BKW
Annual Report 2018

Plain-text annual report

ANNUAL REPORT 2018Urbanstone Commercial Engineered Stone Adelaide Convention Centre 02 05 09 15 19 20 36 40 43 45 Five Year Summary Chairman’s Letter Managing Director’s Overview Financial Overview Group Structure Building Products Property Investments Health and Safety Environmental Sustainability 48 51 55 57 59 61 65 69 83 84 85 Sustainability Product Design Our People Community Support Board of Directors Executive Management Corporate Governance Summary Directors’ Report Remuneration Report Auditor’s Independence Declaration Consolidated Financial Statements Consolidated Income Statement 86 87 88 89 90 Consolidated Statement of Other Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 125 Directors’ Declaration 127 131 132 Independent Auditor’s Report Statement of Shareholders Corporate Information and Important dates Table of CONTENTS Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 01 / Five Year SUMMARY Building Products revenue Total Revenue Total EBIT Dividends $637m $701m $748m $763m $820 m $670m $724m $751m $842m $821 m $143m $166m $196m $246m $280 m 42.0¢ 45.0¢ 48.0¢ 51.0¢ 54.0¢ Total revenue Building Products revenue Earnings before interest and tax Building products Property Waste management Investments Associates Head office and other expenses Total EBIT Total EBITDA Finance costs Income tax 2018 $000 Growth % 2014 $000 670,268 636,895 45,081 61,013 1,414 262 44,382 (8,945) 2015 $000 723,611 700,871 56,364 61,735 2,649 280 54,574 (9,699) 2016 $000 750,985 748,128 75,381 72,105 1,346 442 59,117 (12,479) 2017 $000 841,816 763,338 65,036 90,588 – 224 102,873 (12,432) 821,084 819,980 75,950 93,979 – 1,053 122,445 (13,666) 143,207 165,903 195,912 246,289 279,761 168,132 191,133 223,313 274,140 309,163 (18,073) (23,845) (19,482) (26,122) (14,080) (34,753) (12,436) (37,428) (14,456) (41,575) (2%) 7% 17% 4% – 370% 19% (10%) 14% 13% (16%) (11%) Net profit after income tax (excluding significant items)1 101,289 120,299 147,079 196,425 223,730 14% Significant items net of tax 1,466 (42,209) (68,889) (10,215) (48,288) Net profit after income tax (including significant items) Per share earnings and dividends Basic earnings per share (cents) Underlying earnings per share (cents)1 Ordinary dividends per share (cents) Ratios Net tangible assets per share Return on shareholders equity Underlying return on shareholders equity1 Interest cover ratio Gearing (net debt to equity) 102,755 78,090 78,190 186,210 175,442 (6%) 69.4 68.4 42.0 $10.32 5.7% 5.6% 7.3 17.0% 52.6 81.1 45.0 $10.59 4.3% 6.6% 9.7 16.6% 52.6 98.9 48.0 $10.95 4.3% 8.0% 14.4 14.6% 124.9 131.8 51.0 $11.77 9.5% 10.0% 16.7 14.9% 117.5 149.8 54.0 $12.42 8.5% 10.8% 18.0 14.7% (6%) 14% 6% 5% (10%) 8% 7% (2%) 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 / 02 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 03 / 1 This is an alternative measure of earnings that excludes significant items, which are separately disclosed in the consolidated financial statements. Urbanstone Commercial – Natural Stone Yagan Square Chairman’s LETTER On behalf of your Board of Directors, I am delighted to present Brickworks’ Annual Report for the 2018 financial year. The strong financial and operational performance of the Company during the past year is extremely pleasing and another clear indicator that we have the right strategy and corporate structure in place to deliver earnings growth and strong shareholder returns. 2018 HIGHLIGHTS Brickworks reported a statutory net profit after tax (NPAT) of $175.4 million, down 5.8% on the previous year. Excluding the impact of significant items, our underlying NPAT was a record $223.7 million, up 13.9%. This marks the sixth consecutive year of growth in underlying NPAT. Each of the Company’s three segments delivered an increase in earnings compared to the prior year. Building Products earnings before interest and tax (EBIT) was $76.0 million, up 16.8%. Property delivered another strong result, with EBIT of $94.0 million, and EBIT from Investments was $123.5 million. As well as delivering record underlying earnings, the Company continues to build considerable asset value for shareholders. During financial year 2018, net tangible assets held within Building Products increased by $22 million, Brickworks share of net asset value within the Property Trust2 increased by $58 million, land held for resale increased by $7 million, and the market value of Brickworks’ stake in Washington H. Soul Pattinson (WHSP) increased by $427 million. After including net debt of $304 million, the inferred net tangible asset backing of the Group at 31 July 2018 was more than $3.2 billion. Since the end of the financial year, the market value of Brickworks’ stake in WHSP has increased by a further $350 million3, bringing total inferred assets to almost $3.6 billion. DIVIDENDS AND CAPITAL MANAGEMENT The Directors have declared a fully franked final dividend of 36 cents per share, up 5.9% on the prior year. This brings total dividends for the year to 54 cents per share, up 3 cents or 5.9% on the prior year. We recognise the importance of dividends to our shareholders and are proud of our strong and stable dividend history. Brickworks is one of only 9 companies in the ASX All Ordinaries index that have maintained or increased the normal dividend every year since the turn of the century. Our borrowing level remains conservative, with gearing of 14.7%, reflecting a prudent approach to capital management. Net debt at the end of the year was relatively stable at $303.8 million. CORPORATE STRUCTURE Our strong financial performance during the year again reinforced the benefit of our diversification strategy which has consistently grown net asset value over the long term and helped to deliver solid returns and stability to our shareholders. As a diversified business, we are less exposed to market volatility and are well placed to ride out the low points of business cycles. We take a long-term view of our operations, 1 2 3 This is an alternative measure of earnings that excludes significant items, which are separately disclosed in the consolidated financial statements. The Joint Venture Industrial Property Trust is a 50/50% partnership between Brickworks and Goodman Industrial Trust. Based on the WHSP share price of $25.24 at the close of trading on 18 September 2018. 150¢ Underlying earnings per share 1 h14% 36 ¢ Final fully franked dividend per share h6% 54 ¢ Total full year dividend per share h6% / 04 / Brickworks Limited / Annual Report 2018 / 04 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 05 / IN CONCLUSION The continued strong performance of the Company is a credit to our almost 1,500 staff. On behalf of the Board, I would like to thank all our staff and our executive management team for their ongoing efforts and commitment. I would also like to thank my fellow directors and our shareholders for your continued support. ROBERT MILLNER Chairman and our diversification strategy allows us to make investment decisions not for the short term, but across cycles, ensuring we are in the strongest possible position to continue to grow and succeed in the future. Our Building Products business is the key operational division within the Group and we continue to invest in capital projects and acquisitions to enhance our competitive position and deliver improved returns. The Property division exists to maximise the value of land that is surplus to the Building Products business, and includes a 50% share in an Industrial Property Trust with the Goodman Group. The Company is focused on continuing to build value in the Property Trust, and has re-invested cash proceeds received from land sales in recent years to support development activity. This has seen total assets within the Trust increase to more than $1.5 billion – a significant achievement given its inception just 11 years ago. The 42.7% interest in WHSP, with a current market capitalisation of around $6.0 billion, provides a stable and diversified earnings stream. This investment has delivered outstanding performance over the long term, recording a total shareholder return of 13.0% per annum over the past 15 years (to 31 July 2018), 3.6% ahead of the benchmark All Ordinaries Accumulation Index. BOARD AND GOVERNANCE Brickworks has a strong and stable Board that is committed to acting in the best interests of shareholders and ensuring that Brickworks is well positioned for future growth. The Board regularly reviews its capabilities and composition to ensure an optimal mix of skills, knowledge, and experience to safeguard the continued and long-term success of the Company. As advised to shareholders at the 2016 Annual General Meeting, Mr David Gilham will not seek re-election at the 2018 Annual General Meeting. As part of our succession plan, the Company has engaged external consultants to assist with the appointment of an additional independent non-executive director, and this process is well progressed. On behalf of the Board, I would like to thank David for his 15 years of service on the Brickworks Board. / 06 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 07 / Bowral Bricks in Simmental Silver Tiger Prawn Project GB Masonry Smooth in Nickel Highbury Grove Managing Director’s OVERVIEW It gives me great pleasure to report that Brickworks has delivered another strong financial result in 2018. During the year we have also made significant progress in the implementation of a range of strategic initiatives to position the Company for further growth. SAFETY The health and safety of our people is our number one priority, and the Company has made steady progress in reducing the number of workplace injuries over many years. Despite lost time injuries increasing by one in 2018, to five for the year, injury rates are considerably lower than five years ago. The Company continues to roll out best practice safety standards across all our operations, including recently acquired businesses. We are also focused on ensuring our core value of creating a “Sustainably Safe” workplace is embedded and reflected across all our operations. We will not be satisfied until we have achieved our ultimate goal of zero harm across the business. BUILDING PRODUCTS PERFORMANCE Building Products recorded an EBIT of $76.0 million in 2018, up by 16.8% on the prior year. Strong demand for our products across most operations resulted in record sales revenue of $820.0 million. The result was characterised by another strong performance from our east coast divisions, buoyed by continued robust demand in New South Wales and Victoria. In addition, despite a further deterioration in market activity and a wet winter period, performance in Western Australia improved following a range of restructuring initiatives. Austral Bricks produced another strong result. The key focus of this business continues to be margin growth, including increased sales of premium products. Close collaboration with architects to develop bespoke and customised brickwork, especially in medium and higher density developments is a key initiative to support this objective. As is the Company’s investment in marketing and branding, which was further expanded during the period with a major advertising campaign, and further investment in design studios across the country. An example of the success of this strategy is the Darling Square project in Sydney. Construction of this mixed-use high-rise development in 2018 was the culmination of over 2 years of design and product development collaboration between Austral Bricks, project architects and developers. Ultimately the project involved the supply of almost 600,000 ultra-premium bricks, with various shapes, sizes and surface finishes. At the recent Horbury Hunt awards, which recognise excellence in the use of building products in architectural design, our products featured in four out of the six winning projects. During the year, upgrade works were completed at the Rochedale plant in Queensland and the Cardup plant in Western Australia. In addition, overdue maintenance was carried out on the Wollert East kiln in Victoria following over a decade of near continuous operation. $175m Statutory NPAT x6% $224m Underlying NPAT h14% LTIFR 1.7 Lost Time Injury Frequency Rate h31% / 08 / Brickworks Limited / Annual Report 2018 / 08 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 09 / MANAGING DIRECTOR’S OVERVIEW INEX Boards & Terracade St Andrews Hospital This continued investment in our facilities has delivered lower manufacturing costs and allows more flexible production, positioning the business well for sustained performance over the long term. Bristile Roofing, Austral Precast and Auswest Timbers all delivered improved performance in 2018, whilst Austral Masonry was approximately in line with the prior year. ENERGY SECURITY As recently announced to the market, we have executed a new five-year wholesale gas supply agreement with Santos for our New South Wales, Queensland, Victorian and South Australian operations, commencing on 1 January 2020. At a time of considerable uncertainty within the Australian energy market, we are pleased to secure this flexible and market competitive long-term deal, that extends until the end of 2024. This will allow Brickworks to continue its focus on operational excellence, including securing the lowest cost manufacturing position in Australia. Our transition to the wholesale market will deliver significant advantages, particularly in regard to flexibility of supply. BUILDING PRODUCTS STRATEGY Our strategy to secure market-leading positions and grow earnings over the long term is supported by three key objectives: strengthen the core business; build growth businesses; and sustain our strong culture. We have made good progress on these strategic objectives during the past 12 months. Construction of the Southern Cross Cement import terminal in Brisbane is proceeding on schedule and is expected to be fully installed and commissioned in the 2019 financial year. This investment will strengthen Building Products’ core business, by securing high quality, low cost raw material supply for our Austral Masonry, Bristile Roofing and Austral Precast operations. BUILDING PRODUCTS PROPERTY INVESTMENTS $76.0m Segment EBIT h16.8% $94.0m $123.5m Segment EBIT h3.7% Segment EBIT h19.8% The Property Trust has re-invested the cash proceeds received from this sale to support development activity and reduce debt held within the Trust, with Trust gearing at the end of the year down to 39%. The Property Division is also focused on opportunities for suitable land sales outside of the Property Trust. In May we announced the sale of the Punchbowl brick site for $41 million, via a Call Option that has now been exercised. Completion is due to occur in October. This sale includes a leaseback to Austral Bricks for 10 years, with an additional 10-year option. INVESTMENTS PERFORMANCE Investments consists primarily of a 42.7% stake in WHSP, a core asset of Brickworks that has brought diversity and reliable earnings to the Company for more than 4o years. Our investment in WHSP provides a cash flow stream via dividends that allows long term strategic decision making by sheltering the business during cyclical downturns. Total EBIT from Investments was up 19.8% to $123.5 million in 2018, bolstered primarily by improved underlying earnings from New Hope Corporation. In addition, cash dividends of $56.2 million were received during the year, up 3.8% on the prior year. GROUP OUTLOOK As we move into the new financial year, the Building Products division faces mixed market conditions across the country, with the timing and extent of any sustained decline in building materials demand difficult to predict. Market fundamentals remain supportive for new housing construction, with employment levels healthy, low interest rates and high immigration levels projected to be sustained. External analysis indicates that a housing undersupply still exists in New South Wales and Victoria4. However, tighter bank lending controls have reduced personal borrowing capacity and this is now causing delays and cancellations of dwelling construction. The acquisition of UrbanStone in November 2017 provides additional scale to Austral Masonry and diversifies our product range and geographic exposure. It also enhances our premium product offering in line with our strategy to invest in style and product leadership. As I have already mentioned, developing industry-leading customer relationships is an ongoing priority for Brickworks. In Sydney, a new design studio was launched in March 2018, with an expanded showroom and event space to cater for the growing demand for speaking events and industry functions. Our studios have now become a focal point for the local architectural and design community. Sales of imported products continue to increase, allowing us to secure additional earnings growth and offer our customers a wider range of unique and premium products. During the year, new supply agreements were executed with Italian manufacturer S. Anselmo for a unique range of sandstock bricks and with Italian manufacturer Poesia for ultra-premium glass bricks. The Company continues to actively investigate acquisition opportunities to grow earnings, as well as major capital projects within existing operations to improve production efficiency. PROPERTY PERFORMANCE The continued strong performance of our Property division during 2018 was pleasing, delivering an EBIT of $94.0 million and recording a sixth consecutive year of earnings growth. Net trust income delivered by the Property Trust was $22.0 million for 2018, up 20.2% on the prior year. The key focus during 2018 was the continued development of the Property Trust assets across the country. In April, the Oakdale Central Estate in New South Wales was completed, following the delivery of the final facility to Reckitt Benckiser. At Rochedale in Queensland, the southern section of the estate is now fully occupied with a final 6-hectare mixed use development now under construction. During the second half, infrastructure works were completed at the Oakdale South Estate. This delivered a significant uplift in the value of this property and also triggered the settlement on the sale of 30 hectares of land. This sale resulted in $100 million in gross receipts to the Property Trust, and a $25.9 million profit contribution to Brickworks. 4 BIS Oxford Economics Building in Australia Report 2018. / 10 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 11 / MANAGING DIRECTOR’S OVERVIEW Urbanstone Commercial – Engineered Stone and Natural Stone National Gallery of Victoria Turning to Property, development activity within the Trust remains strong. The completion of new facilities at Oakdale South and Rochedale will drive growth in rent and asset value over both the short and longer term. As I mentioned, the sale of the Punchbowl property is due to complete in October. With a sale price of $41 million, and total costs of approximately $8 million, this transaction will deliver a profit of around $33 million to Brickworks. In 2019 we expect another solid earnings contribution from Property, but as always, the final outcome will depend on the timing of development activity and transactions, and extent of any revaluations. We are confident that WHSP will continue to deliver a stable and growing stream of earnings and dividends over the long term. OUR PEOPLE Finally, I’d like to thank our people. Their energy and dedication is the key to our success. All of our staff across the country are making the difference. From our sales teams who are willing to go the extra mile, get on the front foot and ensure that Brickworks is an easy Company for our customers to do business with. To our production staff who are constantly striving to improve operational efficiency and product quality. I am very proud that at Brickworks we have been able to maintain a stable and highly experienced workforce, and I believe this gives us a competitive edge. As you can see, we have achieved a lot in 2018. I would like to take this opportunity to thank the Board of Directors, the executive team, and all our staff for their support and commitment during the year. Without your ongoing efforts, we would not be the successful Company that we are today. As a result, we are currently experiencing patchy sales, despite our strong order book in the major east coast markets. Weakness is evident in businesses exposed to the multi-residential market in Sydney. Elsewhere, demand is being supported by the continued resilience of the detached housing market, and strong activity in regional centres such as Newcastle and Wollongong in New South Wales and Geelong in Victoria. There are reports of trade shortages in Victoria and South Australia, and in Tasmania housing approvals are at the strongest level for almost a decade. On the other side of the country in Western Australia, the wet winter period has adversely impacted demand, in an already difficult market. Brick selling prices continue to fall in this state, however we expect margins to be supported by continued manufacturing cost savings, following restructuring initiatives and capital upgrade projects that have been completed. Meanwhile, despite the positive development in relation to our future gas supply agreement with Santos, current energy costs and contracted price increases to take effect on 1 January 2019, will have a significant adverse impact on Building Products earnings. These increases are likely to exceed our ability to recover them, through price rises in the current market or other initiatives to reduce cost in the short term. LINDSAY PARTRIDGE AM Managing Director / 12 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 13 / Austral Masonry Breeze Blocks in Diamond Wedge Project: Hall Chadwick $303.8m Net debt h3.6% 14.7% Gearing x1.6% $309m Total EBITDA h12.8% $280m Total EBIT h13.6% $170.9m Cashflow from operating activities h48.1% FINANCIAL Overview HIGHLIGHTS ◗ Statutory NPAT including significant items, down 5.8% to $175.4 million ◗ Underlying NPAT before significant items up 13.9% to $223.7 million ◗ Building Products EBIT up 16.8% to $76.0 million (EBITDA $105.4 million) ◗ Property EBIT up 3.7% to $94.0 million ◗ Investments EBIT up 19.8% to $123.5 million ◗ Gearing (net debt/equity) of 14.7%, net debt $303.8 million ◗ Final dividend of 36 cents fully franked, up 2 cents or 5.9% ◗ Total full year dividend of 54 cents fully franked, up 3 cents or 5.9% EARNINGS Brickworks posted a statutory Net Profit After Tax for the year ended 31 July 2018 of $175.4 million, down 5.8% on the prior year. Record underlying NPAT of $223.7 million was up 13.9% from $196.4 million for the year ended 31 July 2017. Statutory Earnings Per Share was $1.17, down 6.0% on the prior year, and underlying EPS was $1.50, up 13.7%. Building Products EBIT was $76.0 million, up 16.8% on the prior year. Austral Bricks earnings were significantly higher on the back of a strong performance in New South Wales and Victoria. Performance in Western Australia also improved following a range of restructuring initiatives. Bristile Roofing, Austral Precast and Auswest Timbers earnings also increased whilst Austral Masonry was approximately in line with the prior year. Investments EBIT, including the contribution from Washington H. Soul Pattinson Limited (‘WHSP’), was up 19.8% to $123.5 million. This was due primarily to improved earnings from New Hope Coal and TPG Telecom. During the year, the value of Brickworks’ stake in WHSP increased by $427 million to $2.231 billion. Total borrowing costs were up 16.2% to $14.5 million, including the mark to market valuation of swaps. Underlying interest cover was a conservative 18.0 times at 31 July 2018. Statutory income tax was $54.6 million for the year. The underlying income tax expense increased to $41.6 million compared to $37.4 million for the prior year, due to the higher earnings from the combined Building Products and Property Groups. Property EBIT was $94.0 million for the 12 months to 31 July 2018, up 3.7% on the prior year. This result was driven by a significant increase in earnings from the Joint Venture Industrial Property Trust (‘Property Trust’) following continued strong development activity during the year. . / 14 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 15 / FINANCIAL OVERVIEW Significant items reduced NPAT by $48.3 million for the year, and included the following: ◗ $7.1 million in after-tax costs relating to restructuring and commissioning within Building Products. This includes the cost associated with commissioning upgraded plants in Western Australia and Queensland ($3.2 million) and restructuring activities across various operations ($3.9 million); ◗ Business acquisition costs and other legal and advisory costs of $2.1 million (net); ◗ A $22.3 million cost attributable to Brickworks share of WHSP significant items. This includes a share of impairments booked by WHSP associates of $28.6 million (primarily a $19.8 million impact associated with New Hope Corporation’s impairment of coal exploration and evaluation assets), $13.0 million of tax on equity accounted associates and a $5.4 million share of other significant items in associates and JV entities. Partially offsetting these losses were gains on derecognition of associates of $21.6 million, and an $8.0 million profit on investment portfolio sales; and ◗ A $16.9 million cost due to the income tax expense in respect of the equity accounted WHSP profit, less the franking credits associated with the dividends received during the year, and adjusted for the movements in the franking account and the circular dividend impact. Significant Items Restructuring and commissioning Net legal and advisory cost (inc. acquisitions) Significant items relating to WHSP Total BALANCE SHEET Gross $m (10.1) (3.0) (22.3) (35.3) Tax $m 3.0 0.9 (16.9) (13.0) Net $m (7.1) (2.1) (39.2) (48.3) Gearing (net debt to equity) was 14.7% at 31 July 2018, down from 14.9% at 31 July 2017. Total interest-bearing debt increased to $325.0 million and net debt was up 3.6% to $303.8 million at 31 July 2018. Net working capital, excluding land held for resale, was $183.4 million at 31 July 2018, down $13.3 million from the prior year, due primarily to a reduction in debtor days through improved cash collections. During the second half, Brickworks entered into a $100 million Institutional Term Loan (‘ITL’) unsecured syndicated debt facility, with tranches of 8 and 10 years. The ITL (arranged by NAB) comprises 8 institutional investors represented by 3 asset managers, and enables the Group to diversify its funding base at competitive rates and access this developing, longer tenor market. Finished goods inventory was up by $6.4 million, due largely to the impact of the additional stock associated with the UrbanStone acquisition and higher unit brick costs as a result of energy cost increases. Finished goods units were down across most operations, including a reduction of 5.3% within Austral Bricks. Finished goods inventory across the business represented 3.6 months sales at the end of the period. Austral Bricks La Paloma in Miro and Gaudi Project: Baptcare Brookview, Westmeadows DIVIDENDS Directors declared a fully franked final dividend of 36 cents per share for the year ended 31 July 2018, up 5.9% from 34 cents. Together with the interim dividend of 18 cents per share, this brings the total dividends paid for the year to 54 cents per share, up 3 cents or 5.9% on the prior year. Net tangible assets per share was $12.42 at 31 July 2018, up from $11.77 at 31 July 2017 and total shareholders’ equity was up $103.2 million to $2.071 billion. Return on equity of underlying earnings for the year was 10.8%. Over the longer term, Brickworks’ diversified corporate structure has provided stability of earnings and enabled prudent investments that have steadily built net asset value. CASH FLOW Total cash flow from operating activities was $170.9 million, up from $115.4 million in the prior year, due primarily to increased earnings from Building Products, distributions received from the Property Trust following the settlement of land at Oakdale South, and lower income tax payments. Building Products capital expenditure decreased to $43.3 million, from $60.3 million in the prior year. Stay in business capital expenditure was $24.3 million, marginally below depreciation. Spend on major upgrade and growth projects totalled $19.0 million, primarily consisting of upgrades to the Rochedale brick plant in Queensland, the Cardup brick plant in