanced disclosure The company’s continuous disclosure policy complies with the council’s recommendation 5.1. This policy is available on the company’s website at the corporate, corporate governance section. Principle 6: Respect the rights of shareholders Communication policy The company is committed to providing all shareholders with comprehensive, timely and equal access to information about its activities to enable them to make informed investment decisions. The company’s shareholder communication policy is available on the company’s website at the corporate, corporate governance section. Breville Group Limited annual report 2020 53 Corporate governance statement continued Principle 6: Respect the rights of shareholders continued Electronic communication The company’s website displays recent ASX announcements and contains information about the company. Shareholders can elect to receive communications from the company’s share registry electronically which also gives shareholders the opportunity to manage their account details and holdings electronically. Shareholders are also able to send communications to the company and receive responses to these communications electronically. Brieﬁngs The company does not have an internal audit function and management is ultimately responsible to the Board for the system of internal control and risk management and has reported to the Board as to the effectiveness of the company’s management of its material business risks. The A&RC assists the Board in monitoring this function. During the year ended 30 June 2020, the company did not have a separately established risk committee. All duties and responsibilities typically delegated to such a committee are the responsibility of the full Board, with assistance from the A&RC. The Group’s exposure to economic, environmental and social sustainability risks, together with how these risks are managed, are detailed in the Operating and Financial Review section of the Directors’ report. The company keeps a record of brieﬁngs held with investors and analysts, including a record of those present and the time and place of the meeting. Principle 8: Remunerate fairly and responsibly Principle 7: Recognise and manage risk The company is committed to the identiﬁcation, monitoring and management of risks associated with its business activities including ﬁnancial, operational, compliance, ethical conduct, brand and product quality risks. The company has embedded in its management and reporting systems a number of risk management controls. These include: • guidelines and limits for approval of capital expenditure; • policies and procedures for the management of ﬁnancial risk and treasury operations including exposures to foreign currencies and movements in interest rates; • annual budgeting and monthly reporting systems for all businesses which enable the monitoring of progress against performance targets and the evaluation of trends; • policies and procedures which enable management of the company’s material business risks; • formal strategic planning sessions; and • presentation of periodic reports to the Board and the A&RC identifying items that represent a potential risk and the manner in which these are being managed and responded to. People, performance, remuneration and nominations committee During the year, the people & performance committee (P&PC) expanded its remit and updated its charter to explicitly include the remuneration and nomination of both key executive, and non-executive Board roles. The people, performance, remuneration and nominations committee (PPR&NC), comprises the following directors as at the date of this report: • Ms Kate Wright (chairperson) • Mr Dean Howell • Mr Lawrence Myers In accordance with the council’s recommendation 8.1, the PPR&NC comprises: • an independent chairperson; and • at least three members, in Breville’s case all of whom are independent The PPR&NC is considered to be independent as at the date of this report. For details on the number of meetings of the PPR&NC held during the year and the members attendance at those meetings, refer to the directors’ report on page 48. Remuneration disclosure For details of the company’s remuneration philosophy and framework, and the remuneration received by directors and executives in the current period, please refer to the remuneration report contained in the directors’ report on pages 26 to 47. 54 Breville Group Limited annual report 2020 [This page is left deliberately blank] Breville Group Limited annual report 2020 55 Consolidated income statement for the year ended 30 June 2020 Revenue Cost of sales Gross proﬁt Other income Employee beneﬁts expenses Premises, lease & utilities expenses Advertising and marketing expenses Other expenses Earnings before interest, tax, depreciation & amortisation (EBITDA) Depreciation & amortisation expense Earnings before interest & tax (EBIT) Finance costs Finance income Proﬁt before income tax Income tax expense Net proﬁt after income tax for the year attributable to members of Breville Group Limited Earnings per share for proﬁt attributable to the ordinary equity holders of Breville Group Limited: - basic earnings per share - diluted earnings per share Consolidated 30 June 2020 $’000 30 June 2019 $’000 952,244 (631,684) 320,560 294 (89,213) (12,646) (35,053) (57,421) 759,967 (488,767) 271,200 287 (82,402) (15,686) (32,221) (27,217) 126,521 113,961 (25,582) 100,939 (8,368) 192 92,763 (16,616) 97,345 (3,483) 449 94,311 (26,562) (26,926) 66,201 67,385 Cents Cents 50.5 50.5 51.8 51.8 Note 3(a) 3(b) 3(e) 3(d) 3(d) 3(c) 3(f) 3(f) 4 12 12 The accompanying notes form an integral part of this consolidated income statement. 56 Breville Group Limited annual report 2020 Consolidated statement of comprehensive income for the year ended 30 June 2020 Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 Net proﬁt after income tax for the year 66,201 67,385 Other comprehensive income Items that may be reclassiﬁed to proﬁt or loss Foreign currency translation differences Net change in fair value of cash ﬂow hedges Income tax on other comprehensive income 4 Other comprehensive income for the year, net of income tax (2,346) (325) 2,733 62 6,391 (1,878) 2,326 6,839 Total comprehensive income for the year attributable to members of Breville Group Limited 66,263 74,224 The accompanying notes form an integral part of this consolidated statement of comprehensive income. Breville Group Limited annual report 2020 57 Consolidated statement of ﬁnancial position as at 30 June 2020 Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 Current assets Cash and cash equivalents Trade and other receivables Inventories Other ﬁnancial assets Current tax assets Total current assets Non-current assets Plant and equipment Deferred tax assets Right-of-use assets (adoption of AASB 16) Intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Lease liabilities (adoption of AASB 16) Current tax liabilities Provisions Other ﬁnancial liabilities Total current liabilities Non-current liabilities Other payables Borrowings Lease liabilities (adoption of AASB 16) Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Equity attributable to equity holders of the parent Issued capital Reserves Retained earnings Total equity 5 6 7 15 4 8 4 22 9 6 22 4 6 15 6 14 22 4 6 13 13 128,457 156,106 153,734 2,243 2,788 57,129 154,595 152,325 2,016 1,923 443,328 367,988 13,541 9,918 17,198 160,179 200,836 644,164 147,891 7,382 5,014 20,214 1,016 181,517 15,499 - 16,964 2,724 1,060 36,247 217,764 426,400 246,445 2,059 177,896 426,400 12,043 6,322 - 123,414 141,779 509,767 122,700 - 6,276 13,960 464 143,400 3,395 47,283 - 4,346 1,008 56,032 199,432 310,335 140,050 4,553 165,732 310,335 The accompanying notes form an integral part of this consolidated statement of ﬁnancial position. 58 Breville Group Limited annual report 2020 Consolidated statement of changes in equity for the year ended 30 June 2020 Consolidated 2020 At 1 July 2019 (original) Adjustment due to change in accounting standard (AASB 16) Foreign currency trans- lation reserve $’000 Employee equity beneﬁts reserve $’000 Cash ﬂow hedge reserve $’000 Issued capital $’000 Note Retained earnings $’000 Total equity $’000 140,050 5,267 (1,800) 1,086 165,732 310,335 22(d) - - - - (3,188) (3,188) At 1 July 2019 (restated) 140,050 5,267 (1,800) 1,086 162,544 307,147 Foreign currency translation reserve Cash ﬂow hedges Income tax on items taken directly to equity Total other comprehensive income for the year Proﬁt for the year Total comprehensive (loss)/income for the year Dividends paid Ordinary shares issued, net of transaction costs and tax Ordinary shares acquired by the Trustee of the Breville Group Performance Share Plan Trust Transferred to participants of the performance rights plan Share-based payments At 30 June 2020 2019 At 1 July 2018 Foreign currency translation reserve Cash ﬂow hedges Income tax on items taken directly to equity Total other comprehensive income for the year Proﬁt for the year Total comprehensive (loss)/income for the year Dividends paid Ordinary shares acquired by the Trustee of the Breville Group Performance Share Plan Trust Transferred to participants of the performance rights plan Share-based payments At 30 June 2019 - - - - - - - 4 11 13(a) 106,395 13(b) (5,496) 13(b) 5,496 - - - - - - - - 4 11 13(b) (3,767) 13(b) 3,767 - (2,346) - - - - - (325) 2,635 98 (2,346) 2,635 (227) - - - - (2,346) (325) 2,733 62 - - - 66,201 66,201 (2,346) 2,635 (227) 66,201 66,263 - - - (5,496) 2,940 (1,721) - - - - - (50,849) (50,849) - - - - 106,395 (5,496) - 2,940 859 177,896 426,400 6,391 - - - - - (1,878) 1,763 563 6,391 1,763 (1,315) - - - - 6,391 (1,878) 2,326 6,839 - - - 67,385 67,385 6,391 1,763 (1,315) 67,385 74,224 - - (3,767) 2,176 (1,800) - - - - (45,533) (45,533) - - - (3,767) - 2,176 1,086 165,732 310,335 - - - - - - - - - 246,445 2,921 140,050 (1,124) (1,972) 2,401 143,880 283,235 140,050 5,267 The accompanying notes form an integral part of this consolidated statement of changes in equity. Breville Group Limited annual report 2020 59 Consolidated cash ﬂow statement for the year ended 30 June 2020 Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 Cash ﬂows from operating activities Receipts from customers Payments to suppliers and employees Finance costs paid Income tax paid Finance income received Net cash ﬂows from operating activities 5(a) Cash ﬂows used in investing activities Purchase of plant and equipment Proceeds from sale of plant and equipment Development of intangible assets Cash consideration paid on acquisition of business Net cash ﬂows used in investing activities Cash ﬂows used in ﬁnancing activities Proceeds from issue of shares net of transaction costs 13(a) Proceeds from borrowings Repayment of borrowings Irretrievable cash contributions paid to the Trustee of the Breville Group Performance Share Plan Trust to acquire ordinary shares Principal elements of lease payments (adoption of AASB 16) Equity dividends paid Net cash ﬂows used in ﬁnancing activities 13(b) 22(b) 11(a) Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of the year Net foreign exchange difference 1,004,785 (836,779) (6,973) (28,930) 192 132,295 (7,004) 126 (31,372) (14,289) (52,539) 100,722 202,604 (253,704) - (7,325) (50,849) (8,552) 71,204 57,129 124 775,992 (717,668) (2,996) (25,436) 449 30,341 (5,473) 95 (23,003) - (28,381) - 99,577 (99,603) (3,767) - (45,533) (49,326) (47,366) 103,316 1,179 Cash and cash equivalents at end of the year 5(a) 128,457 57,129 The accompanying notes form an integral part of this consolidated cash ﬂow statement. 60 Breville Group Limited annual report 2020 Notes to the ﬁnancial statements for the year ended 30 June 2020 Key numbers 1 Summary of signiﬁcant accounting policies 2 Operating segments 3 Revenue and expenses 4 Income tax 5 Cash and cash equivalents 6 Receivables, payables and provisions 7 Inventories 8 Non-current assets – plant and equipment 9 Non-current assets – intangible assets 10 Impairment testing of goodwill and intangibles with indeﬁnite lives Capital management 11 Dividends 12 Earnings per share 13 Issued capital and reserves 14 Borrowings 15 Financial risk management Group structure 16 Interests in other entities 17 Parent entity information Other 18 Share-based payments 19 Related party transactions 20 Auditor’s remuneration 21 Contingencies 22 AASB 16 Leases 23 Signiﬁcant events after year end 24 Other accounting policies Breville Group Limited annual report 2020 61 Notes to the ﬁnancial statements for the year ended 30 June 2020 Key numbers Note 1. Summary of signiﬁcant accounting policies Breville Group Limited is a for proﬁt company limited by shares incorporated in Australia. Breville Group Limited shares are quoted on the Australian Securities Exchange. This ﬁnancial report covers the consolidated entity comprising Breville Group Limited and its subsidiaries (company or Group). A description of the Group’s operations and of its principal activities is included in the operating and ﬁnancial review in the directors’ report on pages 15 to 24. The directors’ report is unaudited (except for the remuneration report) and does not form part of the ﬁnancial report. (a) Basis of preparation The ﬁnancial report is a general-purpose ﬁnancial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. The ﬁnancial report has also been prepared on a historical cost basis, except for derivative ﬁnancial instruments which have been measured at fair value. The ﬁnancial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated 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 the class order applies. Where necessary, comparatives have been reclassiﬁed and repositioned for consistency with current year disclosures. (b) Statement of compliance The ﬁnancial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. (c) Basis of consolidation The consolidated ﬁnancial statements comprise the ﬁnancial statements of Breville Group Limited and its subsidiaries as at 30 June each year. Subsidiaries are all those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. The ﬁnancial statements of subsidiaries are prepared for the same reporting period, using consistent accounting policies. In preparing the consolidated ﬁnancial statements, all inter-Group balances and transactions, income and expenses and proﬁt and loss resulting from intra-Group transactions have been eliminated in full. Subsidiaries are fully consolidated from the date on which control is obtained by the Group and cease to be consolidated from the date on which control is transferred out of the Group. The acquisition of subsidiaries is accounted for using the purchase method of accounting. The purchase method of accounting involves allocating the cost of the business combination to the fair value of assets acquired and the liabilities and contingent liabilities assumed at the date of acquisition. 62 Breville Group Limited annual report 2020 Note 1. Summary of signiﬁcant accounting policies continued (d) Signiﬁcant accounting judgements, estimates and assumptions The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a signiﬁcant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: Impairment of goodwill & intangibles with indeﬁnite useful lives The Group determines whether goodwill and intangibles with indeﬁnite useful lives are impaired at least on an annual basis. This requires an estimation of the recoverable amount of the cash generating units to which the goodwill and intangibles with indeﬁnite useful lives are allocated. The assumptions used in this estimation of recoverable amount and the carrying amount of goodwill and intangibles with indeﬁnite useful lives are discussed in note 10. Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an external valuer using either the Black-Scholes or Monte-Carlo option pricing model, using the assumptions detailed in note 18. Taxes Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax laws, and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. The Group establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective Group company’s domicile. As the Group assesses the probability for litigation and subsequent cash outﬂow with respect to taxes as remote, no contingent liability has been recognised. Warranty and faulty goods Provision for warranty and faulty goods is recognised at the date of sale of the relevant products, at the Group’s best estimate of the expenditure required to settle the Group’s liability. Factors that could impact the estimated claim information include the success of the Group’s productivity and quality initiatives, as well as parts and labour costs. The related carrying amounts are disclosed in note 6. (e) Notes to the ﬁnancial statements Notes relating to individual line items in the ﬁnancial statements include accounting policy information where it is considered relevant to an understanding of these items. Details of the impact of new accounting policies and all other accounting policy information are disclosed in note 24 of the ﬁnancial report. Breville Group Limited annual report 2020 63 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 2. Operating segments Operating segments The Group has identiﬁed its operating segments in line with AASB 8 Operating Segments based on the internal reports that are reviewed by the chief operating decision makers (group chief executive ofﬁcer and Board of directors) in assessing performance and in determining the allocation of resources. The Group’s external reporting segments are ‘Global Product’ and ‘Distribution’. ‘Global Product’ sells premium products designed and developed by Breville, which are sold globally. Products may be sold directly or through 3rd parties, and may be branded Breville®, Sage® or carry a 3rd party brand. ‘Distribution’ sells products that are designed and developed by a 3rd party. Breville distributes these products pursuant to a license or distribution agreement, or they are sourced directly from manufacturers. Products in this business unit may be sold under a brand owned by the Group (e.g. Breville®, Kambrook®), or they may be distributed under a 3rd party brand. Consolidated Note 30 June 2020 30 June 2019 Global Product $’000 Distribu- tion $’000 Total $’000 Global Product $’000 Distribu- tion $’000 Total $’000 Segment revenue (a) 764,409 187,835 952,244 611,960 148,007 759,967 Segment results EBITDA Depreciation and amortisation EBIT Finance income Finance costs Proﬁt before income tax Other segment information Capital expenditure - plant and equipment Capital expenditure - intangibles (a) Segment revenue Global Product North America ANZ Europe Rest of World 99,752 26,769 126,521 94,754 19,207 113,961 (24,372) (1,210) (25,582) (15,932) (684) (16,616) 75,380 25,559 100,939 78,822 18,523 97,345 192 (8,368) 92,763 449 (3,483) 94,311 5,559 1,612 7,171 4,513 859 5,372 31,388 - 31,388 22,771 - 22,771 Consolidated 30 June 2020 $’000 30 June 2019 $’000 420,397 157,390 143,331 43,291 764,409 357,429 132,860 89,580 32,091 611,960 Total Global Product revenue Distribution Revenue generated from ANZ and North America 64 Breville Group Limited annual report 2020 Note 3. Revenue and expenses (a) Revenue Sale of goods Total revenue (b) Cost of sales Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 952,244 952,244 759,967 759,967 Costs of inventories recognised as an expense (includes write- down of inventory to net realisable value (note 7)) Costs of delivering goods to customers Warranty expense Total cost of sales (c) Depreciation and amortisation expense Depreciation – right-of-use assets (adoption of AASB 16) 22(b) Depreciation – plant and equipment Amortisation – computer software Amortisation – development costs Amortisation – customer relationships Total depreciation and amortisation expense (d) Lease payments and other expenses included in consolidated income statement Included in premises, lease & utilities expenses: • Minimum lease payments – operating lease From 1 July 2019, the Group adopted the new accounting standard AASB 16 Leases and has recognised right-of-use assets for these leases, except for short-term and low-value leases. Refer to Note 22 Included in other expenses: • Net foreign exchange (gain)/loss • Other product related costs • Impairment charge – IoT platform • Doubtful debt expense (e) Employee beneﬁts expenses Wages & salaries, leave and other employee related beneﬁts Deﬁned contribution plan expense Share-based payments expense Total employee beneﬁts expenses 8 9 9 9 9 6 556,990 38,910 35,784 631,684 6,377 5,574 3,307 10,145 179 25,582 431,373 31,665 25,729 488,767 - 4,633 2,750 9,054 179 16,616 - 8,635 (307) 5,819 9,644 13,570 82,143 4,130 2,940 89,213 (616) 4,365 - - 76,867 3,359 2,176 82,402 Breville Group Limited annual report 2020 65 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 3. Revenue and expenses continued Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 (f) Finance costs/income Finance costs paid or payable on borrowings and bank overdrafts: • interest • other borrowing costs (line fees and bank charges) Interest on other payables – non current (deferred consideration) Interest on lease liabilities (adoption of AASB 16) 22(b) Finance costs Finance income Total net ﬁnance costs 2,195 3,190 1,395 1,588 8,368 (192) 8,176 1,047 1,949 487 - 3,483 (449) 3,034 (g) Research and development costs Amortisation of previously capitalised development costs included in amortisation expense Research and development costs charged directly to the income statement (including employment costs and impairment charge for IoT) Total research and development costs 3(c) 10,145 9,054 34,430 44,575 21,464 30,518 Recognition and measurement (i) Sale of goods In accordance with AASB 15, Revenue from Contracts with Customers is recognised at a point in time when the performance obligation of transferring goods to the buyer has been satisﬁed and the transaction price can be measured. Goods are considered transferred to the buyer when the buyer obtains control of those goods, which is at the earlier of delivery of the goods or the transfer of legal title to the buyer. Revenue is measured at the fair value of the consideration received or receivable, net of returns, allowances, trade discounts and volume rebates. (ii) Finance costs/income Revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a ﬁnancial asset and allocating the interest income over the relevant period using the effective interest, which is the rate that exactly discounts estimated future cash receipts through the expected life of the ﬁnancial asset to the net carrying amount of the ﬁnancial asset. Borrowing costs are recognised as an expense when incurred. 66 Breville Group Limited annual report 2020 Note 4. Income tax The major components of income tax expense are: Income statement Current income tax Current income tax charge Adjustments in respect of current income tax of previous years Deferred income tax Relating to the origination and reversal of temporary differences Total income tax expense reported in the income statement Deferred income tax related to items charged or credited directly to other comprehensive income Employee equity beneﬁts reserve Net (loss)/gain on revaluation of cash ﬂow hedges Income tax (beneﬁt)/expense reported in other comprehensive income A reconciliation between tax expense and the product of accounting proﬁt before income tax multiplied by the parent entity’s applicable income tax rate is as follows: Proﬁt before income tax At the parent entity’s statutory income tax rate of 30% (2019: 30%) • adjustments in respect of current income tax of previous years • effect of different rates of tax on overseas income • expenditure not allowable for income tax purposes • other Income tax expense reported in the income statement Consolidated 30 June 2020 $’000 30 June 2019 $’000 28,063 (238) (1,263) 26,562 (2,635) (98) (2,733) 92,763 27,829 (238) (527) 1,389 (1,891) 26,562 25,438 (434) 1,922 26,926 (1,763) (563) (2,326) 94,311 28,293 (436) (559) 1,139 (1,511) 26,926 Breville Group Limited annual report 2020 67 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 4. Income tax continued Consolidated Consolidated Statement of ﬁnancial position Income statement 30 June 2020 $’000 30 June 2019 $’000 30 June 2020 $’000 30 June 2019 $’000 Deferred income tax Deferred income tax at 30 June relates to the following: Deferred tax liabilities Brand names Development costs Other intangibles Cash ﬂow hedge reserve Accelerated depreciation for tax purposes 1,875 13,285 760 368 505 1,875 11,806 281 466 482 Gross deferred income tax liabilities 16,793 14,910 Deferred tax assets Losses available for offset against future taxable income Provisions and accruals Other long term payables Employee beneﬁts Revaluation of inventories Employee equity beneﬁts reserve Net liability arising from adoption of AASB 16 Other Gross deferred income tax assets Net deferred income tax assets Deferred tax expense Current income tax Current tax asset Current tax liabilities 193 12,665 743 2,406 777 5,028 1,326 849 23,987 7,194 311 6,636 859 3,608 1,051 3,160 - 1,261 16,886 1,976 30 June 2020 $’000 30 June 2019 $’000 2,788 5,014 1,923 6,276 - (1,280) (479) - (23) (118) 5,374 (116) (1,202) (274) 446 (418) (647) - (3,193) 54 - (437) (275) 410 (91) 355 492 384 - 379 1,263 (1,922) At 30 June 2020, there is no recognised or unrecognised deferred income tax liability (2019: $nil) for taxes that would be payable on the unremitted earnings of certain of the Group’s subsidiaries, as the Group has no current intention of distributing existing retained earnings in jurisdictions where liability for additional taxation exists should such amounts be remitted. 68 Breville Group Limited annual report 2020 Note 4. Income tax continued Recognition and measurement Current tax Current tax assets and liabilities for the current and prior periods are measured at the amounts expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Deferred tax Deferred income tax is provided on all temporary differences between the tax bases of assets/liabilities and their carrying amounts at balance sheet date for ﬁnancial reporting purposes. 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; or • when the taxable temporary difference is associated with investments in subsidiaries and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets 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 assets 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 nor taxable proﬁt or loss; or • when the deductible temporary difference is associated with investments in subsidiaries 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 differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance sheet 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 balance sheet 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 income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income taxes in relation to items recognised directly in equity are recognised in equity and not in the income statement. 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. Tax consolidation legislation Breville Group Limited and its wholly-owned Australian resident controlled entities (excluding the Breville Group Performance Share Plan Trust) have implemented the tax consolidated legislation as of 1 July 2003. Breville Group Limited is the head entity of the tax consolidated Group. For further information, refer to note 17. Breville Group Limited annual report 2020 69 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 5. Cash and cash equivalents Cash at bank and on hand Notes: - Cash at bank earns interest at ﬂoating rates based on daily bank deposit rates. - At 30 June 2020, the Group had available $272,429,000 (2019: $35,109,000) of undrawn committed borrowing facilities in respect of which all conditions precedent had been met. This does not include the three year committed seasonal facility which is drawable between August and January (see note 14). - The fair value of cash and cash equivalents is $128,457,000 (2019: $57,129,000). Cash and cash equivalents Non-current borrowings Net cash (a) Reconciliation of net proﬁt after tax for the year to net cash ﬂows from operating activities Net proﬁt for the year Adjustments for: Depreciation and amortisation (including AASB16) Impairment charge Share-based payments Foreign exchange (gains)/losses Doubtful debt expense Changes in assets and liabilities: Decrease/(increase) in: Trade receivables, prepayments and other receivables Inventories Other current assets Non-current assets (Decrease)/increase in: Current liabilities Non-current liabilities Net cash ﬂows from operating activities Consolidated 30 June 2020 $’000 30 June 2019 $’000 128,457 57,129 Note (a) (a) 14 (b) 128,457 - 128,457 57,129 (47,283) 9,846 66,201 67,385 25,582 9,644 2,940 (307) 13,570 (4,664) (382) (82) (1,485) 22,492 (1,214) 132,295 16,616 - 2,176 (616) - (28,758) (49,004) 3,135 1,203 18,240 (36) 30,341 70 Breville Group Limited annual report 2020 Note 5. Cash and cash equivalents continued (b) Net debt reconciliation Consolidated Cash $’000 Borrowings $’000 Total $’000 Net cash at 30 June 2018 Cash ﬂows FX adjustments Net cash at 30 June 2019 Cash ﬂows FX adjustments Net cash at 30 June 2020 (c) Disclosure of ﬁnancing facilities Refer to note 14. Recognition and measurement 103,316 (47,366) 1,179 57,129 71,204 124 128,457 (45,324) 26 (1,985) (47,283) 51,100 (3,817) - 57,992 (47,340) (806) 9,846 122,304 (3,693) 128,457 Cash and cash equivalents in the balance sheet comprise cash at bank and on hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insigniﬁcant risk of changes in value. For the purposes of the consolidated cash ﬂow statement, cash and cash equivalents consist of cash and cash equivalents as deﬁned above, net of outstanding bank overdrafts. Note 6. Receivables, payables and provisions Trade and other receivables Current Trade receivables Allowance for uncollectible receivables Trade receivables, net Prepayments Other receivables Total current trade receivables, prepayments and other receivables Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 (a) (b) 166,133 (14,101) 152,032 2,487 1,587 152,325 (457) 151,868 1,750 977 156,106 154,595 Notes: (a) Trade receivables are non-interest bearing and are generally on 30-60 day terms. In 2H20 the trading environment has seen some lengthening of credit terms, and a withdrawal of some insurance credit limits, which has heightened the credit risk environment. An allowance for uncollectible, or doubtful, receivables is made when there is objective evidence on a case by case basis that a trade receivable is partially or fully impaired. A charge of $13,570,000 (2019: $312,000) has been recognised by the Group as an expense in ‘other expenses’ for the current year for speciﬁc debtors for which such evidence exists. Breville Group Limited annual report 2020 71 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 6. Receivables, payables and provisions continued Trade and other receivables continued At 30 June 2020 an ageing analysis of those trade receivables (net of allowance for uncollected receivables) are as follows: Current 31 – 60 days overdue 61+ days overdue Trade receivables, net Consolidated 30 June 2020 $’000 30 June 2019 $’000 149,168 143,608 1,747 1,117 4,402 3,858 152,032 151,868 Trade receivables (net) past due, but not impaired, amount to $2,864,000 (2019: $8,260,000). Of the remaining balance, 70% is covered by insurance, 23% is considered very low risk for collection default and 7% is uninsured. In all instances each operating unit has been in contact with the relevant debtor and is satisﬁed that payment will be received in full or has been provided for. (b) Non-trade other receivables are non-interest bearing and have repayment terms between 30 and 60 days. Balances within other receivables do not contain impaired assets and are not past due. It is expected that these balances will be received when due. Recognition and measurement Trade receivables are initially recognised at fair value and subsequently measured at amortised cost. Bad debts are written off when incurred. An allowance for uncollectible receivables is established when there is objective evidence that the Group may not be able to collect all amounts due. The amount of the allowance is recognised in the income statement. The carrying value and estimated net fair values of the trade and other receivables is assumed to approximate their fair value, being the amount at which the asset could be exchanged between willing parties. Details regarding the effective interest rate and credit risk of current receivables are disclosed in note 15. Trade and other payables Current Trade and other payables – unsecured Total current trade and other payables Non current Other payables Notes: Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 147,891 147,891 15,499 15,499 122,700 122,700 3,395 3,395 (a) (a) Relates to earn-outs in relation to the acquisitions of PolyScience and ChefSteps. Recognition and measurement Trade and other payables are carried at amortised cost. Trade payables represent liabilities for goods and services provided to the Group prior to the end of the year, including customer rebates, that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured, non-interest bearing and are usually settled on 30 day terms. The carrying value and estimated net fair values of the trade and other payables is assumed to approximate their fair value, being the amount at which the liability could be settled in a current transaction between willing parties. Details regarding interest rate, foreign exchange and liquidity risk exposure are disclosed in note 15. 