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Anglo-Eastern PlantationsC o s t a G r o u p H o l d i n g s L i m i t e d | A n n u a l R e p o r t 2 0 1 6 Costa Group Holdings Limited Annual Report 2016 Investing in Growth Contents 02 Chairman’s Report 05 Managing Director’s Review 06 Company Profile 10 Harvest Calendar 12 Sustainability Report 19 Directors’ Report 44 Auditor’s Independence Declaration 45 Consolidated Statement of Profit and Loss and Other Comprehensive Income 46 Consolidated Statement of Financial Position 47 Consolidated Statement of Changes in Equity 48 Consolidated Statement of Cash Flows 49 Notes to the Consolidated Financial Report 91 Directors’ Declaration 92 Independent Auditor’s Report 94 Shareholder Information 96 Corporate Directory Corporate Governance Statement Costa Group’s 2016 Corporate Governance Statement is located at http://investors.costagroup.com.au/investor-centre/?page=corporate-governance Costa Group Holdings Limited ABN 68 151 363 129 Costa Group Holdings Limited | Annual Report 2016 | 01 Chairman’s Report The Company has continued to deliver on its growth projects, with the completion of a further 76 hectares in new berry plantings across our Australian farms, the commencement of production at our new 10-hectare tomato glasshouse in northern New South Wales, the further expansion of our African Blue operations in Morocco and the development of our berry farms in China. Overview The 2016 financial year has seen Costa Group exceed our prospectus forecast with a pro forma (NPAT) of $49.3 million net profit after tax. Continued growth in our berry, citrus and mushroom categories and increasing revenue in the second half of the year from our international operations offset the under performance of our tomato category. Our diversified portfolio of high yield quality produce sets us apart from other agricultural businesses and provides us with the capacity to absorb and evenly spread risk, without impacting our overall performance and results. Our FY2016 performance is also evidence of our successfully transition from a private to a public company, while delivering positive returns to shareholders. The Company has continued to deliver on its growth projects, with the completion of a further 76 hectares in new berry plantings across our Australian farms, the commencement of production at our new 10-hectare tomato glasshouse in northern New South Wales, the further expansion of our African Blue operations in Morocco and the development of our berry farms in China. In recognition of the strong potential for continued berry category growth, during the year the Board also approved a further berry growth program involving an estimated $80 million worth of capital projects to be undertaken in Australia over four years from FY2017. This investment in expanding our production capability leverages our superior plant genetics, agronomic skills, established cold chain infrastructure and scale of operations. We are the only grower which can supply fresh blueberries and raspberries to the Australian market year round. With our farming footprint continuing to grow, we recognise the importance of ensuring our existing and new operations are sustainable 02 | Costa Group Holdings Limited | Annual Report 2016 and that we engage in responsible environmental stewardship. To this end the Company continues to be committed to investing in farming operations that are innovative and promote sustainable horticultural practices. During the year we targeted investment in technology to enable the recycling and reuse of water. As a result, our main mushroom farm located at Mernda in Victoria is now capturing and reusing waste water resulting in up to a 40% reduction in water use. Our new 10-hectare glasshouse facility at Guyra in northern New South Wales has also been designed for full water self- sufficiency. At the community level we continue to support and work with a variety of organisations. A particular focus over the past year has been on developing educational opportunities for young people in regional and rural areas to study and pursue a career in agriculture. Our citrus category is collaborating with local training organisations, TAFE and high schools in the South Australian Riverland to host field days, which provide on-site and practical demonstrations of how our business operates and the job opportunities that are available. The Company also commenced funding one undergraduate and one postgraduate scholarship per year over the next four years for local students from the north-west of Tasmania to study Agricultural Science at the University of Tasmania. Results Pro forma full year revenue of $809 million saw an 11.8% increase on our full year FY2015 result. Pro forma EBITDA before SGARA was up 27.6% on full year FY2015 to $91.1 million, while pro forma NPAT was $49.3 million and statutory NPAT $25.3 million. For the first time ever, the Company’s annual transacted sales exceeded $1 billion. Dividends The Board declared a fully franked final dividend of 6.0 cents per share, resulting in a fully franked dividend total of 9.0 cents per share in respect of FY2016. Our People I would like to acknowledge the valuable contribution of my Board colleagues, the management team and all of our people throughout the organisation for their commitment to ensuring the Company delivered not only its prospectus forecasts, but also continued to establish a strong foundation for growth and sustainable value creation. Outlook FY2017 will see continued execution of our announced domestic and international growth initiatives, while our strong balance sheet supports continued organic growth and a disciplined M&A program. With projected NPAT (pre-SGARA) growth at approximately 10% for FY2017, seasonality and increased contribution from our international operations will see the Company’s performance more heavily weighted towards the second half. FY2017 dividends will be balanced against the Company’s need to fund growth objectives, but indicatively will be in the range of 50-70% of NPAT (pre-SGARA). Neil Chatfield Chairman Costa Group Holdings Limited | Annual Report 2016 | 03 The first blueberry and raspberry farm has been established in Yunnan province, with the initial raspberry harvest completed in February and the first blueberry harvest expected from December this year. 04 | Costa Group Holdings Limited | Annual Report 2016 Managing Director’s Review Once again our people have ably met all challenges through their dedicated performance and commitment to the Company’s ongoing success. Delivering Growth From a Strong Business Model This year has seen Costa Group complete our first full financial year as a publicly listed company, and it has been a period in which the Company has demonstrated on more than one occasion the resilience of our business model. Strong and consistent performances from our core categories of mushrooms, citrus and berries highlighted the benefits of having a diversified portfolio structure enabling our capacity to absorb any individual category volatility in both our on-farm production and markets. The way in which we were able to deal with the impact of several hailstorms on our New South Wales berry farms and the downturn in the tomato market has been testament to this. Over the year we also made significant progress in delivering on our growth program. The second year of our first Australian berry