BKW
Annual Report 2016

Plain-text annual report

ABN 17 000 028 526 ANNUAL REPORT 2016 BRICKWORKS LIMITED AND CONTROLLED ENTITIES A.B.N. 17 000 028 526 FIVE YEAR SUMMARY 2012 $000 2013 $000 2014 $000 2015 $000 2016 $000 Growth % Total revenue 556,911 606,509 670,268 723,611 750,985 Building Products revenue 547,590 568,654 636,895 700,871 748,128 Earnings before interest and tax (excluding significant items) Building products Property Waste management Investments Associates Head office and other expenses 28,538 16,438 2,571 1,081 66,619 (6,796) 32,802 49,206 413 493 59,509 (7,384) 45,081 61,013 1,414 262 44,382 (8,945) 56,364 61,735 2,649 280 54,574 (9,699) 75,381 72,105 1,346 442 59,117 (12,479) 4% 7% 34% 17% (49%) 58% 8% (29%) Total EBIT (excluding significant items) 108,451 135,039 143,207 165,903 195,912 18% Borrowing costs Income tax (25,215) (4,366) (18,800) (16,191) (18,073) (23,845) (19,482) (26,122) (14,080) (34,753) 28% (33%) Net profit after income tax (excluding significant items) Significant items Washington H Soul Pattinson & Co. Write down of assets to recoverable value - Property, plant & equipment - Building products inventory Costs related to JV and business acquisition Costs on closure of manufacturing facility and site relocation costs Costs on start up of manufacturing facilities Impairment of goodwill and timber access rights Legal and advisory costs - Perpetual matter Restructuring activities Other significant items Tax on significant items Tax benefit arising from WHSP carrying value 78,870 100,048 101,289 120,299 147,079 22% 756 (18,483) 4,973 (25,140) 129 (4,169) (4,192) (1,947) (6,927) (4,147) (31,627) (1,273) – (2,612) 7,580 12,992 (8,608) – 729 (3,130) (593) – (465) (970) (2,040) 5,424 13,253 (2,581) – – (379) – – (2,841) (578) – 1,914 958 – – (577) – (4,333) (16,761) (1,504) (1,236) – 2,822 4,520 (14,523) – (206) (5,201) (1,025) (47,258) (2,828) (2,929) (315) 8,109 (2,842) Total significant items (35,566) (14,883) 1,466 (42,209) (68,889) Net profit after income tax (including significant items) 43,304 85,165 102,755 78,090 78,190 0% Basic earnings per share (cents) Underlying earnings per share (cents) 29.3 53.4 57.6 67.7 69.4 68.4 52.6 81.1 52.6 98.9 (0%) 22% Dividends Ordinary dividends per share (cents) 40.5 40.5 42.0 45.0 48.0 Ratios Net tangible assets per share Return on shareholders equity Underlying return on shareholders equity Interest cover ratio Net debt to capital employed $9.44 2.6% 4.7% 5.2 14.7% $9.82 5.0% 5.8% 6.6 15.7% $10.32 5.7% 5.6% 7.3 14.5% $10.59 4.3% 6.6% 9.7 14.2% $10.96 4.3% 8.0% 14.4 12.8% 3% (1%) 21% 48% (10%) BRICKWORKS LIMITED A.B.N. 17 000 028 526 A N N U A L R E P O R T 2 0 1 6 REGISTERED OFFICE: 738 - 780 Wallgrove Road Horsley Park NSW 2175 Telephone: (02) 9830 7800 Facsimile: (02) 9830 7797 DIRECTORS: ROBERT D. MILLNER FAICD (Chairman) Director since 1997 MICHAEL J. MILLNER MAICD (Deputy Chairman) Director since 1998 BRENDAN P. CROTTY LS; DQIT; Dip.Bus Admin; MAPI; FAICD; FRICS Director since 2008 DAVID N. GILHAM FCILT; FAIM; FAICD Director since 2003 DEBORAH R. PAGE AM B.Ec, FCA, FAICD Director since 2014 THE HON. ROBERT J. WEBSTER MAICD; MAIM Director since 2001 MANAGING DIRECTOR: LINDSAY R. PARTRIDGE AM BSc. Hons.Ceramic Eng; FAICD; Dip.CD Joined the Company 1985 Director since 2000 CHIEF FINANCIAL OFFICER: ROBERT C. BAKEWELL B.Comm; CA From 1 June 2016 ALEXANDER J. PAYNE B.Comm; Dip CM; FCPA; FCIS; FCSA Until 31 May 2016 COMPANY SECRETARY: SUSAN L. LEPPINUS B.Ec; LLB; Grad Dip App Fin From 29 April 2015 AUDITORS: EY BANKERS: NATIONAL AUSTRALIA BANK SHARE REGISTER: COMPUTERSHARE INVESTOR SERVICES PTY. LIMITED GPO Box 2975 Melbourne Victoria 3001 Telephone: 1300 855 080 (within Australia) (03) 9415 4000 (international) Facsimile: (03) 9473 2500 PRINCIPAL ADMINISTRATIVE OFFICE: 738 - 780 Wallgrove Road Horsley Park NSW 2175 Telephone: (02) 9830 7800 Facsimile: (02) 9830 7797 E-mail: info@brickworks.com.au 1 BRICKWORKS LIMITED A.B.N. 17 000 028 526 DIRECTORS’ REPORT The Directors of Brickworks Limited present their report and the financial report of Brickworks Limited and its controlled entities (referred to as the Brickworks Group or the Group) for the financial year ended 31 July 2016. Directors The names of the Directors in office at any time during or since the end of the year are: Robert D. Millner FAICD (Chairman) Michael J. Millner MAICD (Deputy Chairman) Lindsay R. Partridge AM BSc. Hons. Ceramic Eng; FAICD; Dip. CD (Managing Director) Brendan P. Crotty LS; DQIT; Dip.Bus Admin; MAPI; FAICD; FRICS David N. Gilham FCILT; FAIM; FAICD Deborah R. Page AM B.EC, FCA, FAICD The Hon. Robert J. Webster MAICD; MAIM; JP All Directors have been in office since the start of the financial year to the date of this report. Principal activities The Brickworks Group manufactures a diverse range of building products throughout Australia, engages in development and investment activities to realise surplus manufacturing property, and participates in diversified investments as an equity holder. Result of operations The consolidated net profit for the year ended 31 July 2016 of the Brickworks Group after income tax expense, amounted to $78,190,000 compared with $78,090,000 for the previous year. Dividends The Directors recommend that the following final dividend be declared: Ordinary shareholders – 32 cents per share (fully franked) The record date for the final ordinary dividend will be 10 November 2016, with payment being made on 30 November 2016. Dividends paid during the financial year ended 31 July 2016 were: (a) Final ordinary dividend of 30 cents per share (fully franked) paid on 25 November 2015 (2015: 28 cents). (b) Interim ordinary dividend of 16 cents per share (fully franked) paid on 3 May 2016 (2015: 15 cents). REVIEW OF OPERATIONS Highlights • Statutory NPAT including significant items, up 0.1% to $78.2 million • Underlying NPAT before significant items up 22.3% to $147.1 million  Building Products EBIT up 33.7% to $75.4 million (EBITDA $102.8 million)   Land and Development EBIT up 14.1% to $73.5 million Investments EBIT up 8.6% to $59.6 million • Net debt/capital employed of 12.8%, net debt $269.2 million • • Final dividend of 32 cents fully franked, up 2 cents or 6.7% Total full year dividend of 48 cents fully franked, up 3 cents or 6.7% Overview1 Brickworks (ASX: BKW) posted a record underlying Net Profit After Tax (‘NPAT’) for the year ended 31 July 2016 of $147.1 million, up 22.3% on the prior year. A feature of the result was the diversified earnings contribution, with Building Products, Land and Development and Investments all delivering an uplift in underlying earnings compared to the prior year. After including the impact of significant items, statutory NPAT was $78.2 million. The significant items, totalling $68.9 million after tax, primarily relate to the impairment of goodwill in Austral Bricks Western Australia. In addition significant restructuring activities in Austral Bricks and Auswest Timbers in that state resulted in the closure of plants and the non-cash write down of assets. The asset carrying values of all other divisions are supported by the net present value of their respective future cash flows2. 1 All underlying profit and earnings measures exclude significant items, unless otherwise stated. 2 Further information regarding the annual goodwill impairment assessment is contained in Note 15 (b) to the financial statements. 2 On record sales revenue of $748.1 million, Building Products’ underlying earnings before interest and tax (‘EBIT’) was $75.4 million, up 33.7% on the prior year. EBITDA was up 26.0% to $102.8 million, on a combination of continued volume growth and increased margins. Land and Development EBIT was $73.5 million for the 12 months to 31 July 2016, primarily due to a strong revaluation profit in the Joint Venture Industrial Property Trust3 (‘Property Trust’). Investment EBIT, including the underlying contribution from Washington H. Soul Pattinson Limited (‘WHSP’), was up 8.6% to $59.6 million. This was due primarily to an increase in earnings from TPG Telecom. Underlying earnings per share (‘EPS’) were 98.9 cents, up 21.9% from 81.1 cents for the prior year. Directors have declared a fully franked final dividend of 32 cents per share for the year ended 31 July 2016, up 6.7% from 30 cents. Together with the interim dividend of 16 cents per share, this brings the total dividends paid for the year to 48 cents per share, up 3 cents or 6.7% on the prior year. The record date for the final dividend will be 10 November 2016, with payment on 30 November 2016. Financial Analysis Gearing (gross debt to equity) was 16.3% at 31 July 2016, down from 17.8% at 31 July 2015. Total interest bearing debt decreased to $300.0 million and net debt reduced to $269.2 million at 31 July 2016. Net debt to capital employed was 12.8% at the end of the period. Interest costs were down 20.5% to $13.6 million for the year on the reduced debt level and a lower average interest rate. Total borrowing costs were $14.1 million, including the mark to market valuation of swaps. Underlying interest cover was 14.4 times, up from 9.7 times at 31 July 2015. Working capital, excluding land held for resale, was $189.0 million at 31 July 2016, up $32.8 million from the prior year, due to an increase in cash, inventory and receivables. During the year finished goods inventory was up by $8.1 million, due to increases in Austral Bricks Western Australia and a stock build required to launch the new Specialised Building Systems division. Excluding these businesses, stock levels were held relatively steady compared to the prior year. Total cash flow from operating activities was $148.5 million, up 11.4% from $133.3 million in the prior year. Building Products spend on capital expenditure and acquisitions increased to $52.7 million, from $46.6 million in the prior year. Stay in business capital expenditure was $23.5 million, 85.8% of depreciation. Spend on major upgrade projects totalled $20.6 million, primarily consisting of upgrades to the Rochedale plant in Queensland and the Cardup plant in Western Australia. Spending on growth projects and acquisitions totalled $8.6 million for the year, comprising the purchase of three small metal roofing and fascia and gutter installation businesses based in New South Wales and Queensland, and a sawmill in Western Australia. Land and Development spend on capital expenditure was $5.4 million, relating to various site infrastructure works and development applications. In addition, a net amount of $13.6 million was invested into the Property Trust to reduce gearing to 34.4%, funded by the settlement of the Coles CDC facility in August 2016. The underlying income tax expense for the year increased to $34.8 million compared to $26.1 million for the previous year, due to the increased earnings from the Building Products and Land and Development Groups. Actual tax paid during the year was significantly lower at $10.2 million, due primarily to the benefits associated with the fully franked dividends received from WHSP and the property revaluations booked this year. Net tangible assets (‘NTA’) per share was $10.96 at 31 July 2016, up from $10.59 at 31 July 2015 and total shareholders’ equity was up $14.2 million to $1.839 billion, after including the impact of the goodwill impairment. Return on equity of underlying earnings was 8.0%, up from 6.6% in the prior year. This does not include a $381.4 million increase in the market value of the company’s investment in WHSP over the period. Looking back over the past fifteen years, this investment has delivered an average $85 million p.a. in value to Brickworks, not recognised on the income statement. Significant items reduced NPAT by $68.9 million for the full year, consisting primarily of the non-cash goodwill impairment in Austral Bricks Western Australia of $47.3 million, in accordance with AASB 136. There are no other Cash Generating Units where a reasonably possible change in a key assumption would result in impairment to the carrying value of goodwill or other indefinite useful life intangibles. In response to the current operating conditions in Austral Bricks Western Australia, management has taken decisive action, with a restructuring program well underway. One-off costs of $4.8 million after tax were incurred in relation to the restructuring initiatives within Austral Bricks Western Australia. This includes a non-cash write- down of plant and equipment due to the planned closure of the Malaga plant, with production being transferred to Cardup to allow the sale of the valuable Malaga site. Following the acquisition of the Greenbushes sawmill in Western Australia, a restructure of Auswest Timbers operations was implemented in the second half of the year, to significantly improve the efficiency of operations in that state. One-off costs of $7.6 million after tax were incurred as a result of this restructure, including a non-cash write-down of plant and equipment following the closure of the Deanmill site. 3 The Joint Venture Industrial Property Trust is a 50/50 partnership between Brickworks and Goodman Industrial Trust. 3 Significant Items ($m) Gross Tax Goodwill impairment – Austral Bricks WA Austral Bricks WA restructure Auswest Timbers Restructure Costs relating to Perpetual litigation Other significant items Significant items relating to WHSP TOTAL Perpetual Litigation Update (47.3) (6.8) (10.8) (2.8) (6.6) 0.1 (74.2) - 2.0 3.3 0.8 2.0 (2.8) 5.3 Net (47.3) (4.8) (7.6) (2.0) (4.6) (2.7) (68.9) On 20 February 2015, Brickworks announced that Perpetual and Carnegie had agreed to the cancellation of the general meeting of shareholders and Carnegie had withdrawn its cross-claim against Brickworks and WHSP. The cross-claim brought by Perpetual against Brickworks and WHSP is continuing. Following a lengthy discovery process the parties are now in the process of preparing evidence for trial. The Perpetual litigation has caused Brickworks to incur approximately $2.0 million after tax in costs during the twelve months to 31 July 2016. Brickworks’ Building Products Group Summary of Housing Commencements – 12 months to June 2016 Estimated Starts4 Detached Houses Other Residential Total Jun 16 Jun 15 Change Jun 16 Jun 15 Change Jun 16 Jun 15 Change New South Wales5 27,739 26,704 3.9% 42,764 34,689 23.3% 70,503 61,393 14.8% Queensland 22,632 23,174 (2.3%) 25,174 21,998 14.4% 47,806 45,172 5.8% Victoria 33,735 32,341 4.3% 33,516 32,587 2.9% 67,251 64,928 3.6% Western Australia 18,379 23,520 (21.9%) 7,004 8,082 (13.3%) 25,383 31,602 (19.7%) South Australia 7,416 7,729 (4.0%) 2,958 2,867 3.2% 10,374 10,596 (2.1%) Tasmania 1,991 2,326 (14.4%) 441 510 (13.5%) 2,432 2,836 (14.2%) Total Australia6 112,749 116,662 (3.4%) 112,618 101,824 10.6% 225,367 218,486 3.1% New Zealand7 26,836 22,969 16.8% 2,261 2,185 3.5% 29,097 25,154 15.7% Total dwelling commencements for Australia were up 3.1% to 225,367 for the twelve months ended 30 June 2016. This level of residential building activity is the highest on record in Australia, driven by unprecedented growth in other residential commencements over the past four years. In the 12 months to June 2016, other residential developments represented around 50% of total commencements. Other residential commencements increased a further 10.6% to 112,618 for the twelve months to 30 June 2016. This level of other residential activity is more than double the 25 year average and almost three times the levels recorded seven years ago. Following three years of growth, detached housing commencements decreased 3.4% on the prior year, with continued momentum in the major east coast states of New South Wales and Victoria offset by sharp declines in Western Australia. Despite the strong conditions detached house commencements remain 15% below the record level. Conditions in New South Wales (including ACT) remain strong, with total residential commencements up 14.8% on the prior year. Following four years of strong growth, total commencements in this region are at a new record peak. Once again, growth was driven by other residential commencements, up 23.3% whilst detached houses continued a trend of steady growth. 4 Original data sourced from ABSCat. 8752.0 Number of Dwelling Unit Commencements by Sector, States & Territories. June 16 quarter estimate from BIS Shrapnel. 5 Includes ACT, to align with Brickworks divisional regions. 6 Includes Northern Territory, not shown separately on table. 7 Building Consents data sourced from Statistics New Zealand – Building Consents. 4 Queensland experienced an increase in overall activity, with commencements up 5.8% to 47,806 for the twelve months to 30 June 2016. Detached housing commencements were down 2.3%, and at levels more than 8% below the 25 year average, represent an area of weakness in the Australian housing market. Total commencements in Victoria of 67,251 for the year are the highest on record for any state, with a relatively even split between detached houses and other residential developments. The rate of growth in Victoria has slowed over the past twelve months, following a period of unprecedented increases in other residential commencements over the prior 2 years. Western Australia is in the midst of a cyclical decline in building activity, with a 21.9% reduction in detached house commencements and a 13.3% decline in other residential commencements over the period. Continued growth in New Zealand was recorded, with building consents for the year ended 30 June 2016 increasing by 15.7%. The value of approvals in the non residential sector in Australia increased by 8.3% to $34.3 billion for the twelve months to 30 June 2016. Within the non residential sector, Commercial building approvals decreased by 10.7% to $11.0 billion for the period and Industrial building approvals increased 6.1% to $4.8 billion. The Educational sub-sector, an important driver for bricks and masonry demand, was up 20.5% to $4.9 billion. Building Products’ Results in Detail8 Year Ended July Revenue EBITDA EBIT Capital Expenditure and acquisitions EBITDA margin EBIT margin Net Tangible Assets Return on Net Tangible Assets Full Time Employees Safety (TRIFR)9 Safety (LTIFR)10 $mill $mill $mill $mill % % $mil % 2016 748.1 102.8 75.4 52.7 13.7 10.1 620.0 12.2 1,490 19.2 1.6 2015 700.9 81.6 56.4 46.6 11.6 8.0 590.6 9.5 1,468 22.5 2.0 Change % 6.7 26.0 33.7 13.1 18.1 26.3 28.4 5.0 28.4 (14.7) (20.0) Revenue for the year ended 31 July 2016 was up 6.7% to a record $748.1 million, compared to $700.9 million for the prior year. Financial year 2016 saw continued growth in building materials demand, with sales revenue exceeding the prior year in all divisions except Auswest Timbers. EBIT was $75.4 million, up 33.7% on the prior year, and EBITDA was $102.8 million. Earnings in the second half of $42.8 million were 31.2% higher than the first half and 41.4% up on the prior corresponding period. This acceleration of earnings growth was achieved despite extended periods of rain and cold weather during June and July that impacted sales during the latter part of the year. Unit margins were significantly higher for the year, supported by the growth of premium, higher priced products across most divisions. This follows a sustained investment in product development and marketing over many years, and the company’s collaboration with key influencers to position Brickworks as the leading style brand in the industry. Manufacturing costs were well controlled during the year, supported by an increase in production volume to meet the higher demand, and prior period plant upgrades in some divisions. Despite the ongoing success in managing production costs, Brickworks continues to face significant uncertainty in relation to the availability and price of natural gas. With energy representing around 20% of the total cost of bricks, securing a reliable and cost effective gas supply is critical to Brickworks’ operations. Although gas has now been secured across all operations until the end of calendar 2018, pricing is extremely volatile in each state from one year to the next. In response, the company is continuing to investigate and make significant capital investments in a range of energy reduction, alternative fuels and green synthetic natural gas (‘GSNG’) projects to mitigate the uncertainty surrounding future supply. Sales and overhead costs were significantly lower as a percentage of revenue. This outcome was particularly pleasing given the continued investment in marketing and increased spend on information technology to better support our customer requirements. Building Products earnings for the year also included a $7.2 million adverse impact due primarily to lower clay receipts from building sites, and to a lesser extent the costs associated with launching the new Specialised Building Systems division and a range of other minor items. 8 All references to earnings within Building Products represent underlying earnings, pre significant items. 9 Total Reportable Injury Frequency Rate (TRIFR) measures the total number of reportable injuries per million hours worked. 10 Lost Time Injury Frequency Rate (LTIFR) measures the number of lost time injuries per million hours worked. 5 Following four consecutive years of earnings growth, Building Products’ underlying Return on Net Tangible Assets (‘RONTA’) was 12.2%, up from 9.5% in the prior year. Full time equivalent employees increased by 22 during the year, taking the total number to 1,490 at 31 July 2016. This includes the addition of 20 employees as a result of acquisitions during the year. Brickworks’ on-going commitment to maintaining a pro-active approach to workforce productivity is demonstrated by the increase in revenue per employee to over $500,000, up 6.0% compared to the prior year. There were 5 Lost Time Injuries (‘LTIs’) during the year, down from 6 in the prior year. This translated into a reduction in the Lost Time Injury Frequency Rate (‘LTIFR’) to 1.6, compared to 2.0 in the 2015 financial year. The Total Reportable Injury Frequency Rate (‘TRIFR’) decreased to 19.2 from 22.5 in the prior financial year. Divisional Results Austral Bricks delivered a 21.5% increase in earnings for the twelve months ended 31 July 2016, with sales revenue up 6.9% to $405.8 million on sales volume of over 670 million bricks. The company’s sustained investment in style and branding has contributed to the renaissance of face brick over the past few years. Together with a focus on building strong and collaborative relationships with architects and specifiers, this has resulted in Austral Bricks products being specified in many land-mark projects across the country. In New South Wales alone, Austral Bricks products were specified in over 50 high rise developments during financial year 201611. For example, the 20 storey residential developments in Darling Square Sydney, utilising 500,000 bricks in 22 custom made shapes, and the Arc Development by Crown, also in Sydney that incorporates 8 storeys of intricate brickwork. The success of this strategy has delivered increased sales of premium products, resulting in higher margins for the 12 months to 31 July 2016. At the recent Horbury Hunt awards that recognise excellence in the use of bricks in architectural design, Austral Bricks feature in four of the six winning projects, including the residential, commercial, landscaping and overall categories. Performance on the east coast was particularly strong, driven primarily by the major markets of New South Wales and Victoria. Austral Bricks has forged a strong competitive position in these markets following years of investment in manufacturing plants and product development initiatives. Buoyant market conditions in these states supported an increase in sales volume, and unit margins were significantly higher on the back of manufacturing efficiencies and improved prices. In Victoria, the Wollert plant is performing well ahead of the original design expectations, with production for the year at record levels. Earnings in Queensland were also ahead of the prior year and gathered momentum in the second half. This follows the completion of the first phase of the Rochedale plant upgrades, resulting in much improved product quality and lower unit production costs. The final phase of the refurbishment program, comprising upgrades to the kiln, kiln cars and packaging plant, is planned for financial year 2017. Earnings in Western Australia were lower, with this market in the midst of a cyclical downturn in market activity and intense competition for sales. As a result, sales volume was down on the prior year, despite a small decrease in average selling price. Prices in this market are now lower than they were eight years ago. A comprehensive restructuring plan is currently underway, aimed at delivering a market leading position in Western Australia. During the year, work progressed on a major refit to the previously mothballed Cardup plant to fit advanced automation, set to deliver improved product quality and significantly lower production costs. These upgrade works will be completed early in calendar year 2017, allowing the transfer of production from the less efficient Malaga plant, to be closed and made available to the Property Group for sale. Earnings from the New Zealand Brick Distributors joint venture were lower for the year. Although overall market activity in New Zealand remains robust, sales have been adversely impacted by bricklayer shortages and the limited release of land suited to brick veneer construction as part of the Christchurch rebuild program. Austral Masonry delivered another increase in earnings on sales revenue of $90.9 million, up 4.4% on the prior year. Total sales volume increased to 479,000 tonnes for the year, driven by strong growth in south east Queensland and New South Wales. In these markets, grey block sales were significantly higher, buoyed by the increase in multi-residential building where blocks continue to be a popular choice for a wide range of walling applications. Elsewhere, the Central Queensland market is currently depressed due to a downturn in mining related activity, whilst demand remains stable in the tourist based economy of North Queensland. The improved earnings were supported by a sustained focus on premium products in both the commercial and residential sectors that delivered improved pricing outcomes. Over the year a number of new honed and polished blocks were launched and are now gaining traction in applications such as feature walls in residential dwellings. Meanwhile, increased sales of higher margin engineered retaining wall systems such as “Keystone” and “Magnumstone” had a positive impact on the result. Bristile Roofing earnings increased on the prior year, with revenue up 11.5% to $124.2 million, on sales volume of almost 3.7 million square metres of tiles. On the east coast, demand in Victoria was particularly strong, driving strong earnings growth in this state. Premium imported La Escandella terracotta tiles continue to gain market traction with sales volume increasing by a further 24.0% on the prior year. Despite the difficult conditions in Western Australia resulting in a significant decline in sales volume, earnings in this state were held relatively steady, due to a range of initiatives implemented to control costs and an increased focus on securing higher margin sales. 11 Buildings greater than four storeys. 