72 Breville Group Limited annual report 2020 Note 6. Receivables, payables and provisions continued Provisions Current Warranty and faulty goods Employee beneﬁts – annual leave Employee beneﬁts – long service Other provisions Total current provisions Non current Employee beneﬁts – long service Total non-current provisions Consolidated Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 (a) (a) (a) (a) (a) (a) (a) 12,562 5,058 2,544 50 20,214 1,060 1,060 7,630 3,942 2,338 50 13,960 1,008 1,008 Warranty and faulty goods $’000 Employee beneﬁts - annual leave $’000 Employee beneﬁts - long service $’000 Other Provisions $’000 Total $’000 (a) Movement in provisions Carrying amount at the beginning of the year: Current Non-current Total Movement in provisions during the year: Amounts utilised during the year Additional provisions made in the year Net exchange differences Net movement Carrying amount at the end of the year: Current Non-current Total Recognition and measurement 7,630 - 7,630 (30,903) 35,871 (36) 4,932 12,562 - 12,562 3,942 - 3,942 (2,634) 3,762 (12) 1,116 5,058 - 5,058 2,338 1,008 3,346 (337) 591 4 258 2,544 1,060 3,604 50 - 50 - - - - 50 - 50 13,960 1,008 14,968 (33,874) 40,224 (44) 6,306 20,214 1,060 21,274 Provisions are recognised when the Group has a present legal or constructive obligation as a result of a past event, it is probable that an outﬂow of resources embodying economic beneﬁts will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. Breville Group Limited annual report 2020 73 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 6. Receivables, payables and provisions continued Provisions continued (a) Movement in provisions continued Recognition and measurement continured Provisions are measured as the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reﬂects the risks speciﬁc to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a ﬁnance cost. Warranties and faulty goods Provisions for warranty and faulty goods are recognised at the date of sale of the relevant products. A provision for warranty and faulty goods represents the present value of the best estimate of the future sacriﬁce of economic beneﬁts expected that will be required for warranty and faulty goods claims on products sold. This estimate is based on the historical trends experienced on the level of repairs and returns. It is expected that these costs will be incurred in the next year. Assumptions used to calculate the provision for warranty and faulty goods were based on the level of warranty and faulty goods claims experienced during the last year. During COVID-19 related lock downs in various markets, the ability of consumers to make returns has been inhibited so the Group has prudently increased its provision in a number of territories. Employee beneﬁts - annual leave Liabilities for wages and salaries, including non-monetary beneﬁts, annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. During COVID-19 employees have not chosen to take leave at normal levels. Contributions to the deﬁned contribution fund are recognised as an expense as they become payable. Employee beneﬁts – long service The provision for employee beneﬁts represents the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to the expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using appropriate market yields at the reporting date to estimate the future cash outﬂows. Note 7. Inventories Finished goods (at lower of cost and net realisable value) Stock in transit (at cost) Total inventories Note (a) Consolidated 30 June 2020 $’000 30 June 2019 $’000 126,995 26,739 153,734 123,255 29,070 152,325 Notes: (a) Total net ﬁnished goods provision movements recognised in the income statement totalled a $19,000 debit (2019: $326,000 debit) for the Group. This net debit/credit is included in the cost of inventories line in the cost of sales. The nature of the Group’s ﬁnished products make obsolescence and deterioration in storage unlikely. Recognition and measurement Inventories are valued at the lower of cost and net realisable value. The cost of inventories comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. This includes the transfer from equity of gains and losses on qualifying cash ﬂow hedges of purchases of ﬁnished goods. Costs are assigned to individual items of inventory on a weighted average cost basis. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. 74 Breville Group Limited annual report 2020 Note 8. Non-current assets - plant and equipment At the beginning of the year At cost (gross carrying amount) Accumulated depreciation and impairment Net carrying amount Reconciliation of the carrying amount: Carrying amount at the beginning of year Additions Additions from acquisition of ChefSteps Disposals Reclassiﬁcations Depreciation Net exchange difference Carrying amount at the end of year At the end of the year At cost (gross carrying amount) Accumulated depreciation and impairment Net carrying amount Recognition and measurement Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 44,628 (32,585) 12,043 12,043 7,171 168 (271) - (5,574) 4 13,541 50,807 (37,266) 13,541 39,696 (28,317) 11,379 11,379 5,372 - (180) (10) (4,633) 115 12,043 44,628 (32,585) 12,043 3(c) Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation on plant and equipment is calculated on a straight line basis over the estimated useful life of between 2 and 10 years. The assets’ residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each year end. An item of plant and equipment is derecognised upon disposal or when no further future economic beneﬁts are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset at the time of derecognition) is included in the income statement in the year in which they arise. Breville Group Limited annual report 2020 75 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 9. Non-current assets - intangible assets Development costs Computer software Brand names Customer relationships Goodwill Total intangible assets (net carrying amount) Consolidated 30 June 2020 $’000 30 June 2019 $’000 44,248 16,980 31,575 759 66,617 160,179 39,352 12,946 31,575 938 38,603 123,414 Consolidated 2020 At the beginning of the year At cost (gross carrying amount) Accumulated amortisation and impairment Develop- ment costs $’000 Computer software $’000 Brand names $’000 Customer relation- ships $’000 Note Goodwill $’000 Total $’000 99,376 21,098 31,575 1,835 38,603 192,487 Net carrying amount 39,352 12,946 31,575 Reconciliation of the carrying amount: (60,024) (8,152) - (897) 938 - (69,073) 38,603 123,414 Carrying amount at the beginning of year Additions Additions from acquisition of ChefSteps Impairment charge – IoT platform Amortisation Net exchange difference Carrying amount at the end of year At the end of the year At cost (gross carrying amount) Accumulated amortisation and impairment (i) (ii) (iii) 3(c) 39,352 24,047 12,946 7,341 717 (9,644) (10,145) (79) - - (3,307) - 31,575 938 38,603 123,414 - - - - - - - - (179) - - 31,388 28,014 28,731 - - - (9,644) (13,631) (79) 44,248 16,980 31,575 759 66,617 160,179 124,047 28,439 31,575 1,835 66,617 252,513 (79,799) (11,459) - (1,076) - (92,334) Net carrying amount 44,248 16,980 31,575 759 66,617 160,179 Notes: (i) Investment in new product development and upgrade of Global IT 2.0 platform including D365 ERP, PIM and middleware. (ii) Acquisition of ChefSteps – Goodwill of $28,014,000 and $717,000 of Development Costs were recognised arising from the acquisition of Chefsteps Inc., a US-based business on 16 July 2019. Cash consideration was paid on acquisition with a further deferred consideration payable as an earn out based on future performance of the acquired assets. The assets have been included within the Global Product segment cash generating unit (CGU). (iii) One-off impairment charge to IoT platform assets arising as a result of strategic decision to move to a standards- based IoT platform and to write-off development work on a range of proprietary IoT platforms. 76 Breville Group Limited annual report 2020 Note 9. Non-current assets - intangible assets continued Consolidated 2019 At the beginning of the year At cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount Develop- ment costs $’000 Computer software $’000 Brand names $’000 Customer relation- ships $’000 Note Goodwill $’000 Total $’000 79,680 18,010 31,575 1,835 38,577 169,677 (50,970) (5,401) - (718) - (57,089) 28,710 12,609 31,575 1,117 38,577 112,588 Reconciliation of the carrying amount: Carrying amount at the beginning of year Additions Reclassiﬁcations Amortisation Net exchange difference Carrying amount at the end of year At the end of the year At cost (gross carrying amount) Accumulated amortisation and impairment 28,710 19,696 - 12,609 3,075 10 3(c) (9,054) (2,750) - 2 31,575 1,117 38,577 112,588 - - - - - - (179) - 26 22,797 - - - 10 (11,983) 2 39,352 12,946 31,575 938 38,603 123,414 99,376 21,098 31,575 1,835 38,603 192,487 Net carrying amount 39,352 12,946 31,575 (60,024) (8,152) - (897) 938 - (69,073) 38,603 123,414 Breville Group Limited annual report 2020 77 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 9. Non-current assets - intangible assets continued A summary of the policies applied to the Group’s intangible assets is as follows: (a) Development costs Internally generated / Acquired Recognition Useful lives Amortisation method Impairment test (b) Computer software Internally generated / Acquired Recognition Useful lives Amortisation method Impairment test (c) Brand names Internally generated / Acquired Recognition Useful lives Amortisation method Impairment test (d) Customer relationships Internally generated / Acquired Recognition Internally generated and acquired products and product platforms Capitalised at cost and recognised only after the Group can demonstrate the technical feasibility and commercial viability of the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic beneﬁts, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Research costs are expensed as incurred. Finite Amortised straight line over the period of expected future sales, not exceeding 3 years, from the related project on a straight line basis. Annually and more frequently when an indication of impairment exists. An impairment loss is recognised to the extent that the recoverable amount is lower than the carrying amount. The amortisation method is reviewed at each year end. Internally generated and acquired software Capitalised at cost Finite Amortised over the useful life, not exceeding 7 years, on a straight line basis. When an indication of impairment exists. The amortisation method is reviewed at each year end. Acquired Brand names Capitalised at cost or if acquired as part of a business combination at fair value at the date of acquisition Indeﬁnite No amortisation Annually and more frequently when an indication of impairment exists. Acquired Customer Relationships Useful lives Amortisation method Impairment test (e) Goodwill Internally generated / Acquired Recognition Useful lives Amortisation method Impairment test Capitalised at cost or if acquired as part of a business combination at fair value at the date of acquisition Finite Amortised over the useful life, not exceeding 10 years, on a straight line basis. Annually and more frequently when an indication of impairment exists. The amortisation method is reviewed at each year end. Acquired Goodwill Initially capitalised at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquiree’s identiﬁable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Indeﬁnite No amortisation Annually and more frequently when an indication of impairment exists. 78 Breville Group Limited annual report 2020 Note 9. Non-current assets - intangible assets continued The amortisation period and the amortisation method for an intangible asset with a ﬁnite useful life are reviewed at least at each year end. Changes in the expected useful life or the expected pattern of consumption of future economic beneﬁts embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with ﬁnite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised. Note 10. Impairment testing of goodwill and intangibles with indeﬁnite lives On a consistent basis, goodwill and brand names acquired through business combinations have been allocated to these cash generating units or Groups of cash generating units for impairment testing as follows: • Global Product ANZ • Global Product North America • Global Product Europe & Rest of World • Distribution In all cases the recoverable amount of the individual cash generating unit has been determined based on a value in use calculation using cash ﬂow projections based on ﬁnancial budgets approved by the Board. The pre-tax discount rates applied to cash ﬂow projections are in the range of 8.0% to 11.5% (2019: 7.2% to 11.7%), depending on the CGU. This discount rate has been determined using the weighted average cost of capital which incorporates both the cost of debt and the cost of capital. Cash ﬂows beyond the approved 30 June 2021 budgets are extrapolated using a 3.0% growth rate (2019: 3.0%), which is considered a reasonable estimate of the long-term average growth rate for the wholesale consumer products industry. Management has performed sensitivity testing by cash generating unit (CGU), based on assessing the effect of changes in revenue growth rates as well as discount rates. Management consider any reasonable likely combination of changes in these key assumptions would not result in the carrying value of the goodwill or brand names exceeding the recoverable amount. Key assumptions used in value in use calculations for the cash generating units for 30 June 2020 and 30 June 2019 The key assumptions on which management has based its cash ﬂow projections when determining the value in use of the cash generating units are budgeted revenue and gross margins. The basis used to determine the value assigned to the budgeted revenue and gross margins are based on past performance and expectations for the future. Breville Group Limited annual report 2020 79 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 10. Impairment testing of goodwill and intangibles with indeﬁnite lives continued Carrying amount of goodwill and brand names are allocated as follows: Breville Group - brand names with indeﬁnite useful lives Global Product ANZ - goodwill Global Product North America - goodwill Global Product Europe & Rest of World - goodwill Distribution - goodwill - brand names with indeﬁnite useful lives All cash generating units - goodwill - brand names with indeﬁnite useful lives Total carrying amount of goodwill and brand names Recognition and measurement Intangible assets – goodwill Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 13,800 20,553 35,714 2,241 8,109 17,775 98,192 66,617 31,575 98,192 13,800 20,553 7,700 2,241 8,109 17,775 70,178 38,603 31,575 70,178 9(ii) 9 9 The useful life of an intangible asset with an indeﬁnite life is reviewed each reporting period to determine whether indeﬁnite life assessment continues to be supportable. For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the Group’s cash generating units, or groups of cash generating units, that are expected to beneﬁt from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated represents the lowest level within the Group at which the goodwill is monitored for internal management purposes. Impairment is determined by assessing the recoverable amount of the cash generating unit to which the goodwill relates. When the recoverable amount of a cash generating unit is less than the carrying amount, an impairment loss is recognised. When goodwill forms part of a cash generating unit and an operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed of and the portion of the cash generating unit retained. Impairment losses recognised for goodwill are not subsequently reversed. Impairment of non-ﬁnancial assets other than goodwill Intangible assets that have an indeﬁnite useful life are not subject to amortisation and are tested annually for impairment; or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identiﬁable cash inﬂows that are largely independent of the cash inﬂows from other assets or groups of assets (cash generating units). Non-ﬁnancial assets other than goodwill that suffered impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. 