growth program saw a further 76 hectares in new plantings. Our new 10-hectare tomato glasshouse, which produces cocktail and snacking varieties, was commissioned in October 2015 and has exceeded expectations on production volumes to date. With respect to our international segment, we now have 208 hectares of blueberries planted across five farms in Morocco under our African Blue business. The Company also signed a joint venture agreement with Driscoll’s, which formalised an agreement for berry farming operations in China to service the expanding Asian appetite for high-quality berries. Costa will have 70% ownership of the joint venture, with Driscoll’s having the remaining 30%. The first blueberry and raspberry farm has been established in Yunnan province with the initial raspberry harvest completed in February and the first blueberry harvest expected from December this year. A second farming location has been selected, with land preparation and planting currently under way. This investment is a long-term proposition requiring effort and patience to establish our footprint in China and the wider Asian marketplace. However, it is clearly also one with very large potential. The new, second Australian berry growth plan approved by the Board in FY2016 will be undertaken over a four-year period. This investment will further consolidate and build on our ability to supply the Australian market with berries 52 weeks of the year. It will also see for the first time the Company undertaking significant investment in our nascent blackberry category. The Company also continued to pursue strategic opportunities through acquisitions that deliver immediate value to our earnings. To this end, Costa acquired the Pike Creek citrus orchard located in the South Australian Riverland, adding up to 120 hectares of quality citrus plantings to our existing citrus farms. Our Australia-wide production footprint and the size and scale of our operations mean that we rely on a dedicated and highly skilled workforce. Once again our people have ably met all challenges through their dedicated performance and commitment to the Company’s ongoing success. We will continue to put our people first through our core Company values of passion, respect, sincerity, determination and accountability. We look forward to 2017 and beyond as we continue to build the business both domestically and internationally and deliver on our growth plans. Harry Debney Managing Director and CEO ”Over the year we also made significant progress in delivering on our growth program. The second year of our first Australian berry growth program saw a further 76 hectares in new plantings. Our new 10-hectare tomato glasshouse, which produces cocktail and snacking varieties, was commissioned in October 2015 and has exceeded expectations on production volumes to date.” Costa Group Holdings Limited | Annual Report 2016 | 05 Company Profile Operations About Us Costa is Australia’s leading horticulture company and is the largest fresh produce supplier to the major Australian food retailers, with revenues of $809.0 million in FY2016. Figure 1: Costa’s Operational Structure Business Model Costa has a business model built on the optimisation of a portfolio of integrated farming, packing and marketing activities. Costa’s portfolio aims to be broad enough to mitigate agricultural and market risks while maintaining a strategic focus on high-growth and high-value fresh produce categories. Costa practises proactive risk management through diversification of categories and geographies, growing in protected cropping environments, using technology, targeting produce categories with 52-week production windows, and maintaining strong hygiene and post-harvest protocols. Costa’s operations include approximately 3,200 planted hectares of farmland, 30 hectares of glasshouse facilities and seven mushroom growing facilities across Australia, in addition to its international interests. Operational Structure Costa consists of three reportable segments: • Produce – operates principally in four core categories – berries, mushrooms, glasshouse-grown tomatoes and citrus. • International – comprises licensing of proprietary blueberry varieties and expansion of berry farming in attractive international markets, such as Morocco and China. • Costa Farms and Logistics (CF&L) – incorporates interrelated logistics, wholesale, avocado marketing and banana farming and banana marketing operations. Produce International Costa Farms and Logistics (CF&L) Berries Mushrooms Tomatoes Citrus Genetics Licensing China & Morocco Costa Farms Logistics Avocados Bananas 06 | Costa Group Holdings Limited | Annual Report 2016 Figure 2: Costa’s Pro Forma Business Performance by Segment for FY2016 Transacted Sales1 EBITDA before SGARA1 23% 2% 12% 12% Produce International CF&L Produce International CF&L 75% 76% 1. Transacted sales and EBITDA before SGARA are non-IFRS financial measures. See Table 12 on page 31 for details. Costa’s products are predominantly grown and sourced from Costa’s expansive footprint of farms and supplemented through a diverse network of third party growers. Morocco China Where we operate Western Australia Gingin Berry Farm Gingin Mushroom Farm Casuarina Jandakot DC Jandakot Mandurah Compost Facility Mandurah Queensland Glen Aplin Mushroom Farm Glen Aplin North Maclean Mushroom Farm North Maclean Tolga Berry Farm Tolga Atherton Berry Farm Atherton Walkamin Banana Farm Walkamin Tully Banana Farm Tully Mundubbera Grape Farm Mundubbera Brisbane Market Rocklea New South Wales Corindi Berry Farm Corindi Guyra Tomato Glasshouse Guyra Eastern Creek DC Eastern Creek Euston DC Grapes Euston Tumbarumba Berry Farms Tumbarumba Victoria Mushroom Farm Mernda Nagambie Compost Facility Nagambie Melbourne Market Epping Derrimut DC Derrimut Business Support Centre Ravenhall South Australia Monarto Mushroom Farm South Monarto Yandilla Citrus Farm and Packhouse Renmark Solora Citrus Farm Loxton Pike Creek Farm Lyrup Amaroo Citrus Farm Murtho Kangara Citrus Farm and Packhouse Murtho Adelaide Market Pooraka Tasmania Sulphur Creek Berry Farm Sulphur Creek Wesley Vale Berry Farm Wesley Vale East Devonport Berry Farm East Devonport Dunorlan Berry Farm Dunorlan Berry Farm North Launceston Devonport DC Quoiba Devonport Berry DC and Packhouse Devonport Spreyton Mushroom Farm Spreyton Dulverton Compost Facility La Trobe Costa Group Holdings Limited | Annual Report 2016 | 07 Company Profile continued Summary of Financial Performance – FY2013 to FY2016 Figure 3: Summary of Pro Forma Financial Performance FY2013 to FY2016 Transacted Sales ($m) Pro Forma Revenue ($m) Pro Forma EBITDA Before SGARA ($m) CAGR 13.0% . 0 2 2 9 . 9 7 4 8 . 8 2 2 7 . 5 2 4 0 1 , CAGR 12.2% CAGR 17.3% . 0 9 0 8 . 5 3 2 7 . 3 2 6 6 . 3 3 7 5 . 1 1 9 . 4 1 7 . 2 0 7 . 4 6 5 FY2013 FY2014 FY2015 FY16 FY2013 FY2014 FY2015 FY2016 FY2013 FY2014 FY2015 FY2016 Figure 4: Summary of Statutory Financial Performance FY2013 to FY2016 Statutory Revenue ($m) Statutory EBITDA Before SGARA ($m) Statutory Net Profit After Tax ($m) . 0 9 0 8 . 1 9 9 6 . 0 7 2 7 . 7 2 9 5 . 2 7 6 . 3 0 6 . 5 4 6 . 7 8 3 . 