Western Australia, and the installation of a large log line at the Greenbushes timber mill, also in Western Australia. / 16 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 17 / Building Products Property Investments GROUP Structure Brickworks has a diversified corporate structure that has delivered stability of earnings over the long term. There are three divisions within the Brickworks Group structure: BUILDING PRODUCTS PROPERTY The Building Products division is a leading Australian manufacturer and distributor of building products. Since 2002, the Building Products Group has grown from a two state brick manufacturer, in New South Wales and Queensland, to a diversified national building products business with significant sales and operations in all states. In total the Building Products Group comprises 33 manufacturing sites and more than 27 display centres and design studios across the country. This is complemented by an extensive reseller network that includes over 100 additional displays. The portfolio includes: ◗ Austral Bricks: Australia’s largest clay brick manufacturer with significant market positions in every state ◗ Austral Masonry: Australia’s second largest masonry manufacturer with operations in all major states ◗ Bristile Roofing: A “full service” roofing supplier with a strong presence in all major states, offering supply and install tiles (concrete or terracotta), metal roofing and fascia and guttering ◗ Austral Precast: A national supplier of precast walling and flooring products, with plants in Sydney, Brisbane and Perth ◗ Auswest Timbers: Operates sawmills and value adding facilities across the country, supplying roof tile battens, structural timber, pre finished flooring and various other timber products. The Property division was established to maximise the value of land that is surplus to the Building Products business. Operational land that becomes surplus to the business needs is transferred to the Property division where it is assessed for optimum land use. In some cases, land is rezoned to residential and sold. Alternatively, the land is rezoned industrial and transferred into the Property Trust and developed, creating a stable, growing annuity style income stream. The Joint Venture Industrial Property Trust is a 50/50% partnership between Brickworks and Goodman Industrial Trust. Over the past decade it has grown significantly and now has a total asset value of over $1.5 billion. After including debt, Brickworks 50% share of the Property Trust has an equity value of $538 million. In addition to the Property Trust, the Company holds around 3,750 hectares of operational land and 370 hectares of development land. INVESTMENTS Investments consists primarily of a 42.7% interest in Washington H. Soul Pattinson, an ASX listed Company with market capitalisation of $5.225 billion as at 31 July 2018 (market value of Brickworks share $2.231 billion). This investment provides a stable and diversified earnings stream and has provided Brickworks with superior returns and security to weather periods of weaker building products demand. / 18 / Brickworks Limited / Annual Report 2018 / 18 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 19 / / 19 / OUR BRAND 1.9 ORGANIZATION CHART Brickworks Brand chart BUILDING PRODUCTS MARKET CONDITIONS Total dwelling commencements for Australia were down 1.6% to 217,120 for the twelve months ended 30 June 2018. Despite the decline, this level of building activity remains elevated compared to historical averages. The decline in activity was caused by a 4.7% reduction in other residential commencements, following unprecedented growth in this segment in recent years. In detached housing, where Brickworks’ products have the greatest exposure, construction activity has remained near historical peak levels for around four years. A small increase of 1.2% was recorded in the twelve months to 30 June 2018, with further increases limited by trade availability, construction bottlenecks and materials supply constraints in some areas. Detached housing commencements in New South Wales (including ACT) remain strong, albeit down slightly on the record high level of one year ago. However, following many years of strong growth, other residential construction activity appears to have passed the peak, with a decline of 10.3% recorded for the twelve months to 30 June 2018. Queensland continues to experience steady growth in detached housing activity since the low point in 2011, with almost 25,000 starts for the year. However other residential commencements recorded another sharp decline, having now fallen by over 40% from the peak level experienced in 2016. In Victoria residential building remains extremely strong. Both detached housing and other residential activity increased during the year, pushing total starts in this state to a new record. Bricks & Pavers Timber Masonry Timber & Stone Roofing Concrete Specialised Concrete Building Systems Cement Bowral Chillingham White – OP9 House / 20 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 21 / BUILDING PRODUCTS SUMMARY OF HOUSING COMMENCEMENTS Detached Houses Other Residential Total Estimated Starts5 Jun 17 Jun 18 Change Jun 17 Jun 18 Change Jun 17 Jun 18 Change New South Wales6 30,260 29,990 (0.9%) 48,440 43,470 (10.3%) 78,700 73,460 (6.7%) Queensland Victoria 24,190 24,870 35,690 37,170 Western Australia 14,460 13,850 South Australia Tasmania 7,640 1,750 7,700 1,980 2.8% 4.1% (4.2%) 0.8% 13.1% 19,730 14,540 (26.3%) 43,920 39,410 (10.3%) 28,490 33,080 16.1% 64,180 70,250 5,410 3,230 420 5,040 4,000 600 23.8% 42.9% (6.8%) 19,870 18,890 10,870 11,700 2,170 2,580 18.9% 9.5% (4.9%) 7.6% Total Australia7 114,730 116,120 1.2% 106,000 101,000 (4.7%) 220,730 217,120 (1.6%) New Zealand8 27,540 28,940 5.1% 2,913 3,922 34.6% 30,453 32,860 7.9% Weakness in Western Australia persisted during the period, with both detached houses and other residential activity continuing to decline, albeit at a slower rate. Building activity in this state is now down by over 40% in the past three years, and detached house commencements are at their lowest level for over 15 years. The value of approvals in the non-residential sector in Australia increased by 3.6% to $46.5 billion for the twelve months to 31 July 2018. Within the non-residential sector, Commercial building approvals decreased by 9.0% to $16.7 billion for the period and Industrial building approvals increased 20.0% to $6.6 billion. The Educational sub-sector, an important driver for bricks and masonry demand, was up 5.9% to $6.8 billion. OVERVIEW OF FY2018 RESULTS Revenue for the year ended 31 July 2018 was up 7.4% to a record $820.0 million, compared to $763.3 million for the prior year. Continued strong demand for building materials in the major East Coast markets of New South Wales and Victoria, and the impact of the acquired UrbanStone operations was partially offset by a further decline in demand from Western Australia. EBIT was $76.0 million, up 16.8% on the prior year, and EBITDA was $105.4 million. The uplift in earnings was primarily due to another strong performance from Austral Bricks, including an improvement in Western Australia following a range of restructuring activities. Improved earnings were achieved despite the impact of new gas and electricity contracts on the East Coast that took effect from 1 January 2018, resulting in higher energy costs of around $7 million compared to the prior year. The Company’s investment in marketing and branding was further expanded during the year, with direct marketing costs increasing compared to the prior year. This includes a major advertising campaign, together with the Company’s successful investment in design studios across the country. This sustained investment over many years to position Brickworks as the leading style brand in the industry has supported the growth of premium, higher priced products across all divisions. 5 6 7 8 Based on Housing Industry Association May 2018 Forecast. Includes ACT, to align with Brickworks divisional regions. Includes Northern Territory, not shown separately on table. Building Consents data sourced from Statistics New Zealand – Building Consents. BUILDING PRODUCTS REVENUE BY STATE and location map Export $4m WA $84m SA $26m Total $819m Design Studios Brick Plants Roofing Plants Masonry Plants Timber Mills Precast Plants QLD $117m NSW (incl. ACT) $342m VIC $236m TAS $10m / 22 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 23 / BUILDING PRODUCTS FY2018 RESULTS Year Ended July Revenue EBITDA EBIT EBITDA margin EBIT margin Net Tangible Assets Return on Net Tangible Assets9 Full Time Equivalent Employees (#) Safety (TRIFR)10 Safety (LTIFR)11 Full time equivalent employees decreased by 26 during the year, taking the total number to 1,485 at 31 July 2018. The addition of 66 employees following the acquisition of UrbanStone was more than offset by a reduction in Austral Precast, following the closure of the Dandenong facility in Victoria, and a decrease in Austral Bricks Western Australia following restructuring initiatives. There were 5 Lost Time Injuries (‘LTIs’) during the year, up from 4 in the prior year. This translated into an increase in the Lost Time Injury Frequency Rate (‘LTIFR’) to 1.7, compared to 1.3 in the 2017 financial year. The Total Reportable Injury Frequency Rate (‘TRIFR’) increased to 20.4 from 17.1 in the prior financial year. Whilst disappointing, the increase in workplace injuries in 2018 follows 4 straight years of decreasing injury rates, and has reinforced the Company’s commitment to rolling out best practice safety standards across all operations. 2017 $m 763.3 92.9 65.0 12.2% 8.5% 711.6 12.6% 1,511 17.1 1.3 2018 $m 820.0 105.4 76.0 12.8% 9.3% 733.3 14.3% 1,485 20.4 1.7 Change % 7.4% 13.4% 16.8% 5.6% 8.8% 3.0% 13.9% (1.7%) (19.3) (30.8) BUILDING PRODUCTS Highlights $820m 1,485 Building Products Revenue Full Time Employees h7% x2% LTIFR 1.7 Safety h31% Revenue by division Austral Bricks $447m h8% Austral Masonry $110m h23% Bristile Roofing $136m Austral Precast $73m Auswest Timbers $45m h7% x9% x4% Revenue by State NSW QLD VIC WA SA TAS Export 40% 14% 29% 10% 3% 1% 1% Commencements by State NSW QLD VIC WA SA TAS 34% 18% 32% 9% 5% 1% 9 10 11 Assumes all Brickworks net debt and interest charges are allocated to Building Products. Total Reportable Injury Frequency Rate (TRIFR) measures the total number of reportable injuries per million hours worked. Lost Time Injury Frequency Rate (LTIFR) measures the number of lost time injuries per million hours worked. / 24 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 25 / / 25 / BUILDING PRODUCTS AUSTRAL BRICKS Austral Bricks delivered a 12.8% increase in earnings for the twelve months ended 31 July 2018, with sales revenue up 8.1% to $447.3 million. Buoyant market conditions supported an increase in sales volume in New South Wales and Victoria. The increase in these states was offset by a decline in sales volume in Western Australia. The improved earnings were driven primarily by continued strong performance in New South Wales and a significant turn-around in Western Australia, despite the difficult market conditions. Earnings were higher in Victoria, despite the impact of a six-week shut-down during January and February to complete necessary maintenance and upgrade works. This was the first plant shutdown at the Wollert “East” kiln since its commissioning a decade ago and this facility continues to operate ahead of original expectations. In Queensland, the final phase of upgrades at the Rochedale plant was completed during the year. Work included the installation of a new packaging line and the re-commissioning of the west kiln (previously mothballed) to replace the older east kiln. These upgrades complete a multi-year refit program to significantly improve product quality and lower unit production costs. Following the completion of upgrades in Queensland and Western Australia in recent years, the focus for capital investment has now turned to New South Wales, where there has been limited major capital expenditure for over twenty years. A review of the future operational footprint within the Horsley Park precinct is underway, where Austral Bricks currently has 3 plants in operation. Planning and capital works in this precinct will be phased over a number of years. Also under consideration is the investment in a new facility at Brickworks’ industrial estate at New Berrima to replace the Bowral facility, an energy intensive plant with some parts having been in operation since the 1920s. Revenue $447m h8% $334m $380m $406m $414m $447 m 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 Burlesque Glazed Sam Sing Street / 26 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 27 / BUILDING PRODUCTS AUSTRAL MASONRY Austral Masonry earnings were in line with the prior year, on a 23.2% increase in sales revenue to $109.7 million. Excluding UrbanStone, revenue was up 5.5% on alike-for- like basis. Earnings and sales in New South Wales were significantly higher than the prior year, on the back of strong demand across all product categories from grey block to premium products such as retaining walls. In this market demand in the residential and commercial sectors remain robust, including a major project with approximately four kilometres of Keystone walling at Oakdale South. Sales of UrbanStone products have been strong since the acquisition of the business in November 2017, underpinned by an order book comprising several large commercial projects in major capital cities across Australia. UrbanStone’s range of premium paving products have now been rolled out into Brickworks’ network of display centres and design studios across the country, positioning the business to deliver further sales growth of these high margin products. Earnings in Queensland were down, due to the slowdown in apartment construction in Brisbane and difficult conditions in Central Queensland. Revenue $110m h23% $83m $87m $91m $89m $110 m 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 GB Masonry 161 Collins Street / 28 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 29 / / 29 / BUILDING PRODUCTS BRISTILE ROOFING Bristile Roofing earnings increased on the prior year, with sales revenue up 6.7% to $136.4 million. Earnings were higher in New South Wales and Victoria, driven by increased sales of both roof tiles and metal products. Despite the increased demand, margins on the East Coast are under pressure due to strong competition. The continued difficult conditions in Western Australia resulted in decreased sales and earnings in this state. Sales of premium imported terracotta tiles from La Escandella in Spain continue to increase, and supplement the sales of locally produced concrete tiles. Metal roofing and fascia and gutter sales now make up a significant portion of total Bristile Roofing revenue and these products delivered increased earnings compared to the prior year. Bristile Solar was launched in August 2017, offering premium solar roof-tiles and conventional bolt-on systems for existing homes or new residential builds. Through an exclusive agreement in place with Sonnen, the world’s largest producer of battery and solar energy storage systems, Bristile Solar is able to offer home owners a full energy management system. The Bristile Solar package is offered in conjunction with Bristile tiles and is expected to attract new customers and support increased roof tile sales volume. Revenue $136m h7% $100m $111m $124m $128m $136 m / 30 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 31 / 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 La Escandella Planum by Bristile Roofing BUILDING PRODUCTS AUSTRAL PRECAST Austral Precast earnings were higher, despite a 9.1% decrease in revenue to $73.2 million for the year. The decline in revenue was primarily due to the closure of the Victorian facility, a highly unionised operation that resulted in this business being uncompetitive. In addition, the slowdown in high rise multi-residential development in Brisbane significantly impacted sales in this market. Demand in New South Wales is particularly strong, resulting in a significant increase in earnings in this state. Increased utilisation at the highly automated Wetherill Park facility resulted in improved manufacturing efficiencies and lower production costs. During the year, further investments in automation were completed at this plant with the successful commissioning of a new shuttering robot. At the end of the financial year the order book was extremely strong, with over $50 million of work in the pipeline across the country, predominantly in New South Wales and Queensland. To meet demand and maintain plant efficiency, construction of a second production line to cater for specialised panels in New South Wales has commenced. This line will assist the business to meet the large backlog of work in this state. Revenue $73m x9% $70m $66m $74m $80m $73 m 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 Austral Precast / 32 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 33 / BUILDING PRODUCTS AUSWEST TIMBERS Auswest Timbers earnings were higher than the prior year, despite a 4.2% decrease in revenue to $44.6 million. In Western Australia, improved earnings were delivered following the commencement of restructuring activities in the prior year. During the year, the restructuring process continued, with the installation of a large log line at Greenbushes, currently being commissioned. This restructuring program allows the consolidation of operations to one site at Greenbushes, positioning this business for continued improvement in the years ahead. Earnings also improved in Victoria, due primarily to operational improvements that delivered manufacturing cost savings. Despite ongoing challenges with log supply quality, adjustments to manufacturing processes, as well as the end customer mix allowed improved production efficiencies, particularly in the second half of the year. Further improvements rely on investment in processing equipment and investment planning is well advanced. Operationally the Fyshwick roof tile batten mill continues to set new performance benchmarks. Auswest Timbers is currently seeking additional log supply volume beyond the existing term to ensure the mill can continue to meet the strong demand for structural pine across the country. Revenue $45m x4% $50m $56m $53m $47m $45 m 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 Auswest Timbers / 34 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 35 / Artist’s impression of the proposed development of Oakdale West No land sales were completed in financial year 2018, however the preparation of the Punchbowl site for sale resulted in $3.0 million in costs during the period. In May a call option for the sale of this site was granted, at a sale price of $41 million, and this option has now been exercised. The settlement of this site is expected to occur in October 2018, and will include a lease back to Austral Bricks for 10 years, with an additional 10-year option. Property administration expenses totalled $3.6 million, down 12.2% from $4.1 million in the prior year. These expenses include holding costs such as rates and taxes on properties awaiting development. The decrease resulted from the sale of Oakdale West into the Property Trust in financial year 2017. Borrowings of $451 million are held within the Property Trust, giving a total net asset value of $1.076 billion. Brickworks’ 50% share of net asset value was $538 million, up $58 million from $480 million at 31 July 2017. The settlement on the sale of land at Oakdale South provided the Property Trust with $100 million in cash receipts in June. These proceeds were re-invested into the Trust to repay borrowings and fund additional developments at Oakdale South. This has contributed to a significant reduction in gearing within the Property Trust, with gearing on leased assets decreasing to 39% at 31 July 2018, from 46% twelve months earlier. PROPERTY TRUST ASSET VALUE The total value of assets held within the Property Trust at 31 July 2018 was $1.527 billion. This includes a 33% increase in the value of leased assets, to $1.168 billion, due primarily to the completion of the Oakdale Central Estate in the second half. The Property Trust also holds a further $360 million in land to be developed. PROPERTY TRUST – LEASED PROPERTIES The entire Property Trust portfolio consists of “A grade” facilities, each less than eight years old, with long lease terms and stable tenants. The annualised gross rent exceeds $70 million, and the average capitalisation rate is 5.9%. At the end of July 2018 there was one vacancy, a 10,400m2 facility at the Rochedale Estate, and this facility has since been leased. PROPERTY Property delivered an EBIT before significant items of $94.0 million for the year ended 31 July 2018, up 3.8% from $90.6 million for the prior year. OVERVIEW OF FY2018 RESULT Year Ended July Net Trust Income Revaluation of properties Development Profit Sale of assets Property Trust Land Sales Property Admin and Other Total 2017 $m 18.3 14.3 10.8 1.0 44.4 50.3 (4.1) 90.6 2018 $m 22.0 23.8 28.9 25.9 100.6 (3.0) (3.6) 94.0 Change % 20.2 66.4 167.6 >500 126.6 N/A (12.2) 3.8 The improved result was due to higher earnings from the Property Trust, which generated an EBIT of $100.6 million, up 126.6% from $44.4 million in the prior period. Property Trust earnings were primarily driven by the sale of land at Oakdale South, ($25.9 million contribution) and development profits from the completion of assets at Oakdale Central and Rochedale ($28.9 million contribution). Net property income distributed from the Trust was $22.0 million, up 20.2% from $18.3 million in financial year 2017. Revaluations on existing properties provided an additional $23.8 million profit, up 66.4% from $14.3 million in the prior year. / 36 / Brickworks Limited / Annual Report 2018 / 36 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 37 / / 37 / PROPERTY PROPERTY TRUST ASSET VALUE Year Ended July Leased properties Land to be developed Total Property Trust assets Borrowings on leased assets Borrowings on developments Net Property Trust assets Brickworks 50% share Rental return on leased assets12 Reval return on leased assets13 Total return on leased assets Gearing on leased assets14 PROPERTY TRUST – LEASED PROPERTIES Estate M7 Hub Interlink Oakdale Rochedale Total Asset Value $m 133 384 481 169 Gross Lettable Area m2 64,125 192,207 245,205 95,636 1,168 597,173 PROPERTY TRUST – DEVELOPMENT PIPELINE Current Leased Assets New – Oakdale Central Future Leased Assets Asset Value $m 1,168 148 1,315 Gross Lettable Area m2 597,173 79,745 676,918 Based on Net Trust Income, divided by Brickworks share of leased properties less associated borrowings. As above, but using revaluation profit. Borrowings on leased assets / total leased assets. 12 13 14 15 Weighted average lease expiry. 2017 $m 878 523 1,401 (408) (34) 960 480 7.8% 6.1% 13.9% 46% Gross Rental $m/year 8.3 24.3 29.0 10.2 71.8 Gross Rental $m/year 71.8 8.8 80.6 2018 $m 1,168 360 1,527 (451) – 1,076 538 6.1% 6.6% 12.8% 39% Change % 33 (31) 9 11 – 12 12 (21) 9 (8) (17) WALE15 years Capitalisation Rate % 3.4 4.6 5.8 12.8 6.1 6.0 6.0 5.7 5.9 5.9 Capitalisation Rate % 5.9 6.0 6.0 Progress on Oakdale South facilities development PROPERTY TRUST – DEVELOPMENT PIPELINE A significant milestone for the Property Trust was achieved in financial year 2018, with the completion of all assets at Oakdale Central. Assets completed over the year at this Estate included a 32,000m2 facility for Yusen Logistics and Petbarn, a 38,000m2 facility for Reckitt Benckiser and a 14,000m2 small unit development. Following the completion of the Oakdale Central Estate, development activity is now focused on Oakdale South, which has 24 hectares of land available for development. Assets under construction include a 20,000m2 facility for Iron Mountain and a 15,000m2 warehouse for Briggs and Stratton, both due for completion in October 2018. In addition, a 33,000m2 facility for DHL will commence construction in the coming months and be completed during financial year 2019. Once completed, these new developments will contribute in excess of $8.8 million16 in gross rental income to the Property Trust, taking the forecast gross rental income to over $80 million at the end of financial year 2019. A conditional contract for the sale of Lot 6, a 52,000m2 developable lot at the rear of Oakdale South has also been signed during the period. The sale is conditional on development approval for a 24-hour logistics facility on the land, which is expected to be secured in late financial year 2019. No further land sales are expected to occur at Oakdale South. Looking further ahead, the State Significant Development Application for the 100-hectare (developable area) Oakdale West property has been put on public exhibition. Approval is expected to be achieved in early 2019. BRICKWORKS OPERATIONAL AND DEVELOPMENT LAND Operational land is utilised in the day to day activities of the Building Products Group. The total value of operational land remained stable during the period at around $357 million. The largest site held for development is at Craigieburn in Victoria. Brickworks is currently collaborating with other local landowners to produce development concepts that may accelerate rezoning of this land to residential. 16 This increase in gross Trust rent equates to around $2.5–3.0 million in net trust income to Brickworks, based on current gearing. / 38 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 39 / INVESTMENTS The EBIT from total investments was up 19.8% to $123.5 million in the year ended 31 July 2018. Investment Market Exposure WASHINGTON H. SOUL PATTINSON LIMITED ASX Code: SOL Brickworks’ investment in WHSP returned an underlying contribution of $122.4 million for the year ended 31 July 2018, up 19.0% from $102.9 million in the prior year. This was due primarily to increased earnings from New Hope Corporation. The market value of Brickworks 42.72% shareholding in WHSP was $2.231 billion at 31 July 2018, up $427 million from $1.804 billion at 31 July 2017. This investment continues to provide diversity and stability to earnings, with cash dividends totalling $56.2 million received during the year, up 3.8% on the prior year. WHSP has delivered outstanding returns over the long term, with fifteen year returns of 13.0% per annum to 31 July 2018 being 3.6% 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, Apex Healthcare Berhad and TPI Enterprises. Energy 26% Telecoms 24% Building Products 20% Other 14% Financials 8% Healthcare 4% Property 4% This provides WHSP with a diversified end market exposure, as shown in the chart on the right. 