80 Breville Group Limited annual report 2020 Capital management Note 11. Dividends (a) Dividends on ordinary shares declared and paid during the year: Final partially franked dividend for the year ending 30 June 2019 of 18.5 cents per share, 11.1 cents (60%) franked (2019: ﬁnal partially franked dividend for 2018 of 16.5 cents per share, 9.9 cents (60%) franked) • Paid in cash Final dividend Partially franked interim dividend for the year ending 30 June 2020 of 20.5 cents per share, 12.3 cents (60%) franked (2019: interim partially franked dividend for 2019 of 18.5 cents per share, 11.1 cents (60%) franked) • Paid in cash Interim dividend Total partially franked dividends declared and paid during the year of 39.0 cents per share, 23.4 cents (60%) franked (2019: 35.0 cents per share (21.0 cents (60%) franked)) • Paid in cash Total dividends (b) Dividends on ordinary shares proposed and not recognised as a liability: Final partially franked dividend for 2020 of 20.5 cents per share, 12.3 cents (60%) franked (2019: ﬁnal partially franked dividend of 18.5 cents per share, 11.1 cents (60%) franked) (i) (c) Franking credit balance The amount of franking credits in the parent available for the subsequent year are: • franking account balance as at the end of the year at 30% (2019: 30%) • franking (debits)/credits that will arise from the payment of income tax (receivable)/payable as at the end of the year The amount of franking credits in the parent available for future reporting periods: • impact on the franking account of dividends proposed or declared before the ﬁnancial report was authorised for issue but not recognised as distribution to equity holders during the period Total franking credit balance The tax rate at which dividends are franked is 30% (2019: 30%). Consolidated 30 June 2020 $’000 30 June 2019 $’000 24,121 24,121 21,466 21,466 26,728 26,728 24,068 24,068 50,849 50,849 45,533 45,533 27,992 24,121 13,754 (1,545) 12,209 8,089 2,932 11,021 (7,198) 5,011 (6,189) 4,832 (i) The Group has established a new Dividend Reinvestment Plan (“DRP”) for its shareholders, replacing its previous inactive DRP. The DRP will apply to the ﬁnal dividend for the year ending 30 June 2020 and will remain in place until further notice. Please refer to page 19 of the Directors’ report for full details. Breville Group Limited annual report 2020 81 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 12. Earnings per share The following reﬂects the income and share data used in the basic and diluted earnings per share computations: Consolidated 30 June 2020 $’000 30 June 2019 $’000 Earnings used in calculating basic and diluted earnings per share: Net proﬁt attributable to ordinary equity holders of Breville Group Limited 66,201 67,385 Thousands Thousands Weighted average number of shares: Weighted average number of ordinary shares for basic and diluted earnings per share 131,090 130,095 Weighted average number of exercised, forfeited or expired potential ordinary shares included in diluted earnings per share - - There have been no transactions involving ordinary shares or potential ordinary shares that would signiﬁcantly change the number of ordinary shares or potential ordinary shares outstanding between the reporting date and the date of completion of these ﬁnancial statements. Recognition and measurement Basic earnings per share is calculated as net proﬁt attributable to members of the parent, adjusted to exclude any costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares. Diluted earnings per share is calculated as net proﬁt or loss attributable to members of the parent, adjusted for: • cost of servicing equity (other than dividends); • the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; • other non-discretionary changes in revenue or expenses during the period that would result from the dilution of potential ordinary shares; and • divided by the weighted average number of ordinary shares and dilutive potential ordinary shares. Note 13. Issued capital and reserves Issued capital Ordinary shares – authorised, issued and fully paid Ordinary shares – held by the Breville Group Performance Share Plan Trust Total contributed equity Ordinary shares Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 (a) (b) 246,445 140,050 - - 246,445 140,050 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. 82 Breville Group Limited annual report 2020 Note 13. Issued capital and reserves continued Issued capital continued Ordinary shares held by the Breville Group Performance Share Plan Trust Ordinary shares held by the Breville Group Performance Share Plan Trust in order to fulﬁl its obligations under the Breville Group Limited Performance Share Plan are deducted from equity. No gain or loss is recognised in the income statement on the purchase of the Group’s equity instruments by the Breville Group Performance Share Plan Trust. The ordinary shares held by the Breville Group Performance Share Plan Trust, if any, are yet to be allocated to LTI participants. They will be allocated to participants once performance rights vest and they are exercised. The ordinary shares held by the Breville Group Performance Share Plan Trust, if any, have the right to receive dividends as declared and, in the event of winding up the company, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. The ordinary shares held by the Breville Group Performance Share Plan Trust, if any, entitle their holder to one vote, either in person or by proxy, at a meeting of the company. Details are provided in note 16(b) and note 18. Consolidated 30 June 2020 Consolidated 30 June 2019 Note Number of shares $’000 Number of shares $’000 (a) Movements in ordinary issued shares: Beginning of the year 130,095,322 140,050 130,095,322 140,050 Movements during the year Ordinary shares issued during the year for Breville Group Performance Share Plan Trust Ordinary shares issued, net of transaction costs and tax, as part of capital raise (i) (ii) 331,155 5,496 6,117,648 100,899 - - - - End of the year 136,544,125 246,445 130,095,322 140,050 (b) Movements in ordinary shares held by the Breville Group Performance Share Plan Trust: Beginning of the year - - - - Movements during the year Ordinary shares transferred to participants of the Breville Group Performance Share Plan Ordinary shares subscribed to/acquired by the Breville Group Performance Share Plan Trust during the year - cash End of the year (iii) (iv) 331,155 5,496 268,720 3,767 (331,155) (5,496) (268,720) (3,767) - - - - (i) During the year the group issued 331,155 fully paid ordinary shares (2019: nil) of Breville Group Limited as a result of the vesting of Performance Rights issued under the Breville Group Performance Share Plan. The average value attributable to these issued shares was $16.60 (2019: nil), as of the date of issue. (ii) In May and June 2020 the Group successfully completed an institutional placement and retail share purchase plan (SPP), issuing 6,117,648 shares at $17.00 per share, raising $100,899,000 net of transaction costs and tax. (iii) During the year the Trustee of the Breville Group Performance Share Plan Trust transferred 331,155 ordinary company shares (2019: 268,720) to participants in order to fulﬁl its obligations under the Breville Group Limited Performance Share Plan. (iv) During the year the Trustee of the Breville Group Performance Share Plan Trust subscribed to 331,155 ordinary shares of Breville Group Limited (2019: acquired 268,720 shares) in order to fulﬁl its obligations under the Breville Group Limited Performance Share Plan. The average value placed on these subscriptions was $16.60 per share (2019: average value placed on these acquisitions was $14.02 per share). Details are provided in note 16(b) and note 18. Breville Group Limited annual report 2020 83 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 13. Issued capital and reserves continued Issued capital continued (c) Rights over ordinary shares: The company has a share-based payment rights schemes under which rights to subscribe for the company’s shares have been granted to certain executives and other employees (refer note 18). At the end of the year there were 1,380,127 (2019: 1,106,255) potential unissued ordinary shares in respect of rights that were outstanding. Reserves Foreign currency translation reserve Employee equity beneﬁts reserve Cash ﬂow hedge reserve Total reserves Nature and purpose of reserves Consolidated 30 June 2020 $’000 30 June 2019 $’000 2,921 (1,721) 859 2,059 5,267 (1,800) 1,086 4,553 Foreign currency translation reserve - This reserve is used to record exchange differences arising from the translation of the ﬁnancial statements of foreign subsidiaries. Employee equity beneﬁts reserve - This reserve is used to record the value of equity beneﬁts provided to employees as part of their remuneration. Refer to note 18 for further details of these plans. Cash ﬂow hedge reserve - This reserve records the portion of the gain or loss on a hedging instrument in a cash ﬂow hedge that is determined to be an effective hedge. Note 14. Borrowings Non-current Other loans: - Cash advance facilities Total non-current borrowings Terms and conditions Consolidated 30 June 2020 $’000 30 June 2019 $’000 - - 47,283 47,283 The Group operates under one primary facility with Australia and New Zealand Banking Group Limited (ANZ) enabling all jurisdictions to borrow under one global facility. The facility agreement has a number of ﬁnancial covenants all of which have been fully complied with as at the years ended 30 June 2020 and 30 June 2019. The Australia and New Zealand ﬁnancing facilities are secured by a ﬁrst ranking ﬁxed and ﬂoating registered charge (or general security for Breville New Zealand Limited), over all the assets and undertakings of Thebe International Pty Limited, Breville Pty Limited, Breville Holdings Pty Limited, Breville R&D Pty Limited and Breville New Zealand Limited and are guaranteed by Breville Group Limited. The Hong Kong facility is secured via a security agreement over the assets and undertakings of HWI International Limited. A security agreement in favour of ANZ is in existence over the assets and undertakings of Breville USA, Inc. Breville Group Limited has issued corporate guarantees in favour of the local bank (HSBC) which provides the day to day US, Canadian, UK and German transactional banking facilities. Borrowings may include Australian dollar, US dollar, Canadian dollar, British pounds, Euro and New Zealand dollar denominated amounts. 84 Breville Group Limited annual report 2020 Note 14. Borrowings continued Fair value The carrying value and estimated net fair values of the borrowings held with banks (determined under Level 2, as described in note 15) approximates their fair value. Fair values of the company’s interest-bearing loans are determined by using a discounted cash ﬂow method using a discount rate that reﬂects the issuer’s borrowing rate as at the end of the reporting period. The non-performance risk as at 30 June 2020 was assessed to be insigniﬁcant (2019: insigniﬁcant). Details regarding interest rate, foreign exchange and liquidity risk are disclosed in note 15. Financing facilities available At reporting date, the following ﬁnancial facilities have been negotiated and were available to the group: Facilities used at the reporting date Facilities unused at the reporting date Total facilities (a) Facilities used at the reporting date: - Non-current cash advance facilities – committed - Non-current cash advance facilities – uncommitted - Overdraft facilities - Business transactions facilities - Indemnity/guarantee facilities - Documentary credit facilities Facilities used as at reporting date (b) Facilities unused at the reporting date: - Non-current cash advance facilities – committed - Non-current cash advance facilities – uncommitted - Overdraft facilities - Business transactions facilities - Indemnity/guarantee facilities - Documentary credit facilities Facilities unused as at reporting date (c) Total facilities: - Non-current cash advance facilities – committed - Non-current cash advance facilities – uncommitted - Overdraft facilities - Business transactions facilities - Indemnity/guarantee facilities - Documentary credit facilities Total facilities Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 (a) (b) (c) 7,984 276,974 284,958 52,057 66,518 118,575 - - 395 1,929 5,660 - 7,984 261,376 - 11,053 1,612 2,207 726 276,974 261,376 - 11,448 3,541 7,867 726 284,958 47,283 - - 698 4,076 - 52,057 23,222 30,000 11,887 698 - 711 66,518 70,505 30,000 11,887 1,396 4,076 711 118,575 Breville Group Limited annual report 2020 85 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 14. Borrowings continued Group facilities In June 2020, the Group reﬁnanced its existing debt facilities with ANZ bank including - an extension of committed base and seasonal multicurrency facilities from 1 to 3 years (30 June 2020: $246,000,000) - a $115,000,000 one year multicurrency facility, with a deﬁned extension mechanism. Seasonal facilities The Group also has 3 year committed seasonal facilities available between August and January for FY21, FY22 and FY23, which range between $43,619,000 and $99,682,000 (2019: between $9,710,000 and $71,137,000). Borrowings may include Australian dollar, US dollar, Canadian dollar, British pounds, Euro and New Zealand dollar denominated amounts. Recognition and measurement All borrowings, including cash advance facilities, are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, borrowings, including cash advance facilities, are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the liabilities are derecognised. Borrowings are classiﬁed as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Note 15. Financial risk management The Group’s principal ﬁnancial instruments, other than derivatives, comprises cash advances, bank overdrafts, cash at bank and short-term deposits. The main purpose of these ﬁnancial instruments is to raise ﬁnance for the Group’s operations. The Group has various other ﬁnancial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The Group also enters into derivative transactions, primarily forward exchange contracts. The purpose is to manage the currency risks arising from the Group’s business operations and its sources of ﬁnance. It is the Group’s policy that no speculative trading in derivatives shall be undertaken. The main risks arising from the Group’s ﬁnancial instruments are foreign currency risk and credit risk. The Board reviews and agrees policies for managing each of these risks and they are summarised below. Recognition and measurement Derivative ﬁnancial instruments and hedging The Group may use derivative ﬁnancial instruments such as forward exchange contracts to hedge its risks associated with foreign currency ﬂuctuations. 