3 5 2 3 4 . ) 9 1 ( . . ) 3 0 4 ( FY2013 FY2014 FY2015 FY2016 FY2013 FY2014 FY2015 FY2016 FY2013 FY2014 FY2015 FY2016 08 | Costa Group Holdings Limited | Annual Report 2016 Growth and Future Prospects Costa aims to generate growth by investing in its core categories and strategically growing its offshore exposure in highly attractive international markets. During the year Costa continued to deliver on its growth projects, with the completion of a further 76 hectares in new berry plantings across its Australian farms, the commencement of production at the new 10-hectare tomato glasshouse in northern New South Wales, the further expansion of African blueberry operations in Morocco and the development of its berry farms in China. FY2017 will see continued execution of the domestic and international growth initiatives. Australian Berry Expansion Australian Citrus Expansion International – Morocco International – China • 76 hectares of new plantings across four regions in FY2016. • New Pike Creek farm acquired • Further 70 hectares planned in 2016. to be planted in 2017. • Year-round production achieved for blueberries. • Second growth plan announced during the year. • Further development of existing orchards with 170 hectares of new plantings and a further 129 hectares of topworking and replanting to be undertaken over the next three years. • New packing facility expected to be operational for FY2017 harvest. • Joint venture agreement with Driscoll’s executed in January 2016. • First farm established with second farm being established. The Board has declared a final dividend of 6.0 cents per share to be paid on 26 October 2016 (record date 28 September 2016), taking the 2016 full year dividend to 9.0 cents per share. The dividend will be fully franked. Costa Group Holdings Limited | Annual Report 2016 | 09 Harvest Calendar Blueberries Blueberries Blueberries Blueberries Blueberries Raspberries Raspberries Raspberries Strawberries Blackberries Mushrooms Mushrooms Tomatoes Tomatoes Tomatoes Bananas Bananas Corindi FNQ WA Tumbarumba TAS Corindi Gin Gin TAS TAS TAS Browns Whites Truss Cocktail Sweet Snacking Cavendish Lady Fingers January February March April May June July August September October November December January February March April May June July August September October November December Oranges Oranges Oranges Mandarins Mandarins Mandarins Mandarins Mandarins Mandarins Mandarins Mandarins Lemons Limes Grapefruit Grapefruit Persimmons Tangelos Avocados Grapes Valencia Navels Blood Orange Satsuma Clementines Daisy Imperial Afourer Ellendale Honey Murcott Ortanique Marsh Ruby Red 10 | Costa Group Holdings Limited | Annual Report 2016 Blueberries Blueberries Blueberries Blueberries Blueberries Raspberries Raspberries Raspberries Strawberries Blackberries Mushrooms Mushrooms Tomatoes Tomatoes Tomatoes Bananas Bananas Corindi FNQ WA Tumbarumba TAS Corindi Gin Gin TAS TAS TAS Browns Whites Truss Cocktail Sweet Snacking Cavendish Lady Fingers Oranges Oranges Oranges Mandarins Mandarins Mandarins Mandarins Mandarins Mandarins Mandarins Mandarins Lemons Limes Grapefruit Grapefruit Persimmons Tangelos Avocados Grapes Valencia Navels Blood Orange Satsuma Clementines Daisy Imperial Afourer Ellendale Honey Murcott Ortanique Marsh Ruby Red January February March April May June July August September October November December January February March April May June July August September October November December Costa Group Holdings Limited | Annual Report 2016 | 11 Sustainability Report Community We are actively involved in supporting the social fabric of the many regional communities in which we operate. Our footprint requires us to not only act and behave as a responsible corporate citizen, but to also work closely with communities so they can benefit in ways both economic and social. Half and full year performance appraisals are also undertaken for all salaried employees. The Company has recently established an online portal for the completion of performance reviews and the provision of employee feedback and satisfaction surveys. The Corporate Office is the first to utilise this tool beginning FY2017, with an objective to extend its reach to the business units in the future. Costa Sustainability Loop Human Capital Development The seasonal nature of the Costa business necessitates that our direct and indirect employee numbers will vary during the course of the year, and in FY2016 our workforce comprised 3,273 full-time equivalent employees. Recruitment and Talent Retention The Company has in place an active recruitment and talent retention program overseen by the Group Human Resources Manager. The CEO, in consultation with business unit General Managers and the Group Human Resources Manager, undertakes half and full year Capability Development Reviews, which cover critical roles and organisational structures in the Company. This forms the basis for identifying any talent and capability gaps within the Company’s key management roles and, where necessary, the need to recruit for those positions. People First Program The Company’s core values of passion, respect, sincerity, determination and accountability are the linchpin of our People First program. The program consists of bi-monthly presentations across all sites highlighting our core values and recognising individuals for demonstrating these values in their everyday work. The presentations share news of what is happening across the entire Company, and are divided into three main parts – values, safety and community. The presentations are also designed to act as a mechanism for employees to provide direct feedback on any issues, with a particular focus on values including how they are being practised within the Company. Education and Training The Company runs a number of education and training programs for our employees, including the Costa Manager Program, Costa Supervisor Program and Costa Finance Program. The Costa Manager Program is an experiential learning program designed to provide knowledge and skills for day-to-day leadership, supervision and management of staff through examples and applied learning that participants can adapt back to their own workplace. Participants gain skills in areas of team leadership, self-awareness, emotional intelligence, giving and receiving feedback, effective listening, problem solving and decision making in a team and managing conflict. More importantly, it is an opportunity for our managers across the country to come together and share experiences and ideas around the challenges they face at their sites. 104 employees have completed the program since its introduction in 2011, with 30 employees participating in the program during FY2016. As a Company engaged in intensive horticulture across a number of regional and rural communities, Costa recognises an obligation to conduct our business in a sustainable manner, both in an environmental and social context. We take great pride in knowing we are contributing to a healthier community and population, with the fresh produce that we grow and sell being recognised for its health and nutritional benefits. As a listed public company, we also recognise that our investors and broader stakeholders want to be kept informed and up to date on how the Company is tracking with respect to our environmental and social performance, including the publication of relevant data and progress reports. Our aim is to build on this reporting over the next two years through providing material via our Annual Report, with the ultimate goal being the production of an annual standalone Sustainability Report. This Sustainability Report, and those to be compiled in the future, will report on our performance as it relates to our people, environmental performance and interaction with stakeholders and the communities we operate in. People We put our people first through our core values of passion, respect, sincerity, determination and accountability. We recognise that they deserve a workplace which is safe and healthy, provides them with every opportunity to succeed, and rewards effort for their contribution to our success. Environmental We are committed to investing in farming practices that are innovative and promote sustainable horticulture and focusing on the need for responsible environmental stewardship with respect to our use of natural resources. 