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 Property divisions. $123.5m EBIT from Total Investments h19.8% / 40 / Brickworks Limited / Annual Report 2018 / 40 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 41 / / 41 /  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. STRATEGY Brickworks is committed to minimising risks to the health and safety of its employees, contractors and the general public and believes continual improvement in health and safety is a key requirement for a sustainable workplace. The Company’s health and safety strategy sets the framework for the development and management of programs to improve safety performance year on year. PERFORMANCE Essential to Brickworks improved safety performance is the effective communication of safety performance and goals throughout all levels of the Brickworks business. Performance is measured utilising both lead and lag performance indicators. Brickworks benchmarks its safety performance both internally and externally and this assists in driving improved safety performance. Performance targets are set within the Brickworks Workplace Health and Safety Management System with a key target being a 10 percent reduction in injury rates each year. For the year to 31 July 2018, Brickworks’ lost time injury frequency rate (LTIFR) of 1.7 was up 30.8% on the prior year, and the total recordable injury frequency rate (TRIFR) of 20.4 was up 19.3%. Although injury rates were higher in 2018, looking over a five-year period, Brickworks’ safety performance has improved. Lost Time Injury Frequency Rate (LTIFR) Total Recordable Injury Frequency Rate (TRIFR) 3.3 2.0 1.6 1.3 1.7 33.6 22.2 19.2 17.1 20.4 5 4 3 2 1 0 50 40 30 20 10 0 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 LTIFR 1.7 Lost Time Injury Frequency Rate h30.8% TRIFR 20.4 Total Recordable Injury Frequency Rate h19.3% / 42 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 43 / HEALTH AND SAFETY Environmental SUSTAINABILITY Brickworks is committed to managing our operations in an environmentally sustainable manner, whilst considering economic and social influences. Brickworks’ aim is to reduce the environmental impact of our operations. REPORTING During financial year 2018, priority areas were identified through an internal materiality assessment, which was supported by EY. Brickworks also engages with stakeholders through groups such as the Australian Network Partner of the World Business Council for Sustainable Development (WBCSD) to better understand stakeholder expectations. These reviews inform our sustainability agenda, including resource efficiency, reducing our energy usage and greenhouse gas emissions, strengthening environmental compliance, engaging closely with local communities, sourcing our raw materials responsibly and developing innovative building products. The Company has identified targets to further drive our sustainability strategy during financial year 2019. RESOURCE EFFICIENCY Construction and demolition (C&D) waste generates 30% of Australia’s total waste. The C&D sector has the highest recovery rates at approximately 64%. Preserving raw materials reduces extraction and provides opportunities for the reuse of waste to increase resource efficiency and drive the circular economy. Brickworks continually engineers products, reducing materials required while maintaining structural integrity. We achieve this through product design, raw material substitution and process resource efficiency. To continue our focus on resource efficiency, we have set a financial year 2019 target to develop waste reduction and recycling plans for all relevant businesses. Product Design Brick core patterns reduce clay use by up to 45% compared to solid bricks. Bricks are 100% recyclable. Bricks are durable products with warranties of up to 100 years for some products. Waste Reuse All damaged or rejected clay products are returned into the raw material mix. Clay sourced from infrastructure projects, with some factories using up to 20% recycled content. Material Substitution Materials such as fly ash, bottom ash, sawdust, spent scrubber medium and crushed concrete. Up to 50% material substitution in some masonry and precast products. KEY INITATIVES Fundamental to Brickworks’ work health and safety strategy are a number of key safety initiatives, supported by a robust safety culture. This is underpinned by a common work health and safety management system across all divisions of the Company, providing a consistent approach to managing health and safety within Brickworks. Employee education and training is a key safety initiative and the number of training hours completed by each staff member is a lead indicator measured at Brickworks. On-line ELearning training is available for all Brickworks employees and educational courses in safety are assigned based on the requirements of individual roles. This has assisted in achieving the reduction in workplace injuries over the past five years. In order to ensure a safe work environment, Brickworks has implemented a structured program to eliminate hazards that risk worker injury and illness. 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 believes a drug and alcohol-free workplace is also essential for the welfare of employees, contractors and visitors and mandatory random testing continued to be implemented across the business nationally in 2018. Safe environments and systems alone will not eliminate workplace injuries and having good general health is crucial in reducing injuries in the workplace. As such, employee health and wellbeing is another key focus area for the Company. Brickworks’ wellbeing program provides employees advice, education and professional assistance to improve their personal health. This includes on site physiotherapy sessions available at larger operational sites, undertaking workplace task assessments and treating employee ailments before they turn into injuries. In addition to this, diligent recruitment processes which include professional functional health assessments ensure that all new recruits are appropriately suited to the physical requirements of the position. / 44 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 45 / ENVIRONMENTAL SUSTAINABILITY WATER Water is a valuable resource, and essential to the production of our building products. Many of the manufacturing facilities use runoff as the major water supply. During financial year 2019, Brickworks will seek to identify opportunities to further reduce mains water through water management plans for all relevant businesses. ENERGY Energy use in financial year 2017 (the latest available data) was 5.15 PJ, composed largely from natural gas. Alternative biofuels made up 10%, including landfill gas and sawdust. In financial year 2019, Brickworks will continue to review alternative sources of energy, such as biofuels. Energy efficiency is a focal point, using audits, regular maintenance and upgrades to ensure that energy efficiency is continuously managed. Heat recovery systems are utilised in all brick manufacturing facilities. The Company has progressed upgrades of lighting, efficient motors and hydraulic systems. In addition, Brickworks has continued an assessment of on-site solar opportunities and are currently reviewing implementation at some of our manufacturing sites. During financial year 2019 Brickworks will refresh energy efficiency programs for all high natural gas using sites. Energy Usage Natural Gas 77% Biofuels 10% Electricity 8% Liquid Fuels 5% CARBON Greenhouse gas emissions is reported and audited for the National Greenhouse and Energy Reporting Scheme (NGERS). In financial year 2017 (the latest available data) emissions were 243,889 tCO2-e (Scope 1) and 98,325 tCO2-e (Scope 2), an overall 6.5% decrease compared to the previous year. Over the past decade, carbon emissions have followed a general downward trend, with a 28.5% decrease compared to financial year 2006 (Scope 1 & 2). The decrease can be attributed to efficiencies gained from manufacturing consolidation, equipment upgrades and operational improvements. During financial year 2019, Brickworks will continue tracking carbon intensity trends. Brickworks Ltd Carbon Intensity (kTCO2 -e/$m Revenue)* 0.52 0.47 0.46 0.48 0.41 0.55 0.5 0.45 0.4 0.35 0.3 3 1 / 2 1 0 2 4 1 / 3 1 0 2 5 1 / 4 1 0 2 6 1 / 5 1 0 2 7 1 / 6 1 0 2 * 2016/17 is the latest available data ENVIRONMENTAL COMPLIANCE Brickworks monitors its environmental performance and compliance in accordance with its Environmental Management System which aligns with ISO14001:2004. Manufacturing and raw materials sites are audited regularly by internal and external auditors, any issues are reported as either a hazard or an incident and rectified in a timely manner. Twenty-eight site audits were undertaken, meeting our audit target. Hazard and incident reporting is undertaken with our Risk Management framework, involving 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. This information is reported to Divisional and Group management. Issues of material concern are reported to the board monthly. Coolup Rehabilitation During the year, results of our environmental management process indicated some non-compliant administrative issues relating to mining authorisations and exploration leases. The Group continues to investigate all these instances of non- compliances, working closely with the relevant authorities to resolve these issues. Austral Bricks is finalising an enforceable undertaking with the NSW Department of Planning and Environment (DPE). This followed a determination that Brickworks has breached the Mining Act 1992 at two clay pits in southern NSW. The NSW DPE fined Austral Bricks $2,500 for exploration without authority at our Horsley Park site and $2,500 under the Cumberland Exploration Lease. Brickworks is focusing on strengthening environmental awareness and capability to ensure compliance. During financial year 2019, Brickworks will drive a program of implementing site level environmental plans and awareness training as part of a strengthened Environmental Management System. The purpose of site specific environmental plans and training is to ensure that our operations have appropriate environmental management practices in place to minimise environmental impacts and prevent legal non-compliances. During financial year 2019, we will target zero environmental fines. ENVIRONMENTAL AWARDS In 2018, Brickworks held its inaugural Awards for Environmental Excellence, celebrating and promoting environmental excellence with our employees. EMISSION CONTROLS We are committed to reducing our impact on the environment, including reducing air emissions from all relevant activities. We implement air quality improvement programs and invest in emission control technologies. During financial year 2019, we will develop investment plans for emission control technology across our NSW brick business. STAKEHOLDER ENGAGEMENT & COMMUNITY We believe that continued business success depends on maintaining relationships with all stakeholders. Brickworks attend various community forums, including consultation in relation to various development applications. At a Company level, ongoing relationships with legislative and regulatory authorities are managed. In addition, Company representatives are involved with industry groups to promote issues such as sustainable building products. During financial year 2019, Brickworks will develop stakeholder maps and community engagement plans for all appropriate sites. REHABILITATION & HERITAGE CONSERVATION Rehabilitation planning is central to preserving natural and cultural heritage. We invest in the rehabilitation of our quarries, such as the Coolup Rehabilitation, due for completion in financial year 2019. We work to preserve heritage, such as working with local Aboriginal groups to identify and arrange respectful burial of Aboriginal artefacts found during topsoil stripping at our NSW New Berrima quarry. / 46 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 47 / CARBON NEUTRAL BRICKS 2018 marks the five-year anniversary of the Carbon Neutral Brick. Brickworks has retained a partnership with the Department of Environment and Energy’s National Carbon Offset Standard (NCOS) and Tasmanian Forestry projects since the implementation of the certification. The Company has signed a new licence for another five years with NCOS. The full Austral Bricks range produced at the Longford plant in Tasmania are certified as carbon neutral. This factory uses low carbon technology, substituting natural gas with biofuel sawdust. In 2018, the Austral Bricks Carbon Neutral Brick was submitted as a case study to the Australian Government’s platform on progress against the UN Sustainability Development Goals. Sustainability PRODUCT DESIGN Brickworks works with architects and builders to provide innovative products and support the construction of ground breaking efficient homes. As one of Australia’s largest and most diverse building product manufacturers, our product range offers valuable features for energy efficient and sustainable housing. Our clay and concrete products offer thermal mass, a well-established passive design principle. Clay and concrete products have a long product life, making the energy embodied in bricks a once-off investment that pays dividends now, and in the future. In addition to long product life expectancies, many of Brickworks products are low maintenance. Our precast panels are designed for disassembly. Bricks and blocks can be reused after the mortar is removed. Roof tiles and Terraçade can be disassembled and reused. Brickworks’ website (www.brickworks.com.au) provides more case studies and technical information. CUTTING EDGE THERMAL RESEARCH Brickworks works in partnership with industry group Think Brick Australia to support ongoing research programs at the University of Newcastle, contributing significantly to our understanding of the thermal performance of Australian housing. A Study of the Thermal Performance of Australian Housing Phase II was recently published, demonstrating the thermal benefits and performance of bricks compared to lightweight cladding used in housing construction. SOLAR ROOF TILES After extensive design, modifications and testing undertaken in collaboration with CSIRO, Bristile Roofing is proud to have released the innovative and sustainable Solar Roof Tile and Sonnen Battery with integrated inverter. The solar tile interlinks seamlessly with a range of roof tiles whilst the DC battery with built in inverter (exclusive to Brickworks) negates the requirement of a standalone inverter. The battery comes with a smart app which allows for household energy optimisation and management. 2017 saw a record high in rooftop solar and battery installations according to the Clean Energy Regulator and the introduction of Bristile’s solar tiles means that households can enjoy the benefits of rooftop solar without compromising on style. A STUDY OF THE THERMAL PERFORMANCE OF AUSTRALIAN HOUSING Volume II Priority Research Centre for Frontier Energy Technologies and Utilisation The University of Newcastle, Australia Dariusz Alterman, Adrian W. Page, Behdad Moghtaderi / 48 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 49 / Bristile Roofing Solar Roof Tile Caption???? Our PEOPLE WORKPLACE PROFILE LEADERSHIP & CULTURE As at 31 July 2018, Brickworks employed 1,485 full time equivalent employees across its Australian operations (permanent and part time employees, excluding casuals). The average age of Brickworks employees is 42, with 31.6% aged 50 years and over. The average length of employee service at Brickworks is 7.7 years. The gender makeup of the Company’s leadership team was 24% female at 31 July 2018, an increase from 19% over the past two years. Brickworks recognise that sustaining a strong culture driven by diverse and talented people is critical to our long-term success. In financial year 2018, Brickworks has continued its focus on building and sustaining a strong culture with the continued integration of the ‘WE ARE BRICKWORKS’ Values & Behaviours. These values and behaviours drive unity and focus across the organisation by providing a simple way for employees to understand what the Company stands for and how success is achieved at Brickworks. The campaign was created to share and celebrate the Company’s culture with employees, customers, investors and the community. The embedment of these Values and Behaviours across the organisation has continued to be a priority of Brickworks. / 50 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 51 / OUR PEOPLE PEOPLE, SYSTEMS AND PROCESSES Sustaining and growing Brickworks’ strong culture was a key focus in financial year 2018, through the continued embedment of the Company’s core Values and Behaviours in the following ways. Talent Acquisition and Retention Attracting and retaining the right people with the right skills is a strategic imperative for Brickworks to allow the Company to continue to innovate and grow. During financial year 2018, Brickworks continued to evolve its talent acquisition and retention strategies to ensure the right people are attracted and retained to strengthen the organisational and talent pipeline. The improvement of the candidate experience and building Brickworks’ employer brand has been the key focus for 2018 for the attraction of talent. In terms of retention there has been a focus on internal development and progression with 58 promotions occurring across Brickworks in the financial year 2018. Performance Management Brickworks is committed to the understanding that great achievements come from unity and cooperation. The Company’s ability to deliver the best possible building products relies on having a strong culture of high performing people who are aligned to deliver the Brickworks strategy. Performance at Brickworks is assessed in equal measure on what we do and how we do it. The Values and Behaviours are integrated into performance reviews to ensure employees focus on the how as well as the what in their day to day activities. Learning and Development During the financial year 2018, the national leadership and sales development pathways were piloted to support the business strategy. The pilots have positively impacted the organisation and the programs continue to be evolved and implemented to build a strong focus on consistency and excellence. A commitment has been made to the ongoing development of all staff, with monthly ‘lunch and learns’ encouraging knowledge sharing across the business, regular round table sharing with broader industry groups as well as a commitment to a minimum of 2 hour per week per employee dedicated to their development goals. Compliance Brickworks is committed to all staff gaining and maintaining a thorough understanding and awareness of compliance obligations and 2018 saw an improved mechanism to ensure all staff understand their obligations through e-learning and face to face education sessions. Policies and Procedures A comprehensive review of key Company policies was undertaken in financial year 2018. The policies are being rolled out through a comprehensive roadshow to ensure thorough understanding by all staff and will be developed into e-learning packages for new staff and to act as a regular refresher for all staff. DIVERSITY AND INCLUSION Brickworks is committed to an inclusive culture where all employees are treated with dignity and respect, and valued for their contributions and diverse backgrounds, experience and perspectives. Led by the Managing Director, the Brickworks Diversity Council drives the Diversity & Inclusion Strategy. During financial year 2018, the key focus has been on delivering a range of initiatives to increase the gender diversity across the leadership of the Company, predominately focusing on attracting and retaining female leaders, which over the past 2 years has increased from 19% to 24%. This will continue to be a focus during 2019 with targets being developed to continue this commitment. INDUSTRIAL RELATIONS Brickworks operations include sixteen non-union enterprise agreements, seven union enterprise agreements, and a number of sites covered by the respective Modern Awards. During financial year 2018, seven site based enterprise agreements were successfully negotiated and executed, reflecting the strong working relationship that exists between manufacturing staff and local management teams across the organisation. A notice of intended protected industrial action received in September 2018 by production employees at the Austral Bricks sites at Horsley Park and Bowral was subsequently withdrawn. For over twenty years Brickworks has had strong and co- operative industrial relations with its employees at these sites. Austral Bricks continues its good faith negotiations in an effort to resolve the outstanding issues and attain a fair and reasonable outcome for all parties. / 52 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 53 / COMMUNITY Support Brickworks is committed to social responsibility and we aim to make a valuable contribution to our communities. Brickworks is a long- standing partner with the Children’s Cancer Institute (CCI) Australia, the only independent medical research institute in Australia dedicated to research into the causes, cure and prevention of childhood cancer. For the past decade Brickworks has been a proud supporter of the Children’s Cancer Institute (CCI) Australia for medical research. Ongoing Company support for CCI’s work has been supplemented with staff donations, primarily through the Casual Friday program. In return for a payroll donation of $2 per week, staff are issued with a “Care for Cancer kids” shirt to wear with their casual clothes on Fridays. Other Brickworks and staff fundraising activities have included: BUILD FOR A CURE In addition, Brickworks are a founding partner of the CCIA’s Build for a Cure – teaming with other partners such as McDonald Jones Homes to build a house in just 28 days – with auction proceeds donated to the CCIA. In September 2017 Austral Bricks were again thrilled to donate all the bricks that made the build possible. The house was sold for $700,000, bringing total money raised from the Build for a Cure house auctions to over $2.1 million since 2014. ‘Dare the Boss’ fundraisers ◗ Endure for a Cure cycle ◗ ◗ Diamond Ball ticket sales ◗ ◗ Golf day fundraisers ‘Round-up’ program on customer purchases The contribution from both Brickworks and staff has provided the opportunity for a number of pieces of vital equipment to be purchased by the CCI Australia. / 54 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 55 / Poesia Glass from Austral Brick Board of DIRECTORS ROBERT D. MILLNER FAICD CHAIRMAN In 2018 the Housing Industry Association awarded Mr Partridge the “Sir Phillip Lynch Award”, their highest award. The award was in recognition of a lifetime contribution to the Housing Industry. 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. MICHAEL J. MILLNER MAICD DEPUTY CHAIRMAN 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. Mr M. Millner is a non-executive Director who was appointed to the Board in 1998. He is Vice President of the Royal Agricultural Society of NSW, Chairman of the Royal Agricultural Society of NSW (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. 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, as well as being appointed by the Federal Government to be Chairman of the National Housing Finance and Investment Corporation in June 2018. He is the Chair of the Remuneration Committee, and a Member of the Audit and Risk Committee and the Nomination Committee. / 56 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 57 / INEX Wallboard Monsu Café 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. 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. Company Secretary SUSAN LEPPINUS B.EC; LLB; GRAD DIP APP FIN COMPANY SECRETARY AND GENERAL COUNSEL Ms Leppinus was appointed Company Secretary and General Counsel in April 2015. She is admitted to practice in NSW and has over 13 years experience as a company secretary and general counsel. She has worked closely with boards and senior management in ASX 200 companies, and has significant experience in mergers and acquisitions, contract negotiation, corporate governance, corporate and commercial law. She is responsible for the legal governance and company secretarial functions of the Group, including liaising with the ASX, ASIC and other regulatory bodies. Executive MANAGEMENT LINDSAY R. PARTRIDGE AM BSC. HONS. CERAMIC ENG; FAICD; DIP CD MARK ELLENOR B.BUS MANAGING DIRECTOR Refer to Board of Directors, page 57. ROBERT BAKEWELL B.COMM; CA CHIEF FINANCIAL OFFICER Mr Bakewell was appointed Chief Financial Officer in June 2016. He is a chartered accountant with more than 31 years finance and commercial experience in listed Australian and international companies including significant experience in mergers and acquisitions, restructuring, balance sheet and capital management. He is responsible for all financial operations of the business including group accounting and taxation, treasury, banking and finance and investor relations. GROUP GENERAL MANAGER – BRICKS & ROOFING Mr Ellenor was appointed Group General Manager Bricks and Roofing in June 2018. Mark started with Austral Bricks in the graduate program in 1999 and progressed through management and promoted to General Manager Eureka Tiles in 2006, General Manager Austral Bricks NSW in 2009 then General Manager Austral Bricks Australia in 2017. Mark is responsible for setting and implementing the strategic plan for Austral Bricks and Bristile Roofing and the complete day to day safety, sales, operational and financial performance of both divisions. Mark is on the ATTBF and Think Brick Boards and has completed the Stanford Executive Program. MEGAN KUBLINS BS (ARCH), B ARCH EXECUTIVE GENERAL MANAGER – PROPERTY & DEVELOPMENT Ms Kublins was appointed General Manager Property in November 2001 and became Executive General Manager Property in 2006. She has over 21 years experience in the property industry gained in public and private organisations in the capacity of both landowner and developer. She manages all of Brickworks property assets, including over 3,500 hectares of land. Her primary focus is to identify value creation opportunities within this portfolio. She is responsible for the growth and management of the Goodman/Brickworks JV, which was established and grown under her direction. Megan has completed the Stanford Executive Program. / 58 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 59 /  Corporate GOVERNANCE The Brickworks Limited (Company) Board is committed to developing and maintaining good corporate governance and recognises that this is best achieved through its people and their actions. The Company’s long-term future is best served by ensuring that its employees have the highest levels of honesty and integrity and that these employees are retained and developed through fair remuneration. It is also critical to the success of the Company that an appropriate culture is nurtured and developed, starting from the Board itself. Brickworks full Corporate Governance Statement which provides detailed information about governance at Brickworks is available on Brickworks’ website at www.brickworks.com.au. BRICKWORKS GOVERNANCE FRAMEWORK Brickworks Board Audit & Risk Committee Nomination Committee Remuneration Committee Independent Board Committee ◗ Financial reporting, internal and external audit ◗ Risk management frame- work and strategy, risk appetite and risk profile ◗ Board and Committee membership and renewal ◗ Remuneration policies, practices and related disclosure ◗ To consider and make recommendations to the Board when circumstances exist or proposals are received when the interests of WHSP may differ from the interests of Brickworks or other shareholders in Brickworks Brickworks Managing Director & Chief Financial Officer ◗ Delegated limits of authority to manage the Company other than matters reserved to the Board or as otherwise delegated to a Board Committee Brickworks senior management / 60 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 61 / CORPORATE GOVERNANCE Bristile Roofing, La Escondello Timely and balanced disclosure ◗ Brickworks is committed to keeping its shareholders informed about the Company’s activities. ◗ The Company aims to provide relevant information to shareholders in a timely manner which is supported by its continuous disclosure policy. Safeguard integrity in financial reporting ◗ The Board through the Audit and Risk Committee: ◗ monitors Company performance; and ◗ ensures the proper external reporting of financial information. Recognise and manage risk ◗ To ensure robust and effective risk management systems are in place and operating effectively, the Board through the Audit and Risk Committee: ◗ determines the risk profile for the Company; ◗ ensures that business initiatives are consistent with its risk appetite; ◗ reviews the controls and systems in place to continually mitigate risk; and ◗ oversees reporting and compliance requirements. ◗ Risk management is a priority for senior management. Remunerate fairly and responsibly ◗ The Board through the Remuneration Committee ensures that remuneration policies and practices are consistent with strategic goals. ◗ The Company’s remuneration policy is to: ◗ equitably reward executives with a mix of fixed remuneration, short term and long-term incentives aimed at attracting and retaining executives who will create value for shareholders; and ◗ ensure appropriate succession planning is in place. ◗ Non-executive directors receive no incentive payments and there are no retirement benefits in place. Contributions to the retirement allowance plan for non-executive Directors were discontinued on 30 June 2003. 