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 to fair value. The fair value of the forward exchange contracts is estimated using market observable inputs. Derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Any gains or losses arising from changes in the fair value of derivatives, except for those that qualify for hedge accounting, are taken directly to the income statement for the year. The fair value of forward exchange contracts are calculated by reference to current forward exchange rates for contracts with similar maturity proﬁles and where applicable, exercise prices. For the purposes of hedge accounting, hedges are classiﬁed as cash ﬂow hedges when they hedge exposure to variability in cash ﬂows that is attributable either to a particular risk associated with a recognised asset or liability or to a forecast transaction. At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identiﬁcation of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s cash ﬂows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in cash ﬂows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the ﬁnancial reporting periods for which they were designated. 86 Breville Group Limited annual report 2020 Note 15. Financial risk management continued Recognition and measurement continued Derivative ﬁnancial instruments and hedging continued Hedges that meet the strict criteria for hedge accounting are accounted for as follows: Cash ﬂow hedges Cash ﬂow hedges are hedges of the Group’s exposure to variability in cash ﬂows that is attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction and that could affect proﬁt or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in income statement. Amounts taken to equity are transferred to the income statement when the hedged transaction affects proﬁt or loss, such as when hedged income or expenses are recognised or when a forecast purchase occurs. When the hedged item is the cost of a non-ﬁnancial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-ﬁnancial asset or liability. If the forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs. If the related transaction is not expected to occur, the amount is taken to the income statement. A hedge of the foreign currency risk of a ﬁrm commitment is accounted for as a cash ﬂow hedge. Interest rate risk The Group is exposed to interest rate risk on its borrowings, cash balances and derivative ﬁnancial instruments. The Group’s policy is to manage its interest rate risk using a mix of ﬁxed and variable rate debt where appropriate. Cash advance facilities have short term ﬁxed interest rates with maturities ranging between 1 and 3 months, therefore within the ﬁnancial year they are exposed to interest rate risk. At 30 June 2020, the Group has the following exposure to interest rate risk: Cash at bank Cash advance facilities Net exposure Consolidated 30 June 2020 $’000 30 June 2019 $’000 128,457 - 128,457 57,129 (47,283) 9,846 The Group’s net exposure to interest rate risk calculated as at 30 June 2020 is not representative of its exposure during the ﬁnancial year due to seasonality in the volume of sales such that ﬁnancial performance is historically weighted in favour of the half to 31 December. This seasonality results in a higher level of receivable and inventory balances and a consequent increase in working capital requirements. At 30 June 2020, the Group did not have any borrowings drawn down from its cash advance facilities, and so there is no material interest rate risk that would impact ﬁnance costs due to exposure to ﬂoating rates. Breville Group Limited annual report 2020 87 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 15. Financial risk management continued Foreign currency risk The Group undertakes certain transactions denominated in foreign currency and is exposed to foreign exchange rate ﬂuctuations. Such exposure arises primarily from purchases of inventory by a business unit in currencies other than the unit’s functional currency (purchases are predominately US dollar denominated). Other foreign exchange risk only arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the entity’s functional currency. To hedge exposure arising from the purchase of inventories or payments in currencies other than the business unit’s functional currency, forward exchange contracts may be utilised. At inception these hedge contracts are designated as cash ﬂow hedges to hedge the exposure to the variability in cash ﬂows arising as a result of movements in exchange rates below contracted exchange rates for options and for movements above or below a contracted exchange rate for forward exchange contracts. Also, as a result of the Group’s investment in its overseas operations, the Group’s balance sheet can be affected signiﬁcantly by movements in the exchange rates of the jurisdictions it operates within. At 30 June 2020, the Group has the following ﬁnancial assets and liabilities exposed to foreign currency risk: Cash at bank Trade and other receivables Trade and other payables Other ﬁnancial assets – derivative assets – forward exchange contracts Other ﬁnancial liabilities – derivative liabilities – forward exchange contracts Net exposure Instruments used by the group Consolidated 30 June 2020 $’000 30 June 2019 $’000 7,346 3,178 (15,358) 2,243 (1,016) (3,607) 9,873 4,404 (15,826) 2,016 (464) 3 Derivative ﬁnancial instruments are used by the Group in the normal course of business in order to hedge exposures to ﬂuctuations in interest and foreign exchange rates. The Group uses the following hierarchy for determining and disclosing the fair value of ﬁnancial instruments by valuation technique: Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities. Level 2: other techniques for which all inputs that have a signiﬁcant effect on the recorded fair value are observable, either directly or indirectly. Level 3: techniques that use inputs that have a signiﬁcant effect on the recorded fair value that are not based on observable market data. The fair value of all derivative assets and liabilities have been determined under Level 2. 88 Breville Group Limited annual report 2020 Note 15. Financial risk management continued Instruments used by the group continued (i) Forward exchange contracts – cash ﬂow hedges The majority of the Group’s inventory purchases from suppliers are denominated in US dollars (US$). In order to manage exchange rate movements and to manage the inventory costing process, the Group has entered into forward exchange contracts to purchase USD, Euro and CHF. These contracts are hedging highly probable forecasted purchases and highly probable forecasted payments and they are timed to mature when settlement of purchases or the payments are scheduled to be made. All forward exchange contracts have 0-12 months maturity (2019: 0-12 months). The cash ﬂows are expected to occur between 0-12 months from 1 July 2020 (2019: 0-12 months) and the cost of sales and where applicable the sale of goods within the income statement will be affected in the next ﬁnancial year as the inventory is sold or the payments are made. At balance date, the details of outstanding contracts are: Buy USD Buy Euro Buy CHF Consolidated 30 June 2020 A$’000 30 June 2019 A$’000 115,446 3,265 17,222 107,844 15,779 15,432 The cash ﬂow hedges of the forecast purchases and forecast payments are considered to be highly effective and any gain or loss on the contracts is taken directly to equity. Where the contracts are hedging highly probable forecasted inventory purchases, when the inventory is received or the risk is assumed, the amount recognised in equity is adjusted to the inventory account in the balance sheet. Where the contracts are hedging highly probable forecasted payments, when the payments are made the amount recognised in equity is adjusted to the income statement. During the year $4,698,000 was credited to inventory (2019: $4,289,000 credited) and $2,254,000 was credited (2019: $2,411,000 credited) to equity in respect of the Group. At 30 June 2020, the Group had hedged 42% (2019: 50%) of its forecast foreign currency purchases extending to June 2021 (2019: June 2020). The remaining 58% (2019: 50%) is exposed to some foreign exchange risk, however is also naturally hedged within the Group. In respect of net derivative assets and liabilities above, being the fair value of forward exchange contracts designated as cash ﬂow hedges, a decrease of 10% in the US dollar exchange rate against local currencies, all other variables held constant, would result in an increase in equity of $10,649,000 (2019: $9,702,000). Conversely, an increase of 10% in the US dollar exchange rate against local currencies, all other variables held constant, would result in a decrease in equity of $8,633,000 (2019: $7,608,000). Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market conﬁdence and to sustain future development of the business. The Board seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. The Board monitors the Group’s gearing ratio and compliance with debt covenants on a regular basis. The Group’s gearing ratio at 30 June 2020 and 30 June 2019 is nil due to the Group being in a net cash position. The gearing ratio is deﬁned as Group net borrowings divided by capital employed (net borrowings plus shareholders’ equity). Credit risk Credit risk represents the loss that would be recognised if counterparties failed to perform as contracted. The credit risk on ﬁnancial assets (including trade receivables), excluding investments, of the Group that has been recognised on the balance sheet is the carrying value amount, net of any uncollectible receivables (measured on a collective basis). To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. The Group appropriately provides for expected credit losses on a timely basis, and in calculating the expected credit loss rates, the Group considers historic loss rates for each category of customers, adjusting for forward looking macroeconomic data. The Group trades only with recognised, creditworthy third parties. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit veriﬁcation procedures. In certain instances, where deemed appropriate, receivable insurance is acquired to offset the Group’s exposure to credit risk. Breville Group Limited annual report 2020 89 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 15. Financial risk management continued Credit risk continued Post COVID-19 a number of retailers/customers have experienced cashﬂow difﬁculties with an increased instance of delayed payments or bankruptcy. At the same time insurers have reduced insurable limits with a number of customers heightening the Group’s exposure to credit risk. In response the Group has increased its doubtful debt provision. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is appropriately provided for. With respect to credit risk arising from the other ﬁnancial assets of the Group, which comprise cash and cash equivalents and certain derivative instruments, the Group’s exposure to credit risk arises from default of the counter party with a maximum exposure equal to the carrying amount of these instruments. These counter parties are large multi-national banks. Since the Group trades only with recognised third parties, there is no requirement for collateral. Liquidity risk The Group’s objective is to maintain a balance between continuity of funding and ﬂexibility through the use of cash advances and bank overdrafts. Group facilities In June 2020, the Group reﬁnanced its existing debt facilities with ANZ bank including - an extension of committed base and seasonal multicurrency facilities from 1 to 3 years (30 June 2020: $246,000,000) - a $115,000,000 one year multicurrency facility, with a deﬁned extension mechanism. As at 30 June 2020, the Group did not have any outstanding debt relating to its cash advance facilities (2019: 100% of the Group’s borrowings were due to mature in greater than one year and nil in less than one year). Management monitors rolling forecasts of the Group’s liquidity reserve on the basis of expected cash ﬂows. See note 14 for details of available facilities. At 30 June 2020, the remaining contractual maturities of the Group’s ﬁnancial liabilities are: Less than 1 year Between 1 and 5 years Consolidated 30 June 2020 $’000 30 June 2019 $’000 148,907 15,499 164,406 123,164 50,678 173,842 The table below analyses the Group’s remaining contractual maturities by the type of ﬁnancial liability. The amounts disclosed are the contractual undiscounted cash ﬂows. Consolidated 30 June 2020 Consolidated 30 June 2019 Less than 1 year $’000 Between 1 and 5 years $’000 Total $’000 Less than 1 year $’000 Between 1 and 5 years $’000 Total $’000 Trade and other payables 147,891 15,499 163,390 122,700 3,395 126,095 Borrowings Other ﬁnancial liabilities - 1,016 - - - 1,016 - 464 47,283 47,283 - 464 148,907 15,499 164,406 123,164 50,678 173,842 Contractual maturities disclosed in the tables above include contracted interest payments. Total borrowings disclosed in note 14 exclude such contracted interest payments. 