12 | Costa Group Holdings Limited | Annual Report 2016 Costa Group Holdings Limited | Annual Report 2016 | 13 Sustainability Report continued Our Safety Performance The Group’s total recordable injury frequency rate (TRIFR) fell by 12% during FY2016. There were no fatalities recorded at our operated sites, reflecting our continued commitment to the health and safety of our employees, contractors and visitors as well as aligning with initiatives implemented through the Company WHS Strategic Plan. The severity rate fell by 35% during FY2016. The principal contributing factor in this reduction was a focus on being more proactive with respect to early intervention of injury management. The Company’s New Claims Frequency Rate (NCFR) correlates with an improvement in safety performance and was a contributing factor in significantly reducing workers compensation premiums by 22%. Total Recordable Injury Frequency Rate (12-month Rolling Average)1 Severity Rate (12-month Rolling Average)1 2 9 8 3 . 2 7 0 3 . . 6 0 9 2 4 4 5 2 . 4 1 2 7 7 1 9 7 1 0 4 1 FY2013 FY2014 FY2015 FY2016 FY2013 FY2014 FY2015 FY2016 1. Per million hours worked. 1. Per million hours worked. Workers Compensation New Claims Frequency Rate (NCFR) (12-month Rolling Average)1 18 16 14 12 10 8 6 4 2 0 FY15 Jul 15 Aug 15 Sep 15 Oct 15 Nov 15 Dec 15 Jan 16 Feb 16 Mar 16 Apr 16 May 16 Jun 16 1. Per million hours worked. Workplace Health and Safety Our Approach The Costa ‘3 Pillars of Safety’ provides the Company with an effective WHS vision which supports our strategy to work towards a zero injury workplace. • To protect • To improve culture • To be the best Our Focus During FY2016, the following WHS initiatives were implemented or commenced: • Development of the ‘Costa Safety Leadership Program’. This program is designed to focus behaviours, challenge our beliefs and values about safety, and set a benchmark to improve our culture. The aim is to ensure this program is conducted with consistency across all of our sites, with over 600 employees participating in its first year. • The Company’s WHS Strategic Plan (year two of a three-year plan) was completed successfully with a number of key initiatives implemented to support the ‘3 Pillars of Safety’. Some key action outcomes for FY2016 were to regularly review our systems for compliance, review performance to measure and improve accountability, and to provide tools to effectively manage a safe workplace. • A review was completed to ensure that all contractors comply with the Company’s safety requirements, including the completion of site-specific inductions. Contractors are required to provide evidence of current insurances, inductions and training and legal compliance. This information is uploaded onto Skytrust, our fully integrated health and safety web-based IT solution and allows access for both the Company and contractors to actively manage safety compliance. 14 | Costa Group Holdings Limited | Annual Report 2016 Environmental The Company is actively seeking to improve the collection of environmental data and our reporting by way of making such data publicly available through a future Sustainability Report. FY2016 has seen a particular focus on identifying and implementing water-saving strategies. This has included building on existing activity and the introduction of new technology. Irrigation Innovation The Company’s citrus farms in the Riverland of South Australia utilise cutting-edge drip irrigation technology to precisely determine water usage. Enviro scan probes have been installed to monitor moisture in different patches of soil, with approximately 270 probes currently in use across our farms. Each probe has soil moisture sensors mounted on the probe rod. The sensor uses ‘capacitance’ technology, which measures the electrical resistance in the soil (dry soil = more resistance, wet soil = less resistance). The depth of the sensors is determined by a soil/irrigation agronomist, and are fixed in place on the probe. Sensors are normally placed at 10, 30, 50, 80 and 120cm below the soil surface, depending on the citrus variety, soil type and irrigation system. The sensors take a reading every hour of every day, and transmit the data back to the irrigation computer at each farm. The data is displayed in a graphical format on the computer for easy interpretation, and whilst data is available at each farm, it is also transmitted to the main office so the Horticultural Manager and Agronomist can view it remotely. This enables the Farm Manager, Irrigation Manager and Farm Agronomist to monitor depth and calculate the total amount of moisture in the soil and root zone at any time. The technology is used to determine if there is under irrigating (causing stress) or over irrigating (wasting water) of the trees, enabling informed decisions to apply precisely what water the trees require based on their current water use and climatic conditions via drip irrigation. Recycling Efficiency During FY2016 the Company installed a water recycling plant at its largest mushroom farm located in Mernda, Victoria. The farm uses up to two mega litres of water per week, with 40% of this total being used for plant and equipment wash down. Although some of this water was being captured, it was not being recycled. Management recognised the need to make better use of this waste water and the opportunity to utilise innovative technology to enable sustainable use of water resources. The solution was the installation of a waste water treatment plant, which now captures approximately one mega litre of waste water per week and allows for this water to be recycled and reused. Most importantly this has reduced the site’s usage of mains water by up to 40%. Food Safety National Quality Assurance System To guarantee safe, high quality produce, Costa operates a National Quality Management System (NQMS) across the group which meets the requirements of GFSI (Global Food Safety Initiative) benchmarked certification standard. The NQMS reflects the Company’s commitment to the provision of safe quality food to our customers and the end consumer. The Board and management have committed to ensuring sufficient resources are dedicated to maintaining the NQMS. Underpinning the NQMS is a suite of policies and procedures, including a Safe Food and Quality Policy, Personal Hygiene Policy and Allergen Management Policy. Management remains committed to ensuring all Costa personnel receive the necessary training to perform their duties safely and effectively. Food Quality To manage food quality Costa has adopted the Muddy Boots Greenlight QC system across multiple product categories; the Greenlight mobile technology software captures and processes information on product quality at the point of input, enabling the Costa businesses to quickly identify problem areas