6 Over the past 12 months, Bristile Roofing has expanded its product offer, through the acquisition of two metal roofing and fascia and gutter installers in New South Wales and one in Queensland. These acquisitions provide diversification and earnings growth opportunities, allowing Bristile to offer an all inclusive product range that includes locally manufactured concrete tiles, premium imported ceramic tiles, metal roofing, re-roofing and fascia and guttering. Austral Precast delivered a strong turn-around in performance with earnings significantly higher than the prior year and sales volume in excess of 20,000 panels for the year. Sales revenue of $74.0 million was up 11.4%, with strong sales growth in New South Wales and Victoria offset by weakness in Western Australia. An increased focus on the growing high rise market, through developing “whole of structure” solutions is progressing well, with over 50% of sales now generated from this segment. A range of process improvements and low cost capital initiatives resulted in improved operational efficiency across all plants. Another key focus during the period was the creation of a unified national approach to back office functions such as estimating, drafting and quoting. Auswest Timbers revenue was down 5.7% to $52.5 million on sales volume of 62,000m³ for the year. Significant progress has been made to enhance operational efficiency, with productivity improvements being wide spread across all sites. Domestic demand benefited from the strong detached housing activity on the east coast, with the Fyshwick mill supplying roof tile battens into this market. Export demand increased from the Korean, US and UK markets, helping to offset weaker demand from China. In February Auswest Timbers completed the purchase of a previously shut down timber mill at Greenbushes, in the southwest of Western Australia. This low cost modern mill was purpose built to process smaller sized Jarrah resource, in line with expected future log supply. Since the purchase, the mill has been recommissioned, with production volume being transferred from the now closed Deanmill site. Operational performance is ahead of expectation with the mill delivering almost 25% lower costs and greater throughput. Specialised Building Systems was established during the first half of the year, with a focus on distributing high quality, market leading products to meet the evolving demands of the building industry. All products are rigorously tested to ensure they meet or exceed the requirements of the Building Code of Australia. Pronto™ panels have been well accepted by the market as a lightweight, durable, non load bearing walling solution, with significant interest from our vast network of residential and commercial customers. INEX™ boards, a range of lightweight cementitious sheets that can be used in a wide range of flooring and walling applications, are also proving extremely popular. Production capacity is currently being increased to meet the large pipeline of orders and strong demand for this product. Terracade™ façade systems also continues to gain traction with increasing sales volume, particularly in commercial and high rise residential applications. The product range has recently been expanded to include baguettes, an important accessory that allows the business to offer a full product solution to architects. 7 Strategic update “We believe in making beautiful products that last forever” Our goal is to be Australia’s best building products company Brickworks goal of being Australia’s best building products company is supported by a strategy that comprises: 1. Strengthening the core business: • Operations excellence • • • Consolidation and growth Customer and key influencer relationships Style & product leadership 2. Building new growth businesses: • • • Investing in affiliated businesses Distributing market leading products Creating better building solutions 3. Sustaining our strong culture • Embed our values across the organisation Strengthening the core business Operational excellence activities are focussed on achieving the lowest cost position in each of our markets. Restructuring and productivity improvements are a fundamental requirement in achieving this. As such the company will always take a pro-active approach and act decisively when required, as illustrated by initiatives underway in our Western Australian operations. Achieving the lowest cost position also requires a willingness to invest capital in facilities in order to replace outdated equipment or make significant cost improvements. In financial year 2016 major capital investments were made to upgrade facilities and improve the competitive position in Austral Bricks Western Australia, Austral Bricks Queensland and Auswest Timbers. Looking ahead, a range of other capital investment opportunities across the Group are under consideration, including a new technology skate kiln plant in Austral Bricks WA, a state-of-the-art masonry plant in New South Wales, an automated precast facility in Victoria and a new brick kiln at Bowral. Brickworks is also committed to market consolidation and growth opportunities within its core business. In recent years market consolidating acquisitions in Austral Masonry have delivered a much improved industry structure, resulting in increased scale and profitability. Our investment during the year to expand into metal roofing, fascia and gutter installation is an example of the growth opportunities that are available within our core business and the company will continue to consider other opportunities as they arise. Developing the strongest customer and key influencer relationships is an ongoing priority for Brickworks. For more than 30 years, the company has been investing in customer relationships through industry leading incentive programs that now extend across the entire customer base. The roll out of our CBD design studios was completed during the year, with studios now established in all major capital cities. Over the past 12 months, these studios have hosted hundreds of events and attracted thousands of customers, architects and other key influencers. This has resulted in the increasing penetration of Brickworks products in a number of key markets such as high rise and commercial developments, as outlined earlier. The company has continued its sustained investment in style and product leadership. This strategy starts with the creation of desirable products, but is ultimately aimed at consumers, to drive demand. For our customers this provides greater product choice, versatility in design and ultimately a better end product. For Brickworks, our leadership in style and our premium products allows us to differentiate from our competitors, penetrate new markets and secure higher margins. A national Austral Bricks branding campaign covering television, digital and print media was launched during the year to support this priority. This campaign, featuring brand ambassador Kate Waterhouse, promotes Brickworks personality as stylish, aspirational, innovative, beautiful and confident. Building new growth businesses Just over a decade ago, the Building Products Group was a two state brick manufacturer with operations in New South Wales and Queensland. Since that time the company has invested in affiliated businesses to become a diversified national building products business. Acquisitions in masonry, precast concrete and timber have provided increased end-market exposure and geographic diversification. Brickworks has maintained a disciplined approach to expansion, with each new acquisition being closely aligned with existing products, allowing the company to leverage customer relationships by offering an expanded range of complimentary products. The company will continue to maintain a diligent approach to assessing acquisition opportunities beyond the existing core businesses. 8 The company is well placed to leverage its strong relationships and channels to market to distribute new market leading products. The launch of Specialised Building Systems during the year is an example of this. This business utilises a low capital cost model, through establishing manufacturing and distribution partnerships with “best in class” suppliers and leveraging Brickworks market leading customer relationships. During the year the company also executed a distribution agreement for INEX™ boards. This follows the success of our exclusive distribution arrangements in place for premium La Escandella roof tiles and specialised bricks from Spain. The Building Products Group is continually developing new and innovative products and creating better building solutions to meet our customers’ needs. For example, over the past 12 months the company has launched the Pronto™ panel lightweight cladding system, introduced Swiftdeck, an easy to install timber decking system, and continued to expand its “whole of structure” precast solution. Sustaining our strong culture Brickworks is proud of its dynamic, hard working, “can-do” culture that has evolved over many years as the company has grown from a two state brick manufacturer to an ASX200 company. The company recognises that this culture is a key differentiator from competitors and a fundamental component of its success. As such, sustaining this strong culture and embedding it across the organisation is critical, and forms an integral part of the Building Products strategy. Significant work was undertaken during the year to define the key values that drive the company’s culture and ensure that these values are embedded throughout the organisation, including through the recruitment, performance review and succession planning processes. Building Products Outlook Current residential building activity in Australia is at the highest level on record, driven by strong population growth over the past five years, low interest rates and rising house prices. With approvals remaining elevated, commencements are likely to stay high for some time to come, particularly considering the significant weather related delays experienced in June, July and August. Although the overall housing market remains very strong, conditions vary significantly across the country. On the east coast, strong demand in Victoria is being fuelled by the highest rate of net interstate migration in the country. Meanwhile in New South Wales, housing activity is expected to stay robust for an extended period of time, due to a large undersupply of housing that developed during the 2000’s and remains significant even today. Recent analysis from BIS Shrapnel estimates that in New South Wales there is around 15 months of unsatisfied housing demand, even at the current record rate of building. These conditions are reflected in a full order book in all east coast divisions with builders in the major markets of Sydney and Melbourne reporting a long pipeline of work. In Austral Precast, work in hand extends over 9 months, fuelled by numerous large scale projects in the commercial and multi-residential high rise sector. The continued buoyancy of the housing market on the east coast is being offset by a cyclical decline in building activity in Western Australia, as employment prospects in this state deteriorate, leading to slowing population growth, high vacancy rates and reduced housing demand. Despite the current downturn, Western Australia has a strong and entrenched tradition of brick usage, with sales per capita being more than 3 times any other state in Australia. Therefore as the country’s largest brick maker this is a very attractive market to Brickworks. As such the company is making the necessary investment to upgrade facilities and rationalise manufacturing operations in that state. The ongoing capital upgrade works at the Cardup brick plant will be a key focus in the first half of financial year 2017, whilst further rationalisation of Auswest Timbers’ Western Australian production facilities are planned over the coming months. These initiatives will deliver significantly lower costs and much improved prospects for these operations over the long term; however earnings will be impacted in the short term. Elsewhere, isolated issues remain a concern in some businesses. After many years of negotiation, the Victorian state government continues to frustrate efforts to make the required investments in our East Gippsland timber mills, by denying certainty of log supply. These operations now have only 9 months supply contracted, with no clarity being provided beyond that term. As one of the largest employers in this region, these investments would provide an important boost for the local community, as well as enabling Auswest to cost effectively meet the strong demand for product from these mills. However, if an acceptable log contract is unable to be secured, the East Gippsland facilities will be closed. Overall, the short term outlook for Building Products remains positive, with a full order book and a long pipeline of work at higher margins in our major east coast markets set to support earnings in 2017. Business growth initiatives will provide diversification and underpin earnings in the event of a cyclical decline in market activity over the medium term. 9 Land and Development FY2016 Result Year Ended July ($million) Net Trust Income Revaluation of properties Development Profit Sale of assets Property Trust Land Sales Waste Property Admin and Other Total 2016 15.3 41.8 17.8 - 74.9 1.4 1.3 (4.2) 73.5 2015 Change % 15.3 30.9 2.7 12.1 61.1 4.6 2.6 (3.8) 64.4 - 35.3 >500 - 22.6 (69.6) (50.0) (10.5) 14.1 Land and Development produced an EBIT before significant items of $73.5 million for the year ended 31 July 2016, up 14.1% from $64.4 million for the prior year. The improved result was due to growth in the industrial Property Trust, generating an EBIT of $74.9 million, up 22.6% from $61.1 million in the prior year. Net property income distributed from the Trust was $15.3 million, in line with the prior year, despite the settlement of the Coles CDC facility in August 2015. The lost rent from this sale was offset by lower interest payments, rent increases on stabilised assets and the additional rental income of new developments at Oakdale Central and Rochedale. The reduction in interest payments were the result of lower average interest rates and reduced gearing within the Property Trust. The Property Trust gearing12 level was 34.4% at 31 July 2016, down from 38.0% a year earlier. Three new developments were completed during the period, including two facilities for DHL at Oakdale Central, and the Beaumont Tiles facility at Rochedale. Revaluation profit on completion of these developments totalled $17.8 million. Property revaluations contributed a profit of $41.8 million. This was made up of the revaluation profit of stabilised assets of $33.4 million, due to compression in capitalisation rates, and an additional EBIT of $8.4 million following pre-leases being secured at Oakdale Central. Land Sales contributed an EBIT of $1.4 million for the year. Transactions included the sale of 16 properties and 2 blocks of vacant land at Pemberton, Western Australia, originally part of the Pemberton mill leasehold land parcel. Waste Management contributed a profit of $1.3 million for the year, down from $2.6 million in the prior year. This was due to the completion of the royalty period on the Horsley Park landfill in February 2016. Property administration expenses totalled $4.2 million, up from $3.8 million in the prior year. These expenses include holding costs such as rates and taxes on properties awaiting development. Property Trust The total value of assets held within the Property Trust at 31 July 2016 was $1.011 billion. This includes $787.3 million in leased properties and a further $223.8 million in land to be developed. Borrowings of $347.4 million are held within the Property Trust, giving a total net asset value of $663.7 million. Brickworks Group share of net asset value was $331.9 million, down $5.1 million from $337.1 million at 31 July 2015 due to the Coles CDC sale. Since this sale, Brickworks Group share of the Trust’s net asset value has increased by $53.9 million. The entire Property Trust portfolio consists of “A grade” facilities, each less than seven years old, with long lease terms and stable tenants. The annualised gross rent exceeds $51 million, capitalisation rates range from 6.3% to 8.3% and there are currently no vacancies. 12 Borrowings divided by total Property Trust assets including land to be developed. 10 Summary of Property Trust Assets – Leased Properties Only Note: The Trust also holds land to be developed with a value of $223.8 million Estate M7 Hub Interlink Park Wacol Oakdale Rochedale Total Asset Value ($m) Gross Lettable Area (m²) Gross Rental ($m p.a.) WALE13 (yrs) Cap. Rate 117.6 356.8 12.8 276.0 24.1 787.3 64,125 192,207 10,384 146,556 12,912 426,184 8.2 23.1 1.2 17.1 1.5 51.1 4.1 6.2 2.1 6.8 12.0 6.1 6.4% 6.3% 8.3% 6.3% 6.3% 6.4% Brickworks Development Land Development land is excess to Building Products operations requirements and is held within the Land and Development Group. Where appropriate, development land is rezoned residential and sold. Alternatively the land is rezoned industrial and transferred into the Property Trust for future development. Development Land Gross Land Area (ha) Development Area (ha) Book Value ($m) Potential Value ($m) NSW VIC QLD WA Total FY16 FY15 Change 154 332 36 - 522 154 332 36 187 709 - - - (187) (187) 97 196 14 - 307 14 29 2 - 45 73 146 11 - 230 In total development land has the potential to be worth at least $230 million, assuming rezoning and development approval of these properties. The largest site held for development is at Craigieburn in Victoria. Delays have been experienced on the rezoning of part of this site to residential, with the Metropolitan Planning Authority (“MPA”) still working on the finalisation of its Quarry Investigating Area Plan. As a result Brickworks is now collaborating with other landowners in this Area Plan to produce development concepts that may accelerate the project, subject to regulatory approvals. Brickworks Operational Land Operational land is utilised in the day to day activities of the Building Products Group. The total value of operational land is around $368 million14, due primarily to valuable land held within New South Wales and Western Australian operations. Operational Land Gross Land Area (ha) FY15 Change FY16 Book Value ($m) Valuation ($m) NSW VIC QLD WA SA & TAS Total 486 567 464 1,968 272 3,757 435 567 470 1,781 272 3,525 51 - (6) 187 - 232 47 22 29 40 7 145 163 23 41 128 13 368 During the year a 51 hectare parcel of industrial land adjoining Brickworks existing quarry was purchased at Berrima. In addition the 187 hectare Cardup site in Western Australia was re-classified as operational land as a result of the works in progress to re-start this facility. 13 Weighted average lease expiry. 14 Based on feasibility assessment by independent valuers on the future land value if rezoned and rehabilitated and excludes any development profit to Brickworks. 11 Land and Development Outlook Development activity in the Property Trust in financial year 2017 will be extremely strong, with a number of new developments at both the Oakdale Central and Rochedale estates. At Oakdale Central in New South Wales, a total of 83,945m² of new developments will be commenced during FY2017, whilst at Rochedale in Queensland 63,000m² will be commenced. Asset Value ($m) 787.3 149.4 Gross Lettable Area (m²) 426,184 83,945 111.3 63,000 Current Leased Assets New developments at Oakdale New developments at Rochedale Future Leased Assets15 1,048.1 573,129 Gross Rental ($m p.a.) WALE (yrs) Cap. Rate 51.1 9.4 6.8 67.3 6.1 8.2 13.2 7.1 6.4% 6.4% 6.1% 6.3% Once completed, these new developments will contribute in excess of $16 million in gross rental income to the Property Trust (greater than the $15.1 million rent received from the Coles CDC facility). Together with the significantly lower interest payments within the Property Trust, net trust income attributable to Brickworks will grow strongly over the next two years. Medium term growth is also expected to be strong with further expansion to be focussed on the remaining land at Oakdale Central (2.8 hectares) and Rochedale (7.0 hectares), followed by the vast Oakdale South Estate. At Oakdale South, 28 hectares of land sales were secured in financial year 2016, subject to DA approval and conditions. This includes a 6.4 hectare parcel to Toyota Motor Corporation Australia and 7.0 hectares to Sigma Pharmaceuticals, and will generate sales to the Property Trust of around $90 million late in 2017. These sales will underpin the commencement of infrastructure to the entire 70 hectare estate, opening up 43 hectares of land to meet the pre-commitment market. Development of this land is likely to extend for around five years. Looking further ahead, planning work is also well underway for the Oakdale West site, owned by Brickworks, with a State Significant Development Applications for this 100 hectare (developable area) property lodged by early October 2016. The first section of this property will then be ready for sale into the Property Trust in financial year 2017, generating a land sale profit to Brickworks. Development of this site within the Property Trust will then likely extend for up to a decade from 2020. Investments The underlying EBIT from total investments was up 8.6% to $59.6 million in the year ended 31 July 2016. Washington H. Soul Pattinson Limited (‘WHSP’) ASX Code: SOL Brickworks Group’s investment in WHSP returned an underlying contribution of $59.1 million for the year ended 31 July 2016, up 8.3% from $54.6 million in the prior year. This was due primarily to an increase in earnings from TPG Telecom. The market value of Brickworks 42.72% share holding in WHSP was $1.782 billion at 31 July 2016, up $381.4 million from $1.401 billion at 31 July 2015. This investment continues to provide diversity and stability to earnings, with cash dividends totalling $52.2 million received during the year, up 4.2% on the prior period. WHSP has delivered outstanding returns over the long term, with fifteen year returns of 12.6% per annum to 31 July 2016 being 4.5% ahead of the All Ordinaries Accumulation Index. WHSP holds a significant investment portfolio in a number of listed companies including Brickworks, TPG Telecom, New Hope Corporation, Australian Pharmaceutical Industries, BKI Investment Company, Ruralco Holdings and Apex Healthcare Bernhard. The investment in WHSP has been an important contributor to Brickworks’ success for more than four decades. Over this period it has delivered an uninterrupted dividend stream that reflects the earnings from WHSP’s diversified investments. This dividend helps to balance the cyclical earnings from Brickworks’ Building Products and Land divisions. Investments Outlook The diversified nature of our holding in WHSP’s investments is expected to deliver steadily increasing earnings and dividends to Brickworks over the long term. Building Products Group Outlook Building Products earnings for the 2017 financial year will be underpinned by a full order book and a long pipeline of work at higher margins in our major east coast markets. Land and Development earnings will be supported by the sale of Oakdale West into the Property Trust, and an unprecedented level of development activity within the Trust. Investment earnings are expected to deliver steadily increasing earnings and dividends over the long term. Significant changes in state of affairs There were no significant changes in the state of affairs of the Brickworks Group during the year, other than those events referred to in the Review of Operations and Financial Performance and the Financial Statements. 15 Excludes land to be developed and any changes in value of current leased assets. 12 After balance date events On 17 August 2016 the Group’s $100 million working capital facility was extended until December 2018. This facility was not drawn as at 31 July 2016. No other matters or circumstances have arisen since the end of the financial year that have significantly affected the current financial year, or may significantly affect in subsequent financial years: • • • the operations of the Brickworks Group; the results of those operations; or the state of affairs of the Brickworks Group. Likely developments and expected results of operations The Review of Operations gives an indication of likely developments and the expected results of operations in subsequent financial years. Workplace Health and Safety “There is no task that we undertake that is so important that we can’t take the time to find a safe way to do it”. Brickworks is committed to minimising the risks to health and safety of its employees, contractors and the general public. A strong safety culture is fundamental to our Company’s ongoing WHS performance with an unremitting determination to achieve continual improvement in safety. The safety performance continued to improve for the Brickworks Group in FY2016. The lost time injury frequency rate (LTIFR) reduced by 19.9% down to 1.6 while the total recordable injury frequency rate (TRIFR) was 19.2 down by 14.6%. Total workplace injury frequency rates also declined recording a 17.5% reduction from the previous year. Key to Brickworks’ continual improvement in safety performance are a number of initiatives which include employee wellbeing programs focusing on employee health and welfare, ongoing employee education utilising the Brickworks Online ELearning platform, diligent recruitment processes which include functional health assessments for all new recruits and a robust WHS Management system specifically developed for Brickworks businesses underpinned by a structured rigorous audit program. Another focus this year was trialling the effectiveness of emerging technologies to improve health and safety outcomes in Brickworks. Employee fatigue measurement devices are under evaluation. The standardisation of the WHS management system in all divisions of the Company has provided a consistent approach to managing safety to reduce risk. The computerisation of this management system has commenced which will add a new dimension to managing safety providing real-time information throughout the Brickworks Group. Engaging employees and contractors through consultation, to identify physical hazards and effective controls has also proven to be another key activity in reducing workplace injury rates. Brickworks has a strong measurement culture with workplace health and safety goals effectively communicated throughout all levels of the business. Safety activities are monitored utilising lead and lag performance indicators which are benchmarked both internally and externally to guide Brickworks workplace health and safety performance. This result reflects the sustained commitment of all Brickworks personnel to safety. The Environment The Brickworks Group understands and accepts its responsibility for environmental protection which is integral to the conduct of its commercial operations. Brickworks’ objective is to comply with all applicable environmental laws and regulations and community standards in a commercially effective way. We are committed to encouraging concern and respect for the environment and emphasizing every employee’s responsibility for environmental performance. Management of Brickworks’ environmental responsibilities, objectives and commitments will be further improved by the national integration of management systems that is underway to form a Safety, Health and Environment Management System (SHEMS). The manual elements and procedures common to both safety and environment have been written, with the SHEMS to be implemented progressively during 2016/17 and onwards. A key component of the implementation will be the migration of the SHEMS from a paper-based system to one that operates on-line with greater performance and higher efficiency. Brickworks maintains its commitment to reducing its energy consumption and carbon footprint through the use of clean, renewable fuels as substitutes for natural gas which aligns with the Australian Government’s commitment following the historic Conference of the Parties COP21 in Paris in December 2015. Brickworks is continuing its initiatives to reduce energy usage and cost across all divisions. These include fuel– switching projects from natural gas to cheaper and lower emissions intensity sources such as landfill gas, sawdust and other organic materials. Brickworks has been working with its suppliers of landfill gas to increase available volumes and invests in kiln technology to accept the additional landfill gas. The network tariff reassignment project and capacity management continued throughout the year, which resulted in substantial reductions in electricity and network charges. The Group is continuing to introduce ways to reduce energy consumption and emissions through product re-engineering such as redesigning the bricks to reduce their mass and incorporating other waste streams and fluxes to reduce peak firing temperatures. An innovative reduction system was commissioned in Bowral, NSW. It is the first of its kind in Australia and significantly reduced energy requirements. The site has seen a 33% reduction in electricity and 46% reduction in natural gas consumption. The upgrade has also resulted in a decrease of carbon emissions by 12,456 tonnes of carbon dioxide per year and reduction in air emissions. The successful launch of the Carbon Neutral brick has created much interest from the design and architectural community and we are currently reviewing the opportunity to undertake Environmental Product Disclosures on similar products utilizing clean renewable fuel sources with lower embodied carbon. 