90 Breville Group Limited annual report 2020 Group structure Note 16. Interests in other entities The consolidated ﬁnancial statements include the ﬁnancial statements of Breville Group Limited and the subsidiaries listed in the following table. Legal entity Country of incorporation 30 June 2020 % 30 June 2019 % Note Equity interest (a) (a) (a) (b) Thebe International Pty Limited Investments not held directly by Breville Group Limited: Breville Holdings Pty Limited Breville Pty Limited Breville R&D Pty Limited Breville Group Performance Share Plan Trust Breville New Zealand Limited HWI International Limited Breville Services (Shenzhen) Company Limited Breville Holdings USA, Inc. Breville USA, Inc. Holding HWI Canada, Inc. HWI Canada, Inc. Breville Canada, L.P. BRG Appliances Limited Sage Appliances GmbH Sage Appliances France SaS Australia Australia Australia Australia Australia New Zealand Hong Kong China USA USA Canada Canada Canada UK Germany France 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 - Breville Group Limited, a company incorporated in Australia is the ultimate parent of the group. (a) Entities subject to reporting relief Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785, relief has been granted to Thebe International Pty Limited, Breville Pty Limited and Breville Holdings Pty Limited from the Corporations Act 2001 requirements for preparation, audit and lodgement of their ﬁnancial reports. As a condition of the instrument, Breville Group Limited and Thebe International Pty Limited entered into a Deed of Cross Guarantee on 4 November 1999. This deed was subsequently assumed by Breville Pty Limited and Breville Holdings Pty Limited under an assumption deed dated 19 December 2001. The effect of the deed is that Breville Group Limited has guaranteed to pay any deﬁciency in the event of winding up of either controlled entity or if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities have also given a similar guarantee in the event that Breville Group Limited is wound up or if it does not meet its obligation under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The entities comprising the “closed group” are Breville Group Limited, Thebe International Pty Limited, Breville Pty Limited and Breville Holdings Pty Limited. The consolidated statement of ﬁnancial position and income statement of the entities that are members of the “closed group” are detailed in notes 19(i) and 19(ii). (b) Breville Group Performance Share Plan Trust (refer note 13) A trust fund has been established with the appointment of an independent Trustee. The trust is funded by funds irretrievably contributed to it by the company and the Trustee uses these funds to either subscribe for a new issue of shares in the company or purchase shares on the ASX in order to fulﬁl its obligations under the Breville Group Limited Performance Rights Plan. The trust does not form part of the Breville Group Limited Australian tax consolidation group. During the year the Trustee of the Breville Group Performance Share Plan Trust subscribed to 331,155 ordinary shares of Breville Group Limited (2019: acquired 268,720 shares) in order to fulﬁl its obligations under the Breville Group Limited Performance Share Plan. The average value placed on these subscriptions was $16.60 per share (2019: average value placed on these acquisitions was $14.02 per share). Details are provided in note 18. Breville Group Limited annual report 2020 91 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 17. Parent entity information As at and throughout the ﬁnancial year ended 30 June 2020 the parent company of the Group was Breville Group Limited. Results of the parent entity Proﬁt of the parent entity Total comprehensive income of the parent entity Financial position of the parent entity Current assets Total assets Current liabilities Total liabilities Net assets Equity attributable to the equity holders of the parent Issued capital Employee equity beneﬁts reserve Retained earnings Total shareholders’ equity Contingencies 30 June 2020 $’000 30 June 2019 $’000 53,457 53,457 74,996 253,684 - - 47,220 47,220 66,862 147,376 (2,774) (2,774) 253,684 144,602 246,445 (1,721) 8,960 253,684 140,050 (1,800) 6,352 144,602 The parent company has guaranteed under the terms of an ASIC class order any deﬁciency of funds if Thebe International Pty Limited, Breville Pty Limited and Breville Holdings Pty Limited are wound up. No such deﬁciency currently exists. The parent company has issued corporate guarantees in favour of the HSBC local banks in the US, Canada and the UK which provides the day to day US, Canadian and UK transactional banking facilities. Tax consolidation Breville Group Limited and its 100% owned Australian resident subsidiaries (excluding the Breville Group Performance Share Plan Trust) have formed a tax consolidated Group with effect from 1 July 2003. The head entity, Breville Group Limited, and each subsidiary in the tax consolidated Group are required to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated Group continues to be a stand alone taxpayer in its own right. In addition to its own current and deferred tax amounts, Breville Group Limited also recognises: (a) the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated Group; and (b) assets or liabilities arising for Breville Group Limited under the tax funding agreement as amounts receivable from or payable to other entities in the Group. Members of the tax consolidated Group have entered into a tax funding agreement. The tax funding agreement supports the calculation of current tax liabilities (and assets) and deferred tax assets/liabilities on a stand-alone basis. Calculation is performed in accordance with AASB 112 Income Tax. The allocation of taxes under the tax funding agreement is recognised as an increase/decrease in the subsidiaries’ intercompany accounts with the tax consolidated Group head company, Breville Group Limited. No amounts have been recognised in the ﬁnancial statements in respect of the tax sharing agreement should the head entity default on its tax payment obligations on the basis that the possibility of default is remote. 92 Breville Group Limited annual report 2020 Other Note 18. Share-based payments Performance rights plan (LTI) and ﬁxed deferred remuneration plan Under the performance rights plan (LTI) and ﬁxed deferred remuneration plan participants are issued with rights over the ordinary shares of Breville Group Limited issued in accordance with the Breville Group Limited Share Plan. See pages 29 and 31 of the Remuneration report for details of the two plans. At 30 June 2020 there were 1,380,127 (2019: 1,106,255) total rights outstanding under both plans, 1,183,900 (2019: 1,046,255) under the performance rights plan (LTI) and 196,227 (2019: 60,000) under the ﬁxed deferred remuneration plan. The expense recognised in the income statement in relation to share-based payments is disclosed in note 3(e). Recognition and measurement Performance rights issued to employees (including key management personnel) are accounted for as share- based payments, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions). The cost of these equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value has been determined by an external valuer using a Black Scholes or Monte-Carlo model, further details of which are given below. Market based performance conditions are reﬂected within the fair value at grant date. Service and non-market performance conditions are not taken into account when determining the grant date fair value of the awards. The likelihood of the conditions being met is assessed as part of the Group’s best estimate of the number of equity instruments that will ultimately vest. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulﬁlled (the vesting period), ending on the date on which the relevant employees become fully entitled to the award (the vesting date). At each subsequent reporting date until vesting, the cumulative charge to the income statement is the product of (i) the grant date fair value of the award; (ii) the current best estimate of the number of awards that will vest, taking into account such factors as the likelihood of employee turnover during the vesting period and the likelihood of non-market performance conditions being met; and (iii) the expired portion of the vesting period. The charge to the income statement for the period is the cumulative amount as calculated above less the amounts already charged in previous periods. There is a corresponding entry to equity. No expense is recognised for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is satisﬁed, provided that all other performance and/or service conditions are satisﬁed. Rights granted and outstanding under the performance rights plan (LTI) The following table illustrates the number and weighted average exercise prices (“WAEP”) of and movements in performance rights issued during the year: 30 June 2020 30 June 2019 Number of performance rights Note Number of performance rights WAEP WAEP Outstanding at the beginning of the year 1,046,255 0.0000 978,440 0.0000 Performance rights granted during the year Performance rights exercised during the year Performance rights lapsed during the year Outstanding at the end of the year (a) 1,183,900 Exercisable at the end of the year - (7,600) 476,400 0.0000 351,700 0.0000 (331,155) 0.0000 (268,720) 0.0000 0.0000 0.0000 - (15,165) 1,046,255 - 0.0000 0.0000 - Breville Group Limited annual report 2020 93 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 18. Share-based payments continued Rights outstanding under the performance rights plan (LTI) Notes (a) The outstanding balance as at 30 June 2020 is represented by: Number of performance rights Note Grant date Vesting date Expiry date WAEP $ Fair value at grant date ($) 109,700 97,000 96,300 116,700 116,000 114,900 19,800 19,800 19,700 159,200 157,400 157,400 1,183,900 (i) (ii) (iii) (iv) (v) (vi) (iv) (v) (vi) (vii) (viii) (ix) 9-Aug-16 31-Aug-20 13-Nov-17 28-Aug-20 2-Oct-20 1-Oct-20 13-Nov-17 27-Aug-21 1-Oct-21 11-Sep-18 28-Aug-20 11-Sep-18 27-Aug-21 11-Sep-18 29-Aug-22 16-Nov-18 28-Aug-20 16-Nov-18 27-Aug-21 16-Nov-18 29-Aug-22 11-Oct-19 27-Aug-21 11-Oct-19 29-Aug-22 11-Oct-19 29-Aug-23 1-Oct-20 1-Oct-21 3-Oct-22 1-Oct-20 1-Oct-21 3-Oct-22 1-Oct-21 3-Oct-22 2-Oct-23 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 3.51 6.81 6.68 7.07 6.81 6.58 7.07 6.81 6.58 6.51 6.81 7.06 (i) These performance rights vest based on the Group’s total shareholder return (TSR) from 30 June 2016 to 30 June 2020 applying both an absolute test and a relative test measured against a TSR peer Group. (ii) These performance rights vest based on the Group’s total shareholder return (TSR) from 30 June 2017 to 30 June 2020 applying both an absolute test and a relative test measured against a TSR peer Group. (iii) These performance rights vest based on the Group’s total shareholder return (TSR) from 30 June 2017 to 30 June 2021 applying both an absolute test and a relative test measured against a TSR peer Group. (iv) These performance rights vest based on the Group’s total shareholder return (TSR) from 30 June 2018 to 30 June 2020 applying both an absolute test and a relative test measured against a TSR peer Group. (v) These performance rights vest based on the Group’s total shareholder return (TSR) from 30 June 2018 to 30 June 2021 applying both an absolute test and a relative test measured against a TSR peer Group. (vi) These performance rights vest based on the Group’s total shareholder return (TSR) from 30 June 2018 to 30 June 2022 applying both an absolute test and a relative test measured against a TSR peer Group. (vii) These performance rights vest based on the Group’s total shareholder return (TSR) from 30 June 2019 to 30 June 2021 applying both an absolute test and a relative test measured against a TSR peer Group. (viii) These performance rights vest based on the Group’s total shareholder return (TSR) from 30 June 2019 to 30 June 2022 applying both an absolute test and a relative test measured against a TSR peer Group. (ix) These performance rights vest based on the Group’s total shareholder return (TSR) from 30 June 2019 to 30 June 2023 applying both an absolute test and a relative test measured against a TSR peer Group. 94 Breville Group Limited annual report 2020 Note 18. Share-based payments continued Rights granted and outstanding under the ﬁxed deferred remuneration plan The following table illustrates the number and weighted average exercise prices (“WAEP”) of and movements in rights issued during the year: 30 June 2020 30 June 2019 Note Number of share rights Outstanding at the beginning of the year Rights granted during the year Rights exercised during the year Rights lapsed during the year 60,000 136,227 - - Outstanding at the end of the year (b) 196,227 Exercisable at the end of the year - WAEP 0.0000 0.0000 0.0000 0.0000 0.0000 - Number of share rights - 60,000 - - 60,000 - WAEP 0.0000 0.0000 0.0000 0.0000 0.0000 - Rights outstanding under the ﬁxed deferred remuneration plan Notes (b) The outstanding balance as at 30 June 2020 is represented by: Number of performance rights Note Grant date Vesting date Expiry date WAEP $ Fair value at grant date ($) 60,000 16,467 29,940 29,940 29,940 29,940 196,227 (i) (ii) (iii) (iv) (v) (vi) 13-Nov-17 31-Aug-20 29-Jan-20* 25-Aug-20 29-Jan-20* 25-Aug-21 29-Jan-20* 25-Aug-22 29-Jan-20* 25-Aug-23 29-Jan-20* 25-Aug-24 1-Oct-20 1-Oct-20 1-Oct-21 3-Oct-22 2-Oct-23 1-Oct-24 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 10.12 16.70 16.70 16.70 16.70 16.70 * material terms and conditions of the grant were agreed in January 2020 but administrative ﬁnalisation of grants were delayed due to COVID-19 priorities. In line with AASB2, fair value was based on price at time when grant was agreed when VWAP for H1 FY20 was $16.70. (i) Rights granted as ﬁxed deferred remuneration with vesting condition that the participant must still be employed by the company on 30 June 2020. (ii) Rights granted as ﬁxed deferred remuneration with vesting condition that the participant must complete the service period between 26 August 2019 – 25 August 2020. (iii) Rights granted as ﬁxed deferred remuneration with vesting condition that the participant must complete the service period between 26 August 2020 – 25 August 2021. (iv) Rights granted as ﬁxed deferred remuneration with vesting condition that the participant must complete the service period between 26 August 2021 – 25 August 2022. (v) Rights granted as ﬁxed deferred remuneration with vesting condition that the participant must complete the service period between 26 August 2022 – 25 August 2023. (vi) Rights granted as ﬁxed deferred remuneration with vesting condition that the participant must complete the service period between 26 August 2023 – 25 August 2024. Breville Group Limited annual report 2020 95 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 18. Share-based payments continued Rights granted under the performance rights plan and ﬁxed deferred remuneration plan The average remaining contractual life for the performance and the ﬁxed deferred remuneration rights outstanding at 30 June 2020 is between 1 and 4 years (2019: 1 and 4 years). The exercise price for performance rights and the ﬁxed deferred remuneration rights outstanding at the end of the year was $nil (2019: $nil). The weighted average fair value of performance rights granted under the performance rights plan during the year was $6.83 (2019: $6.82). The fair value of the equity-settled performance rights granted under the performance rights plan is estimated as at the date of grant using a Black-Scholes or Monte-Carlo option-pricing model, taking into account the terms and conditions upon which the options and performance rights were granted. The following table lists the inputs to the model used for the grants during the year ended 30 June 2020 and 30 June 2019: 30 June 2020 (Monte- Carlo) 30 June 2020 (Monte- Carlo) 30 June 2020 (Monte- Carlo) 30 June 2019 (Monte- Carlo) 30 June 2019 (Monte- Carlo) 30 June 2019 (Monte- Carlo) Grant date 11 Oct 19 11 Oct 19 11 Oct 19 11 Sept 18/ 16 Nov 18 11 Sept 18/ 16 Nov 18 11 Sept 18/ 16 Nov 18 Vesting date Dividend yield (%) Expected volatility (%) Historical volatility (%) Risk-free interest rate (%) Expected life of performance right Performance right exercise price ($) Weighted average share price ($)1 Weighted average fair value ($)1 1 At grant date 27 Aug 21 29 Aug 22 29 Aug 23 28 Aug 20 27 Aug 21 29 Aug 22 2.50 33.00 33.00 0.70 2.50 33.00 33.00 0.70 2.50 33.00 33.00 0.70 3.50 25.00 25.00 2.00 3.50 25.00 25.00 2.00 3.50 25.00 25.00 2.00 1.8 years 2.8 years 3.8 years 1.8 years 2.8 years 3.8 years 0.00 0.00 0.00 0.00 0.00 0.00 16.70 16.70 16.70 11.59 11.59 11.59 6.51 6.81 7.06 7.07 6.81 6.58 The expected life of the performance rights is based on historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reﬂects the assumption that the historical volatility is indicative of future trends, which may also not necessarily be the actual outcome. No other features of performance rights granted were incorporated into the measurement of fair value. The weighted average fair value of share rights granted under the ﬁxed deferred remuneration plan during the year was $16.70 (2019: nil). 