and collaborate with production units as well as external suppliers to deliver consistent improvements up and down the supply chain. Compliance and System Review Management is also committed to ensuring quality through a regular compliance and systems review. The NQMS is reviewed bi-annually by trained internal auditors and externally by BSI Group Australia and New Zealand Pty Ltd. In September 2015 BSI were engaged as the external compliance body responsible for auditing all Costa facilities nationally. The collaborative approach, strategic alignment and structured delivery of the auditing service provided by BSI has enabled Costa to provide guidelines for the review of the NQMS and facilitate the continuous improvement of the Company to ensure that food products produced and sold by Costa meet food safety regulatory requirements, and the quality expectations of our customers. Costa Group Holdings Limited | Annual Report 2016 | 15 Sustainability Report continued Product Recall/Withdrawal Costa has implemented the GS1 Recallnet system, a secure online portal which ensures communication of any product recall and withdrawals to all trading partners and regulators. GS1 Recallnet has been specifically designed to support the food and grocery industries. The GS1 Recallnet system ensures the right information is delivered to the right people at the right time. The system also significantly streamlines and improves the product recall and withdrawal process that enables fast and effective removal of unsafe or unsuitable products from the supply chain, retailers and the wider marketplace. Contaminated Product Insurance Costa has in place a Contaminated Products Insurance policy, providing coverage for a number of insured events, including accidental contamination, malicious product tampering, product extortion and government recall. The policy also enables access to our insurer’s crisis hotline, where specialists provide professional guidance and assistance in notifying customers and suppliers up and down the supply chain, communications with state and federal authorities and strategies on the best approach to effectively deal with a recall and help identify possible sources of the contaminants. Costa employees also undertake training funded by our insurer where internal workshops are conducted to focus on specific areas of food safety that are of concern to our customers. In FY2016, 96 personnel were involved in training sessions dealing with foreign object control and the principles and application of HACCP. Community The Company operates across more than 30 regional and rural communities and continues to support a wide array of organisations, including charities, not-for- profits, sporting clubs and educational/ training providers. In FY2016 Costa focused on ways in which it could provide young people with support to enable them to pursue education and career opportunities in the agricultural sector. 16 | Costa Group Holdings Limited | Annual Report 2016 Support for Education and Training Academic Scholarships As a significant economic presence in the north-west of Tasmania and in recognition of the historically limited opportunities for young people to undertake tertiary education from this region, Costa commenced a program of awarding undergraduate and postgraduate scholarships to students from the north-west to study agricultural science at the University of Tasmania in Hobart. Commencing from the academic year 2016, over the next four years Costa will award one scholarship per year to the value of $10,000 per annum for a local student from the north-west Coast to undertake a four-year agricultural science degree. Successful applicants are entitled to $40,000 in total over the life of the degree. One postgraduate scholarship per year over the next four years will also be awarded. The scholarships are administered by the University of Tasmania Foundation, and are used at the discretion of the recipient to cover study and living costs. Transitional Education During FY2016 our berry category worked with the Life Skills program for transitional education students at Don College in Tasmania. The program is for students with learning disabilities and focuses on teaching life skills and independence. The students visited the Company’s berry farms and met with managers and workers. They learnt about how berries are grown, the types of jobs people do on the farm and the basic safety and quality requirements of the work. They also experienced what it is like to be a harvest worker. The program also provides many links for numeracy and literacy activities. Our citrus category supported the GrowSmart program, where industry leaders unite to encourage children to become involved in horticultural science at a young age. Collaborating with local registered training organisations, TAFE, high schools and other relevant institutions, our citrus category has facilitated local field days that provide on-site and practical demonstrations of how our business operates and the job opportunities that are available for young people to pursue a career in agriculture. Management is also involved in the South Australian Riverland Industry Leaders Group, whose main role is to assist government in policy development and planning of training activities to ensure real job outcomes are achieved in the region. Contributing to Better Communities The Company has many dedicated employees who live and work in their local communities. We seek to support and encourage their efforts to undertake fundraising activities that not only sustain their local community, but also contribute to making them a better place to live. One such employee is Carmen White, who is the Harvest Manager at our mushroom farm in Monarto, South Australia. Carmen volunteers her time and effort to support and organise local fundraising activities, encouraging her workmates to also be actively involved. Below are just some of the fundraising activities Carmen and her workmates were involved in over the past year: • World’s Greatest Shave – a number of senior managers shaved their heads in support of raising money for the Leukaemia Foundation. • Biggest Morning Tea – held on-site to raise funds for the Murraylands Cancer Council. • 2016 Murray River Trail Running Festival – Silver Sponsorship with all funds raised going to the Juvenile Diabetes Research Foundation. • Relay for Life – 91 employees joined the ‘Mighty Mushroom Mites’ team to Raise funds for Murraylands Cancer Council. • Annual Golf Day in support of Community Lifestyles Murray Bridge – major sponsor. • Annual New Year’s Day fundraising cricket match – held at Murray Bridge cricket ground to raise funds for the Murraylands Cancer Council. More than 100 people were involved. Across all fundraising activities over the last year, Carmen and her workmates at the Monarto mushroom farm have helped to raise over $10,000. Carmen’s tireless efforts were recognised with her being awarded a well-deserved Chairman’s Award at the Costa Awards ceremony in October 2015. Costa Group Holdings Limited | Annual Report 2016 | 17 18 | Costa Group Holdings Limited | Annual Report 2016 Directors’ Report The Directors of Costa Group Holdings Ltd and its controlled entities (‘the Group’) present their report together with the financial report of the Group for the financial year ended 26 June 2016. 