13 Austral Bricks NSW won the Government of NSW inaugural Green Globe Award for Energy Efficiency in October 2015. The company was recognized for its efforts in relation to the switch from natural gas to landfill gas and the addition of sawdust in its bricks. The project has resulted in a reduction of natural gas consumption and 12,000 tonnes a year of greenhouse gases. The Group actively participates in energy efficiency and greenhouse gas reporting schemes which have assisted in reducing costs, energy consumption, and greenhouse gas emissions. The programs have also led to measurable improvements of systems and processes for data capture and storage, measuring and calculating emissions and implementing energy saving initiatives. These programs include: • National Greenhouse and Energy Reporting (NGER) Act 2007 – this program requires organisations to measure and report their energy consumption, production and greenhouse gas emissions under strict protocols. Brickworks has been measuring its energy consumption and emissions for some 15 years and this program has assisted Brickworks to streamline its processes for data capture, measuring, calculating and reporting energy and emissions. The data is subsequently collated and reported monthly to Senior Management and the Board; and • National Pollution Inventory (NPI) – the NPI provides the government, community and industry with information on substances and emissions estimates for 93 toxic substances. Brickworks continues to fulfil its mandatory reporting requirements under this scheme. There is significant environmental regulation requiring compliance for Brickworks’ building products manufacturing and associated activities in each state of Australia, as set out below referencing key legislation. Each operational manufacturing and quarry site holds a current licence and/or consent in consultation with the local environment protection authorities. Annual returns were completed where required for each licence stating the level of compliance with site operating conditions. Queensland production facilities and mining leases operate and are licensed under the Environmental Protection Act 1994 and Regulations. Each site is regulated by Environmental Management Overview Strategy documentation or plans of operations. New South Wales production facilities and mine areas are administered under the Protection of the Environment Operations Act 1997, which licences organisations and regulates the level of all discharges into the environment. Load based licensing fees are determined by the Environmental Protection Authority based on the level of discharges. The Environmental Planning and Assessment Act 1979 apply to the approval conditions of the Group’s activities. Some sites also operate within additional requirements imposed by local government and NSW Department of Primary Industries. Victorian production sites are licensed under the Environment Protection Act 1970, including various state environmental protection policies and regulations. Mining leases operate under the Extractive Industries Development Act 1995. South Australian production facilities are licensed under the Environment Protection Act 1993, while mining and rehabilitation plans are approved in accordance with 2011 Regulations under the Mining Act 1971. Western Australian operations operate under the Environmental Protection Act 1986. They have licences issued from a number of government agencies, including the Department of Environment and the Department of Mines and Petroleum. A number of our sites also operate under additional requirements issued by local shires and councils. Tasmanian operations and mining leases operate under the Environmental Protection Act of 1973 and the Mineral Resources Development Act 1995. Audit and assurance programs are an integral aspect of Brickworks’ environment management systems assisting in measuring performance and mitigating environmental risks. A total of 17 independent annual audit reports covering 21 sites were completed this year, which were supplemented by two internal audits carried out by Brickworks’ environmental personnel. The independent environmental auditors complete an environmental compliance audit of all factory and quarry sites every one to three years, with the audit frequency determined by risk analysis and the results of previous audits. The purpose of this is to ensure compliance with all current licences and regulations and identify risks of an adverse environmental event under any other relevant legislation. During the year, results of our environmental management process indicated that some emissions were in excess of licence limits. The Group continues to investigate all these instances of non-compliances, working closely with the relevant authorities to resolve these issues. The Queensland Department of Environment and Heritage Protection issued a summons to Austral Masonry (Qld) regarding the unlicensed operation of a small sand quarry at Bundaberg. The site has been completely rehabilitated and the Company is working with the regulator to resolve the matter without a need for a trial. Risk Management The Board of Brickworks has adopted a Risk Management framework that identifies Risk Tolerance and Risk Appetite for the Group and then considers how each identified risk is placed within that framework. That framework involves assessment of the likelihood of an event occurring, the potential impact of each event and the controls and processes in place to continually mitigate each risk. The significant risks that may impact the achievement of the Group’s business strategies and financial prospects are: 14 Building Products The achievement of business objectives in the Building Products Group may be impacted by the following significant risks: Risk Serious Safety Incidents The Group has a strong safety culture and a well developed WHS system (refer Mitigation Environmental incident Alternate products Shift in housing trend New competitor Plant performance Production capacity Business Interruption Asbestos Risk further “Safety”). The Group has a comprehensive environmental compliance system and strong commitment to environmental protection (refer further “Environment”). The Group has a strong focus on research and development, monitors market trends and has strategies to diversify its range of building products and its marketing approach. The movement away from detached housing threatens the Group’s traditional market. The Group has strategies to diversify its range of building products and its marketing approach. Whilst barriers to entry are significant, the Group monitors both domestic manufacturing and import competitors and has adopted a customer relationship and quality model, supported by investment in research and development. All plants are subject to regular preventative maintenance programs and appropriately qualified staff are employed to monitor and oversee production activities. Plant performance is measured and monitored daily, weekly and monthly. The Group manages production capacity by restarting, building and mothballing plant to adapt to cyclical market conditions. In the 2016 financial year, the Group commenced the recommissioning of the Cardup plant and announced the planned closure of the Malaga plant in WA. There are multiple facilities throughout Australia that can transport products between locations as and when required. The major facilities have rolling risk reviews and reporting by outside parties. The business also maintains significant insurance policies to manage the physical loss of assets and any loss of income due in an insurable interruption. There has been a comprehensive review of all locations for the presence of asbestos. Building cladding is regularly removed and replaced with non-asbestos based materials. Where any asbestos is found, either within a plant or during rehabilitation, it is immediately quarantined and removed by qualified, reputable contractors, using the most diligent safety standards. Land and Development The achievement of business objectives in Land and Development may be impacted by the following significant risks: Risk Market Risk Mitigation The industrial property cycle may deteriorate, resulting in softening capitalisation rates and lack of growth. The Group manages the risk by monitoring the key economic drivers, employing property professionals who understand the property cycle and undertaking development in joint venture with Goodman Group. The Group regularly conducts hold/sell assessments. Serious Safety Incidents The Group has a strong safety culture and a well developed WHS system (refer further “Safety”). Property Trust Financing The joint property trusts maintain facilities with multiple lenders with various tenors up to 7 years. In addition, gearing is maintained at prudent levels through the property cycles. The Group takes a long term, patient approach to achieving the highest and best use for each property. The rezoning process for a property usually commences prior to finalisation of its existing use. Rezoning Risk Investment The achievement of business objectives in the Investment activities may be impacted by the following significant risks: Risk Market Risk Group Mitigation The Group’s investment in WHSP is subject to market movements and the underlying performance of WHSP. The WHSP investment is diversified across industries other than those in which the balance of Brickworks specialises, which provides a stable stream of dividends over the long term. The WHSP group may have significant exposure to the Coal and Telecommunications Markets. The achievement of business objectives in the Group activities may be impacted by the following significant risks: Risk Financing Risk Mitigation The Group maintains conservative gearing levels below 20% in recognition of its cyclical nature. Senior debt facilities are maintained with five lenders with whom an open and transparent relationship is maintained. Facilities are maintained over various tenors ranging from 2 to 5 years, ensuring that a maximum of $200 million will expire at any one point in time. 15 Information on Directors Robert D. Millner FAICD Chairman Mr R. Millner is the non-executive Chairman of the Board. He first joined the Board in 1997 and was appointed Chairman in 1999. Mr Millner has extensive corporate and investment experience. He is a member of the Remuneration Committee and the Nomination Committee. Other directorships: Washington H. Soul Pattinson and Co. Ltd Director since 1984 New Hope Corporation Ltd TPG Telecom Ltd BKI Investment Company Ltd Milton Group Director since 1995 Director since 2000 Director since 2003 Director since 1998 Australian Pharmaceutical Industries Ltd Director since 2000 Michael J. Millner MAICD Deputy Chairman Mr M. Millner is a non-executive Director who was appointed to the Board in 1998. He is on the board and a councillor of the Royal Agricultural Society of NSW, including Chair of the RAS Foundation, and has extensive experience in the investment industry. Mr Millner is the Deputy Chairman of the Board, and a member of the Remuneration Committee and the Nomination Committee. Other directorships: Ruralco Holdings Ltd Director since 2007 Brendan P. Crotty LS; DQIT; Dip.Bus Admin; MAPI; FAICD; FRICS Director Mr Crotty was appointed to the Board in June 2008 and is a non-executive Director. He brings extensive property industry expertise to the Board, including 17 years as Managing Director of Australand until his retirement in 2007. He is a director of a number of other entities that are involved in the property sector, including Chairman of Western Sydney Parklands Trust as well as being on the Macquarie University Council. He is the Chair of the Remuneration Committee, and a member of the Audit and Risk Committee and the Nomination Committee. Other directorships: Barangaroo Delivery Authority Appointed 2009, Resigned 2014 GPT Group Director since 2009 David N. Gilham FCILT; FAIM; FAICD Director Mr Gilham was appointed to the Board of Brickworks in 2003. He has extensive experience in the building products and timber industries. He was previously General Manager of the Building Products Division of Futuris Corporation and Managing Director of Bristile Ltd from 1997 until its acquisition by Brickworks in 2003, and has been involved with various timber companies. He is a member of the Remuneration Committee and the Nomination Committee. Deborah R. Page AM B.Ec, FCA, FAICD Director Mrs Page was appointed to the Board in July 2014 and is a non executive Director. Mrs Page has extensive financial expertise, arising initially from her time at Touche Ross/KPMG Peat Marwick including as a partner, and subsequently from senior executive roles with the Lend Lease Group, Allen Allen and Hemsley and the Commonwealth Bank. She also has experience as a Director in a number of sectors, including Property, Energy & Renewables, Insurance, Funds Management, and Public Sector bodies. Mrs Page is the Chair of the Audit and Risk Committee, and a member of the Nomination Committee and the Remuneration Committee. Other directorships: Service Stream Ltd BT Investment Management Ltd GBST Holdings Ltd Investa Listed Funds Management Ltd (responsible entity of ASX listed Investa Office Fund) Director since 2010 Director since 2014 Director since 2016 Appointed 2011, Resigned 2016 Australian Renewable Fuels Ltd Appointed 2012, Retired 2015 The Colonial Mutual Life Assurance Society Ltd (wholly owned subsidiary of CBA) Appointed 2007, Resigned 2014 Commonwealth Insurance Ltd (wholly owned subsidiary of CBA) Appointed 2007, Resigned 2014 16 The Hon. Robert J. Webster MAICD Director Mr. Webster was appointed to the Board in 2001 and is a non executive Director. He is Senior Client Partner in Korn Ferry’s Sydney office. He is the Lead Independent Director, Chair of the Nomination Committee, a member of the Remuneration Committee and a member of the Audit and Risk Committee. Other directorships: Greater Sydney Land Services Board Appointed 2013 Allianz Australia Insurance Ltd Appointed 1997, Resigned 2013 Lindsay R. Partridge AM BSc. Hons. Ceramic Eng; FAICD; Dip CD Managing Director Mr Partridge graduated as a ceramic engineer from the University of New South Wales, and worked extensively in all facets of the clay products industry in Australia and the United States before joining the Austral Brick Company in 1985. In 2008, Mr Partridge completed the Stanford University Executive Development Program. He held various senior management positions at Austral before being appointed Managing Director of Brickworks in 2000. Since then, Brickworks has grown significantly in terms of size and profitability as its operations have become Australia-wide, with its product range extending beyond bricks to tiles, pavers and masonry and activities expanding into property development. Mr Partridge has also had extensive industry involvement, and is currently a director of various industry bodies, including the Australian Brick and Blocklaying Training Foundation and the Clay Brick and Paver Institute. In 2012 he was awarded the Member of the Order of Australia for services to the Building and Construction Industry, particularly in the areas of industry training and career development, and to the community. He is a director of Children’s Cancer Institute Australia. Information on Chief Financial Officer and Company Secretary Robert Bakewell B.Comm; CA Chief Financial Officer from 1 June 2016 Mr Bakewell was appointed Chief Financial Officer in June 2016. He is a finance and commercial executive with more than 20 years experience in listed Australian and international industrial companies including significant experience in mergers and acquisitions, restructuring, balance sheet and capital management and investor relations. Mr Bakewell was previously Chief Financial Officer of Arrium Limited since 2010 and prior to this held various senior management roles with ABB. Alexander J. Payne B.Comm; Dip CM; FCPA; FCIS; FCSA Chief Financial Officer until 31 May 2016 Mr Payne is an accountant with significant financial experience, who joined The Austral Brick Company in 1985. In 1987 he was appointed Group Company Secretary, and was appointed Chief Financial Officer in 2003. He is a Director of BKI Investment Company Ltd. In 2011, Mr Payne completed the Stanford University Executive Development Program. Mr Payne will retire on 30 September 2016 after 30 years with the Company. Susan Leppinus B.Ec; Llb; Grad Dip App Fin Company Secretary and General Counsel Susan Leppinus was appointed as Company Secretary and General Counsel in April 2015. Ms Leppinus has ten years experience as a company secretary and general counsel, working with boards of directors and senior management in publicly listed companies most recently with David Jones Limited and Crane Group Limited. Meetings of Directors The number of meetings of directors (including meetings of committees of directors) held during the year and the number of meetings attended by each director are set out below. All directors were eligible to attend all director and committee meetings held. Directors’ meetings Audit & Risk Remuneration Nomination Committee Committee Committee Independent Board Committee Number of meetings held: Number attended: R.D. Millner M.J. Millner L.R. Partridge B.P. Crotty D.N. Gilham D.R. Page R.J. Webster 11 11 9 11 11 11 11 10 2 N/A N/A N/A 2 N/A 2 1 3 3 3 N/A 3 3 3 3 2 2 2 N/A 2 2 2 2 6 N/A N/A 6 6 6 5 6 17 Directors interests As at 20 September 2016, Directors had the following relevant interests in Brickworks shares: R.D. Millner M.J. Millner L.R. Partridge B.P. Crotty D.N. Gilham D.R. Page R.J. Webster ORDINARY SHARES 5,774,100 5,748,142 189,982 15,209 102,268 4,800 15,922 As at 20 September 2016, no Director had relevant interests in debentures of, or interests in a registered scheme made available by Brickworks or a related body corporate. As at 20 September 2016, no Director had any rights or options over shares in debentures of, or interests in a registered scheme made available by Brickworks or a related body corporate. As at 20 September 2016, there were no contracts entered into by Brickworks or a related body corporate to which any Director is party, or under which any Director is entitled to benefit nor were there any contracts which confer any right for any Director to call for or deliver shares in, debentures of, or interests in a registered scheme made available by Brickworks or a related body corporate. 18 DIRECTORS’ REPORT – REMUNERATION REPORT The Remuneration Report has been audited in accordance with s300A of the Corporations Act 2001. 1. Overview 1.1 Executive Summary The Brickworks Board of Directors is committed to ensuring that the remuneration framework is focused on driving a performance culture that is closely aligned to the achievement of the Company’s strategy and business objectives. During financial year 2015 the Board made a number of changes to its remuneration structure as disclosed in last year’s Remuneration Report as follows: • • • enhanced disclosure particularly around the payment of short term incentives to Key Management Personnel (KMP); placed greater emphasis on and enhanced the level of disclosure of the performance criteria used to determine shares allocated under the long term incentive plan (LTI); and introduced a new TSR performance measure for the LTI which applies to the Managing Director (MD) and the Chief Financial Officer (CFO). Following the vote on the Remuneration Report at the Company’s 2015 Annual General Meeting and a review of the relevant proxy advisor reports, the Board has enhanced its disclosure of the Company’s remuneration framework particularly regarding: • • • • the link between performance and payment of short term incentives (STI) to KMP including outcomes against various performance hurdles of the STI; the rationale behind the LTI and selected TSR measure for the MD and CFO; enhanced disclosure regarding the pre-allocation performance measures for the LTI; and historical performance of the Brickworks share price against index returns. The key remuneration objectives remain driving higher performance and retaining key staff. 1.2. Details of Key Management Personnel The following persons had authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, including any director (whether executive or otherwise) of that entity during the full financial year. Directors The following persons were directors of Brickworks Ltd during the full financial year: Mr R. Millner Mr M. Millner Non-executive Chair Non-executive Deputy Chair Mr L. Partridge Executive Director (Managing Director) Mr B. Crotty Mr D. Gilham Mrs D. Page Non-executive Director Non-executive Director Non-executive Director The Hon. R. Webster Non-executive Director Executives Mr A. Payne Mr R. Bakewell Ms M. Kublins Mr D. Fitzharris Mr M. Finney Chief Financial Officer until 31 May 2016. He remains a KMP until his retirement on 30 September 2016 Chief Financial Officer from 1 June 2016 Executive General Manager – Property & Development Group General Manager Sales – Brickworks Building Products Group General Manager – National Operations and Austral Bricks East Coast until 1 April 2016 Mr P. Scott Group General Manager WA – Brickworks Building Products 1.3. Remuneration Committee The Board has an established Remuneration Committee which operates under the delegated authority of the Board of Directors. A summary of the Remuneration Committee charter is included on the Brickworks website (www.brickworks.com.au). All non-executive Directors of Brickworks are members of the Remuneration Committee and the membership of the Remuneration Committee is as follows: Mr B Crotty Mr D Gilham Mr M Millner Mr R Millner Mrs D Page Non-executive Chair (Committee Chair) Non-executive Director Non-executive Director Non-executive Director Non-executive Director The Hon. R Webster Non-executive Director 19 The main functions of the Remuneration Committee are to assist the Board in fulfilling its responsibilities to: • • • • • ensure that remuneration policies and practices are consistent with Brickworks’ strategic goals and human resources objectives; enable Brickworks to attract and retain executives and Directors who will create value for shareholders; equitably, consistently and responsibly reward executives having regard to the performance of Brickworks, the performance of the executives and the general pay environment; ensure executive succession planning is adequate and appropriate; and retain key executives in the event that competitors attempt to recruit them. The Committee is authorised by the Board to obtain external professional advice, and to secure the attendance of advisers with relevant experience and expertise if it considers this necessary. 1.4. Use of remuneration consultants Where the Remuneration Committee will benefit from external advice, it will engage directly with a remuneration consultant, who reports directly to the Committee. In selecting a suitable consultant, the Committee considers potential conflicts of interest and requires independence from the Group’s KMP as part of their terms of engagement. • During the financial year, the Remuneration Committee appointed Guerdon & Associates (Guerdons) as the remuneration adviser to provide remuneration information regarding remuneration benchmarking for executive KMP. • The consideration paid for the remuneration benchmarking for executive KMP provided by Guerdons was $35,695. • Remuneration information was provided to the Remuneration Committee as an input into decision making only. The Remuneration Committee considered the information in conjunction with other factors in making its remuneration determinations. • The Committee is satisfied the advice received from Guerdons is free from undue influence from the executive KMP to whom the remuneration information applies, as Guerdons were engaged by, and reported to, the Chairman of the Remuneration Committee. • During the year no remuneration recommendations, as defined by the Corporations Act, were provided. 1.5. Board Policies for determining remuneration Policies for determining the nature and amount of remuneration for the executive KMP are developed by the Remuneration Committee for approval by the Board. Once approved by the Board, these policies are applied consistently across all divisions within the Group. Brickworks’ remuneration policy is designed to ensure that every executive KMP’s remuneration reflects their duties and responsibilities, as well as ensuring that the Group is able to attract and retain key talent cost effectively. The Board of Brickworks recognises that the Group’s performance is very dependent on its capacity to attract, retain and develop highly skilled and motivated employees. Whilst remuneration is a key factor in achieving these objectives, the Board recognises there are other factors which influence this capacity, including the culture, reputation, work environment, human resource and professional development policies of the Group. Executive KMP remuneration policies reflect the unique business environment and circumstances in which Brickworks operates as well as its strategic and operational responses to competitor activity and market volatility. 2. Remuneration components 2.1 Group performance, shareholder wealth and remuneration Executive KMP remuneration is comprised of both fixed and performance-based components. The structure of the remuneration is designed to provide an appropriate balance between these components. Fixed remuneration is made up of base salary, superannuation and other benefits such as the provision of Company maintained motor vehicles (if provided). Fixed remuneration is approved by the Remuneration Committee based on data sourced from external providers, including independent remuneration data providers. Performance-based remuneration is tied to the performance of the individual and the division and/or Group in which they work. Any such remuneration earned is available as a combination of Brickworks’ shares purchased through the Brickworks Deferred Employee Share Plan and cash. Brickworks’ remuneration policy has been tailored to help align executive interests with those of shareholders through the use of variable components. Brickworks STI has been designed to focus executives on the necessity to achieve a range of agreed targets for their respective businesses. The Board aims to improve profit and cash flows, improve production and operational efficiencies, rationalise non – performing assets, retain key employees who have developed key skills and expertise in the industries in which the Group operates, ensure the health and safety of employees and provide demonstrated leadership on environmental compliance. The remuneration strategy supports this through its short term performance incentive program and its long term incentive program. The short term incentive program has as key performance measures for each executive KMP the financial and non- financial performance measures to support its strategy as outlined further in section 2.4. Short term incentives paid reflect the increased profit generated by the Building Products and the Land and Development division in FY2016. The primary purpose of Brickwork’s LTI is the retention of the Company’s senior executive team, as many years may be required for an individual to develop a complete knowledge of the operating and manufacturing 20 processes for building materials. An executive who knows the Company’s clients extremely well and has a long history of successful negotiations with them will also be difficult to replace. The Board has developed an effective retention based long term incentive plan which operates over a series of rolling 5 year periods. In addition, for share allocations to the Managing Director and the Chief Financial Officer approved after 31 July 2015 a TSR performance measure applies, recognising their Group roles and their overall responsibility for the long term value of the Company. The Board considers the LTI has been effective in increasing shareholder wealth, and will continue to be effective in creating additional shareholder value over the long term, placing Brickworks in a strong position to outperform its competitors. Because of the 5 year vesting periods that apply to all of the shares granted to Brickworks executives, there are very strong incentives for share price growth to be achieved and maintained at an individual and a group level. The ongoing inclusion of a TSR component in the long term incentive plans for the Managing Director and the Chief Financial Officer further enhances the alignment of executive interests with those of shareholders. Brickworks’ ongoing emphasis on aligning LTI outcomes with medium-long term financial performance has fostered the development and maintenance of an organisational culture that is characterised by co-operative endeavour and mutual respect which has contributed to the following outperformance: • An increase in the annual EBIT (before significant items) generated by the Building Products and Land and Development divisions from $47.5 million in the 2012 financial year to $148.8 million in the year to 31 July 2016. • • The Returns on NTA for the Building Products and Land and Development divisions demonstrate an increase from 6.2% in 2012 to 16.1% in 2016. The Operating Cash Flows generated by the Building Products and Land and Development divisions has demonstrated continuous improvement from $45.7 million for the year ending 31 July 2012 to $121.8 million for the year ending 31 July 2016. While the Board is of the opinion that the Company’s current strategies and operational initiatives will deliver superior long term results to shareholders and performance based remuneration is tied to the financial results delivered by the building products and property segments, Brickworks’ share price may also be influenced by factors outside of management’s control. The following table shows a number of relevant measures of Group performance over the past five years. Although a detailed discussion on the current year results is included in the review of operations and is not duplicated in full here, an analysis of the figures below demonstrates dividend growth, and consistent performance in a difficult cyclical environment. 