96 Breville Group Limited annual report 2020 Note 19. Related party transactions (i) Consolidated statement of ﬁnancial position for class order closed group Current assets Cash and cash equivalents Trade and other receivables Inventories Other ﬁnancial assets Total current assets Non-current assets Investments Right-of-use-assets Current tax assets Plant and equipment Intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Current tax liabilities Provisions Lease liabilities Other ﬁnancial liabilities Total current liabilities Non-current liabilities Other payables Lease liabilities Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity 30 June 2020 $’000 30 June 2019 $’000 43,991 59,111 28,491 2,245 24,059 47,401 34,286 2,016 133,838 107,762 166,176 10,826 1,545 9,588 114,890 303,025 436,863 71,773 - 7,717 2,949 1,016 83,455 2,476 13,439 2,674 911 19,500 102,955 333,908 246,445 (861) 88,324 333,908 70,028 - - 8,867 109,336 188,231 295,993 57,689 2,932 6,540 - 463 67,624 2,862 - 4,307 864 8,033 75,657 220,336 140,050 (713) 80,999 220,336 Breville Group Limited annual report 2020 97 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 19. Related party transactions continued (ii) Consolidated income statement for class order closed group Proﬁt from ordinary activities before income tax expense Income tax expense relating to ordinary activities Net proﬁt Accumulated proﬁts at the beginning of the year Adjustment due to change in accounting standard (AASB 16) Dividends paid or reinvested Accumulated proﬁts at the end of the year 30 June 2020 $’000 30 June 2019 $’000 84,211 (23,449) 60,762 80,999 (2,588) (50,849) 88,324 80,910 (23,250) 57,660 68,872 - (45,533) 80,999 (a) Ultimate controlling entity The ultimate controlling entity of the group in Australia is Breville Group Limited. (b) Wholly owned group transactions During the ﬁnancial period, loans were advanced and repayments received on inter-Group accounts with subsidiaries in the wholly owned Group. These transactions were undertaken on commercial terms and conditions. (c) Key management personnel Details relating to key management personnel, including remuneration paid, are included in the Remuneration Report and below: Compensation by category: key management personnel Short-term Post-employment Other long-term LTI Share-based payment Total Consolidated Note 30 June 2020 $ 30 June 2019 $ (i) 4,769,722 5,006,165 187,262 35,278 1,177,713 6,169,975 208,698 73,490 982,792 6,271,146 (i) This comprises deﬁned contribution plans expense of $187,262 (2019: $208,698). 98 Breville Group Limited annual report 2020 Note 20. Auditor’s remuneration Amounts received or due and receivable from the entity and any other entity in the consolidated entity: PricewaterhouseCoopers Australia – primary auditors Parent entity Audit or review services Taxation and accounting advisory services Network Firms of PricewaterhouseCoopers Australia Controlled entities Audit or review services Taxation and accounting advisory services Total auditor’s remuneration Consolidated 30 June 2020 $ 30 June 2019 $ 524,956 101,468 431,424 138,740 154,869 390,456 139,701 521,416 1,171,749 1,231,281 The increase in the Group’s audit fee between FY19 to FY20 is largely reﬂective of additional procedures and audit effort required over the expanded European geographies. For FY20, the ratio between audit and non-audit fees is 1.4 to 1.0. A portion of the non-audit fees associated with taxation and accounting advisory services in FY20 are non- recurring in nature, relating to ATO Top 1000 review, ChefSteps acquisition, impact of US tariffs and tax compliance in Europe. Note 21. Contingencies Indemnity agreements have been entered into with certain ofﬁcers of the Group in respect of expenses and liabilities they incur in their ofﬁcial capacities. No monetary limit applies to these agreements and no known obligations have emerged as a result of these agreements. Cross guarantees given by Breville Group Limited, Thebe International Pty Limited, Breville Holdings Pty Limited and Breville Pty Limited are described in note 16(a). Breville Group Limited has issued corporate guarantees in favour of the local bank (HSBC) which provides the day to day US, Canadian, UK and German transactional banking facilities. Breville Group Limited annual report 2020 99 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 22. AASB 16 Leases This note provides information for leases where the group is a lessee. The Group does not act as a lessor under any circumstances. a) Amounts recognised in the consolidated statement of ﬁnancial position Right-of-use assets Buildings Vehicles Total Lease liabilities Current Non-current Total Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 17,186 12 17,198 (i) - - - Consolidated 30 June 2020 $’000 30 June 2019 $’000 7,382 16,964 24,346 - - - (i) Additions to the right-of-use assets during FY20 were $4,029,000 b) Amounts recognised in the consolidated income statement Consolidated Note 30 June 2020 $’000 30 June 2019 $’000 Depreciation charge of right-of-use assets Buildings Vehicles Total Other expenses 3(c) Interest expense on lease liabilities (included in ﬁnance costs) 3(f) Expenses relating to short-term and low value assets (included in premises, lease & utilities expenses) 6,328 49 6,377 1,588 114 - - - - - The total cash outﬂow for leases during FY20 was $8,913,000 (includes principal elements of lease payments of $7,325,000 (refer consolidated cash ﬂow statement) plus interest expense on lease liabilities of $1,588,000). As at 30 June 2020, the Group’s leases do not contain any variable payment terms. 100 Breville Group Limited annual report 2020 Note 22. AASB 16 Leases continued c) The Group’s leasing activities and how these are accounted for The Group leases various ofﬁce buildings and motor vehicles, with rental contracts typically spanning ﬁxed periods of 1 to 6 years, with some having options to extend. Contracts may contain both lease and non-lease components. The group allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices. However, for leases of real estate for which the group is a lessee, it has elected not to separate lease and non-lease components and instead accounts for these as a single lease component. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes. Until FY19 and prior, leases were classiﬁed as operating leases or ﬁnancial leases under AASB 117. From 1 July 2019, leases are recognised as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by the Group. Assets and liabilities arising from a lease are initially measured on a present value basis. Lease liabilities include the net present value of the following lease payments: - - ﬁxed payments (including in-substance ﬁxed payments), less any lease incentives receivable variable lease payment that are based on an index or a rate, initially measured using the index or rate as at the commencement date - amounts expected to be payable by the group under residual value guarantees - the exercise price of a purchase option if the group is reasonably certain to exercise that option, and - payments of penalties for terminating the lease, if the lease term reﬂects the Group exercising that option. Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the lessee’s incremental borrowing rate is used, being the rate that the individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. To determine the incremental borrowing rate, the Group: - where possible, uses recent third-party ﬁnancing received by the individual lessee as a starting point, adjusted to reﬂect changes in ﬁnancing conditions since third party ﬁnancing was received - uses a build-up approach that starts with a risk-free interest rate adjusted for credit risk for leases held by Breville Group Limited, which does not have recent third party ﬁnancing, and - makes adjustments speciﬁc to the lease, e.g. term, country, currency and security. Lease payments are allocated between principal and ﬁnance cost. The ﬁnance cost is charged to proﬁt or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Right-of-use assets are measured at cost comprising the following: - the amount of the initial measurement of lease liability - any lease payments made at or before the commencement date less any lease incentives received - any initial direct costs, and - restoration costs. Right-of-use assets are generally depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in proﬁt or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of ofﬁce furniture. Breville Group Limited annual report 2020 101 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 22. AASB 16 Leases continued d) Impact of the adoption of AASB 16 Leases This note explains the impact of the adoption of AASB 16 Leases in FY20 on the Group’s ﬁnancial statements where the Group is a lessee. The Group does not act as a lessor under any circumstances. As indicated in Note 24(d), the Group has adopted AASB 16 Leases retrospectively from 1 July 2019, but has not restated comparatives for the 30 June 2019 reporting period, as permitted under the speciﬁc transition provisions in the standard. The reclassiﬁcations and the adjustments arising from the new leasing rules are therefore recognised in the opening consolidated statement of ﬁnancial position on 1 July 2019. On adoption of AASB 16 Leases, the Group recognised right-of-use assets and lease liabilities in relation to leases which had previously been classiﬁed as ‘operating leases’ under the principles of AASB 117 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate as of 1 July 2019. The weighted average lessee’s incremental borrowing rate applied to the lease liabilities on 1 July 2019 was 5.7%. Practical expedients applied In applying AASB 16 Leases for the ﬁrst time, the Group has used the following practical expedients permitted by the standard: - applying a single discount rate to a portfolio of leases with reasonably similar characteristics - relying on previous assessments on whether leases are onerous as an alternative to performing an impairment review – there were no onerous contracts as at 1 July 2019 - accounting for operating leases with a remaining lease term of less than 12 months as at 1 July 2019 as short- term leases - excluding initial direct costs for the measurement of the right-of-use asset at the date of initial application, and - using hindsight in determining the lease term where the contract contains options to extend or terminate the lease. The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the Group relied on its assessment made applying AASB 117 and Interpretation 4 Determining whether an Arrangement contains a Lease. Measurement of lease liabilities Operating lease commitments disclosed as at 30 June 2019 Discounted using the lessee’s incremental borrowing rate at the date of initial application Less short-term and low value leases not recognised as a liability Lease liability recognised as at 1 July 2019 Of which are: Current lease liabilities Non-current lease liabilities Lease liability recognised as at 1 July 2019 Measurement of right-of-use assets 30 June 2020 $’000 31,466 27,166 (157) 27,009 6,661 20,348 27,009 The associated right-of-use assets for building leases were measured on a retrospective basis as if the new rules had always been applied. Other right-of use assets were measured at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognised in the balance sheet as at 1 July 2019. 102 Breville Group Limited annual report 2020 Note 22. AASB 16 Leases continued d) Impact of the adoption of AASB 16 Leases continued Adjustments recognised in the consolidated statement of ﬁnancial position on 1 July 2019 The change in accounting policy affected the following items in the consolidated statement of ﬁnancial position on 1 July 2019: - Right-of-use assets – increase by $19,396,000 - Deferred tax assets – increase by $1,732,000 - Lease liabilities – increase $27,009,000 - Trade and other payables – decrease by $2,693,000 - Retained earnings – decrease $3,188,000 Impact of the adoption of AASB 16 Leases to the consolidated income statement for FY20 The following table summarises the impact of adopting AASB 16 Leases on the key ﬁnancial metrics within the consolidated income statement of the group for the year ended 30 June 2020. $’000 unless speciﬁed Revenue Gross proﬁt Premises, leases and utilities expenses Other operating expenditure EBITDA Depreciation and amortisation EBIT Net ﬁnance costs Proﬁt before income tax Income tax expense Net proﬁt after tax Earnings per share (EPS) cents per share Note 23. Signiﬁcant events after year end Year ended 30 June 2020 Post AASB 16 as reported Year ended 30 June 2020 Pre AASB 16 952,244 320,560 (12,646) (181,393) 126,521 (25,582) 100,939 (8,176) 92,763 (26,562) 66,201 50.5 952,244 320,560 (20,974) (181,393) 118,193 (19,205) 98,988 (6,588) 92,400 (26,453) 65,947 50.3 Variance - - 8,328 - 8,328 (6,377) 1,951 (1,588) 363 (109) 254 0.2 cps No matters or circumstances have arisen since the end of the year which signiﬁcantly affected or may affect the operations of the consolidated entity. The ﬁnancial report of Breville Group Limited for the year ended 30 June 2020 was authorised for issue in accordance with a resolution of the directors on 13 August 2020. Breville Group Limited annual report 2020 103 Notes to the ﬁnancial statements for the year ended 30 June 2020 Note 24. Other accounting policies a) Foreign currency translation (i) Functional and presentation currency Both the functional and presentation currency of Breville Group Limited and its Australian subsidiaries are Australian dollars (AUD or A$). Each entity in the Group determines its own functional currency and items included in the ﬁnancial statements of each entity are measured using that functional currency. (ii) Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. The functional currency of the foreign subsidiaries is either: • USD - United States dollar (Breville Holdings USA, Inc. and Breville USA, Inc.); • HKD - Hong Kong dollar (HWI International Limited); • CAD - Canadian dollar (HWI Canada, Inc., Holding HWI Canada, Inc. and Breville Canada, L.P.); • NZD - New Zealand dollar (Breville New Zealand Limited); • GBP - British pound (BRG Appliances Limited); • RMB - Chinese Renminbi (Breville Services (Shenzhen) Company Limited); and • EUR – Euro (Sage Appliances GmbH and Sage Appliances France SaS). As at the reporting date the assets and liabilities of these foreign subsidiaries are translated into the presentation currency of Breville Group Limited. They are translated at the rate of exchange ruling at the balance sheet date and the income statements are translated at the weighted average exchange rates for the year. The exchange differences arising on the retranslation of the ﬁnancial statements of foreign subsidiaries are taken directly to a separate component of equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the income statement. (iii) Disposal of foreign operations In some instances companies in the Breville Group provide intra Group funding to other Group entities by way of permanent equity loans. In these instances any foreign exchange movements are recognised in equity (foreign currency translation reserve) as these equity loans are considered to form part of the net investment in the subsidiary. b) Investments and other ﬁnancial assets Financial assets in the scope of AASB 139 Financial Instruments: Recognition and Measurement are classiﬁed as either ﬁnancial assets at fair value through proﬁt or loss, loans and receivables or held-to-maturity investments, as appropriate. When ﬁnancial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through the income statement, directly attributable transactions costs. The Group determines the classiﬁcation of its ﬁnancial assets after initial recognition and, when allowed and appropriate, re-evaluates this designation at each year end. All regular way purchases and sales of ﬁnancial assets are recognised on the trade date i.e. the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of ﬁnancial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the marketplace. 