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. Since 30 June 2003 no new Directors have been entitled to join this plan. Management and oversight ◗ The Board provides leadership to the Company and its employees, oversees the development and implementation of corporate strategy and monitors performance of the Company and senior management. ◗ The Board comprises a majority of independent directors with a mix of skills and experience covering all aspects of the Company’s operations and particularly the core businesses of building products manufacturing and property development. ◗ Day to day management of the Company and the implementation of strategy and policy initiatives is delegated by the Board to the Managing Director and senior executives. Ethical and responsible decision making ◗ The Board aims to ensure the Company continually builds an honest and ethical culture. ◗ Brickworks has an established code of conduct which centres on the Company and all Directors, senior management and employees conducting themselves with integrity in all business dealings. / 62 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 63 / INEX Wallboard Photo: Lipman 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 2018. 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 All Directors have been in office since the start of the financial year to the date of this report. Each Director’s experience and special responsibilities are set out on pages 57 to 58 of this Annual Report. Details for each Director’s directorships of other listed companies held at any time in the three years before the end of the financial year and the period of which such directorships are held are: Robert D. Millner TPG Telecom Ltd ◗ Washington H. Soul Pattinson and Co. Ltd ◗ New Hope Corporation Ltd ◗ ◗ BKI Investment Company Ltd ◗ Milton Group ◗ Australian Pharmaceutical Industries Ltd since 1984 since 1995 since 2000 since 2003 since 1998 since 2000 Michael J. Millner ◗ Ruralco Holdings Ltd Brendan P. Crotty ◗ GPT Group Deborah R. Page AM ◗ GBST Holdings Ltd ◗ Pendal Group Ltd ◗ Service Stream Ltd ◗ Investa Listed Funds Management Ltd (RE of ASX listed Investa Office Fund) ◗ Australian Renewable Fuels Ltd The Hon. Robert J. Webster Endeavour Energy Limited ◗ since 2007 since 2009 since 2016 since 2014 since 2010 Appointed 2011 Resigned 2016 Appointed 2012 Retired 2015 Appointed 2017 COMPANY SECRETARY Susan L. Leppinus B.Ec; Llb; Grad Dip App Fin / 64 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 65 / DIRECTORS’ 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. 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. Building Products The achievement of business objectives in the Building Products Group may be impacted by the following significant risks: Property The achievement of business objectives in Property may be impacted by the following significant risks: Risk Mitigation Risk Mitigation ENVIRONMENTAL PERFORMANCE The Group is subject to various state and federal environmental regulations in Australia. Many sites also operate under additional requirements issued by local government. There is significant environmental regulation requiring compliance for Brickworks’ building products manufacturing and associated activities in each state of Australia. Due to the scale and diversity of the operation there is a risk of non-compliances occurring. To manage these risks, Brickworks continually improves management systems, compliance registers and procedures, in addition to the continuation of training, audit and assurance programs. Annual returns were completed where required for each license stating the level of compliance with site operating conditions. The board places a high priority on environmental issues and is satisfied that adequate systems are in place for the management of Brickworks’ compliance with applicable environmental regulations under the laws of the Commonwealth, States and Territories of Australia. Brickworks is not aware of any pending prosecutions relating to environmental issues. The Directors are not aware of any material non-compliance with environmental regulations pertaining to the operations or activities during the period covered by this Report which would materially affect the business as a whole. Further information regarding Brickworks approach to environmental performance, compliance and approach to environmental management and sustainability is set out on pages 45 to 49. 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: CONSOLIDATED RESULT OF OPERATIONS The consolidated net profit for the year ended 31 July 2018 of the Brickworks Group after income tax expense, amounted to $175,442,000 compared with $186,210,000 for the previous year. DIVIDENDS The Directors recommend that the following final dividend be declared: Ordinary shareholders – 36 cents per share (fully franked) The record date for the final ordinary dividend will be 8 November 2018, with payment being made on 28 November 2018. Dividends paid during the financial year ended 31 July 2018 were: (a) Final ordinary dividend of 34 cents per share (fully franked) paid on 29 November 2017 (2016: 32 cents). (b) Interim ordinary dividend of 18 cents per share (fully franked) paid on 2 May 2018 (2017: 17 cents). REVIEW AND RESULTS OF OPERATIONS A review of Brickworks Group operations and the results for the year is set out on pages 5 to 41 and forms part of the Directors’ Report. 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. AFTER BALANCE DATE EVENTS No matter or circumstance has arisen since the end of the financial year that has 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. On 6 September 2018 an option to purchase the Punchbowl land for $41.0 million from the Group was exercised by the buyer, with the transaction expected to be completed by October 2018. The Group has also entered into a 10-year lease back arrangement in relation to its specialised brick plant at Punchbowl with an option to extend for additional 10 years. As at 31 July 2018, the Punchbowl property was classified as Land Held For Resale. 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. Market Risk 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 Rezoning Risk 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 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. Group The achievement of business objectives in the Group activities may be impacted by the following significant risks: Risk Mitigation Financing Risk Cyber Security Risk The Group maintains conservative gearing levels below 20% in recognition of the industry’s cyclical nature. Senior debt facilities are maintained with financial lenders with whom an open and transparent relationship is maintained. Facilities are maintained over various tenors ranging from 2 to 10 years, ensuring that a maximum of $200 million will expire at any one point in time. The Group has assessed its main cyber security threat as phishing to obtain sensitive company or private information or a virus attack which compromises the system. Investment in technology has increased and risk controls include the use of a VPN and antivirus software to safeguard against incoming viruses from personal computers. Preventative measures include regular system penetration tests and employee training. New leading-edge end-point protection software and firewall protection has been introduced. A disaster recovery plan is in place across the organisation. Energy Supply– sources and cost of gas and electricity Serious Safety Incidents Environmental incident Products – alternative products and product failure Shift in housing trend New competitor Production capacity Business Interruption – plant failure or underutilisation and raw material supply Asbestos Risk Market Risk – deteriorating market conditions The Group continues to review upstream investment options, and alternative sources of gas while leveraging supplier relationships to ensure long term gas supply. Electricity is secured, where viable, through long term supply contracts. The Group has a strong safety culture and a well developed WHS system (refer 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 and quality control. The Group 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. The Group manages production capacity by restarting, building and mothballing plant to adapt to cyclical market conditions. 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 from an insurable interruption. Raw materials are generally secured through ownership of raw material reserves and maintaining prudent raw material stockpiles. Log supply is continually monitored and the Group works closely with relevant Government authorities to ensure licencing renewals. 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. The Group is investing in geographic and product diversification, cost control and continuous improvement of business. Restructuring initiatives have been undertaken in WA to address the challenging market conditions including a pro-active approach to right-sizing our operations to match demand. / 66 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 67 / DIRECTORS’ REPORT Investments The achievement of business objectives in Investments activities may be impacted by the following significant risks: Risk Mitigation Market Risk 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. 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. Remuneration REPORT Directors’ Meeting Audit & Risk Committee Remuneration Committee Nomination Committee Independent Board Committee The Remuneration Report has been audited in accordance with s300A of the Corporations Act 2001. 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 10 10 10 10 10 10 10 10 3 N/A N/A N/A 3 N/A 3 3 2 2 2 N/A 2 2 2 2 3 3 3 N/A 3 3 3 3 3 N/A N/A 3 3 3 3 3 DIRECTORS’ INTERESTS As at 18 September 2018, Directors had the following relevant interests in Brickworks shares: Director R D Millner M J Millner L R Partridge B P Crotty D N Gilham D R Page R J Webster Ordinary Shares 4,813,068 4,878,141 212,395 30,209 102,268 8,700 15,922 As at 18 September 2018, 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. 1 OVERVIEW Executive Summary 1.1 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 as well as the retention of key members of the senior management team. Following the vote on the Remuneration Report at the Company’s 2016 Annual General Meeting and a review of the relevant proxy advisor reports and consideration of the Company’s circumstances the Board made some changes to the Company’s remuneration framework to take effect across FY2017 and FY2018 as follows: ◗ ◗ an increase in the fixed remuneration for the Managing Director (MD) to more properly reflect market practice and peer benchmarks effective from 1 April 2017; a change in the remuneration mix for the MD and Chief Financial Officer (CFO) for FY2017 which includes: ◗ an increase in the proportion of at risk remuneration in the form of STI for the MD and CFO on FY2017 performance from 50% to 60%; and ◗ ◗ ◗ a reduction in the long-term incentive (LTI) opportunity for the MD and CFO from 50% to 40% for all allocations made following FY2017; for STI earned in relation to FY2017 performance a new short-term incentive (STI) deferral for the MD and CFO of 33.33% for a period of 2 years as a retention mechanism; and for LTI rewards allocated in relation to results achieved during FY2017, a new relative Total Shareholder Return (TSR) benchmark will be applied to 50% of LTI allocations so that 100% of shares allocated to the MD and CFO will have a TSR measure. ◗ This remuneration framework was fully implemented for FY2018. Agenda for Financial Year 2019 The Board will conduct a review of executive remuneration during FY2019 to ensure that it continues to align with Brickworks strategy, motivate management, reflect market best practice and support the delivery of sustainable long-term returns to shareholders. As part of the review process we will engage with proxy advisors. 1.2 Details of Key Management Personnel (KMP) 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 Mr L Partridge Mr B Crotty Mr D Gilham Mrs D Page Non-executive Chair Non-executive Deputy Chair Executive Director (Managing Director) Non-executive Director Non-executive Director Non-executive Director The Hon. R Webster Non-executive Director Executives Mr R Bakewell Ms M Kublins Mr M Ellenor Chief Financial Officer Executive General Manager – Property & Development Group General Manager Bricks and Roofing (from 1 June 2018) formerly Group General Manager Austral Bricks Australia / 68 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 69 / REMUNERATION REPORT 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 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 information regarding remuneration benchmarking for executives. ◗ The consideration paid for the remuneration benchmarking for executives provided by Guerdons was $12,013. ◗ 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 executives 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. Board Policies for determining remuneration 1.5 Policies for determining the nature and amount of remuneration for the executives 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. Retention of executives and highly skilled staff continues to be the Remuneration Committee’s highest priority for the following reasons: ◗ ◗ ◗ It requires at least 5 to 10 years for executives and production staff to become totally familiar with the complexities associated with the manufacture of clay and concrete building products. If there is a breakdown Brickworks needs to be able to restart production within hours and days rather than weeks and months. The necessary skills to deal with these challenges cannot be procured easily outside the Brickworks group. The sale and marketing of building products is a function of good client relationships as well as product excellence. Brickworks cannot afford to lose executives who in some circumstances may have been dealing with clients for 10–20 years. 2 2.1 REMUNERATION COMPONENTS Group performance, shareholder wealth and remuneration Executive 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 uses Key Performance Indicators to ensure that its Executives: ◗ ◗ ◗ ◗ ◗ improve profit, cash flows, production and operational efficiencies; rationalise non-performing assets; retain key employees who have developed specialist skills and expertise in the industries in which the Group operates; ensure that the health and safety of employees has the highest priority; and provide demonstrated leadership in relation to environmental compliance. Brickworks’ short-term performance incentive and its long-term incentive (LTI) scheme are designed to prioritise these corporate objectives. The short-term incentive program contains key performance measures for each executive which support its strategy as outlined further in section 2.4. Nevertheless, the primary purpose of Brickworks’ LTI is retention, as many years may be required for an individual to develop a complete knowledge of the operating and manufacturing processes for building products. 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 with an average vesting period of 3 years. For share allocations to the MD and the CFO a relative TSR and absolute TSR performance measure apply. This 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: ◗ ◗ ◗ the annual EBIT (before significant items) generated by the Building Products and Property divisions has increased from $107.5 million in the 2014 financial year to $169.9 million in the year to 31 July 2018; the Return on NTA for the Building Products and Property divisions demonstrate an increase from 12.5% in 2014 to 15.5% in 2018; the Operating Cash Flows generated by the Building Products and Property divisions have demonstrated continuous improvement from $80.5 million for the year ending 31 July 2014 to $142.1 million for the year ending 31 July 2018; and ◗ most of the senior executives who have retired in recent years have been replaced by internal candidates with appropriate skills which highlights the important role that retention plays in Brickworks’ succession planning. The Board is of the opinion that the Company’s current strategies and operational initiatives will deliver superior long-term results to shareholders. While 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. 2014 2015 2016 2017 2018 Total revenue (millions) $670.3 $723.6 $751.0 $841.8 $821.1 Combined Building Products & Property EBIT before significant items (millions) Net profit before significant items after tax (millions) Net profit after tax (millions) Net Tangible Assets (millions) 90 day VWAP for Brickworks shares at year end Dividends – ordinary shares (cents) $107.5 $101.3 $102.8 $120.7 $120.3 $78.1 $148.8 $147.1 $78.2 $155.6 $196.4 $186.2 $169.9 $223.7 $175.4 $1,516.8 $1,572.1 $1,628.9 $1,755.0 $1,854.9 $13.74 42.0 $14.38 45.0 $15.11 48.0 $14.27 51.0 $15.78 54.0 / 70 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 71 / REMUNERATION REPORT Employee Productivity Building Products Brickworks productivity measures have also improved over time. The following Revenue per Employee graph shows historical revenue per employee. Despite having grown substan- ($’000) tially employee productivity has not been compromised in the process. Building Products Revenue per Employee Building Products Revenue per Employee ($’000) 2.2 Potential Remuneration Mix Total remuneration for the MD and the other executives comprises both fixed remuneration and an at risk component (STI and LTI). The mix shown in the graph below is the potential remuneration based on the current remuneration at 31 July 2018 with STI and LTI based on maximum opportunities. This structure is designed to retain and pay executives competitively based on their performance. Potential Managing Director Remuneration Mix 600 500 400 300 200 100 0 Fixed Remuneration 47.2% STI – Cash 33.9% LTI 18.9% Average Potential Other Executive KMP Remuneration Mix 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 Total Shareholder Returns (TSR) Excellent shareholder returns have been achieved for the year to 31 July 2018, Building Products at over 22%. Since the end of the period, the share price has risen a further 10% to 18 September 2018. Revenue per Employee ($’000) Measuring returns to the end of July, longer term performance over ten and fifteen years has trailed All Ordinaries Accumulation Index by approximately 1% per annum. If the recent performance following year end is added, returns outperform the Index over most time horizons. Fixed Remuneration 53.8% STI – Cash 22.9% LTI 23.3% Annual TSR Brickworks Limited All Ords Accum Index Out/(Under) Perform Out/(Under) Perform (extending to 18 Sep 2018*) 1 year 22.3% 14.9% 7.4% 17.1% * Includes the additional period since financial year end (1 Aug 18 to 18 Sep 2018) 3 years 5 years 10 years 15 years 5.0% 8.4% (3.4%) 0.0% 8.4% 9.4% (1.0%) 1.1% 6.3% 6.9% (0.6%) 0.5% All Ords Accumulation Index Brickworks 3 0 0 2 4 0 0 2 5 0 0 2 6 0 0 2 7 0 0 2 8 0 0 2 9 0 0 2 0 1 0 2 1 1 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 7.8% 9.4% (1.6%) (0.9%) 300% 200% 100% 0% 2.3 Remuneration Component – Fixed Remuneration As reported in last year’s remuneration report, the MD was awarded an increase of 7.5% of base pay effective from 1 April 2017 to bring his Total Fixed Remuneration closer to the level enjoyed by his peers in ASX listed building products companies. An independent benchmarking assessment in FY2017 of the fixed pay, cash STI, deferred STI and LTI was conducted. The level of peer MD remuneration opportunity at target and maximum levels was compared against the MD opportunity on the same basis. , , 5 9 6 3 4 3 1 , 0 0 0 9 6 6 , 2 7 0 8 5 6 , 0 0 0 6 0 4 1 , 0 0 6 3 4 8 , 0 0 4 2 6 5 , , 0 1 4 3 5 5 1 , 0 9 0 2 8 9 , , 5 6 1 5 3 1 1 , 1,600,000 1,200,000 800,000 400,000 0 e s a B I T S I T L e s a B I T S I T L e s a B I T S I T L MD’s 2016 Remuneration MD’s 2017 Remuneration Peer Group 2017 Average Remuneration 2.4 Remuneration Component – Short Term Incentives (STI) The information below outlines the STI Plan: Purpose The STI is an annual bonus designed to reward executives for meeting or exceeding financial and non-financial objectives over a one year period. Timing For the MD and CFO the STI is awarded in cash up to a maximum of 72% of total fixed remuneration (including base salary, superannuation and car allowance) with 33.33% of STI awarded deferred for two years. For all other executives 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 the maximum percentage 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. Target Opportunities The MD and CFO have a target STI opportunity of 60% of total fixed remuneration 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. Performance measures 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 2018. The metrics and their rationale for selection are as follows: In considering the fixed pay, cash STI, deferred STI and LTI it was observed that the MD’s remuneration was positioned below that of the market with respect to roles of comparable complexity and size. Rationale for selection Financial measures The Board preference was for this deficit to be made up of a combination of performance pay and fixed pay. The MD was awarded an increase of 7.5% of base pay effective from 1 April 2017 to more fairly reflect his remuneration compared to the market and peers in ASX listed building products companies. The STI opportunity was increased to 60% from 40% but for retention purposes 33.33% of any STI payment will be deferred for 2 years. The 40% LTI opportunity includes performance based measures being applied to 100% of each allocation. There has been no material increase in total fixed remuneration for any KMP or executives during the 2018 financial year. Divisional profit compared with the base target Focus senior executive attention on results and performance for segments for which they have direct responsibility. Cash generation Managing cash to ensure cash and working capital is available whenever and wherever required by the business. / 72 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 73 / REMUNERATION REPORT Non-financial measures Other Executives STI outcomes Quality of earnings Strategic Operational This measure considers the quality of the earnings result including goodwill, impairments and windfall gains. 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. Safety, Health and Environment Rewards employees for demonstrated leadership in enhancing workplace safety and taking a sustainable approach to operations through scientific innovation. People Effective leadership, talent development, retention and succession planning are critical to the success of the business and underpin financial performance. The STI for all other executives is weighted 75% for financial measures and 25% for non-financial measures. Percentage of financial component payable for other executive KMP (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. Performance assessment MD and CFO Weighting of performance measures 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. The potential STI for the MD and CFO at target is based on 60% of total fixed remuneration (including base salary, car allowance and superannuation). The payout schedule against the financial measures is outlined below: 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 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 Clawback There are currently no clawback clauses for STI payments. Termination Should the employment of either the MD or CFO be terminated other than for cause all outstanding STI payments the subject of deferral will be paid as if their employment had continued. Executive MD CFO EGM Property & Development Group GM – Bricks and Roofing Percentage of financial component of STI Award payable for the MD and CFO Target STI Award 110% of profit target 120% of potential STI Between 100% and 110% of profit target Pro rata award on a straight line basis between 100% and 120% of potential STI Between 80% and 100% of profit target Pro rata award on a straight line basis between 60% and 100% of potential STI Below 80% of profit target No STI Award The total STI Award calculated as set above is then considered against each performance measure component as follows: ◗ 37.5% of any STI Award is paid to reflect profit performance ◗ 37.5% of any STI Award is paid as set out below: Target 100% of budgeted operating cash flow Between 80% and 100% of budgeted operating cash flow Below 80% of budgeted operating cash flow STI Award 100% of 37.5% Pro rata award on a straight line basis between 60% and 100% of 37.5% 100% of 37.5% forfeited ◗ The remaining 25% of any STI Award is payable on each non-financial measure reached. The table below outlines the weighting of financial and non-financial KPIs in relation to each executive for financial year 2018 and the performance achieved. Unless otherwise stated all earnings measures exclude significant items. Executive MD & CFO FINANCIAL 75% NON-FINANCIAL 25% Measure(s) Performance Measures Performance ◗ NPAT for Building Products and 149% achieved Property against target ◗ Operating cash flow for Building Products and Property against target 137% achieved ◗ A mixture of Quality of earnings, Strategic, Operational, Safety, Health and Environment and People including Succession Planning relevant to the executive 75% achievement of non-financial KPIs EGM Property & Development ◗ NPAT against target 147% achieved ◗ Mixture of Strategic and ◗ Divisional cash generation against 113% achieved target Operational relevant to the executive Group GM – Bricks and Roofing ◗ EBIT against target for Austral Bricks 114% achieved ◗ Mixture of Strategic, Operational, Safety, Health and Environment and People relevant to the executive ◗ Cash generation for Austral Bricks 102% achieved STI achieved 100% achievement of non-financial KPIs 40% achievement of non-financial KPIs The table below outlines the weighting of financial and non-financial KPIs in relation to each executive for 2018 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 for 2018. STI On Target Opportunity 1,062,000 554,400 240,000 FINANCIAL NON-FINANCIAL Weighting % Achieved % Forfeited % Weighting % Achieved % Forfeited % 75% 75% 75% 100% 100% 123% 25% 25% 25% 75% 75% 100% 25% 25% 0% STI awarded $ 995,625 519,750 262,250 STI over performance subject to LTI $ – – 19,704 232,500 75% 107% 25% 40% 60% 250,000 – 0% 0% 0% 0% / 74 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 75 / REMUNERATION REPORT 2.5 Remuneration Component – Long Term incentives (LTI) for FY 2018 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 The LTI is a broad based employee share plan with 594 employees participating as at 31 July 2018 via 1,597,739 shares on allocation of which 49.81% remain unvested (and 50.19% vested). In addition, 28,409 shares in the plan were forfeited during the year to 31 July 2018. Purpose 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 products 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. Opportunity The value of shares granted was dependent upon the employee’s position within the Group and their base salary. For the MD and CFO this STI entitlement is 60%. For all other executives, this STI entitlement is 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 for all executives (and at 72% of fixed remuneration for the MD and CFO). Outperformance against the STI measures are recognised by the grant of additional LTI shares. Performance measures that apply for allocations made in FY 2018 for the MD and CFO For performance securities granted after 1 August 2017 to the MD and CFO 50% of the award is subject to Brickworks TSR compared to the companies in the S&P/ASX 200 Franking Credit adjusted annual total return Index and 50% of the award is subject to an absolute TSR summarised below. Relative TSR This is a relative TSR measure. The vesting schedule is: BKW’s TSR inclusive of Grossed Dividends as a % of S&P/ASX 200 Franking Credit adjusted annual total return Index (XJOAI Franked) 120% 80% to 100% 50% to 80% Below 50% Level of Vesting 100% Pro rata vesting on a straight line basis between 90% to 100% Pro rata vesting on a straight line basis between 50% to 90% Nil Absolute TSR This is an absolute measure. The Absolute TSR is equivalent to the sum of the grossed-up dividend yield plus or minus the movement in the 90 day VWAP’s during the year under review. The vesting schedule is: Absolute after tax (pre-tax with gross up for dividend component) TSR Target over the performance period 7% or greater 6% to 7% 6% Less than 6% Level of Vesting 100% Pro rata vesting on a straight line basis between 50% and 100% 50% vesting No vesting The Board believes that these measures, when combined with the STI, the vesting period for deferred STI and LTI requirements provides the most suitable link to long-term security holder value creation because: ◗ ◗ no shares allocated to the MD and the CFO after 2015 will vest based only on tenure; absolute TSR ensures vesting is commensurate with the Company’s actual TSR, meaning there are no awards when TSR is negative and it also provides a good line of sight for the MD and CFO; ◗ measuring TSR on a relative basis levels the playing field by removing overall market movements and industry economics for the evaluation of MD and CFO performance; ◗ the use of relative TSR ensures that the MD and CFO are motivated to deliver returns that are superior to what a security holder could achieve in the broader market and ensures as the most senior management they maintain a strong focus on security holder outcomes; ◗ Brickworks calculates its after tax TSR incorporating the full value of franking credits. The S&P ASX 200 Franking Credit adjusted annual total return Index also adjusts the total return for the tax effect of franking credits; ◗ the use of the S&P ASX 200 Franking Credit adjusted annual total return Index was chosen as the relative performance target following testing of this group against a range of historical and future share price/payout scenarios to confirm that outcomes align with the Company’s historical notion of superior long-term performance. The S&P ASX 200 Franking Credit adjusted annual total return Index measure (XJOAI Franked) adjusts the total return of the S&P / ASX 200 Accumulation Index for franked dividends to ensure consistency of calculation. This Index is readily available and simple to use as a comparator for a Group that spans across the building products and property development sectors. Furthermore, Brickworks does not have to separately manage and adjust a custom peer group for changes among constituents. The hurdles are reviewed annually by the Board and the Board believes that the TSR measures will drive outperformance without encouraging excessive risk taking; and ◗ while the Board appreciates that there are at times different views held by different stakeholders, it considers that these measures provide the appropriate balance between market and non-market measures. The assessment of TSR Shares against each of the absolute and relative TSR targets is undertaken progressively for 20% of the TSR Shares on 31 July for each of the 5 years following the allocation date. The share price used at commencement of each tranche for assessing both relative and absolute TSR performance of Brickworks shares is the 90 day Volume Weighted Average Price (VWAP) prior to 31 July. The actual share price used to compare to the TSR target share price is the 90 day VWAP prior to 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 is outlined above. However, 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. For example, if the absolute TSR target of 8.0% or more is met, there will be an incremental vesting of each prior year’s entitlement, if any of these allocations 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 over performance in this and the following years. The cumulative vesting can reach a level that will be equivalent to but not more than the total number of shares originally allocated. Other features Clawback There are currently no clawback clauses for LTI payments. 