2012 2013 2014 2015 2016 Total revenue (millions) $556.9 $606.5 $670.3 $723.6 $751.0 Combined Building Products & Property EBIT before significant items (millions) Net profit before significant items after tax (millions) $47.5 $82.4 $107.5 $120.7 $148.8 $78.9 $100.0 $101.3 $120.3 $147.1 Net profit after tax (millions) $43.3 $85.2 $102.8 $78.1 $78.2 Net Tangible Assets (millions) $1,393.1 $1,450.9 $1,516.8 $1,572.1 $1,630.2 Share price at year end $10.08 $12.20 $14.30 $14.90 $15.03 Dividends – ordinary shares (cents) 40.5 40.5 42.0 45.0 48.0 Employee Productivity Brickworks productivity measures have also improved over time. The following graph shows historical revenue per employee. Despite having grown substantially employee productivity has not been compromised in the process. 21 Total Shareholder Returns In addition, as can be seen in the graph below, Brickworks continues to outperform the All Ordinaries Accumulation Index in terms of Total Shareholder Return over the medium to long term. Returns for the 3 years to 31 July 2016 were 10.4%, representing a 1.9% outperformance compared to the All Ordinaries Accumulation Index of 8.5%. Similarly returns over 5 years to 31 July 2016 were 12.3 %, representing a 2.9% outperformance compared to the All Ordinaries Accumulation Index of 9.4%. Over 15 years, Brickworks has delivered returns of 8.7% per annum, compared to index returns of 8.1% per annum. 2.2 Potential Remuneration Mix Total remuneration for the Managing Director (MD) and the other executive KMP comprises both fixed remuneration and an at risk component (STI and LTI). The mix shown in the graph below is the potential remuneration based on the current remuneration at 31 July 2016 with STI and LTI based on maximum opportunities. Any excess STI earned above 50% of total fixed remuneration will not be paid as a cash bonus but will be added to the long term incentive share allocation for that year with deferral over 5 years. This structure is designed to pay executives competitively based on their performance. POTENTIAL MANAGING DIRECTOR REMUNERATION MIX AVERAGE POTENTIAL OTHER EXECUTIVE KMP REMUNERATION MIX Fixed Remuneration 51.2% Fixed Remuneration 53.0% STI – Cash 24.4% LTI 24.4% STI – Cash 23.6% LTI 23.6% 2.3. Remuneration Component- Fixed Remuneration There has been no material increase in total fixed remuneration for executive KMP during the 2016 financial year. 2.4. Remuneration Component - Short Term Incentives (STI) The table below outlines the STI Plan: Purpose Timing The STI is an annual bonus designed to reward executives for meeting or exceeding financial and non financial objectives over a one year period. The STI is awarded in cash up to a maximum of 50% of total fixed remuneration (including base salary, superannuation and car allowance). Any excess STI earned above 50% of total fixed remuneration will not be paid as a cash bonus but will be added to the long term incentive share allocation for that year with deferral over 5 years. 22 Target opportunities Performance measures The MD and CFO have a target STI opportunity of 50% of base salary while other executives have a target STI opportunity of between 12.5% and 50% of base salary. STI as a proportion of base salary for an employee increases as that employee gains greater responsibility and has greater capacity to influence the performance of the business as a whole. Each year the Remuneration Committee sets KPI’s for the MD and CFO for the financial year, with a view to directly aligning the individuals’ annual incentive opportunity to execution of the Group’s business strategy. The MD determines the KPI’s which are aligned to the delivery of the strategy and performance of the business. Payments under the STI are determined by performance against KPIs. STI performance measures and weightings vary by executive depending on individual accountabilities for the financial year 2016. The metrics and their rationale for selection are as follows: Rationale for selection Financial measures Divisional profit compared with the base target Cash generation Non-financial measures Strategic Operational Safety, Heath and Environment People Focus senior executive attention on results and performance for segments for which they have direct responsibility. Managing cash to ensure cash and working capital is available whenever and wherever required by the business. Focuses senior executives on strategic initiatives such as new product development, network strategy, rationalisation of surplus assets, restructuring and rationalisation of operations to deliver growth and improve business performance. Key operational deliverables align management to the strategic initiatives of the Group with a focus on long-term sustainability of earnings such as production and returns on net tangible assets, efficiencies, operational and manufacturing improvements. Rewards employees for demonstrated leadership in enhancing workplace safety and taking a sustainable approach to operations through scientific innovation. Effective leadership, talent development, retention and succession planning are critical to the success of the business and underpin financial performance. Weighting of performance measures The STI for all KMP is weighted 75% for financial measures and 25% for non- financial measures. The payout schedule against the financial measures is outlined below: Percentage of financial component payable (ie. 75% of total STI) % of profit target achieved Between base target and upper target > upper target % of cash target achieved Between base target and upper target Straight-line between 50% and 100% Pro rata equal to the percentage over budget to a maximum of 50% of total fixed remuneration Straight line between 50% and 100% There is no upside available against cash and non-financial measures. 23 Performance assessment MD and CFO At the end of the financial year the Remuneration Committee assesses actual performance against their respective KPIs and recommends the STI quantum to be paid to the individuals for approval by the Board. These assessment methods have been chosen as they provide the Remuneration Committee with an objective assessment of each individual’s performance. Other Executives At the end of the financial year the MD assesses the actual performance against their respective KPIs and determines the STI quantum to be paid to the senior executives. The MD provides these assessments to the Remuneration Committee annually. The Remuneration Committee and the MD have the discretion to take into account any significant non-cash items, for example acquisitions and divestments and one-off events/abnormal/non-recurring items in determining whether the financial KPIs have been achieved, wherever and whenever this is considered appropriate for linking remuneration reward to Company performance. Other features Unvested Performance Shares On retirement or redundancy of KMP unvested performance shares remain on foot and vest according to the original terms of the five year grant period. Clawback Although there are currently no clawback clauses for STI payments, each executive has a strong ongoing interest in the financial performance of the Company and thereby the value of the Company’s shares. Termination For resignations or terminations for cause, the STI payment is forfeited unless otherwise determined by the MD or the Board. STI outcomes The table below outlines the weighting of financial and non-financial KPIs in relation to each executive KMP for financial year 2016 and the performance achieved. Unless otherwise stated all earnings measures exclude significant items. Executive Financial 75% Non-financial 25% Measure(s) Performance Measure(s) MD & CFO • NPAT for Building Products and Land & Development against target • Operating cash flow for Building Products and Land & Development against target • NPAT against target EGM Land & Development 109% achieved • Mixture of Strategic, Operational, Safety, Health and Environment and People relevant to the executive 111% achieved Performance 100% achievement of non-financial KPIs 114% achieved • Mixture of Strategic and Operational relevant to the executive 100% achievement of non-financial KPIs • Divisional cash 107% achieved generation against target GM Sales – Brickworks Building Products • Divisional EBIT against target for Bristile Roofing East Coast, Austral Bricks East Coast, Austral Masonry, Austral Precast and Export 107% achieved • Mixture of Strategic, Operational, Safety, Health and Environment and People relevant to the executive 98% achievement of non-financial KPIs • Divisional cash 124% achieved generation against target for Bristile Roofing East Coast, Austral Bricks East Coast, Austral Masonry, Austral Precast and Export 24 • Divisional EBIT against Not achieved target • Mixture of Strategic, Operational, Safety, Health and Environment and People relevant to the executive 60% achievement of non-financial KPIs. • Divisional cash Not achieved generation against target GM WA Brickworks Building Products STI achieved The table below outlines the weighting of financial and non-financial KPIs in relation to each executive KMP for 2016 and the performance achieved. The following table outlines the percentage of target STI achieved (and forfeited) in relation to financial and non- financial KPI’s, and the total STI awarded, for each executive KMP for 2016. Financial Non-financial Executive STI On Target Opportunity Weighting % Achieved % Forfeited % Weighting % Achieved % Forfeited % STI awarded $ STI over performance subject to LTI $ 637,500 300,000 227,500 75% 75% 75% 114% 114% 107% 280,000 75% 103% 0% 0% 0% 0% 25% 25% 25% 100% 100% 100% 0% 0% 0% 669,000 34,067 324,250 6,605 239,045 – 25% 98% 2% 280,000 5,427 163,875 75% 0% 100% 25% 60% 40% 25,000 – MD CFO EGM Land & Development GM Sales – Brickworks Building Products GM WA Brickworks Building Products 25 2.5. Remuneration Component – Long- Term Incentives (LTI) What is the LTI? The Group operates an LTI Plan through the Brickworks Deferred Employee Share Plan in which employees receive Brickworks Limited shares. No consideration is payable by participants for shares under the terms of the plan. Scope Purpose Opportunity The LTI is a broad based employee share plan with 590 employees participating as at 31 July 2016 via 1,399,459 shares on allocation of which 50.62% remain unvested (and 49.38% vested). In addition 46,818 shares in the plan were forfeited during the year to 31 July 2016. The primary purpose of the LTI is the retention of the Company’s senior executive team. For example, acquisition of the necessary knowledge to successfully manage the manufacturing processes for building materials usually requires an immersion period of at least 5 years and in some sectors, such as brick production, as much as 10 years. Similarly, an executive who knows the Company’s clients extremely well and has a long history of successful negotiations with them will also be difficult to replace. Not surprisingly, Brickworks seeks to retain as many of its experienced executives as practically possible. For the 2016 financial year, the value of shares granted was dependent upon the employee’s position within the Group and their base salary. For the MD and all other executive KMP, this entitlement was up to 50% of base salary. However, the value of LTI shares may exceed these percentages as a consequence of STI cash payments being capped at 50% of fixed remuneration and outperformance against the STI measures being recognised by the grant of additional LTI shares. Pre-allocation performance measures Performance criteria will be considered by the Board at its discretion before plan shares are allocated. This includes an assessment of the factors below and having regard to general market conditions that have an impact on demand for Brickworks products. LTI allocations to KMP will reflect the level of performance achieved against these criteria. Unless otherwise stated all earnings measures exclude significant items. Executive Measure MD & CFO • Return on NTA Building Products and Land and Development over past 3 years against target Performance Achieved • NPAT for Building Products and Land and Development over past 3 years against target Achieved • Operating cash flow for Building Products and Land & Development against target over the past 3 years Achieved • Strategic goals including consolidation and growth, securing lowest cost manufacturing facilities and create better building solutions Achieved EGM Land & Development • Return on NTA Land and Development over past 3 Achieved years against target • EBIT for Land and Development over past 3 years Achieved against target • Divisional cash generation for Land and Achieved Development against target over the past 3 years • Strategic goals including on-going rezoning of Achieved surplus land and its reallocation to the Property Trust GM Sales – Brickworks Building Products • Return on NTA for Bristile Roofing East Coast, Achieved Austral Bricks East Coast, Austral Masonry, Austral Precast and Export over the past 3 years against target • EBIT for Bristile Roofing East Coast, Austral Bricks East Coast, Austral Masonry, Austral Precast and Export over the past 3 years against target Achieved • Divisional cash generation against target for Bristile Achieved Roofing East Coast, Austral Bricks East Coast, Austral Masonry, Austral Precast and Export over the past 3 years • Strategic goals including development and strengthening of customer relationships and channels to market with a focus on complementary products across the Group Substantially achieved 26 GM WA Brickworks Building Products • Return on NTA for Austral Bricks WA and Bristile Not achieved Roofing West Coast over the past 3 years against target • EBIT for Austral Bricks WA and Bristile Roofing West Not achieved Coast over the past 3 years against target • Divisional cash generation against the target for Not achieved Austral Bricks WA and Bristile Roofing West Coast over the past 3 years • Strategic goals including plant rationalisation and modernisation Partially achieved Post-allocation performance measures For allocations approved and made after 31 July 2015, 50% of shares allocated to the MD and CFO will be assessed for vesting against an annual TSR target of 7.0% (TSR Shares). A TSR based vesting test will not apply to any allocation made or agreed to be made before 31 July 2015 and not yet vested. The assessment of TSR Shares against the TSR target is undertaken progressively for 20% of the TSR Shares on 31 July for each of the 5 years following the allocation date. 50% of the shares allocated to the MD and the CFO will continue to vest progressively at 20% per year based on tenure. The share price used at commencement of each tranche for assessing TSR performance of Brickworks shares is the Volume Weighted Average Price (VWAP) for the month of July prior to the allocation of TSR Shares. The actual share price used to compare to the TSR target share price is the July VWAP in the year of testing. In any one year up to five TSR Share tranches allocated will be tested. The TSR performance target for each allocation in that year is the average of 5 Brickworks share prices calculated from 5 different commencement VWAPs on 5 different years (i.e. it will include the average of a Brickworks one year TSR, a two year TSR, a three year TSR, a four year TSR and a five year TSR). The level of vesting applicable to each tranche will be as follows subject to the overriding requirement that for each allocation shares can only vest up to the maximum of the amount of that allocation: • If the 7.0% TSR target (as explained above) is met, 100% of TSR Shares will vest; • If a 6.0% TSR target (as explained above) is met, then 50% of the TSR Shares will vest; • If the TSR target (as explained above) of 6.0% is not met, then no shares will vest in that initial year of testing. To ensure a long term focus is maintained by the MD and CFO, to the extent that any tranche does not vest in one year it will be deferred and form part of the shares that are eligible for vesting in the following years. In other words, underperformance in one year can be made up by over performance in the following years, provided that underperformance may only be made up by outperformance by the end of the 6th year from the date of first allocation; • If the TSR target (as explained above) of 8.0% is met, there will be an incremental vesting of up to 50%, of each prior year’s entitlement, if any of the allocation did not vest. To ensure long term focus is maintained, by the MD and CFO this enables underperformance in previous years to be partially made up by this over performance in this and the following years. The cumulative vesting can therefore reach a level that will be equivalent to but not more than the total number of shares that would have been allocated and vested as at that date, if all TSR hurdles had been satisfied. TSR performance between 6.0% and 8.0% and above will generate pro-rata vesting entitlements on a straight-line basis. The broad based nature of the LTI that applies to 40% of the Company’s workforce means that a TSR target is appropriately applied to the MD and CFO who have a material impact on the overall share price. This TSR measure should not be extended to employees that do not have control over Brickworks share price. An absolute TSR target was chosen over a relative TSR measure. A primary concern about using relative TSR was the volatility in companies’ performance ranking which can be perceived by plan participants as of more limited value than an absolute performance measure due to an executives’ lack of direct control over relative TSR. The Board is also wary of the potential for TSR to reward share price volatility, as companies with more volatile TSR are more likely to achieve maximum vesting. Furthermore, relative TSR ranking is highly dependent on the peer group selection and the choice of performance period, as the selection of the date or averaging period over which relative TSR is measured can have a significant impact on the outcome. An absolute TSR target has also been chosen due to the difficulty of choosing a meaningful benchmark of companies to use for a relative TSR assessment. This is particularly so given the diverse nature of the Company’s operations which include Building Products, Land and Development and Investments. 27 Rationale for chosen performance measures and hurdles There has been actuarial input in relation to the new TSR performance measure which, confirms that the vesting tests provide an appropriate balance between the key objectives of performance and retention. The share price graph on page 22 also helps to illustrate the appropriateness of a 7% absolute TSR given historical performance of Brickworks shares against the All Ordinaries Accumulation Index on a 1, 3 and 5 year basis. An absolute TSR also avoids the situation where an LTI may be awarded despite particularly low or negative TSR being achieved which aligns the plan with shareholder interests. Also aligned with shareholders’ interests, for tranches of shares that are being tested for vesting in any particular year, a TSR of at least 6.0% must be achieved for 50% of TSR Shares to vest. In addition, the TSR performance target for each allocation in any year is the average of 5 Brickworks share prices calculated from 5 different commencement VWAPs on 5 different years (i.e. it will include the average of a Brickworks one year TSR, a two year TSR, a three year TSR, a four year TSR and a five year TSR). The purpose of this is to average the share price calculation over a particular cycle to remove vesting exposure and to ensure a long term focus on the business by the MD and CFO is achieved. Other features Unvested Performance Shares On retirement or redundancy unvested performance shares for executive KMP remain on foot and vest according to the original terms of the five year grant period including TSR performance testing. Clawback Although there are currently no clawback clauses for LTI payments, each executive has a strong ongoing interest in the financial performance of the Company and thereby the value of the Company’s shares. Change of Control If a change of control event occurs in relation to Brickworks Limited then any shares held by the employee share plan trust on behalf of a participant will vest immediately upon the announcement to ASX of a change of control event. Treatment of Dividends The employee receives the voting rights and any future dividends immediately upon the granting of shares. This reflects the relatively long term nature of the 5 year performance period and that the primary purpose of the LTI is one of retention. Executive’s entitlements to dividends attributable to the unvested performance shares reflect the reality that if there is no dividend entitlement, the number of performance shares that would need to be granted to achieve the same retention impact, is likely to be approximately 10% to 15% greater than current allocations. Sources of Shares The Board has the discretion to either purchase shares on-market or to issue new shares for participants. During the year shares granted to the MD through the LTI were purchased on market. Shares granted to employees other than the MD were issued as new shares. Derivatives Under the Company’s Share Trading Policy Brickworks shares are not permitted to be used to secure any type of financial product such as margin loans or similar. Options, collars and/or other financial derivatives must not be used in respect of any Brickworks shares. 2.5.1. Other Company wide share plan In addition to the Brickworks Deferred Employee Share Plan referred to above, Brickworks operates the Brickworks Exempt Employee Share Plan as part of the remuneration structure of the Group. All employees of Brickworks with a minimum 3 months service are eligible to join the Brickworks Exempt Employee Share Plan, whereby the employee may salary sacrifice an amount toward the purchase of Brickworks ordinary shares and the Company contributes a maximum of $3 per employee per week. The plans are aimed at encouraging employees to share in ownership of their Company, and help to align the interests of all employees with that of the shareholders. 2.5.2. Market purchases In accordance with ASX Listing Rule 10.14, the Company contribution to the Brickworks Exempt Employee Share Plan is unavailable to Directors of Brickworks. An employee’s right to transact shares in either share plan is governed by the trust deeds for those Plans and the Company’s policy regarding trading windows. At 31 July 2016, there were 722 employees participating in the Brickworks Deferred Employee Share Plan and the Brickworks Exempt Employee Share Plan, holding 1,508,253 shares (1.01% of issued capital). 28 During the year, all monthly share purchases through the Brickworks Employee Share Plans were performed on market, as were shares granted to the MD through the Deferred Employee Share Plan. Shares granted through the Deferred Employee Share Plan to employees other than the MD were issued as new shares. 3. Employment Contracts 3.1 Termination payments A payment will be made by the Company to a KMP upon termination or bona-fide retirement, equivalent to a proportion (ranging from 50% to 100%) of each executive’s average base pay for the previous 3 years, and any unvested shares held on behalf of the executive will remain within the Brickworks Deferred Employee Share Plan and retain their vesting criteria. Brickworks does not have fixed term contracts with its executive KMP. It can terminate an executive KMPs employment on 2 month’s notice (or payment in lieu of notice) and executives can terminate on 2 month’s notice (apart from the CFO who must be given 3 months notice, and the MD who must be given 6 months notice). If the MD or any other executive KMP is subject to immediate termination (for cause as defined in their employment contract), Brickworks is not liable for any termination payments to the employee other than any outstanding base pay and accrued leave amounts. All unvested shares held on their behalf by the Brickworks Deferred Employee Share Plan will be forfeited. 3.2 Executive Restraint All executive KMP gain strategic business knowledge during the course of their employment. Brickworks will use any means available to it by law to ensure that this information is not used to the detriment of the Company by any employee following termination. In order to protect the Group’s interests, Brickworks had an enforceable restraint through the executive’s legacy employment contract to prevent executives from either going to work for a competitor, or inducing other employees to leave the Company, for a specified period. In consideration of the restraint, executives would receive a monthly payment, equivalent to their existing base salary plus one twelfth of the average of the previous three annual bonuses, for a period of up to twelve months. Under the new arrangements, the terms of the restraint have been tightened to prevent employees from going to work for a competitor, customer or supplier for commensurate periods of between 6 and 12 months. A breach of the restraint conditions by an employee places at risk either any unvested shares held, or a potential monthly restraint payment at the discretion of the Company. The termination payments referred to above, together with the fact that most executives generally will also have unvested shares with a value in excess of the base remuneration for the restraint period at any time, are intended to discourage executives with deep corporate knowledge and significant capacity to contribute to the profitability of the Company from seeking employment with competitors. 4. Non-executive Directors The remuneration of non-executive Directors is determined by the full Board after consideration of Group performance and market rates for Directors’ remuneration. Non-executive Director fees are fixed each year, and are not subject to performance-based incentives. Brickworks’ non-executive Directors are not employed under employment contracts. The maximum aggregate level of fees which may be paid to non-executive Directors is required to be approved by shareholders in a general meeting. This figure is currently $1,000,000, and was approved by shareholders at the 2014 Annual General Meeting. Brickworks’ constitution requires that Directors must own a minimum of 500 shares in the Company within two months of their appointment. All Directors complied with this requirement during the year. Under legacy arrangements, non-executive Directors appointed prior to 30 June 2003 were entitled to receive benefits upon their retirement from office. These benefits were frozen with effect from 30 June 2003, and are not indexed. The Company has obtained specific independent legal advice regarding the entitlements of the three non-executive Directors referred to below which has confirmed that the amounts listed in the table will be payable, as they have been grandfathered under the previous legislation relating to the retirement benefits of non-executive Directors. These benefits for the three participating Directors, which have been fully provided for in the Company’s financial statements, are as follows: Name R. Millner M. Millner R. Webster Benefit as at 30 June 2003 $300,000 $150,000 $93,750 29 5. Remuneration of Key Management Personnel 5.1 Table of Remuneration to KMP The fees payable to non-executive Directors and the remuneration payable to other KMP during the financial year ending 31 July 2016 are disclosed in the following table. Directors RD Millner MJ Millner BP Crotty DN Gilham DR Page RJ Webster LR Partridge Total Directors Other Key Management Personnel AJ Payne1 RC Bakewell2 M Kublins DT Fitzharris M Finney3 P Scott D Millington4 Total Other KMP Year 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Year 2016 2015 2016 2016 2015 2016 2015 2016 2015 2016 2015 2015 2016 2015 Base fees / salary Non- monetary benefits Post Employment (Super) Total fixed remuneration Short Term Incentive Long Term Incentive 218,995 214,612 109,589 107,306 120,776 114,155 109,589 107,306 120,776 118,037 116,667 114,155 1,318,667 1,269,173 2,115,059 2,044,744 – – – – – – – – – – – – 20,805 20,388 10,411 10,194 11,474 10,845 239,800 235,000 120,000 117,500 132,250 125,000 10,411 120,000 10,194 11,474 11,213 11,083 117,500 132,250 129,250 127,750 10,845 125,000 – – – – – – – – – – – – Total 239,800 235,000 120,000 117,500 132,250 125,000 – – – – – – – 120,000 – – – – – 117,500 132,250 129,250 127,750 125,000 5,965 6,891 5,965 6,891 19,333 1,343,965 669,000 658,072 2,671,037 18,827 1,294,891 642,084 530,803 2,467,778 94,991 2,216,015 669,000 658,072 3,543,087 92,506 2,144,141 642,084 530,803 3,317,028 Base fees / salary Non- monetary benefits Post Employment (Super) Total fixed remuneration Short Term Incentive Long Term Incentive Total 629,167 609,673 121,756 480,167 465,673 540,667 521,173 414,635 605,259 466,667 455,173 159,188 2,653,059 2,816,139 12,432 7,532 2,039 5,728 5,358 31,743 41,916 15,729 6,332 5,621 4,457 13,744 73,292 79,339 19,333 18,827 660,932 320,638 290,636 1,272,206 636,032 304,007 244,899 1,184,938 3,244 127,039 – – 19,333 18,827 19,333 18,827 12,872 18,827 19,333 18,827 10,957 127,039 988,590 914,848 505,228 239,045 244,317 489,858 242,500 182,490 591,743 280,000 179,435 1,051,178 581,916 270,000 140,805 443,236 – – 992,721 443,236 630,418 290,000 137,505 1,057,923 491,621 478,457 183,889 25,000 84,000 – 88,310 98,890 – 604,931 661,347 183,889 93,448 2,819,799 864,683 802,698 4,487,180 105,092 3,000,570 1,190,507 804,589 4,995,666 Note: In addition to the total benefits above, these KMPs accrued leave entitlements during the year as follows: - L R Partridge: net increase of $3,024 in accrued leave entitlements (2015: $35,593 decrease) - A J Payne: net decrease of $16,229 (2015: $889 decrease) - R C Bakewell: net increase of $7,839 - M Kublins: net decrease of $16,522 (2015: $15,532 increase) - D T Fitzharris: net increase of $8,016 (2015: $9,631 increase) - M Finney: net increase of $30,975 (2015: $28,747 increase) - P Scott: net decrease of $20,502 (2015: $12,286 decrease) - D Millington: (2015: $23,231 increase) 1 Alex Payne was CFO until 31 May 2016. He remains a KMP until his retirement on 30 September 2016. In addition to the remuneration presented in the table above an additional liability of $630,195 has been recognised in the Group’s financial statements as at 31 July 2016 in relation to Mr Payne’s contractual retirement benefit. 