104 Breville Group Limited annual report 2020 Note 24. Other accounting policies continued b) Investments and other ﬁnancial assets continued (i) Held to maturity investments Non-derivative ﬁnancial assets with ﬁxed or determinable payments and ﬁxed maturity are classiﬁed as held-to-maturity when the Group has the positive intention and ability to hold to maturity. Investments intended to be held for an undeﬁned period are not included in this classiﬁcation. Investments that are intended to be held-to-maturity, such as bonds, are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts. For investments carried at amortised cost, gains and losses are recognised in the income statement when the investments are derecognised or impaired, as well as through the amortisation process. (ii) Loans and receivables Loans and receivables are non-derivative ﬁnancial assets with ﬁxed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. c) Other Taxes Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST) or value added tax (VAT) except: • where the GST/VAT incurred on the purchase of goods and services is not recoverable from the taxation authority, in which case the GST/VAT is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and • receivables and payables, which are stated with the applicable amount of GST/VAT included. The net amount of GST/VAT recoverable/payable is included in receivables/payables in the statement of ﬁnancial position. Cash ﬂows are included in the cash ﬂow statement on a gross basis and the GST/VAT component of cash ﬂows arising from investing and ﬁnancing activities are classiﬁed as operating cash ﬂows. Commitments and contingencies are disclosed net of recoverable/payable GST/VAT. d) New accounting standards and interpretations (i) Changes to accounting policy and disclosures The Group had to change its accounting policies as a result of adopting AASB 16 Leases. The Group elected to adopt the new rules retrospectively but recognised the cumulative effect of initially applying the new standard on 1 July 2019. For the full impact assessment of adopting AASB 16 Leases, please refer to Note 22. Besides AASB 16 Leases, the other accounting policies of the Group are consistent with those of the previous ﬁnancial year. The Group adopted all other new and amended Australian Accounting Standards and Interpretations that became applicable during the current ﬁnancial year. Besides AASB 16 Leases, the adoption of other Standards and Interpretations did not have a signiﬁcant impact on the Group’s ﬁnancial results or statement of ﬁnancial position. Breville Group Limited annual report 2020 105 Directors’ declaration In accordance with a resolution of the directors of Breville Group Limited, I state that: 1. In the opinion of the directors: (a) the ﬁnancial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s ﬁnancial position as at 30 June 2020 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; (b) the ﬁnancial statements and notes also comply with International Financial Reporting Standards as disclosed in note 1; (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and (d) as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identiﬁed in note 16(a) 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. 2. 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 ﬁnancial year ended 30 June 2020. On behalf of the board Steven Fisher Non-executive chairman Sydney 13 August 2020 106 Breville Group Limited annual report 2020 Independent auditor’s report Independent auditor’s report To the members of Breville Group Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Breville Group Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: • giving a true and fair view of the Group’s financial position as at 30 June 2020 and of its financial performance for the year then ended complying with Australian Accounting Standards and the Corporations Regulations 2001. • What we have audited The Group financial report comprises: • • • • • the consolidated statement of financial position as at 30 June 2020 the consolidated statement of comprehensive income for the year then ended the consolidated cash flow statement for the year then ended the consolidated income statement for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies • the directors’ declaration Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. 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 believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of 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 also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Breville Group Limited annual report 2020 107 108Breville Group Limited annual report 2020Our audit approachAn audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report.We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates.• For the purpose of our audit we used overall Group materiality of $4.6 million, which represents approximately 5% of the Group’s profit before tax.• We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole.• We chose Group profit before tax because, in our view, it is the benchmark against which the performance of the Group is most commonly measured. We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds.• Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events.• The Group comprises entities located in Australia/New Zealand, North America and the ‘Rest of World’ comprising its entities in Europe, Hong Kong and China with the most financially significant operations being Breville Australia and Breville United States. • Our team from the Australian PwC firm undertook all audit procedures to provide us with sufficient and appropriate audit evidence to express an opinion on the Group’s financial report as a whole.MaterialityAudit scopeIndependent auditor’s report continuedKey audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit 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. Further, any commentary on the outcomes of a particular audit procedure is made in that context. Key audit matter Estimated recoverable amount of goodwill and indefinite life intangibles (Refer to note 10) $98.2m The Group recognises assets for goodwill and indefinite life intangibles in respect of its brand names. Under Australian Accounting Standards, the Group is required to test the goodwill and indefinite lived intangible assets annually for impairment, irrespective of whether there are indications of impairment. This assessment is inherently complex and judgemental, and requires judgement by the Group in forecasting the operational cash flows of the cash generating units of the Group, and determining discount rates and terminal value growth rates used in the discounted cash flow models used to assess impairment (the models). The recoverable amount of goodwill and other indefinite life intangible assets was a key audit matter given the: - financial significance of the intangible assets to the statement of financial position; and - judgement applied by the Group in completing the impairment assessment. How our audit addressed the key audit matter We focused our efforts on developing an understanding and testing the overall calculation and methodology of the Group’s impairment assessment, including identification of the cash generating units of the Group for the purposes of impairment testing, and the attribution of net assets, revenues and costs to those components. In obtaining sufficient audit evidence, our procedures included, amongst others: - assessing the cash flow forecasts included in the models with reference to actual historical earnings; - testing the mathematical calculations within the models; - assessing the terminal value growth rates by comparing to external information sources; - assessing the reasonableness of the discount rates by comparing them to market data and comparable companies, with the assistance of our valuation experts; - performing sensitivity analyses over the key assumptions used in the models; and - evaluating the related financial statement disclosures for consistency with Australian Accounting Standards requirements. Breville Group Limited annual report 2020 109 Independent auditor’s report continued Key audit matter Estimated recoverable amount of capitalised development costs (Refer to note 9) $44.2m The Group recognises assets for development costs which meet the recognition criteria required by Australian Accounting Standards. Development costs capitalised in respect of projects that have not yet been completed are referred to in the Australian Accounting Standards as ‘intangible assets not yet available for use’ and are required to be tested annually for impairment, irrespective of whether there are indicators of impairment. This assessment is inherently complex and judgemental, and requires judgement by the Group in forecasting the total costs, economic returns and operational cash flows of these projects and in determining discount rates used in the discounted cash flow models used to assess impairment (the models). The recoverable amount of development costs was a key audit matter given the: - financial significance of these assets to the statement of financial position and the impairment recognised to the statement of comprehensive income; and - judgement applied by the Group in completing the impairment assessment. How our audit addressed the key audit matter We focused our efforts on developing an understanding and testing the overall calculation and methodology of the Group’s impairment assessment, including identifying the projects with the highest magnitudes of capitalised costs. In obtaining sufficient audit evidence, our procedures included, amongst others: - assessing the cash flow forecasts included in the models with reference to actual historical accuracy in forecasting costs and economic returns for past projects; - testing the mathematical calculations within the models; - assessing the reasonableness of the discount rates by comparing them to market data and comparable companies, with the assistance of our valuation experts; - considering the allocation and presentation of the impairment charge recognised; and - performing sensitivity analyses over the key assumptions used in the models; and - evaluating the related financial statement disclosures for consistency with Australian Accounting Standards requirements. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 30 June 2020, but does not include the financial report and our auditor’s report thereon. Prior to the date of this auditor’s report, the other information we obtained included Company information, Directors’ report and Corporate governance statement. We expect the remaining other information to be made available to us after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. 110 Breville Group Limited annual report 2020 In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, 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. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are 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 the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and 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 the 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: https://www.auasb.gov.au/admin/file/content102/c3/ ar1_2020.pdf. This description forms part of our auditor’s report. Breville Group Limited annual report 2020 111 Independent auditor’s report continued Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 26 to 47 of the directors’ report for the year ended 30 June 2020. In our opinion, the remuneration report of Breville Group Limited for the year ended 30 June 2020 complies with section 300A of the Corporations Act 2001. 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 responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Mark Dow Partner Sydney 13 August 2020 112 Breville Group Limited annual report 2020 Auditor’s independence declaration Auditor’s Independence Declaration As lead auditor for the audit of Breville Group Limited for the year ended 30 June 2020, I declare that to the best of my knowledge and belief, there have been: a. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b. no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Breville Group Limited and the entities it controlled during the period. Mark Dow Partner PricewaterhouseCoopers Sydney 13 August 2020 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Breville Group Limited annual report 2020 113 Shareholder information Substantial shareholders notices as at 21 August 2020 The following information is extracted from the company’s register of substantial shareholder notices: Name S. Lew Custodians Pty Limited (a) Bennelong Australian Equity Partners Ltd Matthews International Capital Management, LLC Number of ordinary shares % of issued ordinary shares 43,638,384 12,121,129 8,370,474 31.96% 8.88% 6.13% (a) The interests of S. Lew Custodians Pty Limited include a deemed relevant interest in the 36,499,538 shares held by Premier Investments and shares held by other related parties of the group. Distribution of shareholdings as at 21 August 2020 Size of holding 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total shareholders Number of ordinary shareholders with less than a marketable parcel Voting rights All ordinary shares issued by Breville Group Limited carry one vote per share without restriction. Ordinary shareholders 1,673 1,281 268 201 44 3,467 757 114 Breville Group Limited annual report 2020 Twenty largest shareholders by registered holder as at 21 August 2020 Name HSBC Custody Nominees (Australia) Limited Premier Investments Limited J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited National Nominees Limited SL Superannuation No1 Pty Ltd Lew Family Investments Pty Ltd BNP Paribas Noms Pty Ltd Lew Family Investments Ltd BNP Paribas Nominees Pty Ltd Premier Investments Ltd S L Nominees Pty Ltd Mirrabooka Investments Limited HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited Brisopt Nominees Pty Ltd Nofusa Pty Ltd Quotidian No 2 Pty Ltd Mr Scott Laurence Brady Amcil Limited Total Unquoted equity securities as at 21 August 2020 Rights issued under the Breville Group Performance Rights Plan and Fixed Deferred Remuneration Plan to take up ordinary shares Shares 39,903,834 35,761,415 15,928,242 10,629,833 6,158,384 3,000,000 1,891,461 1,581,209 1,535,718 985,232 738,123 711,667 600,000 535,739 414,752 404,358 351,764 301,764 251,927 249,205 % IC 29.22 26.19 11.67 7.78 4.51 2.20 1.39 1.16 1.12 0.72 0.54 0.52 0.44 0.39 0.30 0.30 0.26 0.22 0.18 0.18 121,934,627 89.30 Number on issue Number of holders 1,380,127* 44 * Number of unissued ordinary shares under the performance rights plan (LTI) and ﬁxed deferred remuneration plan. Breville Group Limited annual report 2020 115 ABN Breville Group Limited ABN 90 086 933 431 Share register Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Enquiries within Australia: (02) 8280 7111 Enquiries outside Australia: (+61 2) 8280 7111 Website: linkmarketservices.com.au Auditors PricewaterhouseCoopers One International Towers Sydney Watermans Quay Barangaroo NSW 2000 Australia Bankers Australia and New Zealand Banking Group Limited 242 Pitt Street Sydney NSW 2000 Company information Directors Steven Fisher Non-executive chairman Timothy Antonie Non-executive director Peter Cowan Non-executive director Sally Herman Non-executive director Dean Howell Non-executive director Lawrence Myers Non-executive director Lead independent director Kate Wright Non-executive director Company secretaries Sasha Kitto Craig Robinson Registered ofﬁce and principal place of business Ground Floor, Suite 2 170-180 Bourke Road Alexandria NSW 2015 Telephone (+61 2) 9384 8100 Company websites brevillegroup.com breville.com kambrook.com.au sageappliances.com 116 Breville Group Limited annual report 2020 This report is printed on ecoStar+ which is an environmentally responsible paper made carbon neutral, and the ﬁbre source is FSC Recycled certiﬁed. ecoStar+ is manufactured from 100% post consumer recycled paper in a process chlorine free environment under the ISO 14001 environmental management system. 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