1. Directors The Directors of the Company at any time during or since the end of the financial year are: Neil Chatfield M.Bus, FCPA, FAICD Chairman and Independent Non-Executive Director Director since 7 October 2011 and Chairman since 24 June 2015. Member of the Audit and Risk Committee, Remuneration Committee and Nomination Committee. Neil is an established executive and Non-Executive Director with extensive experience across all facets of company management, and with specific expertise in financial management, capital markets, mergers and acquisitions, and risk management. Neil is currently the Chair and Non-Executive Director of Seek Limited. Neil is also a Non-Executive Director of Transurban Ltd, Iron Mountain Inc and Launch Housing, a not for profit organisation. He was previously a Non-Executive Director of Recall Holdings Ltd (to May 2016), Chair and Non-Executive Director of Virgin Australia Holdings Ltd (to May 2015) and Non-Executive Director of Grange Resources Ltd (to April 2014). Neil previously served as an executive Director and Chief Financial Officer of Toll Holdings Ltd (from 1997 to 2008). Frank Costa AO OAM Non-Executive Director Director since 8 June 2011. Member of the Remuneration Committee and Nomination Committee. Frank has been at the forefront of developing and building the Costa Group into a major horticultural and logistics company for more than 50 years. He has previously served as President of the Geelong Football Club (1998 – 2010) and tirelessly promotes the development of the City of Geelong and surrounding community. Frank has been honoured with an Order of Australia Medal for his services to youth and the community. During the past three years, Frank has not served as a Director of any other listed company. Harry Debney BAppSc (Hons) Managing Director and Chief Executive Officer Director since 5 January 2012 and Managing Director since 24 July 2015. Since his appointment as CEO in 2010, Harry has overseen the transition of the business from a privately owned company to its listing on the Australian Securities Exchange. Prior to joining Costa, Harry spent 24 years at Visy Industries, including eight years as Chief Executive Officer. During this time, he substantially grew the Visy business, both organically and through acquisitions. During the reporting period and the previous two years, Harry has not served as a Director of any other listed company. Harry was appointed as a Non-Executive Director of Kogan.com Ltd in May 2016, prior to its listing on the ASX in July 2016. Kevin Schwartz BSc (Accountancy) Non-Executive Director Director since 7 October 2011. Member of the Nomination Committee. Kevin is the President of Paine & Partners LLC which he cofounded in 2006. He was a Managing Director at the predecessor firm, Fox Paine & Company, which he joined in 2002. Kevin serves as a Director of AgBiTech Pty Ltd, Verdesian Life Sciences and Suba Seeds Company. He is also a member of the Rush Associates Board of the Rush University Medical Center. Kevin has previously served as a Director of Advanta, Seminis, Inc., Sunrise Holdings (Delaware), Inc. and on the Board of United American Energy Corp. During the past three years, Kevin has not served as a Director of any other listed company. Costa Group Holdings Limited | Annual Report 2016 | 19 Directors’ Report continued Peter Margin BSc (Hons), MBA Independent Non-Executive Director Director since 24 June 2015. Chair of the Remuneration Committee and member of the Audit and Risk Committee and Nomination Committee. Peter has many years of leadership experience in major Australian and international food companies, including Chief Executive of Goodman Fielder Ltd and before that Chief Executive and Chief Operating Officer of National Foods Ltd. Peter has also held senior executive roles in Simplot Australia Pty Ltd, Pacific Brands Ltd, East Asiatic Company and HJ Heinz Company Australia Ltd and is currently Executive Chairman of Asahi Beverages ANZ. Peter currently serves as a Non-Executive Director of PACT Group Holdings Ltd, Nufarm Ltd and Bega Cheese Ltd. He has recently announced his resignation from his position as Chairman and Non-Executive Director of Huon Aquaculture Ltd (effective 30 August 2016) and his position as Non-Executive Director of PMP Ltd (effective 29 August 2016). Peter was previously a Non-Executive Director of the NSX listed company Ricegrowers Ltd (to August 2015). Tiffany Fuller B.Com, GAICD, ACA Independent Non-Executive Director Director since 1 October 2015. Chair of the Audit and Risk Committee and member of the Nomination Committee. Tiffany has held various accounting, corporate finance, financial advisory and management consulting positions with Arthur Anderson in Australia, the United States and in England and subsequently held roles in investment banking and private equity with Rothschild Australia. As a Director in the Rothschild private equity group she focused on the management of Microcap Investments and early stage technology venture capital in Australia and New Zealand. Tiffany currently serves as Non-Executive Director of Computershare Ltd and Smart Parking Ltd and is the Chair of the Audit and Risk Committee of both companies. 2. Company Secretary David Thomas LLB, BSc (Hons) Mr Thomas joined the Company as General Counsel in July 2012 and was appointed to the position of Company Secretary in October 2012. In addition to being the Company Secretary, Mr. Thomas oversees the Group’s legal department and advises the Group on legal, risk and compliance matters. Prior to joining the Company, Mr Thomas was a Partner of Middletons (now K&L Gates), practising in corporate and commercial law. He has over 23 years’ experience in legal practice. 3. Officers who were previously Partners of the Audit Firm There are no officers of the Company during the financial year that were previously partners of the current audit firm, KPMG, at a time when KPMG undertook an audit of the Group. 20 | Costa Group Holdings Limited | Annual Report 2016 4. Directors’ Meetings The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the Directors of the Company during the financial year are: Director Neil Chatfield Frank Costa Harry Debney Kevin Schwartz Peter Margin Tiffany Fuller Board Meetings Held 9 9 9 9 9 5 Attended 9 8 9 9 9 4 Audit and Risk Committee Meetings Held 3 - - - 3 3 Attended 3 - - - 3 3 Remuneration Committee Meetings Held 1 1 - - 1 - Attended 1 1 - - 1 - Nomination Committee Meetings Held 2 2 - 2 2 2 Attended 2 2 - 1 2 1 5. Principal Activities Costa Group is Australia’s largest horticulture group and is the largest fresh produce supplier to the major Australian food retailers. The Group’s principal activities during the year were: • the growing of mushrooms, blueberries, raspberries, glasshouse grown tomatoes, citrus and other selected fruits within Australia; • the packing, marketing and distribution of fruit and vegetables within Australia and to export markets; • provision of chilled logistics warehousing and services within Australia; and • licensing of proprietary blueberry varieties and berry farming in international markets. No significant change in the nature of these activities occurred during the year. 6. Significant Changes in State of Affairs During the Year On 24 July 2015, the Group undertook an Initial Public Offering (IPO) on the Australian Securities Exchange. The purpose of the IPO was to: • provide Costa with access to capital markets to pursue further growth