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 reflects 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 Securities 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. 2.6 LTI Outcomes FY2018 MD and CFO Following the revised terms of the LTI for the MD and CFO including the introduction of an absolute TSR measure for allocations after 31 July 2016 and the relative TSR measure for allocations after 31 July 2017 the following represents Brickworks’ performance against each TSR measure. Brickworks TSR is defined as the change in share price plus dividends (grossed up for associated franking credits). This forms part of the criteria used for assessing the vesting of LTI plan shares under the absolute TSR test and relative TSR test. Absolute TSR performance For the purposes of the absolute TSR measure under the LTI plan, Brickworks’ average TSR is calculated using a simple average of Brickworks’ 1 year TSR, 2 year TSR, 3 year TSR, 4 year TSR and 5 year TSR. Brickworks’ TSR results as at 31 July 2018 are: Year TSR Test period from Test period to TSR Performance 1 year TSR 1-Aug-2017 2 year TSR 1-Aug-2016 3 year TSR 1-Aug-2015 31 July 2018 4 year TSR 1-Aug-2014 5 year TSR 1-Aug-2013 Average TSR 18.0% 9.0% 8.7% 10.1% 12.6% 11.7% Brickworks’ Average TSR of 11.7% has exceeded the performance criteria (being 7%). Relative TSR performance Brickworks’ performance (grossed up for franking credits) versus the S&P ASX 200 Franking Credit Adjusted Total Return Index (XJOAI Franked) is: TSR 1 year 2 years 3 years 4 years 5 years Simple average XJOAI Franked# Brickworks (inc. Franking) Brickworks as % Index Vesting criteria 14.2% 11.9% 9.4% 9.5% 11.9% 18.0% 9.0% 8.7% 10.1% 12.6% 11.4% 11.7% 102.8% If Brickwork’s TSR as a % of the index’s return is greater than 100%, then all shares subject to the Relative Test will vest 100% Relative vesting in FY 2018 # The Index return has been calculated using the same time periods as the Brickworks absolute TSR above / 76 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 77 / REMUNERATION REPORT 2.7 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. 2.8 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 2018, there were 739 employees participating in the Brickworks Deferred Employee Share Plan and the Brickworks Exempt Employee Share Plan, holding 1,713,363 shares (1.15% of issued capital). 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 Termination payments 3.1 A payment will be made by the Company to an executive 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 executives. It can terminate an executive’s employment on 2 months notice (or payment in lieu of notice) and executives can terminate on 2 months 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 executives 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 executives 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. The terms of the restraint to prevent employees from going to work for a competitor, customer or supplier are 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. NON-EXECUTIVE DIRECTORS 4 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 $1,300,000, and was approved by shareholders at the 2017 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 5 REMUNERATION OF KEY MANAGEMENT PERSONNEL Table of Remuneration to KMP 5.1 The fees payable to non-executive Directors and the remuneration payable to other KMP during the financial year ending 31 July 2018 are disclosed in the following table. Base fees/ salary Non- monetary benefits Post Employment (Super) Total fixed remuneration Short Term Incentive Long Term Incentive Retirement benefit Total Directors R D Millner M J Millner B P Crotty D N Gilham D R Page R J Webster L R Partridge Total Year 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 228,311 224,658 114,155 112,329 125,845 123,836 114,155 112,329 125,845 123,836 121,580 119,635 1,454,911 1,386,348 2,284,802 2,202,971 Other Key Management Personnel R C Bakewell M Kublins M A Ellenor2 Total 2018 2017 2018 2017 2018 2017 2018 2017 749,911 730,348 504,411 491,223 485,911 117,810 1,740,233 1,339,381 – – – – – – – – – – – – 6,354 5,957 6,354 5,957 22,373 19,500 6,185 6,034 11,025 2,708 39,583 28,242 21,689 21,342 10,845 10,671 11,955 11,764 10,845 10,671 11,955 11,764 11,550 11,365 20,089 19,652 98,928 97,229 20,089 19,652 20,089 19,652 20,089 4,940 60,267 44,244 250,000 246,000 125,000 123,000 137,800 135,600 125,000 123,000 137,800 135,600 133,130 131,000 1,481,354 1,411,957 2,390,084 2,306,157 792,373 769,500 530,685 516,909 517,025 125,458 1,840,083 1,411,867 – – – – – – – – – – – – 995,625 859,385 995,625 859,385 519,750 458,417 262,250 255,438 250,000 211,100 1,032,000 924,955 – – – – – – – – – – – – 837,5781 734,0591 837,578 734,059 59,9921 – 316,086 277,892 177,059 145,716 553,137 423,608 – – – – – – – – – – – – – – – – – – – – – – – – 250,000 246,000 125,000 123,000 137,800 135,600 125,000 123,000 137,800 135,600 133,130 131,000 3,314,557 3,005,401 4,223,287 3,899,601 1,372,115 1,227,917 1,109,021 1,050,239 944,084 482,274 3,425,220 2,760,430 Notes: In addition to the total benefits above, these KMPs accrued leave entitlements during the year as follows: L R Partridge: net decrease of $53,651 in accrued leave entitlements (2017: $ $24,670 decrease) ◗ ◗ R C Bakewell: net increase of $49,965 in accrued leave entitlements (2017: $29,437 increase) ◗ M Kublins: net decrease of $2,502 in accrued leave entitlements (2017: $11,411 decrease) ◗ M A Ellenor: net increase of $11,750 in accrued leave entitlements (2017: $12,078 increase) The profit (before tax and excluding significant items) generated by the Property division increased by 4% whereas the total remuneration paid to the Executive General Manager – Property and Development increased by 6%. / 78 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 79 / 1 2 Includes the benefit arising from TSR shares in respect of which the associated hurdles have been met at balance date 31 July. These shares became available subsequent to year-end following approval by the Remuneration Committee. Mark Ellenor is KMP from 1 May 2017 following his appointment as Group General Manager Austral Bricks. REMUNERATION REPORT 5.2 Director and Key Management Personnel shareholdings Held 31 July 2017 Granted as Remuneration Date Granted Remuneration Purchases Shares Disposed of Held 31 July 2018 Directors R D Millner M J Millner B P Crotty D N Gilham D R Page R J Webster L R Partridge DESP* 184,039 Other Key Management Personnel R C Bakewell M Kublins M A Ellenor – 86,707 40,758 5,039,980 5,014,023 15,209 102,268 6,500 15,922 Other 31,500 200 34,509 – – – – – – – – – – – – – – – 15,000 – 2,200 – (226,882) (226,882) – – – – 40,798 4 October 2017 10,000 (53,942) 170,895 DESP* 4,813,098 4,787,141 30,209 102,268 8,700 15,922 Other 41,500 21,762 4 October 2017 19,290 4 October 2017 15,313 4 October 2017 – – – – 21,762 200 (15,763) 101,234 23,509 (15,139) 40,932 – * These shareholdings are 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. 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. ROUNDING OF AMOUNTS The Company has applied the relief available to it under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and accordingly, amounts in the financial report and Directors’ report have been rounded off to the nearest $1,000 where allowed under that instrument. Made in accordance with a resolution of the Directors at Sydney. Dated: 20 September 2018 R.D. MILLNER Director L.R. PARTRIDGE AM Director AUDITOR’S INDEPENDENCE DECLARATION The Directors received an independence declaration from the auditor, EY. A copy has been included on page 83 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 $72,400. The non- audit services were for the provision of other assurance services and accounting advice of a general 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 7.3 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. 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. / 80 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 81 / Urbanstone Commercial Engineered Stone Adelaide Convention Centre 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 Auditor’s Independence Declaration to the Directors of Brickworks Limited 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 As lead auditor for the audit of Brickworks Limited for the financial year ended 31 July 2017, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. Auditor’s Independence Declaration to the Directors of Brickworks Limited Auditor’s Independence This declaration is in respect of Brickworks Limited and the entities it controlled during the financial year. As lead auditor for the audit of Brickworks Limited for the financial year ended 31 July 2017, I declare to the best of my knowledge and belief, there have been: DECLARATION a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. Ernst & Young This declaration is in respect of Brickworks Limited and the entities it controlled during the financial AUDITOR’S INDEPENDENCE DECLARATION year. TO THE DIRECTORS OF BRICKWORKS LIMITED As lead auditor for the audit of Brickworks Limited for the financial year ended 31 July 2018, I declare to the best of my knowledge and belief, there have been: Anthony Jones Partner a) 21 September 2017 Ernst & Young b) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Brickworks Limited and the entities it controlled during the financial year. Anthony Jones Partner 21 September 2017 Ernst & Young ANTHONY JONES Partner 20 September 2018 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 41 Brickworks Limited / Annual Report 2018 / 83 / 41 / 82 / Brickworks Limited / Annual Report 2018 Consolidated Financial STATEMENTS 85 Consolidated Income Statement 86 87 88 89 90 90 92 97 103 105 112 121 Consolidated Statement of Other Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements 1 About this Report 2 Financial Performance 3 Operating Assets and Liabilities 4 5 Capital and Risk Management 6 Group Structure 7 Other Disclosures Income Tax CONSOLIDATED INCOME STATEMENT Revenue Cost of sales Gross profit Other income Distribution expenses Administration expenses Selling expenses Impairment of non-current assets Other expenses Share of net profits of associates and joint ventures Profit before finance cost and income tax Finance costs Profit before income tax Income tax expense Profit after tax Profit after tax attributable to: Shareholders of Brickworks Limited Earnings per share attributable to the shareholders of Brickworks Limited Basic (cents per share) Diluted (cents per share) The above consolidated income statement should be read in conjunction with the accompanying notes. Notes 2.2 2.2 3.2 2.3 2.2 4.1 2.4 2.4 2018 $000 821,084 (567,023) 2017 $000 841,816 (559,099) 254,061 282,717 2,074 (72,164) (31,507) (85,413) (124) (23,272) 200,798 244,453 (14,456) 229,997 (54,555) 1,758 (65,632) (28,948) (77,870) (3,046) (25,631) 173,235 256,583 (12,436) 244,147 (57,937) 175,442 186,210 175,442 186,210 Cents Cents 117.5 117.5 124.9 124.9 / 84 / Brickworks Limited / Annual Report 2018 / 84 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 85 / / 85 / CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME CONSOLIDATED BALANCE SHEET Notes 2018 $000 2017 $000 Profit after tax 175,442 186,210 Other comprehensive income, net of tax Items that may be subsequently reclassified to Income Statement Net gain on available-for-sale financial assets Share of increments /(decrements) in reserves attributable to associates and joint ventures Foreign currency translation Income tax (expense)/benefit relating to these items 4.1 Other comprehensive income/(expense), net of tax 1,181 (1,984) 32 241 (530) – (2,596) 1 779 (1,816) Total comprehensive income 174,912 184,394 Total comprehensive income, attributable to: Shareholders of Brickworks Limited 174,912 184,394 The above consolidated statement of other comprehensive income should be read in conjunction with the accompanying notes. Cash and cash equivalents Receivables Inventories Land held for resale Derivative financial assets Prepayments Total current assets Inventories Available-for-sale financial assets Investments accounted for using the equity method Property, plant and equipment Intangible assets Total non-current assets TOTAL ASSETS Payables Derivative financial liabilities Current income tax liability Provisions Total current liabilities Borrowings Derivative financial liabilities Provisions Deferred income tax liability Total non-current liability TOTAL LIABILITIES NET ASSETS Issued capital Reserves Retained profits TOTAL EQUITY The above consolidated balance sheet should be read in conjunction with the accompanying notes. Notes 5.2 3.1 3.1 3.3 5.7 3.1 5.3 6.3 3.2 3.2 3.1 5.4, 5.7 4.2 3.4 5.4 5.4 3.4 4.2 5.5 5.6 2018 $000 21,167 122,216 207,104 7,383 376 10,227 2017 $000 19,641 133,225 195,720 – – 8,393 368,473 356,979 7,356 1,181 1,771,504 510,493 216,130 7,300 – 1,644,029 498,755 212,840 2,506,664 2,362,924 2,875,137 2,719,903 107,909 501 19,577 49,668 110,102 513 6,184 43,416 177,655 160,215 324,105 1,922 10,494 289,883 311,977 3,549 10,436 265,886 626,404 591,848 804,059 752,063 2,071,078 1,967,840 345,873 309,094 1,416,111 340,814 309,782 1,317,244 2,071,078 1,967,840 / 86 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 87 / CONSOLIDATED STATEMENT OF CHANGES IN EQUITY CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 31 July 2018 Balance at 1 August 2017 Profit after tax Total other comprehensive income – net of tax Net dividends paid Issue of shares through employee share plan Purchase of shares through employee share plan Shares vested to employees Share of associates transferred to outside equity interests Share based payments expense Balance at 31 July 2018 For the year ended 31 July 2017 Balance at 1 August 2016 Profit after tax Total other comprehensive income – net of tax Net dividends paid Issue of shares through employee share plan Purchase of shares through employee share plan Shares vested to employees Share of associates transferred to outside equity interests Share based payments expense Issued capital $000 Reserves $000 Retained profits $000 Total $000 Notes 340,814 – – – (17) (562) 5,638 – – 309,782 – (530) – – – (5,638) – 5,480 1,317,244 175,442 – (63,109) – – – (13,466) – 1,967,840 175,442 (530) (63,109) (17) (562) – (13,466) 5,480 345,873 309,094 1,416,111 2,071,078 336,905 – – 194 (15) (750) 4,480 – – 311,255 – (1,816) – – – (4,480) – 4,823 1,190,325 186,210 – (59,321) – – – 30 – 1,838,485 186,210 (1,816) (59,127) (15) (750) – 30 4,823 2.5 5.5 5.5 5.5 7.1 2.5 5.5 5.5 5.5 7.1 Balance at 31 July 2017 340,814 309,782 1,317,244 1,967,840 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. Notes 2018 $000 2017 $000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Proceeds from land held for resale Interest received Interest and other finance costs paid Dividends and distributions received Income tax paid Net cash from operating activities Cash flows from investing activities Purchases of property, plant and equipment Proceeds from sale of property, plant and equipment Purchase of investments in joint ventures Proceeds from sale or return of investments Purchase of controlled entities, net of cash acquired Net cash used in investing activities Cash flows from financing activities Proceeds from borrowings Repayments of borrowings Dividends paid Net cash used in financing activities Net increase/(decrease) in cash held Cash at the beginning of the financial year Cash at the end of the financial year Reconciliation of net profit attributable to shareholders of Brickworks Limited to net cash from operating activities Profit after tax Adjustments for non-cash items Depreciation and amortisation Non-cash amortisation of borrowing costs Net fair value change on derivatives Impairment of property, plant and equipment Non-cash profit on sale of land held for resale Net losses/(gains) on disposal of property, plant and equipment Net gains on disposal of available-for-sale financial assets Non-cash share based payment expense Share of net profit of investments accounted for using the equity method Net cash provided by operating activities before changes in assets and liabilities Changes in assets and liabilities net of effects from business combinations (Increase)/decrease in receivables (Increase)/decrease in inventories (Increase)/decrease in prepayments (Decrease)/increase in payables (Decrease)/increase in provisions (Decrease)/increase in current and deferred income tax 5.2 909,162 (829,130) – 303 (14,046) 116,152 (11,493) 170,948 (43,467) 1,260 (81,465) 33,250 (13,308) (103,730) 280,000 (268,000) (77,692) (65,692) 1,526 19,641 21,167 811,393 (757,772) 20,994 224 (15,222) 73,246 (17,441) 115,422 (61,358) 1,555 (9,450) 5,750 (3,195) (66,698) 523,000 (510,000) (72,866) (59,866) (11,142) 30,783 19,641 175,442 186,210 29,402 127 (1,510) 124 – 185 (750) 4,901 (84,647) 123,274 11,347 (7,631) (1,750) (1,815) 4,331 43,192 27,851 (247) (2,088) 3,046 (31,287) (876) – 4,059 (99,989) 86,679 (26,414) (6,628) 388 26,804 (5,690) 40,283 / 88 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 89 / Net cash provided by operating activities 170,948 115,422 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. NOTES to the Consolidated Financial Statements 1 ABOUT THIS REPORT This section sets out the basis upon which the financial statements are prepared as a whole. Significant and other accounting policies underpinning the recognition and measurement basis of assets and liabilities are summarised throughout the notes to the financial statements. Other accounting policies are outlined in note 7.6. Statement of compliance and basis of preparation 1.1 The financial statements comprise Brickworks Limited and its controlled entities (the “Group”). Brickworks Limited (ABN 17 000 028 526) is a for profit company limited by shares, incorporated and domiciled in Australia whose shares are publicly traded on the Australian Stock Exchange (ASX code: BKW). The nature of the operations and principal activities of the Group are described in note 2.1. The Group’s consolidated financial statements are general purpose financial statements which: ◗ ◗ ◗ ◗ ◗ ◗ ◗ have been prepared in accordance with Australian Accounting Standards (AASBs), other authoritative pronouncements of the Australian Accounting Standards Board (AASB) and the Corporations Act 2001; comply with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB); incorporate the results of each controlled entity from the date Brickworks Limited obtains control and until such time as it ceases to control an entity; have been prepared on a historical cost basis, except for derivative financial instruments, available-for-sale financial assets and investment property, which have been measured at fair value; are presented in Australian dollars, which is the Group’s functional currency1; adopt all new and amended Accounting Standards and Interpretations issued by the AASB that are relevant to the operations of the Group and effective for reporting periods beginning on or after 1 August 2017; do not early adopt any Accounting Standards and Interpretations that have been issued or amended but are not yet effective as disclosed in Note 7.6. The financial statements were authorised for issue in accordance with a resolution of directors on 20 September 2018. 1.2 Key estimates or judgements In the process of applying the Group’s accounting policies, management has made a number of judgements and applied estimates of future events. The areas involving a higher degree of judgement and complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in the following areas: Note 3.2(a) 3.2(c) 6.3(b) Judgement/Estimate Property, plant and equipment Non-current assets impairment assessment Fair value – investment property Comparative information 1.3 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 balance sheet. 1.4 Notes to the consolidated financial statements The notes are organised into the following sections: 2 3 4 5 6 7 Financial Performance Provides the information that is considered most relevant to understanding the financial performance of the Group. Operating Assets and Liabilities Provides a breakdown of individual line items in the balance sheet that are considered most relevant to users of the financial report. Income Tax Provides the information considered most relevant to understanding the taxation treatment adopted by the Group during the financial year. Capital and Risk Management Provides information about the capital management practices of the Group and its exposure to various financial risks. Group Structure Other Explains significant aspects of the Brickworks’ group structure, including its controlled entities and equity accounted investments in which the Group has an interest. When applicable, it also provides information on business acquisitions made during the year. Provides information on items which require disclosure to comply with AASBs and other regulatory pronouncements and any other information that is considered relevant for the users of the financial report which has not been disclosed in other sections. 1 All values are rounded to the nearest thousand dollars or in certain cases, the nearest dollar, in accordance with the Australian Securities and Investments Commission (ASIC) Corporations Instrument 2017/191. / 90 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 91 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2 FINANCIAL PERFORMANCE This section provides the information that is considered most relevant to understanding the financial performance of the Group, including profitability of its operating segments, significant items, nature of its revenues and expenses and dividends paid to the shareholders. 2.1 Segment reporting The Group operates predominantly within Australia, with some clay and timber product exported to other countries. Total revenue from sales outside of Australia in the 12 months ended 31 July 2018 was $14.5 million (2017: $15.9 million). The carrying value of non-current assets held outside of Australia at 31 July 2018 was $7.1 million (2017: $7.4 million). Management identified the following reportable business segments: Building Products Property Investments Manufacture of vitrified clay, concrete and timber products used in the building industry. Major product lines include bricks, masonry blocks, pavers, roof tiles, floor tiles, precast walling and flooring panels, fibre cement walling panels and timber products used in the building industry. Utilisation of opportunities associated with land owned by the Group, including the sale of property and investment in property trusts. Holds investments in the Australian share market, both for dividend income and capital growth, and includes the investment in Washington H. Soul Pattinson and Company Limited (WHSP). BUILDING PRODUCTS PROPERTY INVESTMENTS CONSOLIDATED 2018 $’000 2017 $’000 2018 $’000 2017 $’000 2018 $’000 2017 $’000 2018 $’000 2017 $’000 REVENUE Revenue from sales to external customers RESULT Segment EBITDA Depreciation and amortisation 819,980 763,338 801 78,254 303 224 821,084 841,816 105,352 (29,402) 92,887 (27,851) 93,979 – 90,588 – 123,498 – 103,097 – 322,829 (29,402) 286,572 (27,851) BUILDING PRODUCTS PROPERTY INVESTMENTS CONSOLIDATED 2018 $’000 2017 $’000 2018 $’000 2017 $’000 2018 $’000 2017 $’000 2018 $’000 2017 $’000 OTHER Share of profit of an associate and a joint venture Carrying value of investments accounted for by the equity method Acquisition of non-current segment assets Non-cash expenses other than depreciation and amortisation 260 629 100,359 43,598 100,179 129,008 200,798 173,235 15,798 6,997 485,657 403,843 1,270,049 1,233,189 1,771,504 1,644,029 65,275 62,949 72,965 11,054 43,475 58,316 – – – – – – 138,240 74,003 43,475 58,316 The Group has a large number of customers to which it provides products, with no individual customers that account for more than 10% of external revenues. RECOGNITION AND MEASUREMENT 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 (CODM) to effectively allocate Group resources and assess performance and for which discrete financial information is available. Management identifies the Group’s operating segments based on the internal reports that are reviewed and used by the Board of Directors in their role as the CODM. The operating segments are identified based on the consideration of the nature of products sold and services provided. Discrete information about each of these business divisions is presented to the Board of Directors on a recurring basis. A number of operating segments have been aggregated to form the Building Products segment. The accounting policies used by the Group in reporting segments internally are the same as those disclosed in the significant accounting policies, with the exception that significant items (i.e. those items which by their size and nature or incidence are relevant in explaining financial performance) are excluded from trading profits. This approach is consistent with the manner in which results are reported to the CODM. Segment EBIT 75,950 65,036 93,979 90,588 123,498 103,097 293,427 258,721 Significant items Unallocated expenses Significant items Borrowing costs Other unallocated expenses Profit before income tax Income tax expense1 Profit after income tax ASSETS Segment assets Unallocated assets Total assets LIABILITIES Segment liabilities Borrowings Other unallocated liabilities Total liabilities 1,110,480 1,082,031 493,040 403,843 1,271,617 1,234,029 161,043 157,561 1,587 2,473 208,922 198,527 (35,308) (14,456) (13,666) 10,294 (12,436) (12,432) 229,997 (54,555) 244,147 (57,937) 175,442 186,210 2,875,137 – 2,719,903 – 2,875,137 2,719,903 371,552 324,105 108,402 358,561 311,977 81,525 804,059 752,063 1 Included in the income tax expense is tax expense related to significant items amounting to $12,980,000 (2017: income tax expense of $20,509,000). Significant one-off transactions of associate1 Restructuring activities 2 Costs on commissioning of manufacturing facilities 3 Net legal & advisory costs 2 4 Costs related to business acquisitions 2 Write-down of property, plant and equipment to recoverable value 5 Significant items before income tax Income tax benefit/(expense) on significant items 6 Income tax benefit/(expense) arising from the carrying value of the investment in the associate (WHSP) 6 Total income tax benefit/(expense) on significant items Significant items after income tax 1 2 3 4 5 6 Disclosed in ‘Share of net profits of associates’ line on the Income Statement. Disclosed in ‘Other expenses’ line on the Income Statement. Disclosed in ‘Cost of sales’ line on the Income Statement. The comparative period amount is presented net of recovery of legal costs from Perpetual Limited. Disclosed in ‘Impairment of non-current assets’ line on the Income Statement. Disclosed in ‘Income Tax Expense’ line on the Income Statement. 