2 Robert Bakewell was appointed CFO from 1 June 2016. 3 Mark Finney is no longer KMP from 1 April 2016. 4 David Millington is no longer KMP from 1 February 2015 but still remains a senior Brickworks executive. 30 The profit (before tax and excluding significant items) generated by the Land and Development division increased by 14% whereas the total remuneration paid to the Executive General Manager – Land and Development increased by 8%. The profit (before tax and excluding significant items) generated by the Building Products division increased by 34% whereas the total remuneration received by the Group General Manager Sales – Brickworks Building Products increased by 6%. 5.2 Director and Key Management Personnel shareholdings Held 31 July 2015 Granted as Remuneration Date Granted as Remuneration Purchases Shares Disposed of Held 31 July 2016 Directors RD Millner MJ Millner B Crotty DN Gilham DR Page RJ Webster LR Partridge 5,674,100 5,648,142 15,209 102,268 2,400 15,922 158,434 - - - - - - - - - - - - 74,805 2 October 2015 Other Key Management Personnel AJ Payne RC Bakewell M Kublins DT Fitzharris P Scott 246,449 31,587 2 October 2015 - 84,516 87,592 59,841 - 28,976 21,438 5,457 - 2 October 2015 2 October 2015 2 October 2015 100,000 100,000 - - 2,400 - - - - - - - - - - - - - 5,774,100 5,748,142 15,209 102,268 4,800 15,922 (43,257) 189,982 (50,062) 227,974 - - (7,089) 106,403 (32,999) (13,858) 76,031 51,440 Shareholdings shown above reflect all direct, indirect and beneficial holdings by KMP, and include unvested shares held through the Brickworks Deferred Employee Share Plan which may not vest to the employee if they do not satisfy vesting criteria. All share transactions by KMP were on normal terms and conditions on the Australian Securities Exchange. No options over unissued shares or interests in Brickworks Limited or a controlled entity were granted or lapsed during or since the end of the financial year and there were no options outstanding at the date of this report. No shares or interests have been issued during or since the end of the year as a result of the exercise of any option over unissued shares or interests in Brickworks or any controlled entity. 31 Auditor’s independence declaration The Directors received an independence declaration from the auditor, EY. A copy has been included on page 33 of the report. Provision of non-audit services by external auditor During the year the external auditors, EY, provided non-audit services to the Group, totalling $87,542. The non- audit services were for the provision of other assurance services, tax and accounting advice of general in nature, relating to the interpretation and application of tax laws and accounting standards. The Directors are satisfied that the provision of non-audit services is compatible with general standard of independence for auditors imposed by the Corporations Act 2001. The nature and the scope of each type of services provided means that auditor independence was not compromised. The details of total amounts paid to the external auditors are included in note 6 to the financial statements. Indemnification of auditors To the extent permitted by law, the Company has agreed to indemnify its auditors, EY, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify EY during or since the financial year. Auditor rotation In accordance with section 324DAA of the Corporations Act 2001 a new lead audit partner has been appointed for the financial year ended 31 July 2016. Proceedings on behalf of the Company No person has applied for leave of the Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year. Indemnification of Directors and officers The Company’s Rules provide for an indemnity of Directors, executive officers and secretaries where liability is incurred in connection with the performance of their duties in those roles other than as a result of their negligence, default, breach of duty or breach of trust in relation to the Company. The Rules further provide for an indemnity in respect of legal costs incurred by those persons in defending proceedings in which judgment is given in their favour, they are acquitted or the Court grants them relief. Since the end of the previous financial year, the Company has paid insurance premiums in respect of Directors’ and officers’ liability. The insured persons under those policies are defined as all Directors (being the Directors named in this Report), executive officers and any employees who may be deemed to be officers for the purposes of the Corporations Act 2001. Rounding of Amounts The Company has applied the relief available to it under ASIC Class Order 98/100 and accordingly, amounts in the financial report and Directors’ report have been rounded off to the nearest $1,000 where allowed under that class order. Made in accordance with a resolution of the Directors at Sydney. Dated 22 September 2016. R.D. MILLNER Director L.R. PARTRIDGE AM Director 32 33 Revenue Cost of sales Gross profit Other income Distribution expenses Administration expenses Selling expenses NOTE CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 3 750,985 723,611 (518,579) (513,908) 232,406 209,703 3 2,128 3,483 (63,792) (61,419) (27,880) (26,621) (70,043) (64,107) Borrowing costs expense 4 (14,080) (19,482) Impairment of non-current assets 14,15 (62,185) (16,907) Other expenses (23,577) (17,215) Share of net profits of associates and joint ventures accounted for using the equity method 24, 25 134,699 89,435 Profit before income tax expense 107,676 96,870 Income tax expense attributable to profit 5 (29,486) (18,780) Profit after income tax expense 78,190 78,090 Other comprehensive income Items that may subsequently be reclassified to net profit Foreign currency translation 20 (2) Share of (decrements) / increments in reserves attributable to associates and joint ventures (18,388) (2,472) Income tax on items of other comprehensive income 5,517 742 Other comprehensive income for the period, net of tax (12,851) (1,732) Total comprehensive income for the period Net profit attributable to members of the parent entity Total comprehensive income for the period attributable to members of the parent entity Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 8 8 65,339 78,190 76,358 78,090 65,339 76,358 52.6 52.6 52.6 52.6 These statements should be read in conjunction with the accompanying notes. 34 BRICKWORKS LIMITEDAND CONTROLLED ENTITIES A.B.N. 17 000 028 526STATEMENT OF PROFIT & LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 JULY 2016BRICKWORKS LIMITED AND CONTROLLED ENTITIES A.B.N. 17 000 028 526 STATEMENT OF FINANCIAL POSITION AS AT 31 JULY 2016 CURRENT ASSETS Cash and cash equivalents Receivables Inventories Land held for resale Prepayments TOTAL CURRENT ASSETS NON-CURRENT ASSETS Inventories Land held for resale Investments accounted for using the equity method Property, plant and equipment Intangible assets TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Payables Interest-bearing liabilities Derivative financial instruments Income tax provision Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing liabilities Derivative financial instruments Provisions Deferred taxes TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained profits TOTAL EQUITY NOTE CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 9 10(a) 11(a) 12(a) 11(b) 12(b) 13 14 15 16 17(a) 18(a) 19(a) 17(b) 18(b) 19(b) 20 21 22 30,783 106,558 188,394 9,652 8,781 344,168 7,998 4,137 23,051 103,104 178,706 5,455 6,536 316,852 8,129 8,182 1,462,830 488,454 208,274 1,455,673 477,570 252,111 2,171,693 2,201,665 2,515,861 2,518,517 81,593 - - 13,771 50,134 88,335 24,445 234 16,488 50,703 145,498 180,205 299,224 5,820 9,287 217,547 531,878 677,376 299,239 5,152 8,685 200,986 514,062 694,267 1,838,485 1,824,250 336,905 311,255 1,190,325 334,165 322,444 1,167,641 1,838,485 1,824,250 These statements should be read in conjunction with the accompanying notes. 35 BRICKWORKS LIMITED AND CONTROLLED ENTITIES A.B.N. 17 000 028 526 STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 JULY 2016 l a t o T 0 0 0 $ 0 0 0 $ i d e n a t e R i s g n n r a E 0 0 0 $ s ’ V J & e v r e s e R 0 0 0 $ e v r e s e R s t n e m y a P i s e t a c o s s A d e s a B e r a h S 0 0 0 $ i n g e r o F y c n e r r u C e v r e s e R 0 0 0 $ l a r e n e G e v r e s e R 0 0 0 $ e v r e s e R y t i u q E s t n e m t s u d A j 0 0 0 $ l a t i p a C s t fi o r P e v r e s e R k c o t S 0 0 0 $ y r u s a e r T 0 0 0 $ s e r a h S y r a n d r O i E T O N 6 9 4 6 9 7 , , 1 8 1 5 1 4 1 , , 1 4 3 8 , 3 2 2 8 6 0 , 3 ) 4 1 5 , 1 ( 5 2 1 , 6 3 ) 7 5 0 , 6 2 ( 2 0 1 , 8 8 ) 4 8 7 , 6 ( 4 0 2 , 8 3 3 4 1 0 2 t s u g u A t s 1 t a s a y t i u q e l t a o T ) 2 3 7 , 1 ( 0 9 0 , 8 7 0 9 0 8 7 , – – ) 2 7 4 , 2 ( 8 5 3 , 6 7 0 9 0 , 8 7 ) 2 7 4 , 2 ( ) 2 1 ( – ) 7 3 0 , 1 ( – – – ) 5 5 7 1 5 ( , ) 5 5 7 , 1 5 ( – 6 1 4 , 4 4 – ) 6 1 2 ( ) 6 1 2 ( ) 4 0 6 8 4 ( , ) 7 6 9 , 1 5 ( – – – – – ) 4 ( – ) 4 ( – – – – – – ) 4 9 7 , 3 ( – – 2 2 6 6 1 4 , 4 – ) 2 ( ) 2 ( – – – – – – – – – – – – – – – – – – – – 2 4 7 2 4 7 – – – – – – – – – – – – – – – – – – – – – – – – – – – ) 6 1 9 , 4 ( 4 0 9 , 4 – – – ) 7 3 0 , 1 ( 4 9 7 , 3 – – – – – ) 9 5 1 , 2 ( 4 0 9 , 4 7 ) a ( 1 2 ) b ( 1 2 ) b ( 1 2 i r a e y e h t g n i r u d d a p r o d e d v o r p s d n e d v D i i i t e N r a e y e h t r o f e m o c n i i e v s n e h e r p m o c r e h O t r a e y e h t r o f t fi o r p t e N r a e y e h t r o f e m o c n i i e v s n e h e r p m o c l t a o T y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T s r e n w o s a e e y o p m e l h g u o r h t s e r a h s f o e s a h c r u P s e r a h s f o e u s s I o t r e f s n a r t i s e t a c o s s a f o e r a h S s e e y o p m e l o t d e t s e v s e r a h S n a p l e r a h s e s n e p x e s t n e m y a p d e s a b e r a h S r e f s n a r t i s e t a c o s s a f o e r a h S i s g n n r a e i d e n a e r t m o r f / ) o t ( s t s e r e t n i y t i u q e e d s t u o i 0 5 2 4 2 8 , , 1 1 4 6 , 7 6 1 1 , 8 5 3 , 1 2 2 0 9 6 3 , ) 6 1 5 , 1 ( 5 2 1 , 6 3 ) 5 1 3 , 5 2 ( 2 0 1 , 8 8 ) 3 4 9 , 8 ( 8 0 1 , 3 4 3 5 1 0 2 l y u J 1 3 t a s a y t i u q e l t a o T ) 3 1 ( ) 1 5 1 , 1 ( – 3 1 6 6 5 5 , – – – 3 1 – ) 9 1 5 5 5 ( , ) 9 1 5 , 5 5 ( ) 4 0 1 1 5 ( , ) 6 0 5 , 5 5 ( – – – – – – – 0 9 1 , 8 7 ) 1 5 8 , 2 1 ( 0 9 1 8 7 , – – ) 8 8 3 8 1 ( , 9 3 3 , 5 6 0 9 1 8 7 , ) 8 8 3 8 1 ( , – – – – – – – ) 4 0 9 , 3 ( 6 6 5 5 , 2 6 6 1 , – 0 2 0 2 – – – – – – – – – – – – – – – – – – 7 1 5 , 5 7 1 5 , 5 – – – – – – – – – – – – – – – – – – – – – – – ) 6 3 1 , 5 ( ) 1 5 1 , 1 ( 4 0 9 , 3 – – – – – – – – 3 2 1 , 5 7 ) a ( 1 2 ) b ( 1 2 ) b ( 1 2 i r a e y e h t g n i r u d d a p r o d e d v o r p s d n e d v D i i i t e N r a e y e h t r o f e m o c n i i e v s n e h e r p m o c r e h O t r a e y e h t r o f t fi o r p t e N r a e y e h t r o f e m o c n i i e v s n e h e r p m o c l t a o T y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T s r e n w o s a e e y o p m e l h g u o r h t s e r a h s f o e s a h c r u P s e r a h s f o e u s s I i e d s t u o o t r e f s n a r t i s e t a c o s s a f o e r a h S s e e y o p m e l o t d e t s e v s e r a h S s t s e r e n t i y t i u q e m o r f / ) o t ( r e f s n a r t i s e t a c o s s a f o e r a h S n a p l e r a h s i s g n n r a e i d e n a e r t ) 3 8 3 , 2 ( 3 2 1 , 5 e s n e p x e s t n e m y a p d e s a b e r a h S 5 8 4 8 3 8 , , 1 5 2 3 , 0 9 1 1 , 0 7 9 2 0 2 , 2 5 3 5 , ) 6 9 4 , 1 ( 5 2 1 , 6 3 ) 8 9 7 , 9 1 ( 2 0 1 , 8 8 ) 6 2 3 , 1 1 ( 1 3 2 , 8 4 3 6 1 0 2 l y u J 1 3 t a s a y t i u q e l t a o T These statements should be read in conjunction with the accompanying notes. 36 BRICKWORKS LIMITED AND CONTROLLED ENTITIES A.B.N. 17 000 028 526 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 JULY 2016 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Proceeds from land held for resale Interest received Borrowing costs Dividends and distributions received Income tax paid NOTE CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 815,781 (758,613) - 442 (13,405) 114,548 (10,246) 769,483 (702,444) 18,256 280 (18,360) 66,425 (388) Net cash flows from operating activities 23(a) 148,507 133,252 Cash flows from investing activities Purchases of investments Proceeds from the sale or return of investments Payment for business net of cash acquired Proceeds from sale of property, plant and equipment Purchases of property, plant and equipment 28(b) (20,050) 27,572 (3,321) 3,241 (54,798) (892) – (5,495) 477 (60,685) Net cash flows used in investing activities (47,356) (66,595) Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Dividends paid Net cash flows used in financing activities Net increase in cash held Cash at beginning of year Cash at end of year 99,000 (124,000) (68,419) 441,000 (442,000) (63,814) (93,419) (64,814) 7,732 23,051 30,783 1,843 21,208 23,051 9 These statements should be read in conjunction with the accompanying notes. 37 BRICKWORKS LIMITED AND CONTROLLED ENTITIES A.B.N. 17 000 028 526 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2016 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Brickworks Limited is a listed public company, incorporated and domiciled in Australia, and is a for-profit entity. These accounts were authorised for issue in accordance with a resolution of the directors on 22 September 2016. The financial report includes financial statements for the consolidated entity consisting of Brickworks Limited and its subsidiaries (“the Group”). (a) Basis of preparation and Statement of compliance The financial statement is a general purpose financial statement that has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. The financial statement complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. These financial statements have been prepared under the historical cost convention, except for available-for-sale financial assets, held for trading financial assets, derivatives and investment property, which have been measured at fair value. (b) New accounting standards and interpretations The principal accounting policies adopted in the preparation of the financial statement are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The following amendments to accounting standards became effective for the Group during the year: • AASB 2015-3‘Amendments to Australian Accounting Standards arising from the Withdrawal of AASB 1031 Materiality’. The application of these standards did not result in any changes to profit or carrying value of balance sheet items in either the current or comparative financial year. (c) Principles of consolidation The consolidated financial statements are those of the consolidated entity, comprising Brickworks Limited (the parent entity) and all entities that Brickworks controlled from time to time during the period and at reporting date. Control is achieved when the Group is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. There are no non-wholly owned entities in the group which are solely controlled by Brickworks. All non-wholly owned entities are either jointly controlled or subject to significant influence (in which case these entities are equity accounted), or treated as a held for trading financial asset. There are no dissimilarities in reporting periods or accounting policies between Brickworks or any of its controlled entities. Investments in subsidiaries in the parent entity financial statements are shown at cost. All inter-company balances and transactions between entities in the economic entity, including any unrealised profits or losses, have been eliminated on consolidation. Where controlled entities have entered or left the economic entity during the period, their operating results have been included from the date control was obtained or excluded from the date control ceased. (d) Revenue Sales revenue is recognised when the significant risks and rewards of ownership of the items sold have passed to the buyer, and the revenue is also able to be measured reliably. For revenue from the sale of goods, this occurs upon the delivery of goods to customers. For revenue from the sale of land held for resale, this is recognised at the point at which any contract of sale in relation to industrial land has become unconditional, and at which settlement has occurred for residential land. Revenue from construction contracts is recognised by reference to the stage of completion of a contract or contracts in progress at reporting date or at the time of completion of the contract and billing to the customer. Stage of completion is measured by reference to the number of units installed as a percentage of the number of units for the total contract, which is determined under the contract with the customer. As the number of units is defined in the contract, any level of judgement required is minimal. Interest revenue is recognised on a time proportionate basis that takes into account the effective interest rate applicable to the net carrying amount of the financial asset. Dividend revenue is recognised when the right to receive a dividend has been established. Dividends received from associates and joint venture entities are accounted for in accordance with the equity method of accounting. Rental revenue from investment properties is accounted for on a straight line basis over the lease term. Profits on disposal of investments and property, plant and equipment are recognised at the point where title to the asset has passed. All revenue is stated net of the amount of goods and services tax (GST). (e) Finance costs Borrowing costs incurred for the construction of a qualifying asset are capitalised up to the point that the asset is ready for its intended use. Other finance costs are recognised as an expense over the period to which the expense relates. 38 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (f) Income tax Current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability or asset to the extent that it is unpaid or refundable. Deferred tax Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The tax cost base of assets is calculated based on management’s intention for that asset on either use or sale as appropriate. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. In addition, no deferred income tax is recognised for a taxable temporary difference arising from an investment in a subsidiary, associate or joint venture where the timing of the reversal of the temporary difference can be controlled and it is probable that the difference will not reverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or liability is settled. Deferred tax is credited in the income statement except where it relates to items that may be credited directly to equity, in which case the deferred tax is adjusted directly against equity. The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the economic entity will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. Deferred income tax assets are recognised to the extent that it is probable that future taxable profits will be available against which deductible temporary differences can be utilised. These amounts are reviewed at each balance date. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Tax consolidation Brickworks Limited and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under the Tax Consolidation regime. Brickworks Limited is the head entity of that group. The tax consolidated group has entered into a tax sharing agreement whereby each company in the group contributes to the income tax payable based on the current tax liability or current tax asset of the entity. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. Such amounts are reflected in amounts receivable from or payable to other entities in the group. In addition, the agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At balance date, the possibility of default is remote. Tax expense, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax consolidated group are recognised in the separate financial statements of the members of the tax consolidated group. Any current tax liabilities and assets and deferred tax assets arising from unused tax losses and tax credits of the members of the tax consolidated group are recognised by the parent company (as head entity of the tax consolidated group). (g) Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company, after eliminating the effect of earnings related to the Company’s shareholding arrangements and excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the period, adjusted for bonus elements in ordinary shares issued during the period. Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Diluted earnings per share are shown as being equal to basic earnings per share if potential ordinary shares are non-dilutive to existing ordinary shares. (h) Cash and cash equivalents Cash and cash equivalents on the statement of financial position includes cash on hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position. Cash and cash equivalents for the statement of cash flows are shown as a net of the cash and cash equivalents and bank overdraft liability. Cash and cash equivalents are stated at nominal value. (i) Receivables Trade receivables are recognised and carried at original invoice amount less a provision for any uncollectible debts. A provision for doubtful debts is established when there is existence of objective evidence that the Group may not be able to collect the debts. Bad debts are written off against the provision for doubtful debts as incurred, when there is objective evidence that the Group will not be able to recover the debt. Objective evidence of an impairment loss can include when a debtor is unable to be physically located, or when a report from a liquidator or administrator of a debtor indicates that recovery of any amounts outstanding is unlikely. Receivables from related parties are recognised and carried at nominal amounts due. 39 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (j) Inventories Raw materials are measured at the lower of actual cost and net realisable value. Finished goods are measured at the lower of standard cost and net realisable value. The cost of manufactured products includes direct materials, direct labour and an appropriate portion of variable and fixed overheads. Overheads are applied on the basis of normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. (k) Land held for resale Land held for development and resale is recognised when properties have been identified and incorporated into specific developments that have been approved by relevant planning authorities and commenced. These properties are valued at the lower of cost and fair value less costs to sell. Cost includes the cost of acquisition and development. (l) Property, plant and equipment Land is carried at cost less any impairment losses. Plant and equipment (including buildings) are measured at cost, less depreciation and impairment losses. The carrying amounts of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit (CGU) to which the asset belongs. The recoverable amount is the higher of fair value less costs to sell, and the value in use, assessed on the basis of the expected net cash flows that will be received from the assets employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts, using pre-tax discount rates. Subsequent costs are included in the asset’s carrying amount only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation The depreciable amount of all property, plant and equipment including building and capitalised lease assets, but excluding freehold land, is depreciated over their useful lives to the economic entity commencing from the time the asset is held ready for use. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. The depreciation rates used for each class of depreciable assets are: Class of asset Depreciation rate Buildings 2.5% - 4.0% prime cost Plant and equipment 4.0% - 33.0% prime cost; 7.5% - 22.5% diminishing value The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds on disposal with the carrying amount of the asset at the time of disposal. These gains and losses are included in the income statement. When previously revalued assets are sold, amounts included in the revaluation reserve relating to that asset are transferred to retained earnings. (m) Leases Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses on a straight line basis over the term of the lease. Leases of fixed assets are classified as finance leases where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership, are transferred to entities in the economic entity. Finance leases are capitalised by recording an asset and a liability at the lower of the amounts equal to the fair value of the leased property or the present value of the minimum lease payments, including any guaranteed residual values. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Leased assets are depreciated on a straight-line basis over their estimated useful lives where it is likely that the economic entity will obtain ownership of the asset, or over the term of the lease. (n) Financial assets Regular way purchases and sales of investments are recognised and derecognised on trade date where purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at cost, net of transaction costs. Financial assets are classified into the following specified categories: financial assets at fair value through profit or loss, held-to- maturity investments, available-for-sale financial assets, and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets at fair value through profit and loss (held for trading) The Group has classified certain shares as financial assets at fair value through profit or loss. Financial assets held for trading purposes are classified as current assets and are stated at fair value (subsequent to initial recognition), with any resultant gain or loss recognised in profit or loss. 40 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (n) Financial assets (cont.) Held-to-maturity investments Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group’s management has the positive intention and ability to hold to maturity. These investments are carried at amortised cost using the effective interest method, with any gains or losses recognised in income when the investments are derecognised or impaired. Available-for-sale financial assets Certain shares held by the Group are classified as being available-for-sale and are stated at fair value (subsequent to initial recognition). Gains and losses arising from changes in fair value are recognised directly in reserves, until the investment is disposed of, at which time the cumulative gain or loss previously recognised in the reserve is included in profit or loss for the period. The fair value of financial instruments traded in active markets is based on quoted market bid prices at the reporting date. Where shares are held in listed entities that are not actively traded on the market, quoted marked bid prices are used as the best information on the amount obtainable from an arm’s length transaction. Loans and Receivables Trade receivables, loans and other receivables are recorded at amortised cost less impairment. Derecognition Sales of investments are recognised on trade date – the date the Group commits to sell the asset. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. Impairment The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered in determining whether the security is impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments classified as available-for-sale are not reversed through the income statement. (o) Investments in associates Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for in the parent entity financial statements using the cost method and in the consolidated financial statements using the equity method of accounting, after initially being recognised at cost. Under the equity method, the investment in the associate is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group’s share of net assets of the associate. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortised. After applying the equity method, the Group determines whether it is necessary to recognise an additional impairment loss with respect to the net investment in the associate. The consolidated income statement reflects the Group’s share of the results of operations of the associate. Where there has been a change recognised directly in the associate’s equity, the Group recognises its share of any changes and discloses this in the consolidated statement of movements in equity. The associate’s accounting policies conform to those used by the Group for like transactions and events in similar circumstances. (p) Investments in joint ventures Investments in joint ventures are accounted for in the parent entity’s financial statements using the cost method and in the consolidated financial statements using the equity method of accounting, after initially being recognised at cost. Under the equity method, the investment is carried in the consolidated statement of financial position at cost plus post acquisition changes in the Group’s share of net assets of the joint venture. The consolidated income statement reflects the Group’s share of the results of operations of the joint ventures. Where reporting dates of joint ventures are not identical to the Group and the joint venture is not a disclosing entity, the financial information used is internal management reports for the same period as the Group’s financial year. The joint venture’s accounting policies conform to those used by the Group for like transactions and events in similar circumstances. Profits or losses on transactions with the joint venture are eliminated to the extent of the Group’s ownership interest until such time as they are realised by the joint venture on sale. (q) Investment property Investment property, which is property held to earn rentals and/or for capital appreciation, is measured initially at its cost, including transaction costs. Subsequent to initial recognition, investment property is measured at fair value. Gains or losses arising from changes in the fair value of investment property are included in profit or loss in the period in which they arise. (r) Intangibles Goodwill Goodwill is initially recorded at the amount by which the purchase price for a business or for an ownership interest in a controlled entity exceeds the fair value attributed to its net assets (including contingent liabilities) at the date of acquisition. Goodwill on acquisition of associates is included in investments in associates. Any goodwill acquired in a business combination is allocated to each of the cash generating units (CGU’s) expected to benefit from the combination’s synergies. Impairment is determined by assessing the 41 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (r) Intangibles (cont.) recoverable amount of the CGU to which the goodwill relates. Where this recoverable amount is less than the carrying amount, an impairment loss is recognised. Impairment losses recognised for goodwill are not subsequently reversed. Goodwill is tested for impairment annually and when indicators of impairment exist, and following initial recognition is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Other intangible assets Other intangible assets are valued at cost on acquisition. If the intangible is considered to have an indefinite life, it is carried at cost less any impairment write down required to ensure it is not carried in excess of recoverable amount. If the intangible has a definite life, it is amortised on a straight line basis over the expected future life of that right, which varies according to the term of the issue. (s) Acquisition of assets The purchase method of accounting is used to account for all acquisitions of assets (including business combinations) regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Costs directly attributable to business combinations are expensed in the period in which the acquisition is settled. Where equity instruments are issued in an acquisition, the value of the instruments is their published market price at the date of exchange. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement, but only after a reassessment of the identification and measurement of the net assets acquired. (t) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed 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. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Non-financial assets other than goodwill that have had an impairment write-down are reviewed for possible reversal of the impairment at each subsequent reporting date. (u) Payables Trade payables and other accounts payable are recognised when the Group becomes obliged to make future payments resulting from the purchase of goods and services. Deposits received on land sale agreements relate to amounts received as deposits on pending property transactions where the revenue and associated profit has not been brought to account due to uncertainty surrounding the completion of the transaction. (v) Provisions Provisions are recognised when the Group has a present obligation, the future sacrifice of economic benefits is probable, and the amount of the provision can be measured reliably. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. If the effect of the time value of money is material, provisions are discounted using a pre-tax discount rate that reflects the risks specific to the liability. Any increase in the provision due to the passage of time is recognised as a borrowing cost. (w) Employee benefits Provision is made for the Group’s liability for employee benefits arising from services rendered by employees to balance date. Employee benefits that are expected to be settled within one year have been measured at the amounts expected to be paid when the liability is settled, plus related on-costs. Employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits. Consideration is made of expected future wage and salary levels, employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on Australian high quality corporate bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash flows. Share-based payments Share-based compensation benefits are provided to employees through the Brickworks Employee Share Plan, details of which can be found in the Remuneration Report in the Directors’ Report. Unvested shares are included in contributed equity as Reserved Shares. The fair value of the shares (market value at purchase date) is recognised as an employee benefits expense over the period in which the service conditions are fulfilled with a corresponding increase in equity when the employees become entitled to the shares. (x) Restoration and rehabilitation The landfill opportunities created through the extraction of clay and shale is considered to be a valuable future resource. No provision is made for future rehabilitation costs when the rehabilitation process is expected to be cash flow positive. 42 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (x) Restoration and rehabilitation (cont.) Where the relevant site is identified as being unable to be used for landfill purposes once the clay and shale reserves are exhausted, a provision is generated. This provision is raised based on the expected net present value of future cash flows associated with the total rehabilitation cost of the site, and charged to expenses on a tonnes extracted basis. (y) Interest bearing liabilities Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest method. 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 reporting date. Where the Group expects that it will continue to satisfy the criteria under its banking agreement that ensures the financier is not entitled to call on the outstanding borrowings, and the term is greater than 12 months, the borrowings are classified as non-current. (z) Financial instruments issued by the Group Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement. Transaction costs arising on the issue of financial instruments are recognised directly as a reduction, net of tax, of the proceeds of the financial instruments to which the costs relate. If the financial instrument has an identifiable lifespan, these costs are amortised in the income statement over the period of the instrument. Interest and dividends are classified as expenses or as distributions of profit consistent with the classification of the related debt or equity instruments. (aa) Derivatives Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either fair value hedges or cash flow hedges. The Group documents at the inception of the transaction the relationship between hedging instruments and hedge items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment, both at inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in fair values or cash flows of hedged items. Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in reserves. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item will affect profit or loss. When a hedging instrument expires or is terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is transferred to the income statement. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any such instrument are recognised immediately in the income statement. Fair value of forward currency contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of interest rate swap contracts is determined by reference to market values for similar instruments. (ab) Derecognition of financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires, with any resulting gain or loss taken to the income statement. (ac) Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. Grants relating to costs are deferred and recognised in the income statement over the period necessary to match them with the costs that they are intended to compensate. Grants relating to the purchase of fixed assets are deducted from the carrying amount of the asset, and recognised in profit or loss over the life of a depreciable asset as a reduced depreciation expense. (ad) Reserved shares Own equity instruments which are acquired for later payment as employee share-based payment awards are deducted from equity. These shares are held in trust by the trustee of the Brickworks Deferred Employee Share Plan and vest in accordance with the conditions attached to the granting of the shares, as outlined in the Remuneration Report. The fair value of the shares (market value at purchase date) is recognised as an employee benefits expense with a corresponding increase in equity when the employees become entitled to the shares. No gain or loss is recognised in profit or loss on the purchase, sale or issue of the Group’s own equity instruments. 43 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (ae) Operating segments An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the Group’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Operating segments have been identified based on the information provided to the Managing Director. The Group aggregates two or more operating segments when they have similar economic characteristics, and the segments are similar in each of the following respects: Type or class of customer for the products; • Nature of the products; • Nature of the production process; • • Methods used to distribute the products; and • Nature of the regulatory environment. Management has determined that reportable segments are based around products. A number of identified operating segments have been aggregated to form both the Building Products segment and the Property segment. The accounting policies used by the Group in reporting segments internally are the same as those used by the Group in these consolidated financial statements. Some items which are not attributable to specific segments, such as finance costs and some other expenses, are listed separately in the segment note as ‘unallocated’ items. (af) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST. Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. (ag) Foreign currency transactions and balances Functional and presentation currency The functional currency of each of the Group’s entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars which is the parent entity’s functional and presentation currency. Exchange differences arising on the translation of monetary items are recognised in the income statement, except where deferred in equity as a qualifying cash flow or net investment hedge. Exchange differences arising on the translation of non-monetary items are recognised directly in equity to the extent that the gain or loss is directly recognised in equity, otherwise the exchange difference is recognised in the income statement. Group companies The financial results and position of foreign operations whose functional currency is different from the Group’s presentation currency are translated as follows: Income and expenses are translated at average exchange rates for the period; • Assets and liabilities are translated at period end exchange rates prevailing at that reporting date; • • Retained profits are translated at the exchange rates prevailing at the date of the transaction. Exchange differences arising on translation of foreign operations are transferred directly to the Group’s foreign currency translation reserve in the statement of financial position. These differences are recognised in the income statement in the period in which the operation is disposed. (ah) Fair Value Assets and liabilities of the Group that are measured at fair value are grouped into Levels 1 to 3 based in the degree to which the fair value is observable. • • • Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). All assets and liabilities measured at fair value are identified in the relevant notes to the financial statements, and are either categorised as Level 1 or Level 2. There are no Level 3 categorised items in the Group. There were no transfers between category levels during the current or prior financial year. 44 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont.) (ai) Significant accounting estimates and assumptions The Group makes estimates and assumptions concerning the future, and the resulting accounting estimates will, by definition, seldom equal the related actual results. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances. Judgements that are made by management in the application of accounting standards that have significant effects on the financial statements, and estimates with a significant risk of material adjustments in the next year, are disclosed in the relevant notes to the financial statements, where applicable. (aj) Accounting standards issued but not yet effective A number of Australian accounting standards have been issued but have not been adopted for the financial year ended 31 July 2016. The application of the following standards may have a material impact on the amounts reported and disclosures made in the Group’s consolidated financial statements. However, it is not practicable to provide a reasonable estimate of the effect until the Group performs a detailed review: AASB 16: Leases AASB 15: Revenue from Contracts with Customers The standard will be first applicable for the year commencing 1 August 2019. The impact of this standard is expected to be material to the Group. However, until the Group undertakes a detailed review, it is not practicable to provide a reasonable estimate of the effect of this standard. The standard will be first applicable for the year commencing 1 August 2018. The impact of this standard is not expected to be material to the Group, however the impact on the profits of associates is yet to be determined. AASB 9: Financial Instruments The standard will be first applicable for the year commencing 1 August 2018. The impact of this standard is not expected to be material to the Group. (ak) Comparative information Certain comparative information was amended in these financial statements to conform to the current year presentation. These amendments do not impact the Group’s financial result and do not have any significant impact on the Group’s statement of financial position. 45 NOTE 2: PARENT ENTITY INFORMATION Information relating to Brickworks Ltd Current assets Total assets Current liabilities Total liabilities Issued capital Reserves – capital profits – general – share based payments Total reserves Retained earnings Total shareholders' equity Net profit after income tax Total comprehensive income 31 JULY 16 $000 31 JULY 15 $000 7,436 549 1,079,267 1,099,626 18,103 30,239 607,151 604,156 336,905 334,165 84,479 11,645 5,351 101,475 33,736 84,479 11,645 3,690 99,814 61,491 472,116 495,470 40,664 40,664 38,508 38,508 Information regarding guarantees entered into by the parent entity in relation to the debts of its subsidiaries are contained in note 28(d). There are no contingent liabilities or contractual commitments for the acquisition of property, plant or equipment of the parent identity. NOTE 3: REVENUE Trading revenue Sale of goods Sale of land held for resale Other operating revenue Interest received – other corporations Rental revenue Other Total operating revenue Other income Net gain on sale of property, plant and equipment Property development profits Other items Total other income CONSOLIDATED 746,424 – 695,233 18,256 746,424 713,489 442 1,496 2,623 280 1,759 8,083 750,985 723,611 1,765 – 363 2,128 317 2,932 234 3,483 46 NOTE 4: INCOME AND EXPENSES (a) Specific expense disclosures Depreciation and amortisation – Buildings – Plant and equipment Total depreciation – Intangible assets Total amortisation NOTE CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 4,209 23,168 27,377 24 24 3,824 21,308 25,132 98 98 Total depreciation and amortisation expense 27,401 25,230 Borrowing costs – Paid to other corporations – Mark to market swap valuation losses / (gains) Total borrowing costs expensed Rental expense on operating leases – Minimum lease payments Employee benefit expense Defined contribution superannuation expense Research and development expenditure Bad and doubtful debts – trade debtors Write down of inventories to net realisable value 13,646 434 14,080 17,112 2,370 19,482 23,035 22,451 167,898 11,659 903 472 3,067 157,550 10,976 2,268 786 1,972 (b) Property related income The following items are relevant in explaining the financial performance for the year: Profit from sale of land held for resale Development profits from joint ventures Fair value adjustment on recognition as investment property Share of fair value adjustment of properties Share of property Trust rental profits Share of profit on disposal of investment property held by JV Total profits from Property Trusts 25 – – 8,439 51,220 15,263 – 74,922 4,601 2,664 1,916 29,137 15,335 12,141 58,529 47 CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 NOTE 4: INCOME AND EXPENSES (cont.) (c) Significant items Profit before income tax expense includes the following signficant benefits/(expenses): Significant one–off transactions of associate (1) 129 (25,140) Write down of property, plant and equipment to recoverable value (3) (14,523) Costs related to business acquisition (2) Costs on closure of manufacturing facilities and site relocation(2) Costs on commissioning of manufacturing facilities (2) (206) (5,201) (1,025) – (577) – (4,333) Impairment of goodwill and timber access rights (3) (47,258) (16,761) Legal & advisory costs – Perpetual matter (2) Restructuring activities (2) Other significant items (2) Income tax benefit / (expense) on significant items (4) Income tax benefit / (expense) arising from WHSP carrying value (4) (2,828) (2,929) (315) 8,109 (2,842) (1,504) (1,236) – 2,822 4,520 (1) Disclosed in “Share of net profits of associates” line on Statement of Profit or Loss and Other Comprehensive Income (2) Disclosed in “Other expenses” line on Statement of Profit or Loss and Other Comprehensive Income (3) Disclosed in “Impairment of non–current assets” line on Statement of Profit or Loss and Other Comprehensive Income (4) Disclosed in “Tax expense” line on Statement of Profit or Loss and Other Comprehensive Income NOTE 5: INCOME TAX (a) Income tax expense Current Tax Deferred Tax Overprovided in prior years Utilisation of carried forward capital losses (b) Reconciliation of income tax expense to prima facie tax payable Prima facie tax payable on profit before income tax at 30% Adjust for tax effect of: difference in foreign tax rates rebateable dividends impairment of goodwill and intangibles deferred tax items recognised share of net profits of associates other non–allowable items over provided in prior years utilisation of carried forward capital losses Income tax expense attributable to profit (c) Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss Current tax – debited / (credited) directly to equity Share of increments / (decrements) in reserves attributable to associates Deferred tax – debited / (credited) directly to equity 14,727 18,784 (2,766) (1,259) 29,486 24,962 (3,988) (2,194) – 18,780 32,303 29,061 (12) (15,645) 14,177 – 655 2,033 (2,766) (1,259) 29,486 – (5,517) (5,517) (5,517) (29) (15,032) 5,029 (1,253) 1,682 1,518 (2,196) – 18,780 – (742) (742) (742) 48 NOTE 6: AUDITOR’S REMUNERATION Audit of the financial report Other regulatory audits Taxation services Other assurance services CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 490 25 26 37 578 500 – – – 500 The auditor of the Brickworks Ltd Group is Ernst & Young. Details of non-audit services provided by Ernst & Young are outlined in the Directors’ Report. NOTE 7: DIVIDENDS Final ordinary dividend (prior year) of 30.0 cents per share paid 25/11/15 (2014 - 28.0c paid 27/11/14) Interim ordinary dividend of 16.0 cents per share paid 03/05/16 (2015 - 15.0c paid 5/05/15) Group's share of dividend received by associated company Proposed final ordinary dividend of 32.0 cents per share not recognised as a liability at year end (2015 – 30.0c) 44,621 41,553 23,798 (12,900) 55,519 22,261 (12,059) 51,755 47,596 44,521 All dividends paid and proposed have been or will be fully franked at the tax rate of 30% Balance of franking account at year end adjusted for franking credits arising from payment of income tax payable and dividends recognised as receivables 135,938 132,830 Impact on franking account balance of dividends not recognised (20,398) (19,080) NOTE 8: EARNINGS PER SHARE (a) Reconciliation of earnings Net profit attributed to members of the parent entity 78,190 78,090 Earnings used in the calculation of basic EPS 78,190 78,090 Earnings used in the calculation of diluted EPS 78,190 78,090 (b) Weighted average number of ordinary shares outstanding during the year used in calculation of basic EPS Weighted average number of ordinary shares outstanding during the year used in calculation of diluted EPS Basic earnings per share Diluted earnings per share No. No. 148,674,235 148,334,576 148,674,235 148,334,576 cents cents 52.6 52.6 52.6 52.6 49 NOTE 9: CASH & CASH EQUIVALENTS Cash on hand Deposits at call CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 30,040 743 30,783 22,839 212 23,051 Deposits at call have carrying amounts that reasonably approximate fair value. Deposits are for periods of up to one month, and earn interest at the respective short term deposit rates. NOTE 10: RECEIVABLES (a) Current Trade receivables Provision for doubtful debts Net trade receivables Other debtors (b) Movement in provision for doubtful debts Balance at the beginning of the year Additional provisions recognised Trade debts written off Reversals of provisions not required Balance at the end of the year (c) Receivables past due Receivables past due but not impaired Past due 0 – 30 days Past due 30+ days 94,441 (856) 93,585 12,973 100,681 (1,055) 99,626 3,478 106,558 103,104 1,055 1,217 (671) (745) 856 3,233 2,106 5,339 1,643 1,431 (1,374) (645) 1,055 3,696 2,827 6,523 Trade receivables and other debtors have carrying amounts that reasonably approximate fair value. Average terms are 30 days from statement. Before allowing new customers to trade on credit terms, an analysis of the potential customers credit quality is performed using external credit reporting agencies and internal reporting to determine whether an account will be opened and the amount of the limit to be applied to that account. Various levels of management are required to approve progressively higher credit limits, with individual limits exceeding $1 million reported to the Board. An analysis of trade receivable balances past due is performed constantly throughout the year, and an allowance is made for estimated irrecoverable trade receivables based on historical experience of default, and known information on individual debtors. In many instances security is held over individual debtors in the form of personal guarantees. All receivables not impaired are expected to be collected in full. 50 NOTE 11: INVENTORIES (a) Current Raw materials and stores at cost Work in progress at cost Finished goods at cost Finished goods at net realisable value (b) Non-Current Raw materials and stores at cost NOTE 12: LAND HELD FOR RESALE (a) Current (b) Non-Current CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 33,840 21,841 132,374 33,116 20,997 124,084 188,055 178,197 339 509 188,394 178,706 7,998 8,129 9,652 4,137 5,455 8,182 Non-current land held for resale represents portions of properties which have been classified as ready for sale in accordance with the accounting policy note. Exact timing of these sales is unable to be reliably forecast and the sale of these specific blocks is not expected to occur within the following 12 months from balance date. These properties are disclosed in the Property segment of note 26. Land held for resale is measured at the lower of cost and fair value less costs to sell. In 2016 there have been no write downs of land held for resale to the lower of those two values (2015: Nil). NOTE 13: INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Investment in associated entities – listed Investment in jointly controlled entities 24 25 1,150,243 312,587 1,146,302 309,371 1,462,830 1,455,673 51 NOTE 14: PROPERTY, PLANT AND EQUIPMENT Land Freehold land at cost Leasehold land at cost Buildings At cost Accum depreciation and impairment writedowns Plant and equipment At cost Accum depreciation and impairment writedowns Capital works in progress Total plant and equipment (a) Impairment write-downs CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 176,555 235 171,741 235 176,790 171,976 153,516 (51,608) 152,235 (50,124) 101,908 102,111 465,890 (295,336) 170,554 39,202 450,444 (292,941) 157,503 45,980 209,756 203,483 488,454 477,570 During the period impairment losses totalling $14.9 million (2015: $0.1 million) were recognised in relation to various assets primarily as a result of plant closures. All impairment losses are shown in the ‘Impairment of non-current assets’ line on the Statement of Profit or Loss and Other Comprehensive Income, and all losses are included in the Building Products segment (refer note 26). The carrying value of assets that have been subject to recoverable amount write-downs, by class, are outlined below: Buildings Assets not subject to write-downs Plant and equipment Assets subject to write-downs Assets not subject to write-downs 101,908 101,908 456 209,300 102,111 102,111 – 203,483 209,756 203,483 The carrying amount of temporarily idle buildings, plant and equipment at 31 July 2016 was Nil (2015: Nil). 