opportunities; • pay down the Group’s existing debt; and • allow existing shareholders to realise part of their investment. As a result of the IPO, the Group: • Issued new shares for $173.3 million; • Repaid the existing debt facility of $238.0 million and drew down $142.0 million under a new banking facility; • Disposed of existing options issued to management and Directors under the legacy LTI plan, which resulted in a cash payment of $11.9 million and acceleration of share-based payments expense $0.7 million; • Paid a dividend of $9.4 million in relation to the Redeemable Preference Shares (RPS). The RPS were subsequently converted to ordinary shares; and • Write-off of capitalised borrowing costs of $7.9 million. Costa Group Holdings Limited | Annual Report 2016 | 21 Directors’ Report continued 7. Review of Operations Results for the Financial Year Ended 26 June 2016 Pro Forma Results Pro forma results are provided for the financial year ended 26 June 2016 to allow shareholders to make a meaningful comparison with the pro forma Prospectus forecast. Pro forma adjustments have been made on a consistent basis with those made in the Prospectus. A reconciliation of the pro forma results to the statutory results is provided in Tables 7 and 8 below. Pro Forma Revenue EBITDA before SGARA Net profit after tax vs FY2016 Prospectus +9.6% +0.8% +3.6% vs FY2015 Actual +11.8% +27.6% +29.7% • Pro forma revenue, EBITDA before SGARA and NPAT have exceeded Prospectus forecast. • Favourable performance within the portfolio has offset challenging market conditions in the tomato category • Continued earnings growth contribution from the International segment from both African Blue and royalty income Table 1: Pro Forma Results for FY2016 Actual Compared to Prospectus Forecast1 and Prior Year Consolidated Income Statement A$m Transacted Sales2 Revenue Other revenue Total revenue Raw materials, consumables and third party purchases Employee benefits expense Other operating expense Share of associates profit EBITDA before SGARA Fair value movements in biological assets EBITDA Depreciation and amortisation Profit/(loss) on sale of assets Impairment losses EBIT Net interest expense Net profit/(loss) before tax Income tax expense NPAT 1. FY2016 forecast as per Costa’s Prospectus dated 25 June 2015. Pro Forma FY2016 Actual 1,042.5 Prospectus Forecast 978.8 Change 63.7 Pro Forma FY2015 Restated3 Actual 922.0 Change 120.5 809.0 12.7 821.7 (309.8) (276.4) (159.0) 14.4 91.1 4.3 95.4 (22.5) (1.0) - 71.9 (5.2) 66.7 (17.4) 49.3 738.0 7.9 745.9 (246.0) (262.7) (158.3) 11.5 90.4 2.3 92.8 (21.8) - - 70.9 (6.4) 64.5 (17.0) 47.6 71.0 4.8 75.8 (63.7) (13.6) (0.7) 2.9 0.7 2.0 2.6 (0.7) (1.0) - 1.0 1.1 2.1 (0.4) 1.7 723.5 9.0 732.4 (279.2) (243.8) (147.6) 9.5 71.4 3.4 74.7 (19.0) 0.5 (1.6) 54.6 (5.6) 49.0 (11.0) 38.0 85.5 3.7 89.3 (30.5) (32.6) (11.4) 4.9 19.7 1.0 20.7 (3.5) (1.5) 1.6 17.4 0.3 17.7 (6.4) 11.3 2. Transacted Sales is a non-IFRS operating measure. See Table 2 for a reconciliation of Transacted Sales to statutory and pro forma revenue. Further details on Transacted Sales are provided in Table 12. 3. FY2015 results have been restated as a result of the early adoption of the amendments made to Accounting Standards AASB 116 Property, plant and equipment and AASB 141 Agriculture in relation to bearer plants. 22 | Costa Group Holdings Limited | Annual Report 2016 Pro Forma Results vs FY2015 Actual Pro forma revenue increased by $85.5 million from the prior year due to stronger results in the Produce segment with solid revenue growth achieved across all core categories. This was slightly offset by the CF&L segment due to depressed banana prices caused by industry oversupply. Pro forma EBITDA before SGARA increased by $19.7 million from prior year with all three segments recording an increase in underlying earnings. The Produce and International segments, in particular, reported strong earnings growth of 24% and 78%, respectively, from prior year. Pro Forma Results vs FY2016 Prospectus Forecast Pro forma revenue was $71.0 million above Prospectus forecast with uplift across all Produce categories except tomatoes which was impacted by weaker pricing. Pro forma EBITDA before SGARA was $0.7 million above Prospectus forecast, with solid performance throughout the Group, offset by negative pricing impact for tomatoes in the Produce segment. Table 2: Reconciliation of Transacted Sales to Pro Forma and Statutory Revenue Reconciliation of Transacted Sales A$m Transacted Sales Agency revenue adjustments Joint venture adjustments Driscoll’s Australia Partnership consolidation adjustments Royalty income Statutory and pro forma revenue Note 1 2 3 4 FY2016 Actual 1,042.5 (31.9) (27.6) (169.7) (4.2) 809.0 1. Under AAS, the invoiced value of agency sales is excluded from revenue with only the commission associated with the agency sales recognised. 2. Costa’s proportionate share of joint venture sales relating to the African Blue and Polar Fresh joint ventures, of 49% and 50% respectively. Under AAS, joint ventures are accounted for under the equity method, with only Costa’s share of joint venture NPAT recognised in profit or loss. 3. Costa owns 50% of the equity of Driscoll’s JV. Transacted Sales includes 100% of Driscoll’s JV sales, after eliminating Costa produce sales to the Driscoll’s JV. 4. Costa earns royalty income on the licensing of Costa blueberry varieties in Australia, the Americas and Africa. Royalty income is classified as other income in the statement of profit or loss. Costa Group Holdings Limited | Annual Report 2016 | 23 Directors’ Report continued Statutory Results Highlights of full year statutory results: Pro Forma Revenue EBITDA before SGARA Net profit after tax vs FY2016 Prospectus +9.3% +5.8% +14.0% vs FY2015 Actual +11.3% +11.4% +488.4% • Strong earnings growth reported across the Group despite the negative impact of IPO costs of $21.8 million and start-up costs for Costa Asia of $2.0 million recognised during the year. Table 3: Statutory Results for FY2016 Actual Compared to Prospectus Forecast and Prior Year Consolidated Income Statement A$m Revenue Other revenue Total revenue Raw materials, consumables and third party purchases Employee benefits expense Other operating expense Share of associates profit EBITDA before SGARA Fair value movements in biological assets EBITDA Depreciation and amortisation Profit/(loss) on sale of assets Impairment losses EBIT Net interest expense Net profit/(loss) before tax Income tax expense Net profit after tax Non-controlling interest NPAT attributable to shareholders 1. See note 3 in Table 1. Statutory FY2016 Actual 809.0 12.7 821.7 (311.8) (276.4) (180.8) 14.4 67.2 4.3 71.6 (22.5) 1.4 - 50.5 (14.8) 35.7 (10.4) 25.3 0.0 25.3 Prospectus Forecast 740.2 7.9 748.1 (251.3) (262.7) (182.1) 11.5 63.5 2.3 65.9 (21.8) - - 44.0 (14.5) 29.5 (7.4) 22.2 0.9 23.1 Statutory FY2015 Restated1 Actual 727.0 9.0 736.0 (283.7) (243.8) (157.7) 9.5 60.3 3.4 63.7 (19.6) 0.5 (18.9) 25.6 (20.7) 5.0 (0.6) 4.3 - 4.3 Change 68.8 4.8 73.6 (60.4) (13.6) 1.3 2.9 3.7 2.0 5.7 (0.7) 1.4 - 6.5 (0.3) 6.2 (3.1) 3.1 (0.9) 2.2 Change 82.0 3.7 85.7 (28.0) (32.6) (23.1) 4.9 6.9 1.0 7.9 (3.0) 0.9 18.9 24.8 5.9 30.7 (9.8) 21.0 0.0 21.0 Statutory Results vs FY2015 Actual Statutory revenue increased by $82.0 million from the prior year, driven by the Produce segment as outlined above in the pro forma results. Additionally, the FY2015 statutory results include revenues