2018 $000 (22,266) (5,467) (4,607) (2,056) (912) – 2017 $000 26,135 (11,907) (1,034) 139 – (3,039) (35,308) 10,294 3,913 (16,893) 4,753 (25,262) (12,980) (20,509) (48,288) (10,215) / 92 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 93 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2.1 Segment reporting (continued) RECOGNITION AND MEASUREMENT Significant items are those which by their size and nature or incidence are relevant in explaining the financial performance of the Group compared to the prior year. 2.2 Revenues and expenses (a) Revenue and other income Significant items 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 Profit on disposal of available-for-sale financial assets Proceeds from insurance Net fair value gain on revaluation of FX derivatives Property development income Net gain on disposal of property, plant and equipment Other items 2018 $000 2017 $000 818,940 – 762,337 77,395 818,940 839,732 303 1,320 521 224 1,338 522 821,084 841,816 750 495 384 191 – 254 – – – 808 876 74 Total other income 2,074 1,758 RECOGNITION AND MEASUREMENT Revenue is recognised when the significant risks and rewards of ownership of the items sold have passed to the buyer and the amount of revenue can be measured reliably. Revenue is measured at the fair value of the consideration received or receivable net of discounts, allowances and goods and services tax (GST). Revenue from sale of goods is recognised upon delivery, unless a contract involves installation, in which case revenue is recognised by reference to the stage of completion of a contract in progress. Stage of completion is measured by reference to the number of units installed as a percentage of the total number of units determined under the contract with the customer. Revenue from the sale of land held for resale 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. Dividend revenue is recognised when the right to receive a dividend has been established. Dividends received from associates and joint ventures are accounted for in accordance with the equity method of accounting. Rental income from investment properties is accounted for on a straight-line basis over the term of the rental contract. Net gain/(loss) on disposal of property, plant and equipment is recognised when the risks and rewards have been transferred and the Group does not retain either continuing managerial involvement to the degree usually associated with ownership, or effective control over the assets sold. The gain is measured as a difference between the amount receivable under the sale contract and the carrying value of the disposed asset. (b) Expenses Specific Expense Disclosures Wages and salaries Defined contribution superannuation expense Share based payments expense Other Employee benefits expense Research and development expenses Operating lease expense Depreciation Amortisation Depreciation and amortisation Net loss on disposal of property, plant and equipment Interest and finance charges paid/payable Net fair value change on interest rate swaps Total finance costs Notes 3.2 3.2 5.4 2018 $000 161,455 12,050 5,481 9,398 2017 $000 155,896 11,681 4,823 7,572 188,384 179,972 1,777 26,611 29,350 52 29,402 185 15,582 (1,126) 14,456 1,498 26,074 27,827 24 27,851 – 14,707 (2,271) 12,436 RECOGNITION AND MEASUREMENT Employee benefits expense includes salaries and wages, leave entitlements (refer note 3.4), share based payments and other employee entitlements. The expense is charged against profit in their respective expense categories when services are provided by employees, except for share based payment expense which is recognised based on the vesting period (refer note 7.1). Operating lease expense expense payments made under operating leases (net of any incentives received by the lessor) are expensed on a straight- line basis over the period of the lease. Operating leases are those where the lessor effectively retains substantially all the risks and benefits incidental to ownership of the leased asset. Finance costs expense relates primarily to the interest on interest bearing liabilities and is recognised in the period in which they are incurred, except when they are included in the costs of qualifying assets in which they are capitalised up to the point that the asset is ready for its intended use. 2.3 Share of net profits of associates and joint ventures Share of net of profits of associates Share of net profits of joint ventures Notes 6.3 (a) 6.3 (b) 2018 $000 100,179 100,619 2017 $000 129,008 44,227 200,798 173,235 RECOGNITION AND MEASUREMENT Share of net profits of associates and joint ventures is accounted for using the equity method. The consolidated income statement reflects the Group’s share of the results of associates and joint ventures. Accounting policies applied with respect to the Group’s investments in associates and joint ventures are further outlined in Note 6.3. / 94 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 95 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 2.4 Earnings per share (EPS) 3 OPERATING ASSETS AND LIABILITIES Profit after tax attributable to shareholders of Brickworks Limited ($’000) Weighted average number of ordinary shares used in the calculation of basis and diluted EPS (thousand)1 Basic EPS (cents per share) Diluted EPS (cents per share) 2018 $000 175,442 149,354 Cents 117.5 117.5 2017 $000 186,210 149,040 Cents 124.9 124.9 RECOGNITION AND MEASUREMENT Basic earnings per share (EPS) is calculated by dividing the profit attributable to shareholders of Brickworks Limited, after eliminating the effect of earnings related to the parent entity’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 year. Diluted EPS adjusts the figures used in the determination of basic EPS to reflect the after income tax effect of interest and other finance 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 these 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. 2.5 Dividends and franking credits Dividends declared in each financial year – cents per share Type of dividend (fully franked) Cents per share 2016 Final 2017 Interim 2017 Final 2018 Interim 2018 Final 2 32.0 17.0 34.0 18.0 36.0 Total amount $’000 Date paid/ payable 47,714 30 Nov 16 25,348 2 May 17 50,799 29 Nov 17 26,893 1 May18 53,787 28 Nov 18 58 48 38 28 18 8 2017 Final ordinary dividend (PY: 2016) 2018 Interim ordinary dividend (PY: 2017) Group’s share of dividend received by associated company Franking account balance on a tax paid basis 26.5 30.0 32.0 34.0 36.0 14.0 2014 15.0 2015 16.0 17.0 18.0 2016 2017 2018 Interim ordinary dividend Final ordinary dividend 2018 $000 50,799 26,893 (14,583) 63,109 147,412 2017 $000 47,714 25,348 (13,741) 59,321 145,449 The impact on the franking account of dividends resolved to be paid after 31 July 2018, but not recognised as a liability, will be a reduction in the franking account of $23.1 million (2017: $21.7 million). 1 2 There were no dilutive potential ordinary shares as at 31 July 2018 (2017: nil). The final dividend for the 2018 financial year has not been recognised as a liability in this financial report because it was resolved to be paid after 31 July 2018. The amounts disclosed as recognised in 2018 are the final dividend in respect of the 2017 financial year and the interim dividend in respect of the 2018 financial year. This section provides further information about the Group’s operating assets and liabilities, including its working capital, property, plant and equipment, intangible assets and provisions. 3.1 Working capital (a) Receivables Trade receiva bles Provision for doubtful debts Net trade receivables Other debtors Movement in provision for doubtful debts Opening balance Trade debts provided Trade debts written-off Closing balance Receivables past due Receivables past due but not impaired Past due 0-30 days Past due 30+ days 2018 $000 102,820 (764) 102,056 20,160 2017 $000 113,978 (804) 113,174 20,051 (b) Inventories Current Raw materials and stores Work in progress Finished goods 2018 $000 2017 $000 41,802 21,112 144,190 38,002 19,899 137,819 122,216 133,225 Total 207,104 195,720 Non-current Raw materials 7,356 7,300 Write-down of inventories recognised as an expense for the 2018 financial year amounted to $3.972 million (2017: $6.510 million). (c) Current payables Trade payables and accruals 107,909 110,102 Average terms on trade payables are 30 days from statement. 804 1,030 (1,070) 764 3,098 5,040 8,138 856 1,885 (1,937) 804 5,499 5,432 10,931 RECOGNITION AND MEASUREMENT Trade receivables are initially recognised at the value of the invoice issued to the customer and subsequently at the amount considered recoverable from the customer (net of provisions for doubtful debts). Inventories are measured at: ◗ Raw materials: the lower of actual cost and net realisable value ◗ Finished goods and work in progress: the lower of cost and net realisable value. The cost of manufactured products includes direct materials, direct labour and an appropriate portion of variable and fixed overheads. Fixed overheads are applied on the basis of normal production capacity. Net realisable value represents the estimated selling price less all estimated costs of completion and the estimated costs necessary to make the sale. Trade and other payables are recognised when the Group becomes obliged to make future payments resulting from the purchase of goods and services. Payables are stated at amortised cost. / 96 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 97 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3.2 Property, plant and equipment and intangible assets (b) Intangible assets (a) Property, plant and equipment LAND AND BUILDINGS PLANT AND EQUIPMENT TOTAL Notes 2018 $000 2017 $000 2018 $000 2017 $000 2018 $000 2017 $000 Cost Accumulated depreciation and impairment losses 305,818 313,081 587,052 540,345 892,870 853,426 (54,361) (50,548) (328,016) (304,123) (382,377) (354,671) Net carrying amount 31 July 251,457 262,533 259,036 236,222 510,493 498,755 Net carrying amount at 1 August 262,533 278,698 236,222 209,756 498,755 488,454 Additions 1,823 7,153 Acquisitions through business combinations 6.5 Disposals of subsidiaries Disposals Transfers to land held for resale 3.3 Impairment losses Depreciation expense – – (1,248) (7,383) – – – (28) (18,718) – 41,644 8,351 (1,778) (197) – (124) 54,205 43,467 61,358 40 – (651) (827) (3,046) 8,351 (1,778) (1,445) (7,383) (124) 40 – (679) (19,545) (3,046) (4,268) (4,572) (25,082) (23,255) (29,350) (27,827) Net carrying amount 31 July 251,457 262,533 259,036 236,222 510,493 498,755 As at 31 July 2018 capital works in progress, disclosed as part of plant and equipment, amounted to $36.7 million (2017: $61.9 million). RECOGNITION AND MEASUREMENT Property, plant and equipment is measured at cost less depreciation and impairment losses. 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 reporting period in which they are incurred. Depreciation Depreciation commences on assets when it is deemed they are capable of operating in the manner intended by management. Assets are depreciated over their estimated useful lives, except for leasehold improvements which are depreciated over the shorter of their estimated useful life and the remaining lease period. Depreciation is charged to the income statement based on the rates indicated below. Freehold land Buildings not depreciated 2.5%-4.0% prime cost Plant and equipment 4.0%-33.0% prime cost, 7.5%-22.5% diminishing value Carrying amounts are assessed for impairment whenever there is an indication they may be impaired. If the carrying amount of an asset is greater than its estimated recoverable amount, the carrying amount is written down to its recoverable amount. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Estimation of useful lives of assets has been based on historical experience. The condition of assets is assessed at least annually and considered against the remaining useful lives. Adjustments to useful lives are made when considered necessary. Goodwill $’000 Timber access rights $’000 Notes Cost Accumulated amortisation and impairment losses Net carrying amount 31 July 2018 Net carrying amount 1 August 2017 Additions Disposals Amortisation expense Net carrying amount 31 July 2018 Cost Accumulated amortisation and impairment losses Net carrying amount 31 July 2017 Net carrying amount 1 August 2016 Additions Amortisation expense Balance at 31 July 2017 6.5 6.5 6.5 281,801 (77,742) 204,059 203,393 1,166 (500) – 204,059 292,609 (89,216) 203,393 200,153 3,240 – 203,393 8,656 (8,656) – – – – – – 8,656 (8,656) – – – – – Brand names $’000 11,062 – Other $’000 1,259 (250) Total $’000 302,778 (86,648) 11,062 1,009 216,130 9,000 2,062 – – 447 614 – (52) 212,840 3,842 (500) (52) 11,062 1,009 216,130 9,000 – 9,000 9,000 – – 9,000 646 (199) 447 471 – (24) 447 310,911 (98,071) 212,840 209,624 3,240 (24) 212,840 RECOGNITION AND MEASUREMENT Goodwill represents the excess of the cost of acquisition over the fair value of the identifiable assets and liabilities acquired. Goodwill is not amortised, but tested for impairment annually and whenever there is an indicator of impairment. Brand names obtained through acquiring businesses are measured at fair value at the date of acquisition. The brand names have been assessed as having an indefinite useful life, as the brands have been part of the building products industry for a long time and the Group intends to continue trading under these brands. Other intangible assets are valued at cost on acquisition. If the intangible is considered to have an indefinite useful life, it is carried at cost less any impairment write-downs. If the intangible has a definite life, it is amortised on a straight-line basis over the expected future life of that right. Goodwill and intangible assets with indefinite useful lives are tested for impairment annually and whenever there is an indicator of impairment. For impairment testing purposes, these assets are allocated to the Group’s Cash Generating Units (‘CGUs’). Impairment is determined by assessing the recoverable amount of the CGU to which the goodwill relates. / 98 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 99 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3.2 Property, plant and equipment and intangible assets (continued) (c) Impairment assessment (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. National divisions within the Building Products operating segment are CGUs which represent the lowest level at which the goodwill is monitored for internal reporting purposes. At 31 July 2018 the following CGUs representing business operations have significant allocations of goodwill: ◗ Austral Bricks $152.0 million (2017: $152.0 million) ◗ Austral Masonry $20.0 million (2017: $18.7 million) ◗ Bristile Roofing $32.1 million (2017: $32.1 million) For the purpose of impairment assessment outlined below brand names with indefinite useful lives with a carrying value of $11.1 million (2017: $9.0 million) have been allocated to the following CGUs, which form part of the Building Products segment: ◗ Austral Bricks $9.0 million (2017: $9.0 million) ◗ Austral Masonry $2.1 million (2017: $nil) Each of these CGUs have been valued based on value-in-use methodology, using the assumptions outlined in point (ii) below. (ii) Key assumptions SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Management is required to make significant estimates and judgements in assessing the carrying amount of non-financial assets for impairment. 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 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. Calculation method 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. VIU calculations use cash flows projections, inclusive of working capital movements, and are based on financial projections approved by the Board of Directors 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 predominantly operates in. Sales volumes 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 and commencements. Management has assessed the reported forecast housing construction activity data from sources such as BIS Shrapnel and Housing Industry Association (HIA) over the budget period. Sales prices Management expects to obtain 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 the supply of product approximates demand. Costs Costs are calculated taking into account historical gross margins, known cost increases, and estimated inflation rates over the period that are consistent with the locations in which the CGUs operate. Terminal value earnings Terminal value earnings are based on average earnings over the 5-year forecast period. Long-term growth rates Long-term growth rates used in cash flow valuation reflect the lower of 2.5% (2017: 2.5%) and the average 10-year historical growth rates for states in which CGUs operate (sourced from the Australian Bureau of Statistics). The long-term growth rates applied in VIU calculations are outlined below. ◗ Austral Bricks : 2.50% (2017: 2.50%) ◗ Bristile Roofing: 2.50% (2017: 2.50%) ◗ Austral Masonry 2.50% (2017: 2.50%) Discount rate Management uses an independent external advisor to calculate the appropriate discount rate applied consistently across all CGUs. For 2018, the pre-tax discount rate was 12.13% (2017: 12.13%). The table below illustrates the impact of key assumptions on the goodwill impairment assessment for those CGUs, where the carrying amount approximates the recoverable amount. Bristile Roofing CGU Austral Masonry CGU The excess of CGUs recoverable amount over its carrying value ($ millions) 15.0 11.0 Change in the assumption required for the model to break even Reduction in average EBIT growth FY18-FY23 required for the model to break even Reduction in long-term growth rate (LTGR) for the model to break even Increase in post-tax WACC required for the model to break even 161 basis points 171 basis points 132 basis points 104 basis points 81 basis points 64 basis points There are no other CGUs 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. 3.3 Land held for resale Current Land held for resale 2018 $000 2017 $000 7,383 – In May 2018 the Group entered into a Deed of Call Option over its property at Punchbowl. The option provides the buyer with the option to purchase the site for $41.0 million and includes a 10-year (plus an option to extend for another 10 years) lease back to the Group for its two-hectare specialised brick plant. The option was subsequently exercised in September 2018 (refer Note 7.5). RECOGNITION AND MEASUREMENT Land is classified as land held for resale 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 net realisable value. Cost includes cost of acquisition and development. / 100 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 101 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 3.4 Provisions 4 INCOME TAX Notes 6.5 6.5 Employee benefits $’000 40,425 35,081 1,778 (31,438) 45,846 41,296 4,550 45,846 41,574 35,191 121 (36,461) 40,425 36,418 4,007 40,425 Remediation $’000 7,361 188 – (324) 7,225 1,281 5,944 7,225 8,735 775 – (2,149) 7,361 932 6,429 7,361 Infrastructure costs $’000 Workers compensation $’000 1,561 – – (657) 904 904 – 904 4,262 – – (2,701) 1,561 1,561 – 1,561 2,646 2,804 – (2,054) 3,396 3,396 – 3,396 3,693 2,786 – (3,833) 2,646 2,646 – 2,646 Other $’000 1,859 1,430 200 (698) 2,791 2,791 – 2,791 1,157 1,376 – (674) 1,859 1,859 – 1,859 Total $’000 53,852 39,503 1,978 (35,171) 60,162 49,668 10,494 60,162 59,421 40,128 121 (45,818) 53,852 43,416 10,436 53,852 Opening balance 1 August 2017 Recognised/(reversed) Business combinations Settled Closing balance 31 July 2018 Current Non-current Total Opening balance 1 August 2016 Recognised/(reversed) Business combinations Settled Closing balance 31 July 2017 Current Non-current Total RECOGNITION AND MEASUREMENT Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that settlement will be required and the obligation can be reliably measured. The amount recognised as a provision represents the best estimate of the consideration required to settle the present obligation at reporting date and uncertainties surrounding the obligation. Provision for employee benefits is recognised in respect of the 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. Estimated future payments include related on-costs, reflect assumptions regarding future wage and salary levels, employee departures and periods of service, and have been discounted using market yields on Australian high quality corporate bond rates. Provision for remediation is 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. 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. Provision for infrastructure costs is recognised for the Group’s obligation for the estimated costs of completed infrastructure works in relation to certain properties. The timing of the future outflows is expected to occur within the next financial year. Provision for workers compensation relates to the Group’s self insurance for workers compensation program. The subsidiaries of the Group are licenced self insurers in New South Wales, Victoria, Western Australia and Australian Capital Territory for workers compensation insurance. The provision is determined with reference to independent actuarial calculations provided annually 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 satisfied over a number of future financial periods. This section provides the information considered most relevant to understanding the taxation treatment adopted by the Group during the financial year. TAX CONSOLIDATION Brickworks Limited and its wholly-owned Australian subsidiaries have formed an income tax consolidated group (Tax Group) under the Tax Consolidation regime. Brickworks Limited is the head entity of that group. The Tax 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 Tax 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 considered remote. Tax expense, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the Tax Group are recognised in the separate financial statements of the members of the group. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses and tax credits of the members of the group are recognised by the parent company (as head entity of the Tax Group). Notes 4.2 4.1 Income tax expense Profit before income tax Prima facie tax expense calculated at 30% (Decrease) / increase in income tax expense due to: Franked dividend income Share of net profits of associates Other non-allowable items Overprovided in prior years R&D tax incentive Utilisation of carried forward capital losses Income tax expense attributable to profit Current tax expense Deferred tax expense relating to movements in deferred tax balances Overprovided in prior years Utilisation of carried forward capital losses Total income tax expense on profit Income tax expense /(benefit) recognised directly in equity Tax effect on movements in reserves attributable to equity accounted investments Tax effect on movements in reserves attributable to available-for-sale financial instruments Income tax expense /(benefit) recognised in other comprehensive income Tax effect on the share of associates transferred to outside equity interests Total income tax expense / (benefit) recognised directly in equity 2018 $000 229,997 68,999 (16,873) 3,712 1,483 (463) (2,302) (1) 54,555 25,698 29,321 (463) (1) 54,555 (170) (71) (241) (5,771) (6,012) 2017 $000 244,147 73,244 (16,259) 2,857 909 (143) (2,658) (13) 57,937 14,781 43,312 (143) (13) 57,937 (779) – (779) 13 (766) / 102 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 103 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4.2 Income tax assets and liabilities (a) Current income tax liability Income tax payable 2018 $000 19,577 2017 $000 6,184 RECOGNITION AND MEASUREMENT Current tax represents the amount expected to be paid or recovered in relation to taxable income for the financial year measured using 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 it is unpaid (or refundable). (b) Deferred income tax liability BALANCE SHEET MOVEMENT THROUGH INCOME STATEMENT Equity accounted investments in associates and joint ventures Property, plant and equipment Provisions Tax losses and rebates Intangibles Other 2018 $000 296,635 6,790 (17,946) (159) 3,921 642 2017 $000 271,561 7,046 (15,490) (193) 3,086 (124) Net deferred income tax liability 289,883 265,886 2018 $000 30,048 (257) (1,910) – 31 1,409 29,321 2017 $000 44,327 (3,287) 1,802 – 49 421 43,312 RECOGNITION AND MEASUREMENT Deferred tax is recognised based on the amounts calculated using the balance sheet liability method in respect of temporary differences between the carrying values of assets and liabilities for financial reporting and tax purposes. The tax cost base of assets is determined based on management’s intention for that asset on either use or sale as appropriate. No deferred income tax is recognised for a taxable temporary difference arising from an investment in a subsidiary, associate or a 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 income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset or liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted by reporting date. 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. The amount of benefit brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income tax 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. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Deferred income 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. 5 CAPITAL AND RISK MANAGEMENT This section provides information about the Group’s capital management and its exposure to various financial risks. The Group’s activities expose it to a variety of financial risks: liquidity risk, market risk (including interest rate risk and foreign exchange risk) and credit risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance where the Group’s exposure is material. The Board of Directors approves written principles for overall risk management, as well as policies covering specific areas such as interest rate risk, foreign exchange risk, credit risk and the use of derivative financial instruments. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The Group holds the following financial assets and liabilities at balance date: Financial assets Cash and cash equivalents Receivables Available-for-sale financial assets Derivative financial assets Total financial assets Financial liabilities Trade and other payables Borrowings Derivative financial liabilities Total financial liabilities Notes 5.2 3.1(a) 5.3 5.7(a) 2018 $000 2017 $000 21,167 122,216 1,181 376 19,641 133,225 – – 144,940 152,866 3.1(c) 5.4(a) 5.4(c), 5.7(a) 107,909 325,000 2,423 110,102 313,000 4,062 435,332 427,164 RECOGNITION AND MEASUREMENT Assets and liabilities of the Group that are measured at fair value are grouped into Levels 1 to 3 based on 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. A financial liability is derecognised when the obligation under the liability has been discharged, cancelled or expires, with any resulting gain recognised in the income statement. Capital management .5.1 The Group manages its capital to ensure that all entities in the Group can continue as going concerns while maximising the return to shareholders through an appropriate balance of net debt and total equity. The Group’s capital structure consists of debt disclosed in note 5.4, cash and cash equivalents (refer note 5.2), issued capital (note 5.5), reserves (note 5.6) and retained profits. The capital structure can be influenced by the level of dividends paid, issuance of new shares, returns of capital to shareholders, or adjustments in the level of borrowings through the acquisition or sale of assets. The Group’s 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 represents total drawn at the reporting date (refer note 5.4) less cash and cash equivalents (note 5.2) and total equity includes contributed equity (note 5.5), reserves (note 5.6) and retained earnings. The Group’s strategy during the year was to maintain the total debt to capital employed (at a consolidated level) below a loan facilities banking covenant limit of 40% imposed per the syndicated loan facility agreement disclosed in note 5.4 (2017: 40%). / 104 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 105 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5.1 Capital management (continued) Net debt Total equity Capital employed Net debt to capital employed 5.2 Cash and cash equivalents Cash on hand 2018 $000 2017 $000 303,833 2,071,078 293,359 1,967,840 2,374,911 2,261,199 12.8% 13.0% 2018 $000 2017 $000 21,167 19,641 RECOGNITION AND MEASUREMENT Cash and cash equivalents comprise cash at bank and in hand and short-term deposits. For the purpose of the statement of cash flows, cash and cash equivalents is equal to the balance disclosed in the balance sheet. 5.3 Available-for-sale financial assets The Group’s available-for-sale financial assets represent listed equities publicly traded on the Australian Stock Exchange. The fair value of these investments is based on quoted market prices, being the last sale price, at the reporting date. These are categorised as “Level 1” in the fair value hierarchy. Trading equities - Listed Total 5.4 Borrowings (a) Available loan facilities Current Interest-bearing loans Unamortised borrowing costs Non-current Interest-bearing loans Unamortised borrowing costs Market value 31 Jan 2018 $000 31 Jul 2017 $000 1,181 1,181 – – 2018 $000 2017 $000 – – – – – – 325,000 (895) 313,000 (1,023) 324,105 311,977 An unsecured $355 million variable interest rate syndicated loan facility was established in December 2016. As at 31 July 2018 the facility was drawn to $208.0 million (2017: $275.0 million). In addition, the Group has a $100.0 million working capital facility which at 31 July 2018 was drawn to $17.0 million (2017: $38.0 million). On 20 February 2018 the Group entered into a $100 million syndicated Institutional Term Facility (ITL). The ITL facility was fully drawn as at 31 July 2018 and consists of 3 Tranches as follows: ◗ ◗ ◗ Facility A – $25.0 million, fixed interest rate Facility B – $35.0 million, fixed interest rate Facility C – $40.0 million, floating interest rate. The ITL facility is guaranteed by all members of the cross-guarantor group and includes financial covenants consistent with the existing Syndicated Debt Facility. Except for Facility A and B of the ITL facility, interest on the Group’s loan facilities is payable based on floating rates determined with reference to the BBSY1 bid rate at each maturity. Further information with regards to management of the Group’s interest rate risk is disclosed in Note 5.4(c). The fair value of interest-bearing loans at 31 July 2018 approximated their carrying amount (2017: carrying amount) . RECOGNITION AND MEASUREMENT Borrowings are recorded initially at fair value of the consideration received, net of transaction costs. Subsequent to initial recognition, borrowings are 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. When 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. (b) Management of liquidity risk The 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. The Group’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due. At 31 July 2018 the Group had $230.0 million of unused bank facilities (2017: $142.0 million). These facilities are subject to various terms and conditions, including various negative pledges regarding the operations of the Group, and covenants that must be satisfied at specific measurement dates. A critical judgement is that the Group will continue to meet its criteria under these banking covenants to ensure that there is no right for the banking syndicate to require settlement of the facility in the next 12 months. The maturity profile of the Group’s loan facilities at 31 July 2018 is outlined below. Facility Tranche A Tranche B Tranche C Syndicated loan facility Facility A-ITL Facility B-ITL Facility C-ITL Syndicated ITL facility Working capital facility Total loan facilities Limit ($m) 140 129 86 355 25 35 40 100 100 555 Drawn ($m) Available ($m) 122 – 86 208 25 35 40 100 17 325 18 129 – 147 – – – – 83 230 Maturity date December 2020 December 2021 December 2019 February 2028 February 2026 February 2026 December 2019 1 The Bank Bill Swap Bid Rate (BBSY) is a benchmark interest rate quoted by Reuters Information Service. / 106 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 107 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5.4 Borrowings (continued) The table below analyses the undiscounted value of the Group’s financial liabilities and derivatives based on the remaining period at the reporting date to maturity. For bank facilities the cash flows have been estimated using interest rates applicable at the end of the reporting period. Sensitivity analysis At 31 July 2018, if interest rates had been +/- 1% per annum throughout the year, with all other variables being held constant, the profit after income tax for the year would have been $1.54 million higher or lower respectively (2017: $1.36 million higher/lower). There would not have been any other significant impacts on equity. 1 year or less $’000 1 to 5 years $’000 5 to 10 years $’000 Total $’000 5.5 Contributed equity Contributed equity Ordinary shares, fully paid Treasury shares Movement in ordinary issued capital Opening balance 1 August Issue of shares through employee share plan Share issue costs 2018 Number of shares 2017 Number of shares 2018 $’000 2017 $’000 149,408,331 (838,147) 149,105,838 (869,044) 357,387 (11,514) 353,234 (12,420) 345,873 340,814 149,105,838 302,493 – 148,737,138 368,700 – 353,234 4,170 (17) 348,231 5,018 (15) Closing balance 31 July 149,408,331 149,105,838 357,387 353,234 Movement in treasury shares Opening balance 1 August Issue of shares through employee share plan Purchase of shares through employee share plan Shares allocated as part of Dividend Election Plan Shares vested to employees (869,044) (302,493) (55,096) – 388,486 (805,912) (368,700) (55,096) 14,402 346,262 (12,420) (4,170) (562) – 5,638 (11,326) (5,018) (750) 194 4,480 Closing balance 31 July (838,147) (869,044) (11,514) (12,420) RECOGNITION AND MEASUREMENT Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Treasury shares represent own equity instruments which are issued or acquired for later payment as part of employee share-based payment arrangements and 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. The accounting policy applied in respect of share-based payments is disclosed in Note 7.1. 31 July 2018 Trade and other payables Borrowings Derivatives 31 July 2017 Trade and other payables Borrowings Derivatives 107,909 13,544 501 – 258,792 1,491 – 110,996 431 107,909 383,332 2,423 121,954 260,283 111,427 493,664 110,102 13,905 513 – 347,480 3,549 124,520 351,029 – – – – 110,102 361,385 4,062 475,549 (c) Management of interest rate risk The Group’s main interest rate risk arises from fluctuations in the BBSY bid rate relating to bank borrowings. Where appropriate, the Group uses interest rate derivatives to eliminate some of the risk of movements in interest rates on borrowings, and increase certainty around the cost of borrowed funds. Interest rate swaps The Group has entered into interest rate swaps contracts which allow the Group to swap floating rates into an average fixed rate of 3.06% (2017: 3.47%). The contracts require settlement of net interest receivable or payable usually around every 90 days. The settlement dates are aligned with the dates on which interest is payable on the underlying bank borrowings and are brought to account as an adjustment to borrowing costs. The fair value of interest rate swaps is outlined below. During the financial year ended 31 July 2018 the Group entered into new interest swaps arrangements with a notional value of $125.0 million. These swaps will replace the existing arrangements due to expire over the next 24 months. NOTIONAL PRINCIPAL AMOUNT AVERAGE INTEREST RATE FAIR VALUE 2018 $000 75,000 125,000 50,000 2017 $000 – 125,000 – 250,000 125,000 2018 % 3.49 2.89 2.86 2017 % – 3.47 – – 2018 $000 501 1,491 431 2,423 2017 $000 3,549 – 3,549 Less than 1 year 1 to 3 years 3 to 5 years Total The fair value of these derivatives is 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. RECOGNITION AND MEASUREMENT 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 the nature of the item being hedged. The Group designates certain derivatives as either fair value or cash flow hedges. Changes in the fair value of derivatives that are designated as qualifying 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. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity reserves. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts deferred in equity are recycled in the income statement when the hedged item is recognised in the income statement. Changes in the fair value of derivatives which do not qualify for hedge accounting are recognised immediately in the income statement. / 108 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 109 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5.6 Reserves Capital Profits Reserve $’000 Equity Adjust- ments Reserve $’000 General Reserve $’000 Foreign Currency Reserve $’000 Share- based Payments Reserve $’000 Invest- ments revaluation reserve $’000 Associates and JVs Reserve $’000 Notes Total $’000 Balance at 1 August 2017 88,102 (19,020) 36,125 (1,495) 5,695 – 200,375 309,782 Other comprehensive income for the year Shares vested to employees Share based payments expense 7.1 7.1 – – – 241 – – – – – 32 – – – 1,181 (1,984) (5,638) 5,480 – – – – (530) (5,638) 5,480 Balance at 31 July 2018 88,102 (18,779) 36,125 (1,463) 5,537 1,181 198,391 309,094 Balance at 1 August 2016 88,102 (19,799) 36,125 (1,496) 5,352 Other comprehensive income for the year Shares vested to employees Share based payments expense 7.1 7.1 – – – 779 – – – – – 1 – – – (4,480) 4,823 Balance at 31 July 2017 88,102 (19,020) 36,125 (1,495) 5,695 – – – – – 202,971 311,255 (2,596) – – (1,816) (4,480) 4,823 200,375 309,782 NATURE AND PURPOSE OF RESERVES Capital profits reserve represents amounts allocated from Retained Profits that were profits of a capital nature. Equity adjustments reserve includes amounts for tax adjustments posted directly to equity. General reserve represents amounts for the future general needs of the operations of the entity. Foreign currency translation reserve represents differences on translation of foreign entity financial statements. Share-based payments reserve represents the value of bonus shares granted to employees that have been recognised as an expense in the income statement but are yet to vest to employees. Investment revaluation reserve represents amounts arising on the remeasurement of available-for-sale financial assets. Associates and JVs reserve represents the Group’s share of its associates and joint ventures reserves 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 joint ventures in the form of dividends or trust distributions. 5.7 Management of other risks (a) Foreign exchange risk The 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 NZD would not have a material impact on either profit after tax or equity of the 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 fair value of foreign currency forward contracts is outlined below: USD forward contracts EUR forward contracts Net derivative asset /(liability) FAIR VALUE 2018 $000 378 (2) 376 2017 $000 (516) 3 (513) 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 and EUR would not have a material impact on either profit after tax or equity of the Group. (b) 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 Group’s 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 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. (c) Equity price risk The Group does not have material direct exposure to equity price risk, as the value of its share trading portfolio is insignificant, and hence any fluctuations in equity prices would not be material to either profit after tax or equity of the Group. The Group has significant indirect exposure to equity price risk through its investment in Washington H Soul Pattinson Co Ltd (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 the Group’s 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 2018 or subsequently. / 110 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 111 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6 GROUP STRUCTURE 6.2 Controlled entities Details of wholly owned entities within the Brickworks Group of companies are as follows. This section explains significant aspects of Brickworks’ group structure, including equity accounted investments that the Group has an interest in and its controlled entities. When applicable, it also provides information on business acquisitions made during the financial year. % GROUP’S INTEREST % GROUP’S INTEREST Associated company Note 6.3(a) Parent entity Note 6.1 Jointly controlled entities Note 6.3(b) 43.94% 42.72% 50% Property Trusts NZ Brick Distributors Controlled entities Controlled entities Note 6.2 33.33% Southern Cross Cement 66.66% 50% JV Partner 2018 $000 2017 $000 511 1,141,518 (23,930) (611,864) 6,152 1,118,282 (9,020) (585,361) 506,235 530,053 345,873 101,661 58,701 340,814 101,819 87,420 506,235 530,053 48,973 48,973 48,746 48,746 6.1 Parent entity disclosures Statement of financial position Current assets Non-current assets Current liabilities Non-current liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity Statement of financial performance Profit after tax Total comprehensive income Entity 2018 2017 Entity 2018 2017 Incorporated in Australia A.C.N. 000 012 340 Pty Ltd1 A.C.N. 074 202 592 Pty Ltd1 AP Installations (NSW) Pty Ltd1 AP Installations (Qld) Pty Ltd1 Austral Bricks (NSW) Pty Ltd1 Austral Bricks (Qld) Pty Ltd1 Austral Bricks (SA) Pty Ltd1 Austral Bricks (Tas) Pty Ltd1 Austral Bricks (Tasmania) Pty Ltd1 Austral Bricks (Vic) Pty Ltd1 Austral Bricks (WA) Pty Ltd1 Austral Bricks Holdings Pty Ltd1 Austral Facades Pty Ltd1 Austral Masonry (NSW) Pty Ltd1 Austral Masonry (Qld) Pty Ltd1 Austral Masonry (Vic) Pty Ltd1 Austral Masonry Holdings Pty Ltd1 Austral Precast (NSW) Pty Ltd1 Austral Precast (Qld) Pty Ltd1 Austral Precast (Vic) Pty Ltd1 Austral Precast (WA) Pty Ltd1 Austral Precast Holdings Pty Ltd1 Austral Roof Tiles Pty Ltd1 Auswest Timbers (ACT) Pty Ltd1 Auswest Timbers Holdings Pty Ltd1 Auswest Timbers Pty Ltd1 Bowral Brickworks Pty Ltd1 Brickworks Building Products Pty Ltd1 Brickworks Building Products (NZ) Pty Ltd1 Brickworks Cement Pty Limited1 Brickworks Construction Materials Pty Limited1 Brickworks Head Holding Co Pty Ltd1 Brickworks Industrial Developments Pty Ltd1 Brickworks Properties Pty Ltd1 Brickworks Property Finance Co Pty Ltd Brickworks Specialised Building Systems Pty Ltd1 Brickworks Sub Holding Co No. 1 Pty Ltd1 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Incorporated in Australia Brickworks Sub Holding Co No. 2 Pty Ltd1 Brickworks Sub Holding Co No. 3 Pty Ltd1 Brickworks Sub Holding Co No. 4 Pty Ltd1 Brickworks Sub Holding Co No. 5 Pty Ltd1 Brickworks Sub Holding Co No. 6 Pty Ltd1 Brickworks Sub Holding Co No. 7 Pty Ltd1 Brickworks Sub Holding Co No. 8 Pty Ltd1 Bristile Guardians Pty Ltd1 Bristile Holdings Pty Ltd1 Bristile Pty Ltd1 Bristile Roofing (East Coast) Pty Ltd1 Bristile Roofing Holdings Pty Ltd1 Christies Sands Pty Ltd1 Clifton Brick Holdings Pty Ltd1 Clifton Brick Manufacturers Pty Ltd1 Daniel Robertson Australia Pty Ltd1 Davman Builders Pty Ltd1 Dry Press Publishing Pty Ltd1 Hallett Brick Pty Ltd1 Hallett Roofing Services Pty Ltd1 Horsley Park Holdings Pty Ltd1 International Brick & Tile Pty Ltd1 J. Hallett & Son Pty Ltd1 Lumetum Pty Ltd1 Metropolitan Brick Company Pty Ltd1 Nubrik Concrete Masonry Pty Ltd1 Nubrik Pty Ltd1 Pilsley Investments Pty Ltd1 Prestige Brick Pty Ltd1 Prestige Equipment Pty Ltd1 Southern Bricks Pty Ltd1 Southern Cross Cement Pty Ltd (formerly Falcon CP Pty Ltd)2 Terra Timbers Pty Ltd1 The Austral Brick Co Pty Ltd1 The Warren Brick Co Pty Ltd1 Visigoth Pty Ltd1 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 33 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 RECOGNITION AND MEASUREMENT Control is achieved when the Group is exposed to, or has rights to, variable returns from its involvement with an entity and has the ability to affect those returns through its power to direct the activities of the entity. The financial statements have been prepared by consolidating the financial statements of Brickworks Limited and its controlled entities. All inter-entity balances and transactions are eliminated. All wholly owned entities within the Group have been consolidated in these financial statements. Various intercompany loans are in existence between the parent entity and some of its controlled entities. The loans are unsecured, interest free and have no fixed terms of repayment. The loans are a net asset to the parent entity of $598.2 million (2017: $655.7 million). Parent entity’s contingent liabilities of $9.104 million (2017: $8.818 million) were associated with bank guarantees issued in the ordinary course of business. There are no contractual commitments for the acquisition of property, plant and equipment of the parent entity (2017: nil). 1 2 The entity is party to a deed of cross guarantee (refer note 6.4). On 23 November 2017, Southern Cross Cement Pty Limited was established as a joint venture company, with the Group and two other parties each holding a third of the entity’s shares as the joint venture partners. This was achieved by issuing new shares to the joint ventures partners and the Group. Further details are disclosed in Note 6.3 (b) and Note 6.5. / 112 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 113 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6.3 Investments accounted for using the equity method The information disclosed below reflects the total amounts reported in the financial statements of WHSP amended to reflect adjustments made by the Group in applying the equity method of accounting. Associated companies Joint ventures Notes 6.3(a) 6.3(b) 2018 $000 2017 $000 1,270,049 501,455 1,233,189 410,840 Total investments accounted for using the equity method 1,771,504 1,644,029 RECOGNITION AND MEASUREMENT Under the equity method, the investments are carried in the consolidated balance sheet at cost plus post acquisition changes in the Group’s share of net assets of an associate or a joint venture. After applying the equity method of accounting, the Group determines whether it is necessary to recognise an additional impairment loss with respect to its investment in an associate or joint venture. At each reporting date, the Group determines whether there is objective evidence that the investment is impaired. If there is such evidence, the Group calculates the amount of impairment as a difference between the recoverable amount of the associate or joint venture and its carrying amount, and the recognises the loss as ‘Share of net profits of associates and joint ventures’ in the income statement. The consolidated income statement reflects the Group’s share of the results of operations of the associate/jointly controlled entity. Current assets Non-current assets Current liabilities Non-current liabilities Outside equity interest (OEI) Net assets Equity accounted carrying value Revenue Profit after tax attributable to members Other comprehensive income Total comprehensive income (a) Associated company Dividends received by Brickworks Limited from the associate 2018 $000 2017 $000 926,489 3,913,778 (307,945) (584,907) (974,453) 555,149 3,765,815 (169,372) (484,248) (780,666) 2,972,962 2,886,678 1,270,049 1,233,189 1,174,882 266,846 (3,635) 967,570 333,611 (13,997) 263,211 319,614 56,242 54,197 GROUP’S INTEREST CONTRIBUTION TO GROUP PROFIT AFTER TAX CARRYING VALUE MARKET VALUE OF SHARES 2018 % 2017 % 2018 $’000 2017 $’000 2018 $’000 2017 $’000 2018 $’000 2017 $’000 Washington H. Soul Pattinson and Company Limited 42.72 42.72 100,179 129,008 1,270,049 1,233,189 2,231,266 1,803,828 Washington H. Soul Pattinson and Company Limited’s (WHSP) shares are publicly traded on the Australian Stock Exchange (ASX code: SOL). The nature of WHSP’s activities is outlined below: Investing Energy Investments in cash, term deposits and equity investments (including investments in telecommunications, pharmaceutical, property and agriculture businesses listed on the Australian Stock Exchange) Coal, oil and gas activities Copper and gold operations Copper and gold mining activities In addition to the Group owning 42.72% (2017: 42.72%) of issued ordinary shares of WHSP, at 31 July 2018 WHSP owned 43.94% (2017: 44.03%) of issued ordinary shares of Brickworks Limited. WHSP’s lease commitments and contractual commitments for the acquisition of property, plant and equipment were not publicly available at the time of preparation of this report (2017: $67.4 million and $15.7 million, respectively). The Group has no legal liability for any expenditure commitments incurred by associates. WHSP’s contingent liabilities were not publicly available at the time of preparation of this report (2017: $39.9 million). The Group has no legal liability for any contingent liabilities incurred by its associate. RECOGNITION AND MEASUREMENT 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. The associate’s accounting policies conform to those used by the Group for like transactions and events in similar circumstances. The consolidated financial statements include eliminations related to the cross share-holding arrangement between the Group and the associate. / 114 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 115 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6.3 Investments accounted for using the equity method (continued) (b) Joint ventures Information relating to joint ventures is outlined below. GROUP’S INTEREST CONTRIBUTION TO GROUP PROFIT AFTER TAX CARRYING VALUE PRINCIPAL ACTIVITY 2018 % 2017 % 2018 $’000 2017 $’000 2018 $’000 2017 $’000 Domiciled in Australia BGAI CDC Trust BGAI Erskine Trust BGAI1 Capicure Trust BGAI1 Heritage Trust BGAI1 Oakdale Trust BGAI2 Wacol Trust BGMG1 Oakdale South Trust BGMG2 Rochedale Trust BGMG1 Oakdale West Trust Gain recognised on recognition as investment property and sale to third parties Property trusts 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 – – – 9,524 1,645 4,202 – 277 280 17,059 113,473 104,285 1,682 5,593 11,281 33,704 10,309 31,537 33,435 10,482 146,488 104,652 29 14,677 13,434 – 464 – 5,869 – – 52,167 60,784 67,483 218 45,221 41,018 66,323 23,413 2,450 – – 100,359 43,599 485,657 403,843 Property development, management and leasing Southern Cross Cement 33.33 100.00 61 9,061 Import of cement Domiciled in NZ NZ Brick Distributors 50.00 50.00 199 628 6,737 6,997 Import and distribution of building products Total – – 100,619 44,227 501,455 410,840 Property Trusts and Southern Cross Cement have balance dates of 30 June. The balance date for NZ Brick Distributors is 31 March. Contribution to Group profit after tax from Property Trusts is set out below. Share of fair value adjustment of properties held by joint venture Share of joint venture property rental profits Gain recognised on recognition as investment property and sale to third parties Share of profit on disposal of assets held by joint venture Total equity accounted profit from Property Trusts 2018 $000 40,330 21,939 23,413 14,677 100,359 2017 $000 22,112 18,263 2,450 774 43,599 The information disclosed below reflects the total amounts reported in the financial statements of joint ventures amended to reflect adjustments made by the Group in applying the equity method of accounting. This information has been aggregated due to the similarity of the risk and return characteristics. Current assets Non-current assets Current liabilities Non-current liabilities Net assets Equity accounted carrying value Other balance sheet disclosures Cash and cash equivalents Current financial liabilities Non-current financial liabilities Revenue Depreciation and amortisation Interest income Interest expense Profit after tax Other comprehensive income Total comprehensive income Dividends received by Brickworks Limited from the joint ventures Joint ventures’ expenditure commitments Capital commitments Lease commitments Contingent liabilities of joint ventures Contingent liabilities incurred jointly with other investors The entity has no legal liability for any contingent liabilities incurred by joint ventures 2018 $000 2017 $000 44,856 1,429,840 (13,355) (449,370) 1,011,971 501,455 24,796 (10,297) (449,370) 73,042 (24) 344 (19,339) 201,300 879 202,179 59,910 89,029 – 28,216 1,249,797 (12,632) (443,701) 821,680 410,840 8,781 (6,385) (443,701) 64,419 (44) 103 (14,265) 83,555 4,274 87,829 19,049 163,688 – – – RECOGNITION AND MEASUREMENT A joint venture is a type of arrangement whereby the parties that have joint control of the arrangement have rights to net assets of the joint venture. Joint control is the contractually agreed sharing of control arrangement, which exists only when the decisions about relevant activities require unanimous consent of the parties sharing control. The joint venture’s accounting policies conform to those used by the Group. When 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. Profits or losses on transactions with the joint venture are deferred to the extent of the Group’s ownership interest where properties remain classified as inventory by the joint venture until such time as they realised by the joint venture on sale. During the prior financial year 50% of the gain on sale of the Oakdale West land was eliminated. Total unrealised eliminated profits as at 31 July 2018 amounted to $52.6 million (2017: $76.0 million). Investment property held by the joint venture, which is property held to earn rentals and/or for capital appreciation, is measured initially at cost, including transaction costs. Subsequent to initial recognition, investment property is measured at fair value. Gains or losses arising from changes in fair value of investment property are included in the equity accounted share of the joint venture’s profit and recognised in the income statement of the Group in the period in which they arise. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Management is required to make significant estimates and judgements in assessing the fair value of investment property. An independent valuation specialist was engaged to assess the fair value of investment properties held by the joint venture. The fair value of investment properties is determined using recognised valuation techniques such as the capitalisation of net income method and discounted cash flow method. / 116 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 117 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6.4 Deed of cross guarantee Brickworks Limited and a number of its subsidiaries (“Closed Group”) are parties to a deed of cross guarantee under which each company, including Brickworks Limited, supports liabilities and obligations of other members of the Closed Group. By entering into the deed, the wholly owned entities have been relieved from the requirement to prepare a financial report and directors’ report under ASIC Corporations (Wholly-owned companies) Instrument 2016/785. The entities covered in the deed are listed in Note 6.2. Members of the Closed Group and parties to the deed of cross guarantee are identical. Set out below is a consolidated balance sheet, consolidated income statement and a summary of movements in consolidated retained profits of the Closed Group. Consolidated Balance Sheet Current assets Cash and cash equivalents Receivables Inventories Land held for resale Derivative financial assets Prepayments Total current assets Non-current assets Receivables Other financial assets Inventories Investments accounted for using the equity method Property, plant and equipment Intangibles Total non-current assets Total assets Current liabilities Trade and other payables Derivative financial liabilities Income tax payable Provisions Total current liabilities Non-current liabilities Borrowings Derivative financial liabilities Provisions Deferred income tax liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits Total equity 2018 $000 2017 $000 21,167 121,591 202,435 7,383 376 10,058 363,010 193,280 11,181 7,356 1,285,847 504,653 216,130 19,641 132,648 189,278 – – 8,091 349,658 199,327 10,000 7,300 1,240,187 492,749 212,840 2,218,447 2,162,403 2,581,457 2,512,061 106,495 501 20,099 49,103 176,198 324,105 1,922 10,494 202,445 538,966 715,164 108,481 513 7,741 43,386 160,121 311,977 3,549 10,436 193,095 519,057 679,178 1,866,293 1,832,883 345,873 312,363 1,208,057 1,866,293 340,814 313,357 1,178,712 1,832,883 Consolidated Income Statement Profit before income tax Income tax (expense)/benefit Profit after income tax expense Movement in Consolidated Retained Earnings Retained profits at the beginning of the year Profit after income tax expense Dividends paid Share of associate’s transfer to outside equity interests 2018 $000 2017 $000 131,188 (25,268) 105,920 1,178,712 105,920 (63,109) (13,466) 254,997 (61,032) 193,965 1,044,038 193,965 (59,321) 30 Retained profits at the end of the year 1,208,057 1,178,712 6.5 Business combinations During the financial year ended 31 July 2018 the Group acquired the assets and business of UrbanStone, a market leading manufacturer and distributor of premium paving and masonry block products. The business has manufacturing operations based in Perth, complemented by a national sales and distribution network. The purchase consideration was fully paid in cash and has been provisionally allocated as follows. Business acquired Date acquired Consideration Cash paid ($’000) Total consideration ($’000) Assets acquired Cash ($’000) Inventory ($’000) Other assets ($’000) Property, plant and equipment ($’000) Brand names ($’000) Customer relationships ($’000) Liabilities assumed Provisions ($’000) Other payables ($’000) Deferred tax liabilities ($’000) Fair value of net assets ($’000) Goodwill arising on acquisition ($’000) Direct costs relating to acquisition ($’000) Acquisition costs of $912,000 were expensed and are included in other expenses. UrbanStone Total 2018 22 November 2017 13,314 13,314 6 3,550 342 8,351 2,062 614 (1,978) (590) (209) 13,314 13,314 6 3,550 342 8,351 2,062 614 (1,978) (590) (209) 12,148 12,148 1,166 912 1,166 912 / 118 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 119 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 6.5 Business combinations (continued) From the date of acquisition, UrbanStone contributed $15,582,000 of revenue and $1,053,000 of profit before tax to the Group. Given the acquired business was part of a larger group, there is no comparable information available in relation to its performance for the period prior to the acquisition. It is therefore impractical to determine the theoretical impact on the Group’s revenue and profit before tax for the financial year, if the combination had taken place on 1 August 2017. During the prior financial year the Group acquired in full the share capital of Falcon CP Pty Limited (subsequently renamed to Southern Cross Cement Pty Limited) for $500,000. On 23 November 2017, Southern Cross Cement Pty Limited was established as a joint venture company, with the Group and two other parties each holding a third of the entity’s shares as the joint venture partners. This was achieved by issuing new shares to the joint ventures partners and the Group. As a result of this arrangement, the Group lost control over this entity but continues to exercise significant influence. The assets (including goodwill) and liabilities were derecognised and the remaining investment was recognised as an equity accounted investment at fair value. Refer Note 6.3 for the details on equity accounted investment in Southern Cross Cement Pty Limited as at 31 July 2018. During the financial year ended 31 July 2017 the Group acquired the full ownership of the following: ◗ Assets and businesses of Rix Roofing, a metal roofing and fascia and gutter installation business based in Victoria. Together with similar acquisitions made in the prior year, this acquisition provides diversification and earnings growth opportunities, allowing the Group’s Building Products segment to offer an all inclusive product range of roofing products. ◗ Share capital of Falcon CP Pty Limited (subsequently renamed to Southern Cross Cement Pty Limited). Business acquired Date acquired Consideration Cash paid ($’000) Total consideration ($’000) Assets acquired and liabilities assumed Property, plant and equipment ($’000) Deferred tax assets ($’000) Provisions ($’000) Fair value of net assets ($’000) Goodwill arising on acquisition ($’000) Direct costs relating to acquisition Rix Roofing Falcon CP Total 2017 3 April 2017 24 August 2016 2,695 2,695 40 36 (121) (45) 2,740 – 500 500 – – – – 500 – 3,195 3,195 40 36 (121) (45) 3,240 – RECOGNITION AND MEASUREMENT 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. When 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 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. 7 OTHER DISCLOSURES This section provides information on items which require disclosure to comply with AASBs and other regulatory pronouncements and any other information that is considered relevant for the users of the financial report which has not been disclosed in other sections. Share based payments 7.1 At 31 July 2018, the Brickworks Employee Share Plans had 739 members taking part who owned a combined 1,713,363 shares or 1.15% of issued ordinary share capital (2017: 711 members, 1,616,128 shares, 1.08%). These figures exclude shares held by employees outside the Brickworks Employee Share Plans. This represented shares purchased under the salary sacrifice arrangements, as well as shares held as part of the Brickworks equity compensation plan shown below. (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 Group. All shares acquired under salary sacrifice arrangements are fully paid ordinary shares, purchased on-market under an independent trust deed. (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. Opening balance Granted Vested Forfeited / withdrawn Closing balance Unvested No. of shares Vested No. of shares Total No. of shares 781,640 445,831 (388,783) (42,905) 689,893 – 388,783 (283,132) 1,471,533 445,831 – (326,037) 795,783 795,544 1,591,327 The unvested shares vest to employees at 20% per year for each of the following 5 years, provided ongoing employment is maintained. In addition, a performance hurdle related to the Group’s Total Shareholder Return (TSR) is applicable to the unvested shares granted to the Managing Director and Chief Financial Officer. Unvested shares are unavailable for trading by the employees. All shares granted to employees provide dividend and voting rights to the employee. A fair value of shares with a TSR performance hurdle has been determined with reference to an independent valuation. A summary of key valuation assumptions is outlined below. Grant date Valuation method Tranche 1 performance period Tranche 2 performance period Tranche 3 performance period Tranche 4 performance period Tranche 5 performance period Grant date share price Estimated volatility Dividend yield 2018 2017 11 September 2017 7 September 2016 Monte-Carlo simulation Monte-Carlo simulation 1-6 years 2-6 years 3-6 years 4-6 years 1-6 years 2-6 years 3-6 years 4-6 years 5 and 6 years 5 and 6 years $13.78 18.75% 3.40% $13.79 17.28% 3.70% Risk free rate (forward rates 1-6 years) 1.72%-2.8% 1.26%-1.96% / 120 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 121 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7.1 Share based payments (continued) (b) Equity-based compensation plans (continued) Expense arising from share-based payment transactions Fair value of vested shares held by the plan at the end of the year (based on 31 July share price) Fair value of shares granted during the year 2018 $ 5,480,783 12,398,299 6,145,780 2017 $ 4,823,363 9,106,588 6,266,600 More information regarding the Brickworks Employee Share Plans is outlined in the Remuneration Report included in the Directors’ Report. RECOGNITION AND MEASUREMENT The fair value determined at the grant date of the equity-settled share based payments is expensed over the vesting period, with a corresponding increase to the employee share reserve. Unvested shares are included in the Contributed Equity as Treasury Shares (refer note 5.5). 7.2 Related party transactions During the year material transactions took place with the following related parties: ◗ Property transactions with various trusts (listed in note 6.3) which are jointly owned by the Group and Goodman Australia Industrial Fund, an unlisted property trust. During the comparative financial year the Group completed the sale of the Oakdale West land into the Property Trust. The profit on the disposal of the land held for resale amounted to $50,066,000. There was no land sold into the Property during the financial year ended 31 July 2018. All transactions with the property trusts are at arm’s length values. ◗ During the year the Group engaged Korn/Ferry International and Korn Ferry Hay Group Pty Limited, entities which employ The Hon. Robert Webster, to provide consulting services regarding executive evaluation and development. The total value of services provided was $4,438 (2017: $199,437). 7.4 Commitments and contingencies (a) Commitments Contracted capital expenditure Within one year Operating lease commitments Within one year Between one year and five years Later than five years Total 2018 $’000 2017 $’000 7,167 10,178 26,257 61,330 6,257 93,844 23,938 56,828 4,861 85,627 Contracted capital expenditure relates to contracts to supply or construct buildings or various items of plant and equipment for use in the Building Products operating segment. These have not been provided for at balance date. Operating lease commitments 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 between 3 and 10 years, with renewal options of similar lengths. (b) Contingencies 2018 $’000 2017 $’000 34,874 28,184 ◗ Directors and their direct-related entities are able, with all staff members, to purchase goods produced by the Group on terms and conditions no more Bank guarantees issued in the ordinary course of business favourable than those available to other customers. ◗ There were no other transactions with key management personnel during the period (2017: Nil). 7.3 Auditor’s remuneration Audit of the financial report Other regulatory audits Accounting advice Taxation services Environmental sustainability advice Other assurance services Total 2018 $ 570,000 30,900 19,000 – – 22,500 2017 $ 549,000 30,900 77,196 49,321 30,900 50,000 642,400 787,317 The financial statements of the Group are audited by EY. Details of non-audit services provided by EY are outlined in the Directors’ Report. The Group does not anticipate that any of the bank guarantees issued on its behalf will be called upon. The entities forming the Group are parties to various legal actions against them that are not provided for in the financial statements. These actions are being defended and the Group does not anticipate that any of these actions will result in material adverse consequences for the Group. 7.5 Events occurring after balance date On 6 September 2018 an option to purchase the Punchbowl land for $41.0 million from the Group was exercised by the buyer, with the transaction expected to be completed by October 2018. The Group has also entered into a 10-year lease back arrangement in relation to its specialised brick plant at Punchbowl with an option to extend for additional 10 years. As at 31 July 2018, the Punchbowl property was classified as Land Held For Resale (refer Note 3.3). 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. 7.6 Other accounting policies (a) Other accounting policies Foreign exchange differences arising on the translation of monetary items are recognised in the income statement, except when deferred in equity as a qualifying cash flow or net investment hedge. Revenues, expenses and assets are recognised net of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable or payable to the taxation authority is included as a current asset or liability. Cash flows are presented in the cash flow statement on a gross basis, except for the GST component of investing and financing cash flows which are classified as operating cash flows. Government grants 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 the attached conditions. Grants relating to costs are deferred and recognised in income statement over the period necessary to match them with the costs that they intend 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. / 122 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 123 / NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 7.6 Other accounting policies (continued) (b) New standards not yet applicable AASB 16 Leases The standard will be first applicable for the year commencing 1 August 2019. The Group is a lessee under a number of arrangements currently classified as operating leases. These arrangements relate predominantly to major plant and equipment, property and mobile plant. The Group has commenced a review of underlying lease arrangements to understand the implications of the new standard. Based on the current profile of the Group’s leases a material increase in total assets, total liabilities and EBITDA is expected following the adoption of the new standard. AASB 15 Revenue from Contracts with Customers AASB 15 Revenue from Contracts will be first applicable for the year commencing 1 August 2018. The new standard and the related subsequent amendments replaces all existing revenue requirements (AASB 111 Construction Contracts, AASB 118 Revenue and related Interpretations) and applies to all revenue from contracts with customers. The new requirements provide a single, contract-based revenue recognition model. AASB 15 establishes principles for reporting the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The core principle of AASB 15 is that an entity recognises revenue when a customer obtains control of promised goods or services and is recognised in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The requirements include a five-step framework to determine the timing and amount of revenue to recognise relating to contracts with customers. In addition, the standard requires new and expanded disclosures related to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers and the key judgements made. AASB 15’s increased focus on contracts with customers will require a greater understanding of customer contracts at a level of detail not previously required. Application date and transition approach The Group will adopt the new standard on the required effective date. The standard permits two methods of adoption: full retrospective or modified retrospective. The Group has elected to apply the modified retrospective method. As a result of this election, an adjustment to the comparative period presented in the financial statements will not be required. Impact on the Group’s financial report Based on the assessment of contracts in effect at the date of initial adoption, the application of this standard will not have a material impact on the recognition, timing and measurement of the Group’s revenue in the Building Products and Property segments. The key issues for consideration have been summarised below. Revenue recognition AASB 15 requires the recognition of revenue when the customer obtains control of a good or service. The Group expects that in respect of sales of goods and associated freight the revenue will be recognized at a point in time when the asset is transferred to the customer, generally on delivery of the goods, which is consistent with the current treatment. Performance obligations arising from supply and install contracts have been assessed to be satisfied over time. On that basis, the Group expects to continue recognising revenue from these contracts over time. Customer incentive programs AASB 15 requires the allocation of the transaction price to each performance obligation identified in the contract. On that basis, a portion of revenue in the Building Products segment should be allocated to customer incentive programs and deferred until these obligations are satisfied. This treatment is not expected to have a material impact on the amount of revenue and profit in the Building Products division on adoption of AASB 15. Variable consideration Some contracts with customers offer variable consideration such as trade discounts and volume rebates. The Group’s assessment did not identify any material impact on the recognition of such arrangements on adoption of AASB 15. Warranties Warranties currently offered by the Group will continue to be accounted for under AASB 137 Provisions, Contingent Liabilities and Contingent Assets. Investments segment The Group continues to assess the impact of AASB 15 on equity accounted profit from its investments in associates. Further assessment will be undertaken following a review of updated disclosures in the financial statements of the associate company which will be released to the market subsequent to the release of the Group’s financial report. AASB 9 Financial instruments The standard introduces changes to hedge accounting, classification, measurement of financial and impairment of assets/liabilities. The standard will be first applicable for the year commencing 1 August 2018. The impact of the standard is not expected to be material to the Group. Directors’ DECLARATION In the opinion of the Directors: 1. the complete set of the financial statements and notes of the consolidated entity, as set out on pages 84 to 124, 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) (b) comply with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and give a true and fair view of the financial position as at 31 July 2018 and of the performance for the year ended on that date of the consolidated entity; 2. the financial report also complies with International Financial Reporting Standards as issued by the International Accounting Standards Board; 3. 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 6.4 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 2018. This declaration is made in accordance with a resolution of the Board of Directors. Dated 20 September 2018 R.D. MILLNER Director L.R. PARTRIDGE AM Director / 124 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 125 / Urbanstone Commercial, Engineered Stone – Holdfast Shores, Adelaide 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 Auditor’s Independence Declaration to the Directors of Brickworks Limited 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 As lead auditor for the audit of Brickworks Limited for the financial year ended 31 July 2017, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. Auditor’s Independence Declaration to the Directors of Brickworks Limited Independent This declaration is in respect of Brickworks Limited and the entities it controlled during the financial As lead auditor for the audit of Brickworks Limited for the financial year ended 31 July 2017, I declare year. to the best of my knowledge and belief, there have been: AUDITOR’S REPORT a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. Ernst & Young This declaration is in respect of Brickworks Limited and the entities it controlled during the financial INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF BRICKWORKS LIMITED year. REPORT ON THE AUDIT OF THE FINANCIAL REPORT Anthony Jones Opinion Partner We have audited the financial report of Brickworks Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated balance 21 September 2017 sheet as at 31 July 2018, the consolidated income statement, consolidated statement of changes in equity and consolidated statement of cash flows for the year Ernst & Young then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the consolidated financial position of the Group as at 31 July 2018 and of its consolidated financial performance for the year ended on that date; and b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Anthony Jones Partner Basis for Opinion 21 September 2017 We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 41 / 126 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 127 / A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 41 INDEPENDENT AUDITOR’S REPORT Valuation of investment properties held within joint venture property trusts Why significant How our audit addressed the key audit matter During the year the Group recorded a gain of $39.2 million relating to its share of changes in the fair value of investment properties held within the joint venture property trusts. As disclosed in Note 6.3(b) of the financial report, investment properties are accounted for in accordance with Australian Accounting Standard - AASB 140 Investment Property, with changes in fair value recorded in the income statement. Fair values of properties held within the property trusts are determined by the directors at the end of each reporting period with reference to external independent property valuations, with changes in fair value recognised in the consolidated statement of comprehensive income. This was considered a key audit matter due to the judgments required in determining fair value. These judgments include determining the capitalisation rate, discount rate, market rent, re-leasing costs and forecast occupancy levels. Minor changes in certain assumptions can lead to significant changes in valuations and reported results. Our audit procedures included the following: ◗ We assessed the competence, capabilities, and the objectivity of the Group’s independent property valuation experts. ◗ For independent property valuations, we: ◗ Assessed the appropriateness of the valuation methodology; ◗ Assessed the key assumptions and inputs including the net passing rent, operating expenses, occupancy rates, lease terms, and capital expenditure; and ◗ Evaluated the capitalisation rates adopted, and movement in the year, based on our knowledge of the property portfolio, published industry reports and comparable property valuations. ◗ Our real estate valuation specialists assisted with the assessment of a sample of independent valuations by evaluating the valuation methodology and key inputs and assumptions highlighted above. Gain on reclassification of inventory to investment property and other unrealised gains for property held within joint ventures Why significant How our audit addressed the key audit matter During the year, the classification of properties held within the BGMG1 Oakdale South Trust joint venture was changed from inventory to investment property following a change in intended use of the property. In accordance with the accounting policy disclosed in Note 6.3(b) of the financial report, this change in intention triggered a gain of $12.4 million of previously deferred gains. In accordance with the Group’s accounting policy, $52.6 million of gains on other properties within the joint venture property trusts remain deferred on the basis that the properties continue to be classified as inventory in accordance with Australian Accounting Standards. This was a key audit matter due to the quantum of the gain recorded and the application of judgment related to the classification of the property. Our audit procedures included the following: ◗ We evaluated the Group’s assessment that the property met the definition of investment property as set out in Australian Accounting Standards by enquiring as to the group’s intentions for the property, reading board minutes and contractual agreements supporting the change in intention; ◗ Assessing the accuracy of the Group’s calculation of, and accounting for, the amount of the gain recognised during the year and the amount of the gain deferred; and ◗ We evaluated the adequacy of the financial report disclosures made in respect to this transaction. Information Other than the Financial Report and Auditor’s Report Thereon The directors are responsible for the other information. The other information comprises the information included in the Company’s 2018 Annual Report other than the financial report and our auditor’s report thereon. We obtained the Directors’ Report that is to be included in the Annual Report, prior to the date of this auditor’s report, and we expect to obtain the remaining sections of the Annual Report after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: ◗ Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. ◗ Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. ◗ Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. ◗ Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. ◗ Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. ◗ Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the dverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. REPORT ON THE AUDIT OF THE REMUNERATION REPORT Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 69 to 80 of the directors’ report for the year ended 31 July 2018. In our opinion, the Remuneration Report of Brickworks Limited for the year ended 31 July 2018, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young ANTHONY JONES Partner Sydney, 20 September 2018 / 128 / Brickworks Limited / Annual Report 2018 Brickworks Limited / Annual Report 2018 / 129 /  Statement of SHAREHOLDERS ORDINARY SHARES at 31 August 2018 Shareholders Number of holders Voting entitlement is one vote per fully paid ordinary share % of total holdings by or on behalf of 20 largest shareholders 78.72% Distribution of shareholdings: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Holdings of less than marketable parcel of 29 shares 9,359 4,697 3,560 579 470 53 9,359 573 Substantial Shareholders The names of the substantial shareholders as disclosed in substantial shareholder notices received by the Company: Shareholder Number of Shares 20 LARGEST SHAREHOLDERS as disclosed on the Share Register as at 31 August 2018 Number of Shares % 1 WASHINGTON H SOUL PATTINSON & 65,645,140 43.94 COMPANY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 18,281,380 12.24 CITICORP NOMINEES PTY LIMITED 6,713,456 J P MORGAN NOMINEES AUSTRALIA LIMITED 6,575,780 2 3 4 5 NATIONAL NOMINEES LIMITED 6 MILTON CORPORATION LIMITED 7 8 9 J S MILLNER HOLDINGS PTY LIMITED BNP PARIBAS NOMS PTY LTD AUSTRALIAN FOUNDATION INVESTMENT COMPANY LIMITED 10 MRS MARGARET DOROTHY STONIER 11 12 13 14 CPU SHARE PLANS PTY LTD BNP PARIBAS NOMINEES PTY LTD T G MILLNER HOLDINGS PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 4.49 4.40 2.23 2.16 2.02 1.03 1.01 1.00 0.77 0.77 0.47 0.43 0.39 0.33 0.29 0.28 3,325,656 3,234,567 3,018,836 1,533,622 1,502,970 1,498,743 1,157,153 1,149,897 698,509 644,586 584,009 500,000 436,209 417,036 358,013 0.24 341,349 0.23 117,616,911 78.72 Washington H Soul Pattinson and Company Limited 65,645,140 15 ARGO INVESTMENTS LIMITED 16 DIVERSIFIED UNITED INVESTMENT LIMITED 17 18 19 BKI INVESTMENT COMPANY LIMITED CPU SHARE PLANS PTY LTD CITICORP NOMINEES PTY LIMITED 20 MILLANE PTY LIMITED / 130 / Brickworks Limited / Annual Report 2018 Bowral50 Chillingham White & Austral Bricks La Paloma Gaudi 50mm Project: OP9 House Brickworks Limited / Annual Report 2018 / 131 / CORPORATE information REGISTERED OFFICE 738–780 Wallgrove Road Horsley Park NSW 2175 Telephone: (02) 9830 7800 Website: www.brickworks.com.au info@brickworks.com.au Email: 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) +61 3 9415 4000 (International) PRINCIPAL ADMINISTRATIVE OFFICE 738–780 Wallgrove Road Horsley Park NSW 2175 Telephone: (02) 9830 7800 Email: info@brickworks.com.au / 132 / Brickworks Limited / Annual Report 2018 IMPORTANT DATES 2018 annual result released 20 September 2018 Record date for final ordinary dividend 8 November 2018 Annual General Meeting 27 November 2018 Payment date for final ordinary dividend 28 November 2018 2019 half-year end 2019 half-year result announced 31 January 2019 21 March 2019 Record date for interim ordinary dividend 9 April 2019 Payment date for interim ordinary dividend 30 April 2019 2019 financial year end 31 July 2019 2019 annual result released 19 September 2019 The above dates are indicative only and are subject to change 

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