52 NOTE 14: PROPERTY, PLANT AND EQUIPMENT (cont.) (b) Reconciliations Reconciliations of the carrying amounts of each class of property, plant and equipment at the beginning and end of the current and previous financial year are set out below. Consolidated At 1 August 2014 Cost Accumulated depreciation Balance at 1 August 2014 Year ended 31 July 2015 Additions Assets acquired by acquisition of business Assets transferred to land held for resale Disposals Impairment losses Depreciation expense Land $000 Buildings $000 Plant & Equip. $000 Total $000 157,138 – 157,138 7,664 1,820 5,355 (1) – – 140,379 (43,176) 433,512 (256,011) 731,029 (299,187) 97,203 177,501 431,842 7,549 1,380 – (51) (146) (3,824) 45,472 1,927 – (109) – (21,308) 60,685 5,127 5,355 (161) (146) (25,132) Balance at 31 July 2015 171,976 102,111 203,483 477,570 Year ended 31 July 2016 Additions Assets acquired by acquisition of business Assets transferred (to) / from land held for resale Disposals Impairment losses Depreciation expense 5,442 – – (628) – – 6,015 – – (692) (1,317) (4,209) 43,341 19 (152) (157) (13,610) (23,168) 54,798 19 (152) (1,477) (14,927) (27,377) Balance at 31 July 2016 176,790 101,908 209,756 488,454 NOTE 15: INTANGIBLE ASSETS Goodwill At cost Less: impairment write-downs Timber access rights At cost Less: accumulated amortisation / impairment writedown Brand names At cost Less: accumulated amortisation Other intangibles At cost Less: accumulated amortisation CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 288,019 (89,216) 284,574 (41,958) 198,803 242,616 8,656 (8,656) – 14,300 (5,300) 9,000 646 (175) 471 8,655 (8,655) – 14,300 (5,300) 9,000 646 (151) 495 208,274 252,111 53 NOTE 15: INTANGIBLE ASSETS (cont.) (a) Intangible assets with indefinite useful lives Brand names with a carrying value of $9.0 million (2015: $9.0 million) have been assessed as having an indefinite useful life, as the brand has been part of the brick industry since 1853, and Brickworks intends to continue trading under this brand. The brand names have been allocated to the Austral Bricks (Vic) CGU, which forms part of the Building Products segment. Management’s assessment of the appropriateness of the carrying value of indefinite useful life intangibles is based on key assumptions which may vary. In addition to the projected cash flows to be generated by the ongoing use of these assets, these are the discount rate (WACC) and the long term growth rate (LTGR). The rates used in calculating the value in use are consistent with the rates outlined surrounding the impairment of goodwill below (note 15(b)). Given current volatility in financial markets generally, it is difficult to predict how these variables may move. At balance date, it is not expected that a reasonably possible change in key assumption would result in an impairment to these assets. In 2015 the Group recognised an impairment charge against the carrying value of timber access rights for its full amount of $6.8 million in relation to the Auswest Timber CGU. The impairment loss reflected a delay and risk in achieving planned operational efficiencies in this business. This CGU forms part of the Building Products operating segment. (b) Impairment of Goodwill (i) Allocation of goodwill and intangible assets with indefinite useful lives to cash generating units Goodwill is allocated to the Group’s CGUs for impairment testing purposes. At 31 July 2016 the following CGUs representing business operations have significant allocations of goodwill: • Austral Bricks (NSW) $67.5 million (2015: $67.5m) • Austral Bricks (SA) $8.0 million (2015: $8.0m) • Austral Bricks (WA) $nil (2015: $47.3m) • Bristile Roofing (East Coast) $29.4 million (2015: $25.9m) • Austral Bricks (Vic) $75.2 million (2015: $75.2m) • Austral Masonry $18.7 million (2015: $18.7m) Each of these CGUs have been valued based on value-in-use methodology, using the assumptions outlined in point (iii) below. (ii) Recognised impairment losses The Group tests goodwill and other intangible assets with indefinite useful lives at least annually for any impairment in accordance with the accounting policy stated in note 1(r). At 31 July 2016, the Group recognised an impairment loss against the carrying value of goodwill for its full amount of $47.3 million in relation to the Austral Bricks (WA) CGU. The impairment loss reflects the significant decline in building activity and strong competition in Western Australia. The Austral Bricks (WA) CGU forms part of the Building Products operating segment. The impairment loss of $10 million recognised during the financial year ended 31 July 2015 was in relation to the Austral Precast CGU. (iii) Key assumptions The recoverable amount of each CGU is determined on the basis of value-in-use (VIU), unless there is evidence to support a higher fair value less cost to sell. The valuations used to support the carrying amounts of each CGU (including goodwill, other intangible assets and property plant and equipment) are based on forward looking key assumptions that are by their nature uncertain. The nature and basis of the key assumptions used to estimate the future cash flows and discount rates, and on which the Group has based its projections when determining the recoverable value of each CGU, are set out below. VIU calculations use cash flows projections, inclusive of working capital movements, and are based on financial projections approved by the Board covering a five-year period. Estimates beyond five years are calculated with a growth rate that reflects the long term growth rate for the State (or States) that the CGU predominately operates in. The basis of estimation used the following key operating assumptions: • Sales volumes are management forecasts reflecting independent external forecasts of underlying economic activity for the market sectors and geographies in which each CGU operates. A major driver of sales volumes is housing approvals approvals and commencements; Management has assessed the reported forecast housing construction activity data from sources such as BIS Shrapnel and the Housing Industry Association (HIA) over the budget period; • Costs are calculated taking into account historical gross margins, known cost increases, and estimated inflation rates over the period that are consistent with locations in which the CGU’s operate; • Management expects to obtain sales price growth over the budget period. The assumed increases differ by CGU and between different states where the CGU operates. Price increases are considered inherently achievable in a rational market where supply of product approximates demand; • Terminal value earnings are based on average earnings over the 5 year forecast period moderated to reflect management’s view of long term earnings across the cycle; • Long term growth rates used in the cash flow valuation reflect the lower of 2.5% (2015:3.0%) and the average 10 year historical growth rates for states in which the CGU’s operate (sourced from the Australian Bureau of Statistics). The long term growth rate applied to the significant divisions were Austral Bricks (NSW) 2.14% (2015: 2.08%), Austral Bricks (WA) 2.50% (2015: 3.00%), Austral Bricks (Vic) 2.37% (2015: 2.50%), Austral Bricks (SA) 2.05% (2015: 2.05%), Bristile Roofing East Coast 2.5% (2015:2.53%) and Austral Masonry 2.50% (2015: 2.53%); • Management uses an independent external advisor to calculate the appropriate discount rate applied consistently across all CGUs. For 2016, the pre-tax discount rate was 11.75% (2015: 12.48%). 54 NOTE 15: INTANGIBLE ASSETS (cont.) (b) Impairment of Goodwill (cont.) (iv) Sensitivity to key assumptions An impairment loss of $42.3 million has been recognised with respect to the goodwill allocated to the Austral Bricks (WA) CGU. The forecast future cash flows are broadly in line with the remaining carrying value of the CGU. As a result, any adverse change in an assumption which is not offset by a positive change in another assumption would lead to a reduced valuation on a value-in- use basis, and hence would result in an additional impairment. There are no other CGU’s where a reasonably possible change in a key assumption would result in an impairment to the carrying value of goodwill or other indefinite useful life intangibles. (c) Reconciliations Consolidated At 1 August 2014 Cost Accumulated amortisation / impairment Balance at 1 August 2014 Year ended 31 July 2015 Additions Impairment losses Amortisation Balance at 31 July 2015 Year ended 31 July 2016 Additions Impairment losses Amortisation Balance at 31 July 2015 NOTE 16: PAYABLES Current Trade payables and accruals Goodwill $000 Timber Access Rights $000 Brand Names $000 Other Intangibles $000 294,619 (41,958) 252,661 – (10,045) – 242,616 3,445 (47,258) – 198,803 8,507 (1,717) 6,790 – (6,716) (74) – – – – – 14,300 (5,300) 9,000 – – 9,000 – – – 622 (103) 519 – (24) 495 – – (24) Total $000 318,048 (49,078) 268,970 – (16,761) (98) 252,111 3,445 (47,258) (24) 9,000 471 208,274 NOTE CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 81,593 88,335 Payables have carrying amounts that reasonably approximate fair value. Average terms on trade payables are 30 days from statement. NOTE 17: INTEREST BEARING LIABILITIES (a) Current Commercial bills Unamortised transaction costs (b) Non–current Commercial bills Unamortised transaction costs – – – 300,000 (776) 299,224 25,000 (555) 24,445 300,000 (761) 299,239 27 27 55 NOTE 17: INTEREST BEARING LIABILITIES (cont.) (c) Commercial bills Commercial bills are drawn under either: - a 5 year syndicated facility amortised in three separate tranches with the last tranche expiring December 2019 or - a working capital facility which as at 31 July 2016 was due to expire on 18 August 2016. In August 2016 the working capital facility was extended until December 2018. This facility was not drawn as at 31 July 2016 (2015: Nil). More information on the Group’s borrowing facilities can be found in note 27. Interest is payable based on floating rates determined with reference to the BBSY bid rate at each maturity. The fair value of commercial bills at 31 July 2016 approximated their nominal value (2015: nominal value). A portion of the borrowings are hedged using a fixed interest rate swap contract, details of which can be found in notes 18 and 27. NOTE 18: DERIVATIVE FINANCIAL INSTRUMENTS (a) Current liability Interest rate swap contract (b) Non-Current liability Interest rate swap contract NOTE 27 27 CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 – 234 5,820 5,152 The interest rate swap is being used to hedge the exposure to changes in the interest rate payable on its commercial bills (refer note 17). The hedges in place at 31 July 2016 are not hedge accounted, and the fair value movement of the hedges is recognised in the statement of comprehensive income. The fair value of these derivatives are calculated using market observable inputs, including projected forward interest rates for the period of the derivative. These are categorised as “Level 2” in the fair value hierarchy. NOTE 19: PROVISIONS (a) Current Employee benefits Remediation Infrastructure costs Workers compensation Other (b) Non-current Employee benefits Remediation Other (c) Reconciliations 38,008 3,014 4,262 3,693 1,157 50,134 3,566 2,340 3,381 9,287 36,057 4,166 4,764 4,578 1,138 50,703 3,056 2,354 3,275 8,685 Consolidated Year ended 31 July 2016 Balance at the beginning of the year Additional provisions recognised Amounts used Reversals of provisions Balance at the end of the year Current Non–current Remediation $000 Infrastructure Costs $000 Workers Compensation $000 Other $000 4,578 6,756 (4,283) (3,358) 3,693 3,693 – 3,693 4,413 456 (331) – 4,538 1,157 3,381 4,538 6,520 758 (1,924) – 5,354 3,014 2,340 5,354 4,764 – (502) – 4,262 4,262 – 4,262 56 NOTE 19: PROVISIONS (cont.) (d) Descriptions Provision for Remediation A provision has been recognised for the estimated costs of restoring operational and quarry sites to their original state in accordance with relevant approvals. The settlement of this provision will occur as the operational site nears the end of its useful life, or once the resource allocation within the quarry is exhausted, which varies based on the size of the resource and the usage rate of the extracted material. In some cases this may extend decades into the future. Provision for infrastructure costs A provision has been recognised for Brickworks obligation for the estimated costs of completed infrastructure works in relation to certain properties. The timing of future outflows is expected to occur within the next financial year. Provision for workers compensation The Brickworks group self-insures for workers compensation in certain states. The provision has been based on independent actuarial calculations based on incidents reported before year end. The timing of the future outflows is dependent upon the notification and acceptance of relevant claims, and would be expected to be satisfied over a number of future financial periods. Other provisions Other provisions are made up from a number of sundry items. NOTE 20: NET DEFERRED TAXES CONSOLIDATED CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 31 JULY 16 $000 31 JULY 15 $000 Statement of Financial Position Movement through Profit or Loss Deferred taxes relate to the following: Equity accounted associates Property, plant and equipment Provisions Tax losses and rebates Intangibles Other sundry items 223,581 10,366 (17,256) (286) 1,697 (555) 204,308 13,901 (17,281) (1,159) 1,658 (441) Net deferred taxes 217,547 200,986 23,249 (3,517) (670) - 40 (318) 18,784 (5,847) 481 268 – (316) 1,426 (3,988) The carried forward tax losses will be utilised in coming periods as the Group continues to make profits. NOTE 21: CONTRIBUTED EQUITY Fully paid ordinary shares Treasury stock CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 348,231 (11,326) 343,108 (8,943) 336,905 334,165 (a) Ordinary shares Opening balance Shares issued during the year Costs associated with shares issued 2016 2015 No. of Shares Value $000 No. of Shares 148,403,478 333,660 – 343,108 5,136 (13) 148,038,996 364,482 ) Value $000 338,204 4,916 (12) Balance at end of year 148,737,138 348,231 148,403,478 343,108 57 NOTE 21: CONTRIBUTED EQUITY (cont.) Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of shares held. At shareholder’s meetings each share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. There have been no options issued or on issue at any time during or since the end of the financial year. The parent does not have authorised capital nor par value in respect of its issued shares. (b) Treasury stock Opening balance add: bonus shares purchased / issued by share plan less: bonus shares vested during period 2016 2015 No. of Shares 708,241 408,465 (310,794) Value $000 (8,943) (6,287) 3,904 No. of Shares 588,071 441,311 (321,141) Balance at end of period 805,912 (11,326) 708,241 Value $000 (6,784) (5,953) 3,794 (8,943) Treasury stock are those shares held by the employee share plans that have not vested to the participant at balance date. More information on the employee share plans is contained in note 31 of these financial statements. NOTE 22: RESERVES (a) Composition of reserves – capital profits – equity adjustment – general – foreign currency translation – share based payments – associates & JV's CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 88,102 (19,798) 36,125 (1,496) 5,352 202,970 88,102 (25,315) 36,125 (1,516) 3,690 221,358 311,255 322,444 (b) Descriptions Capital profits reserve The Capital profits reserve represents amounts allocated from Retained Profits that were profits of a capital nature. Equity adjustments reserve Equity adjustments reserve includes amounts for tax adjustments posted direct to equity. General reserve The General reserve represents amounts reserved for the future general needs of the operations of the entity. Foreign currency translation reserve The Foreign currency translation reserve represents differences on translation of foreign entity financial statements. Share based payments reserve The share based payments reserve represents the value of bonus shares (treasury stock) that have been expensed through profit and loss but are yet to vest to the employee. Associates & JV’s reserve The associates reserve represents Brickworks share of its associate’s & JV’s reserve balances. The Company is unable to control this reserve in any way, and does not have any ability or entitlement to distribute this reserve, unless it is received from its associates or JV’s in the form of dividends. 58 NOTE CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 NOTE 23: CASH FLOW INFORMATION (a) Reconciliation of net profit after tax to cash flow from operations Net profit after tax 78,190 78,090 Non-cash flows in net profit Amortisation of intangible assets Amortisation of borrowing costs Depreciation of non-current assets Mark to market interest rate swaps Impairment of goodwill and intangibles Write down of property, plant & equipment to recoverable value (Profits) / losses on disposal of property, plant & equipment Non cash profit on sale of land held for resale Share of profits of associates not received as dividends Changes in assets and liabilities net of the effects of acquisitions of businesses (Increase) / decrease in trade and sundry debtors (Increase) / decrease in inventories (Increase) / decrease in land held for resale (Increase) / decrease in prepayments Increase / (decrease) in creditors and accruals Increase / (decrease) in taxes payable Increase / (decrease) in other current provisions Increase / (decrease) in other non-current provisions Increase / (decrease) in deferred tax liabilities 24 540 27,377 434 47,258 14,927 (1,764) 4,403 (20,151) (3,455) (9,544) - (2,245) (6,772) (2,716) (720) 602 22,119 98 (855) 25,132 2,370 16,761 146 (316) 2,745 (23,010) (4,023) (1,863) 13,079 1,788 6,318 11,871 5,083 (6,683) 6,521 Net cash flows from / (used in) operating activities 148,507 133,252 (b) Reconciliation of cash Cash at the end of the financial year as shown in the statement of cash flows is reconciled to items in the statement of financial position as follows: Cash & cash equivalents 30,783 23,051 NOTE 24: ASSOCIATED COMPANIES Information relating to significant associates: Name Ownership interest Carrying value Profit contribution 2016 % 2015 % 2016 $000 2015 $000 2016 $000 2015 $000 Washington H Soul Pattinson & Co Ltd 42.72 42.72 1,150,243 1,146,302 59,246 29,434 Market value of shares at balance date 1,782,354 1,400,932 Washington H. Soul Pattinson & Co Ltd (WHSP) is involved in coal, pharmaceutical, telecommunications and investment. WHSP’s balance date is 31 July annually. At 31 July 2016 WHSP owned 44.14% (2015: 44.23%) of issued ordinary shares of Brickworks Ltd. WHSP is incorporated in Australia. 59 NOTE 24: ASSOCIATED COMPANIES (cont.) (a) Summary of associates financial information, adjusted to reflect adjustments made in using the equity method Current assets Non-current assets Current liabilities Non-current liabilities Outside equity interest (OEI) Equity excluding (OEI) Brickworks’ share Revenue Profit after income tax from continuing operations Other comprehensive income Total comprehensive income Dividends received (b) Associates’ expenditure commitments Capital commitments Lease commitments CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 405,587 3,496,439 (179,908) (322,334) 1,445,953 2,413,868 (161,398) (267,274) (707,268) (747,857) 2,692,516 2,683,292 1,150,243 1,146,302 620,661 641,604 149,420 (38,563) 110,857 52,151 – * – * 50,827 28,174 79,001 50,106 7,002 66,025 The entity has no legal liability for any expenditure commitments incurred by associates. * Note: Associated company (WHSP) figures for 2016 were not publicly available at the time of preparation of this report. (c) Contingent liabilities of associates Contingent liabilities incurred jointly with other investors – * 30,076 The entity has no legal liability for any contingent liabilities incurred by associates. * Note: Associated company (WHSP) figures for 2016 were not publicly available at the time of preparation of this report. NOTE 25: JOINTLY CONTROLLED ENTITIES Information relating to jointly controlled entities (JV’s) is set out below: Name BGAI CDC Trust BGAI Erskine Trust BGAI Capicure Trust BGAI Heritage Trust BGAI Oakdale Trust BGAI Wacol Trust BGAI Oakdale South Trust BMGW Rochedale Trust NZ Brick Distributors Fair value adjustments Ownership interest 2015 2016 % % Carrying value 2016 $000 2015 $000 Profit contribution 2015 2016 $000 $000 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 50.00 554 91,189 9,512 28,317 98,996 5,743 41,721 29,957 6,598 68,244 75,098 7,026 23,426 58,196 5,743 38,651 26,256 6,731 – 24,813 3,230 7,013 27,620 590 – 3,217 531 8,439 25,073 17,151 707 3,917 9,217 548 – – 1,472 1,916 312,587 309,371 75,453 60,001 60 NOTE 25: JOINTLY CONTROLLED ENTITIES (cont.) The principal activity of each of the above JV’s is property development, management and leasing, and they share the same risk and return characteristics, being the industrial property market in Australian Capital cities. All JV’s are incorporated in Australia and have balance dates of 30 June, as the other partner in the JV has this balance date. They are accounted for using the Equity method. No JV has a quoted market price. The profit contribution includes all fair value adjustments (including impairments) to Investment properties totalling $59.7 million (2015: $31.1 million). Fair value adjustments represent a significant accounting estimate and are determined by reference to independent market valuations. Refer note 4(b) for more detail on these profits. During the financial year, the Group did not sell any investments in jointly controlled entities (2015: Nil). Summarised information below has been aggregated due to the similarity of the risk and return characteristics. (a) Summary of JV’s financial information, adjusted to reflect adjust- ments made in using the equity method Cash and cash equivalents Current assets Non–current assets Current financial liabilities Current liabilities Non–current financial liabilities Non–current liabilities Net assets Brickworks’ share Revenues Depreciation and Amortisation Interest income Interest expense Income tax expense Profit after income tax from continuing operations Other comprehensive income Total comprehensive income Dividends received (b) JV’s expenditure commitments Capital commitments Lease commitments The entity has no legal liability for any contingent liabilities incurred by JV’s. (c) Contingent liabilities of JV’s Contingent liabilities incurred jointly with other investors The entity has no legal liability for any contingent liabilities incurred by JV’s. 2016 $000 2015 $000 15,164 34,383 957,784 (20,900) (18,024) (329,358) (348,969) 625,174 312,587 57,818 40 124 19,079 – 134,028 5,037 275,457 774,405 (20,900) (35,146) (378,585) (395,974) 618,742 309,371 89,871 162 101 29,187 – 123,291 (2,318) (2,327) 131,710 120,964 61,896 16,319 26,365 29,564 – – – – 61 NOTE 26: SEGMENT INFORMATION Building Products 31 JULY 16 31 JULY 15 Property Investments Consolidated 31 JULY 16 31 JULY 15 31 JULY 16 31 JULY 15 31 JULY 16 31 JULY 15 $000 $000 $000 $000 $000 $000 $000 $000 748,128 700,871 2,415 22,460 442 280 750,985 723,611 REVENUE Segment revenue from sales to external customers RESULT Segment EBITDA 102,782 81,594 73,451 64,384 59,559 54,854 235,792 200,832 Less depreciation and amortisation Segment EBIT (before significant items) (27,401) (25,230) - - - - (27,401) (25,230) 75,381 56,364 73,451 64,384 59,559 54,854 208,391 175,602 (Less) / add significant items (70,357) (22,855) - - 129 (25,140) (70,228) (47,995) Segment result 5,024 33,509 73,451 64,384 59,688 29,714 138,163 127,607 Unallocated expenses Borrowing costs Significant items Other unallocated expenses Profit before income tax Income tax expense Profit after income tax ASSETS (14,080) (3,928) (12,479) (19,482) (1,556) (9,699) 107,676 96,870 (29,486) (18,780) 78,190 78,090 Segment assets 1,037,804 1,055,110 320,382 316,551 1,157,675 1,146,856 2,515,861 2,518,517 Unallocated assets Total assets LIABILITIES - - 2,515,861 2,518,517 Segment liabilities 131,836 139,160 4,262 4,998 174,947 176,922 311,045 321,080 Unallocated liabilities Borrowings Other Total unallocated liabilities Total liabilities OTHER Aggregate share of the profit of investments accounted for using the equity method Aggregate carrying amount of investments accounted for using the equity method Acquisition of non-current segment assets Non-cash expenses other than depreciation & amortisation 299,224 67,107 323,684 49,503 366,331 373,187 677,376 694,267 531 1,472 74,922 58,529 59,246 29,434 134,699 89,435 6,598 6,731 305,989 302,640 1,150,243 1,146,302 1,462,830 1,455,673 54,430 66,181 23,739 892 101,779 33,290 - - - - - - 78,169 67,073 101,779 33,290 62 NOTE 26: SEGMENT INFORMATION (cont.) The economic entity has the following business segments: Building products division manufactures vitrified clay, concrete and timber products used in the building industry. Major product lines include bricks, blocks, pavers, roof tiles, floor tiles, precast walling and flooring panels, fiber cement walling panels and timber products used in the building industry. Property division considers further opportunities to better utilise land owned by the Brickworks Group, including the sale of property and investment in property trusts. Investment division holds investments in the Australian share market, both for dividend income and capital growth, and includes the Group’s investment in Washington H Soul Pattinson and Co. Limited. The Group has a large number of customers to which it provides products. There are no individual customers that account for more than 10% of external revenues. The Group operates predominantly within Australia, with some product manufactured by the clay products division exported to other countries, particularly New Zealand. Total revenue from sales outside of Australia in the 12 months ended 31 July 2016 was $19.5 million (2015: $18.0 million). The carrying value of non-current assets held outside of Australia at 31 July 2016 was $6.9 million (2015: $7.0 million). NOTE 27: FINANCIAL INSTRUMENTS (a) Capital Management The Brickworks Group manages its capital to ensure that all entities in the Group can continue as going concerns, while striving to maximise returns to shareholders through an appropriate balance of net debt and total equity. The balance of capital can be influenced by the level of dividends paid, the issuance of new shares, returns of capital to shareholders, or adjustments in the level of borrowings through the acquisition or sale of assets. Brickworks capital structure is regularly measured using net debt to capital employed, calculated as net debt divided by a sum of net debt and total equity. Net debt is calculated as total borrowings (note 17) less cash and cash equivalents (note 9), and total equity of the parent entity includes issued capital (note 21), reserves (note 22) and retained earnings. The Group’s strategy during the year was to maintain the total debt to capital employed (at the consolidated level) below a banking covenant limit of 40% imposed per the variable interest rate facility agreement disclosed in Note 17 (2015: 40%). Net debt to capital employed Net debt Total equity Net debt to capital employed CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 269,217 1,838,485 301,949 1,824,250 12.8% 14.2% The Group is not subject to any other externally imposed capital requirements. (b) Financial Risk Management The Group’s activities expose it to a variety of financial risks, primarily to the risk of changes in interest rates, but also, to a lesser extent, credit risk of third parties with which the Group trades and fluctuations in foreign currency exchange rates. The Group’s overall risk management program seeks to minimise any significant potential adverse effects on the financial performance of the Group. Where approved by the Board, certain derivative financial instruments such as interest rate swaps or foreign exchange contracts may be used to hedge certain risk exposures. The Brickworks Group derivative policy prohibits the use of derivative financial instruments for speculative purposes. (c) Terms, conditions and accounting policies Details of the accounting policies adopted in relation to financial instruments are included in the summary of significant accounting policies to the accounts. Information regarding the significant terms and conditions of each significant category of financial instruments are included within the relevant note for that category. 63 NOTE 27: FINANCIAL INSTRUMENTS (cont.) (d) Financial assets and liabilities by category Details of financial assets and liabilities as contained in the annual report are as follows: Financial assets and liabilities by category Financial Assets Cash and cash equivalents Loans and receivables – current Total financial assets Financial Liabilities Other financial liabilities Payables – current Interest bearing liabilities – current Derivative financial instruments – current Interest bearing liabilities – non-current Derivative financial instruments – non-current Total other financial liabilities Total financial liabilities NOTE CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 9 10(a) 16 17(a) 18(a) 17(b) 18(b) 30,783 106,558 137,341 81,593 - - 300,000 5,820 387,413 387,413 23,051 103,104 126,155 88,335 25,000 234 300,000 5,152 418,721 418,721 Fair values of financial assets and liabilities are disclosed in the notes to the accounts where those items are listed. (e) Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties. The credit risk on liquid funds and derivative financial instruments is considered low because these assets are held with banks with high credit ratings assigned by international credit-rating agencies. The maximum exposure to trade credit risk at balance date to recognised financial assets is the carrying amount net of provision for doubtful debts, as disclosed in the statement of financial position and notes to the financial statements. The Brickworks Group debtors are based in the building and construction industry, however the Group minimises its concentration of credit risk by undertaking transactions with a large number of customers. The Group ensures there is not a material credit risk exposure to any single debtor. The Group holds no significant collateral as security, and there are no other significant credit enhancements in respect of these financial assets. The credit quality of financial assets that are neither past due nor impaired is appropriate, and is reviewed regularly to identify any potential deterioration in the credit quality. There are no significant financial assets that would otherwise be past due or impaired whose terms have been renegotiated. 64 NOTE 27: FINANCIAL INSTRUMENTS (cont.) (f) Liquidity risk The Brickworks Group manages liquidity risk by maintaining a combination of adequate cash reserves, bank facilities and reserve borrowing facilities, continuously monitored through forecast and actual cash flows, and matching the maturity profiles of financial assets and liabilities. Details of credit facilities available to the Group, and the amounts utilised under those facilities are as follows: Unused credit facilities Credit facilities Amount utilised Unused credit facility NOTE CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 450,000 (300,000) 450,000 (325,000) 150,000 125,000 In December 2014 the Group entered into a new $350.0 million unsecured variable interest rate facility with a syndicate of Australian and overseas banks. The funds drawn on this facility were used to repay the $300.0 million facility disclosed in the financial statements as at 31 July 2014, which was subsequently cancelled. As at 31 July 2016 the unsecured variable interest rate facility was drawn to $300.0 million (2015: $325.0 million). The facility is in three tranches as outlined below: Tranche A B C Amount ($m) 150.0 100.0 100.0 Drawn ($m) 100.0 100.0 100.0 Expiry Dec 2017 Dec 2018 Dec 2019 In addition, the Group has a $100 million working capital facility, which was not drawn at balance date (2015: Nil) which as at 31 July 2016 was due to expire on 18 August 2016 . In August 2016 the facility was extended until December 2018. These facilities are subject to various terms and conditions, including various negative pledges regarding the operations of the Group, and covenants that must be satisfied at specific measurement dates. A critical judgement is that the Group will continue to meet its criteria under these banking covenants to ensure that there is no right for the banking syndicate to require settlement of the facility in the next 12 months. An analysis of the maturity profiles of the Group’s undiscounted financial liabilities, based on contractual maturity and obligated payments, is as follows: Liquidity risk maturity analysis 1 year or less Trade and other payables Commercial bills Derivatives Total 1 year or less 1 to 5 years Commercial bills Derivatives Total 1 to 5 years (g) Currency risk NOTE 16 18(a) 18(b) CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 81,593 - - 81,593 328,175 5,820 333,995 88,335 25,928 234 114,497 340,623 5,152 345,775 The Brickworks Group does not have any material exposure to unhedged foreign currency receivables. Export sales are all made through Australian agents or direct to overseas customers using Australian Dollars or letters of credit denominated in Australian Dollars. The trading of the Group’s foreign subsidiary, which is in New Zealand dollars (NZD) is not material to the Group as a whole. Accordingly, any reasonably foreseeable fluctuation in the exchange rate of the NZD would not have a material impact on either profit after tax or equity of the Brickworks Group. The Group has a limited exposure to foreign currency fluctuations due to its importation of goods. The main exposure is to US dollars (USD) and Euros (EUR). It is the policy of the Group to enter into forward foreign exchange contracts to cover specific currency payments, as well as covering anticipated purchases for up to 12 months in advance. The overall level of exposure to foreign currency purchases is not material to the Group. Accordingly, any reasonably foreseeable fluctuation in the exchange rate of the USD or EUR would not have a material impact on either profit after tax or equity of the Brickworks Group. 65 NOTE 27: FINANCIAL INSTRUMENTS (cont.) (h) Interest rate risk Brickworks’ significant interest rate risk arises from fluctuations in the BBSY bid rate relating to Brickworks long and short term borrowings. Primarily, the exposure to interest rate risk is on the variable interest rate facility referred to in note 27(f) above. The Brickworks Group manages its exposure to interest rate risk within the Group’s derivative policy. The Group uses interest rate derivatives, where appropriate, to eliminate some of the risk of movements in interest rates on borrowings, and increase certainty around the cost of borrowed funds. The policy has target ranges for fixed interest rate borrowings. At 31 July 2016, if interest rates had been +/- 1% per annum throughout the year, with all other variables being held constant, the operating profit after income tax for the year would have been $1.26 million higher or lower respectively (2015: $1.25 million higher / lower). There would not have been any other significant impacts on equity. Interest rate swaps The Brickworks Group has entered into interest rate swaps contracts which allow the Group to raise borrowings at floating rates and effectively swap them into a fixed rate (average rate 3.45%, 2015: 3.87%). The contracts require settlement of net interest receivable or payable usually around 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying long term debt and are brought to account as an adjustment to borrowing costs. The notional principal amounts reduce from $125.0 million over the next three years (2015: $150.0 million over three years) as detailed below: Settlement Less than 1 year 1 to 3 years 3 to 5 years Total notional principal at balance date Financial Assets 2016 Avg % - 3.47 3.43 2015 Avg % 5.96 - 3.45 2016 $000 - 75,000 2015 $000 25,000 -   50,000 125,000 125,000 150,000 Interest rates on money market instruments (deposits) vary with current short term bank bill rate movements. At balance date, the effective weighted interest rates on these financial assets was 2.05% (2015: 1.85%). There are no other financial assets with exposure to interest rate risk. (i) Other price risk The Brickworks Group does not have material direct exposure to equity price risk, as the value of the share trading portfolio is insignificant, and hence any fluctuation in equity prices would not be material to either profit after tax or equity of the Brickworks Group. Brickworks has significant indirect exposure to equity price risk through its investment in WHSP. Although this investment is accounted for as an equity accounted investment, WHSP has a significant listed investment portfolio which is accounted for at fair value through equity, and contribute to the profit on subsequent disposal. As a result, fluctuations in equity prices would potentially impact on both net profit after tax (where portions of the portfolios are traded) and equity (for balances held at the end of the period) which would result in adjustments to Brickworks net profit after tax and equity. At the time of preparing this report, there was no publicly available information regarding the effects of any reasonably foreseeable fluctuations in equity values on net profit or equity of WHSP at 31 July 2016. NOTE 28: CONTROLLED ENTITIES AND BUSINESS ACQUISITIONS (a) List of significant controlled entities Details of the significant wholly owned entities within the Brickworks Group of companies are as follows. All wholly owned entities within the Group have been consolidated into these financial statements. Controlled entities incorporated in Australia ABN Group’s Interest A.C.N. 000 012 340 Pty Ltd A.C.N. 074 202 592 Pty Ltd AP Installations (NSW) Pty Ltd AP Installations (Qld) Pty Ltd Austral Bricks (NSW) Pty Ltd Austral Bricks (Qld) Pty Ltd Austral Bricks (SA) Pty Ltd Austral Bricks (Tas) Pty Ltd Austral Bricks (Tasmania) Pty Ltd Austral Bricks (Vic) Pty Ltd Austral Bricks (WA) Pty Ltd Austral Bricks Holdings Pty Ltd Austral Facades Pty Ltd 38 000 012 340 82 074 202 592 19 165 402 602 21 165 402 611 60 125 934 849 62 125 934 858 66 125 934 876 83 125 934 947 14 009 501 053 64 125 934 867 34 079 711 603 55 120 364 365 63 144 804 553 66 2016 % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 2015 % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 NOTE 28: CONTROLLED ENTITIES AND BUSINESS ACQUISITIONS (cont.) (a) List of significant controlled entities (cont.) Controlled entities incorporated in Australia ABN Group’s Interest 2016 % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 2015 % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 - - 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 - 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Austral Masonry (NSW) Pty Ltd Austral Masonry (Qld) Pty Ltd Austral Masonry (Vic) Pty Ltd Austral Masonry Holdings Pty Ltd Austral Precast (NSW) Pty Ltd Austral Precast (Qld) Pty Ltd Austral Precast (Vic) Pty Ltd Austral Precast (WA) Pty Ltd Austral Precast Holdings Pty Ltd Austral Roof Tiles Pty Ltd Auswest Timbers (ACT) Pty Ltd Auswest Timbers Holdings Pty Ltd Auswest Timbers Pty Ltd Bowral Brickworks Pty Ltd Brickworks Building Products Pty Ltd Brickworks Building Products (NZ) Pty Ltd Brickworks Cement Pty Limited Brickworks Construction Materials Pty Limited Brickworks Head Holding Co Pty Ltd Brickworks Industrial Developments Pty Ltd Brickworks Properties Pty Ltd Brickworks Property Finance Co Pty Ltd Brickworks Specialised Building Systems Pty Ltd (formerly Austral Panels Pty Ltd) Brickworks Sub Holding Co No. 1 Pty Ltd Brickworks Sub Holding Co No. 2 Pty Ltd Brickworks Sub Holding Co No. 3 Pty Ltd Brickworks Sub Holding Co No. 4 Pty Ltd Brickworks Sub Holding Co No. 5 Pty Ltd Brickworks Sub Holding Co No. 6 Pty Ltd Brickworks Sub Holding Co No. 7 Pty Ltd Brickworks Sub Holding Co No. 8 Pty Ltd Bristile Guardians Pty Ltd Bristile Holdings Pty Ltd Bristile Pty Ltd Bristile Roofing (East Coast) Pty Ltd Bristile Roofing Holdings Pty Ltd Christies Sands Pty Ltd Clifton Brick Holdings Pty Ltd Clifton Brick Manufacturers Pty Ltd Daniel Robertson Australia Pty Ltd Davman Builders Pty Ltd Dry Press Publishing Pty Ltd Hallett Brick Pty Ltd Hallett Roofing Services Pty Ltd Horsley Park Holdings Pty Ltd International Brick & Tile Pty Ltd J. Hallett & Son Pty Ltd Lumetum Pty Ltd Metropolitan Brick Company Pty Ltd Nubrik Concrete Masonry Pty Ltd Nubrik Pty Ltd Pilsley Investments Pty Ltd Prestige Brick Pty Ltd Prestige Equipment Pty Ltd Southern Bricks Pty Ltd Terra Timbers Pty Ltd The Austral Brick Co Pty Ltd The Warren Brick Co Pty Ltd Visigoth Pty Ltd 45 141 647 092 30 000 646 695 53 120 364 356 97 141 629 996 81 125 934 938 20 145 070 855 16 145 070 837 22 145 070 884 88 140 573 646 67 144 804 571 34 087 808 811 51 120 364 347 28 071 093 591 39 000 165 579 63 119 059 513 64 076 976 880 14 607 791 088 83 607 788 590 95 120 360 036 47 120 364 329 12 094 905 996 28 158 536 353 61 144 804 544 89 120 360 009 61 120 364 392 59 120 364 383 57 120 364 374 16 125 922 821 18 125 922 830 97 125 922 849 99 125 922 858 40 079 711 630 32 008 668 540 19 056 541 096 77 090 775 634 49 120 364 338 63 007 635 529 83 004 493 181 63 004 529 104 53 087 575 611 66 004 434 342 93 000 002 979 20 007 622 317 93 007 880 220 65 008 392 014 31 003 281 123 40 007 870 779 98 607 790 634 13 008 666 840 29 004 767 113 59 004 028 559 70 008 768 330 24 009 266 273 68 006 727 920 83 007 749 840 93 091 183 050 52 000 005 550 24 000 006 682 72 076 286 710 67 NOTE 28: CONTROLLED ENTITIES AND BUSINESS ACQUISITIONS (cont.) (b) Business acquisitions During the financial year ended 31 July 2016 the Group acquired 3 fascia and gutter businesses. Details of the net assets acquired under these transactions are set out below. Date acquired Cost of acquisition Cash paid Net assets acquired: Inventory Property, plant & equipment Deferred tax assets Trade and other payables Employee entitlements assumed Fair value of net assets acquired Goodwill arising on acquisition Direct costs relating to the acquisition CJM $000 Adams Direct $000 31 August 2015 15 February 2016 MFS $000 7 March 2016 Total 2016 $000 388 850 2,083 3,321 12 - 14 (50) (45) (69) 457 (15) - - 12 - (40) (28) 878 (34) - 19 19 - (65) (27) 12 19 45 (50) (150) (124) 2,110 3,445 (109) (158) Upon acquisition these acquired businesses were integrated into the existing Brickworks business and systems. As a result, specific financial information relating to the acquired businesses is not available and therefore it is impracticable to disclose the revenue and profit or loss of the acquirees since the acquisition date. In prior year the Group acquired the business and assets of Capricornia Rockblock Pty Limited located in Rockhampton in Central Queensland for $5.5 million. Details of the net assets acquired under this transaction are set out below. Cost of acquisition Cash paid Net assets acquired: Inventory Property, plant & equipment Deferred tax assets Other assets Employee entitlements assumed Fair value of net assets acquired Direct costs relating to the acquisition 2015 $000 5,495 354 5,127 61 3 (50) 5,495 (577) (c) Controlled entities disposed of There were no controlled entities within the Group that were disposed of during the current or prior period. 68 NOTE 28: CONTROLLED ENTITIES AND BUSINESS ACQUISITIONS (cont.) (d) Closed group A deed of cross-guarantee between Brickworks Ltd and a number of its subsidiaries (the “closed group”) was enacted during the 2010 financial year and relief was obtained from preparing a financial statement for those subsidiaries under an ASIC instrument of relief under subsection 340(i) of the Corporations Act 2001. Under the deed, Brickworks guarantees to support the liabilities and obligations of those subsidiaries. The controlled entities have also given a similar guarantee. The entities covered under the deed are listed in note 28 (a). The members of the closed group and the parties to the deed of cross guarantee are identical. The following are the aggregate totals, for each category, relieved under the deed. CONSOLIDATED INCOME STATEMENT Profit before income tax expense Income tax (expense) / benefit Profit after income tax expense RETAINED PROFITS Retained profits at the beginning of the year Profit after income tax expense Dividends paid Share of associate’s transfer to outside equity interests Retained profits at the end of the year CLOSED GROUP 31 JULY 16 $000 31 JULY 15 $000 32,266 (7,206) 25,060 35,340 555 35,895 1,074,484 25,060 (55,519) 13 1,090,558 35,895 (51,754) (215) 1,044,038 1,074,484 69 NOTE 28: CONTROLLED ENTITIES AND BUSINESS ACQUISITIONS (cont.) (d) Closed group (cont.) CONSOLIDATED BALANCE SHEET CURRENT ASSETS Cash assets Receivables Inventories Land held for resale Prepayments TOTAL CURRENT ASSETS NON-CURRENT ASSETS Receivables Other financial assets Inventories Land held for resale Investments accounted for using the equity method Property, plant and equipment Intangibles TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Payables Interest-bearing liabilities Derivative financial instruments Income tax provision Provisions TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Interest-bearing liabilities Derivative financial instruments Provisions Deferred tax liabilities TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Retained profits TOTAL EQUITY CLOSED GROUP 31 JULY 16 $000 31 JULY 15 $000 30,783 104,916 181,434 9,652 8,599 335,384 122,396 10,000 7,998 4,137 1,156,841 480,323 208,275 23,052 100,880 171,829 5,455 5,935 307,151 176,511 10,000 8,129 8,182 1,153,033 469,676 252,111 1,989,970 2,077,642 2,325,354 2,384,793 80,163 - - 13,771 50,006 85,795 24,445 234 16,488 53,858 143,940 180,820 299,224 5,820 9,287 169,172 483,503 627,443 299,239 5,152 5,410 158,987 468,788 649,608 1,697,911 1,735,185 336,905 316,968 1,044,038 334,165 326,536 1,074,484 1,697,911 1,735,185 70 NOTE 29: CONTINGENT LIABILITIES Contingent liabilities at balance date not provided for in these financial statements: Bank guarantees issued in the ordinary course of business 26,836 26,543 CONSOLIDATED 31 JULY 16 $000 31 JULY 15 $000 The Directors do not anticipate that any of the bank guarantees issued on behalf of the Group will be called upon. Members of the economic entity are parties to various legal actions against them that are not provided for in the financial statements. These actions are being defended and the directors do not anticipate that any of these actions will result in material adverse consequences for the Company or the Consolidated Entity. NOTE 30: CAPITAL AND LEASING EXPENDITURE COMMITMENTS (a) Capital projects contracted for but not provided for at balance date Payable not later than one year 14,268 10,929 The capital commitments relate to contracts to supply or construct buildings or various items of plant and equipment for use in the Building Products segment of the business. (b) Operating lease commitments Non-cancellable operating leases contracted for but not capitalised in the financial statements 81,675 97,059 Payable – not later than one year – later than one year but not later than five years – later than five years 24,788 50,775 6,112 81,675 24,947 58,668 13,444 97,059 Operating leases are for the rental of land (used for sales and display centres), manufacturing equipment and motor vehicles. The leases are non-cancellable with rent payable monthly in advance. Leases for properties are on terms of between 3 and 10 years, with renewal options of similar lengths. NOTE 31: EMPLOYEE SHARE PLANS (a) Salary sacrifice arrangements Brickworks Limited has an employee share ownership plan, which allows all employees who have achieved 3 months service with the Group to purchase Brickworks Limited shares, using their own funds plus a contribution of up to $156 per annum from the Company. All shares acquired under salary sacrifice arrangements are fully paid ordinary shares, purchased on-market under an independent trust deed. At 31 July 2016, the Brickworks Employee Share Plans had 722 members taking part who owned a combined 1,508,253 shares or 1.01% of issued ordinary capital (2015: 739 members, 1,413,008 shares, 0.95%). These figures exclude shares held by employees outside the Brickworks Employee Share Plans. This represented shares purchased under the salary sacrifice arrangements described above, as well as shares held as part of the Brickworks equity based compensation plans shown below. The reduction in employee shareholder numbers reflects an overall reduction in eligible employee numbers during the financial year. (b) Equity-based compensation plans The following table shows the number of fully paid ordinary shares held by the Brickworks Deferred Employee Share Plan that had been granted as remuneration. This table does not include any shares held in the plan that were purchased by the employee under the salary sacrifice arrangements described above. Unvested Granted Sept 11 Granted Sept 12 Granted Sept 13 Granted Sept 14 Granted Sept 15 Total Unvested Vested Total Opening Balance 45,505 99,701 171,554 340,422 - 657,182 629,699 1,286,881 Granted - - - - 408,465 408,465 - 408,465 71 Vested (37,824) (45,644) (53,061) (79,883) (78,939) (295,351) 295,351 Forfeited / Withdrawn (7,681) (10,456) (14,806) (23,897) (16,077) (72,917) (244,757) Closing Balance - 43,601 103,687 236,642 313,449 697,379 680,293 - (317,674) 1,377,672 The amount recognised in the statement of comprehensive income in relation to equity based compensation arrangements for the year ended 31 July 2016 was $5,556,605 (2015: $4,415,505). The unvested shares vest to employees at 20% per year for each of the following 5 years, provided ongoing employment is maintained. Unvested shares are unavailable for trading by the employee. The fair value of vested shares held by the share plan at 31 July 2016 was $10,552,262 (2015: $9,777,529), based on the closing share price at 31 July 2016 ($15.03 per share) (2015: $14.90 per share). The fair value of shares granted during the period was $6,287,339 (2015: $5,953,285), based on the price paid for these shares when they were acquired on market. All shares granted by the Company provide dividend and voting rights to the employee. More information regarding the Brickworks Employee Share Plans is outlined in the Remuneration Report included in the Directors’ Report. NOTE 32: RELATED PARTIES During the year material transactions took place with the following related parties: • • • • Various intercompany loans are in existence between the Parent entity and some of its wholly owned subsidiaries. The loans are unsecured, interest free and have no fixed terms for repayment. The loans are a net asset to the Parent entity of $572.6 million (2015: $617.3 million). Property transactions with various trusts (Iisted in note 25) which are jointly owned by the Brickworks Group and Goodman Australia Industrial Fund, an unlisted property trust. During the year there was no sale of land held for resale by the Brickworks Group to these trusts (2015: Nil). All transactions with the property trusts are at arm’s length values. During the year the Group engaged Korn/Ferry International, an entity which employs The Hon. Robert Webster, to provide consulting services regarding executive evaluation and development. The total value of services provided was $526,533 (2015: $417,000) and were on arm’s length terms. Directors and their director-related entities are able, with all staff members, to purchase goods produced by the Brickworks group on terms and conditions no more favourable than those available to other customers. There were no other transactions with key management personnel during the period. NOTE 33: EVENTS OCCURING AFTER BALANCE DATE On 17 August 2016 the Group’s $100 million working capital facility was extended until December 2018. This facility was not drawn as at 31 July 2016 (2015: Nil). Further information in relation to the Group’s banking facilities is provided in Note 17. There have been no other events subsequent to balance date that could materially affect the financial position and performance of Brickworks Limited or any of its controlled entities. 72 In the opinion of the Directors: DIRECTOR’S DECLARATION 1. the complete set of the financial statements and notes of the consolidated entity, as set out on pages 34 to 72, and the additional disclosures included in the Remuneration Report section of the Directors’ Report designated as audited, are in accordance with the Corporations Act 2001: (a) comply with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) give a true and fair view of the financial position as at 31 July 2016 and of the performance for the year ended on that date of the consolidated entity; 2. 3. the financial report also complies with International Financial Reporting Standards as issued by the International Accounting Standards Board; 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 4. as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in note 28(a) will be able to meet any obligations or liabilities to which they are or may become subject to, by virtue of the Deed of Cross Guarantee. This declaration is made after receiving the declaration required to be made to the Directors in accordance with s295A of the Corporations Act 2001 for the financial year ended 31 July 2016. This declaration is made in accordance with a resolution of the Board of Directors. Dated 22 September 2016 R.D. MILLNER Director L.R. PARTRIDGE AM Director 73 Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Independent auditor's report to the members of Brickworks Limited Report on the financial report We have audited the accompanying financial report of Brickworks Limited, which comprises the consolidated statement of financial position as at 31 July 2016, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors' declaration of the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year. Directors' responsibility 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 controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor's responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit we have complied with the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is referred to in the directors’ report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 74 Opinion In our opinion: a. the financial report of Brickworks Limited is in accordance with the Corporations Act 2001, including: i ii giving a true and fair view of the consolidated entity's financial position as at 31 July 2016 and of its performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001; and b. the financial report also complies with International Financial Reporting Standards as disclosed in Note 1. Report on the remuneration report We have audited the Remuneration Report included in the directors' report for the year ended 31 July 2016. 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. Opinion In our opinion, the Remuneration Report of Brickworks Limited for the year ended 31 July 2016, complies with section 300A of the Corporations Act 2001. Ernst & Young Anthony Jones Partner Sydney 22 September 2016 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 75 STATEMENT OF SHAREHOLDERS ORDINARY SHARES AT 31 AUGUST 2016 Number of holders Voting entitlement is one vote per fully paid ordinary share % of total holdings by or on behalf of twenty largest shareholders Distribution of shareholdings: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,000 – 100,000 100,001 and over Holdings of less than marketable parcel of 36 shares 7,689 81.58% 3,869 2,921 455 398 46 7,689 636 The names of the substantial shareholders as disclosed in substantial shareholder notices received by the Company: Shareholder Washington H Soul Pattinson & Co. Ltd Perpetual Ltd and subsidiaries 20 LARGEST SHAREHOLDERS AS DISCLOSED ON THE SHARE REGISTER AS AT 31 AUGUST 2016 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. WASHINGTON H SOUL PATTINSON & COMPANY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED NATIONAL NOMINEES LIMITED MILTON CORPORATION LIMITED J S MILLNER HOLDINGS PTY LIMITED BNP PARIBAS NOMS PTY LTD UBS NOMINEES PTY LTD MRS MARGARET DOROTHY STONIER AUSTRALIAN FOUNDATION INVESTMENT COMPANY LIMITED CPU SHARE PLANS PTY LTD MR ROBERT DOBSON MILLNER + MR MICHAEL JOHN MILLNER CITICORP NOMINEES PTY LIMITED BNP PARIBAS NOMINEES PTY LTD T G MILLNER HOLDINGS PTY LIMITED ARGO INVESTMENTS LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED Number of Shares 65,645,140 9,437,917 Number of Shares 65,645,140 10,648,000 9,180,772 7,708,213 4,510,978 3,284,584 3,234,567 2,968,836 2,088,939 1,704,569 1,684,579 1,502,970 1,384,164 1,361,292 1,166,417 875,000 678,509 584,009 577,001 543,918 % 44.14 7.16 6.17 5.18 3.03 2.21 2.17 2.00 1.40 1.15 1.13 1.01 0.93 0.92 0.78 0.59 0.46 0.39 0.39 0.37 121,332,457 81.58 76 TABLE OF IMPORTANT DATES 2016 annual result released Record date for final ordinary dividend Annual General Meeting Payment date for final ordinary dividend 2017 half-year end 2017 half-year result announced Record date for interim ordinary dividend Payment date for interim ordinary dividend 2017 financial year end 2017 annual result released 22 September 2016 10 November 2016 29 November 2016 30 November 2016 31 January 2017 23 March 2017 11 April 2017 2 May 2017 31 July 2017 21 September 2017 The above dates are indicative only and are subject to change 

Continue reading text version or see original annual report in PDF format above