of $3.7 million from the Menindee and St. George grape farms which were closed in January 2015. Statutory EBITDA before SGARA increased by $6.9 million compared to prior year. The statutory results were impacted significantly by $21.8 million of transaction costs incurred associated with the Initial Public Offering (2015: $5.2 million). Fair value movements in biological assets increased by $1.0 million, predominantly due to stronger pricing in the citrus category. Depreciation and amortisation increased by $3.0 million in line with increased capital expenditure on the berry growth projects as well as the commencement of depreciation on the new tomato glasshouse. Profit on sale of assets includes $2.4 million gain on the sale of the St. George grape farm. The FY2015 result also includes significant impairment costs resulting from the downsizing of the grape category and closure of two sites during the year. Net interest expense includes all-in net cost of debt (including guarantee fees and amortisation of facility establishment fees). The Group refinanced its debt facility upon completion of the IPO in July 2015 which resulted in write-off of $7.9 million of borrowing costs on the pre-existing facility. Despite this, net finance costs were $5.9 million lower than prior year due to a combination of lower prevailing interest rates and lower average debt throughout the year. Income tax expense increased to $10.4 million in line with a higher PBT compared to prior year. The prior year also benefited from an overprovision of $1.8 million as a result of R&D credits received. FY2016 income tax expense also includes $1.7 million of deferred tax asset not recognised on capital losses associated with site closures during the year. As a result, the effective tax rate increased to 29%. 24 | Costa Group Holdings Limited | Annual Report 2016 Segment Information Produce Highlights of pro forma results: Pro Forma Transacted Sales Revenue EBITDA before SGARA vs FY2016 Prospectus +5.6% +12.5% -6.1% vs FY2015 Actual +16.1% +18.7% +24.2% • Transacted Sales and revenue growth on FY2015 achieved across all four categories. • Revenue growth led by citrus, berry and mushroom volume growth. • EBITDA before SGARA growth of 24.2% against FY2015, but below prospectus forecast due to tomato pricing impact. Figure 1: Pro Forma Revenue, Transacted Sales and EBITDA before SGARA Results From FY2014 to FY2016 50.9m 55.7m 69.1m EBITDA before SGARA Revenue Transacted Sales 482.9m 531.7m 631.1m 635.5m 695.9m 808.2m FY2014 Actual FY2015 Actual FY2016 Actual Table 4: Selected Pro Forma Financial Information for the Produce Segment Produce A$m Transacted sales Revenue EBITDA before SGARA EBITDA before SGARA margin Pro Forma FY2016 Actual 808.2 631.1 69.1 10.9% Prospectus Forecast 765.0 560.8 73.6 13.1% Change 43.2 70.3 (4.5) (220 bps) Pro Forma FY2015 Actual 695.9 531.7 55.7 10.5% Change 112.3 99.4 13.4 50 bps Produce pro forma revenue increased by $99.4 million on FY2015. The drivers for the increase include: • continued expansion of the berry category with 76 hectares of new plantings during the year; • solid year in mushroom driven by production yield improvement; • exceptional year in citrus due to a combination of strong yields, good quality, favourable exchange rates and contribution from the new Amaroo citrus farm; and • revenue growth from additional production of sweet snacking tomatoes from the new glasshouse. • However this was offset by price deflation across the tomato category which experienced cyclical lows due to high levels of supply combined with sluggish supermarket sales over the summer period. Pro forma EBITDA before SGARA increased by $13.4 million against FY2015. This was predominantly driven by the revenue growth in the citrus, berry and mushroom categories, partially offset by weaker tomato pricing. 40% 30% 20% 10% 0% Figure 2: Produce Pro Forma Revenue Growth Percentage on FY15 Mushroom Berry Tomato Citrus Costa Group Holdings Limited | Annual Report 2016 | 25 Directors’ Report continued Costa Farms and Logistics Highlights of pro forma results: Pro Forma Transacted sales Revenue EBITDA before SGARA vs FY2016 Prospectus +3.4% -1.3% +16.7% vs FY2015 Actual -1.6% -5.9% +12.9% • Revenue down on FY2015 primarily due to lower banana pricing. • EBITDA before SGARA growth of $1.5 million on FY2015 due to improved logistics earnings through cost control and service volumes. Figure 3: Pro Forma Revenue, Transacted Sales and EBITDA Before SGARA Results from FY2014 to FY2016 14.4m 9.3m 10.5m EBITDA before SGARA Revenue Transacted Sales 227.1m 231.5m 217.8m 250.3m 250.6m 246.7m FY2014 Actual FY2015 Actual FY2016 Actual Table 5: Selected Pro Forma Financial Information for the CF&L Segment Costa Farms and Logistics A$m Transacted sales Revenue EBITDA before SGARA EBITDA before SGARA margin Pro Forma FY2016 Actual 246.7 217.8 10.5 4.8% Prospectus Forecast 238.7 220.7 9.0 4.1% Change 8.0 (2.9) 1.5 80 bps Pro Forma FY2015 Actual 250.6 231.5 9.3 4.0% Change (3.9) (13.7) 1.2 80 bps Pro forma revenue decreased by $13.7 million against FY2015. This was mainly driven by price deflation on bananas caused by industry oversupply and a higher proportion of marketed produce being undertaken on an agency basis. Figure 4: CF&L Pro Forma Revenue Growth Percentage on FY15 Pro forma EBITDA before SGARA increased by $1.2 million against FY2015 driven by: • improved earnings from the distribution centres through increased throughput and strong cost management; and • strong performance from the Polar Fresh joint venture through enhanced gain share outcomes. This was partially offset by the negative impact from banana price deflation. ) % 6 ( ) % 6 ( Costa Farms Logistics 26 | Costa Group Holdings Limited | Annual Report 2016 International Highlights of pro forma results: Pro Forma Transacted sales EBITDA before SGARA vs FY2016 Prospectus +46.5% +46.2% vs FY2015 Actual +79.1% +78.1% • Strong Transacted Sales growth on both FY2015 and Prospectus forecast with increase in both African Blue and royalty income. • EBITDA $5.0 million above FY2015, and $3.6 million above Prospectus forecast. Figure 5: Pro Forma Revenue, Transacted Sales and EBITDA Before SGARA Results from FY2014 to FY2016 4.9m 6.4m EBITDA before SGARA Transacted Sales 11.4m 10.3m 15.3m FY2014 Actual FY2015 Actual FY2016 Actual 27.4m Table 6: Selected Pro Forma Financial Information for the International Segment International A$m Transacted sales Revenue EBITDA before SGARA EBITDA before SGARA margin Pro Forma FY2016 Actual 27.4 - 11.4 nm Prospectus Forecast 18.7 - 7.8 nm Change 8.7 - 3.6 nm Pro Forma FY2015 Actual 15.3 - 6.4 nm Change 12.1 - 5.0 nm Pro forma International segment results are comprised of the African Blue JV and royalty income from the licensing of Costa’s blueberry genetics. African Blue is accounted for as an associate and therefore no revenue is recognised. Royalty income is recognised as other income in profit or loss, as opposed to revenue. Transacted sales increased by $12.1 million, or 79.1%, on FY2015. This was primarily driven by: • African Blue FY2016 season exceeding expectations with favourable growing conditions enabling a longer growing season. Consistent high quality has continued to position African Blue as a premium brand attracting strong pricing in target markets of UK and Europe, even in the most competitive parts of the season; and • Royalty income through increased fruit based sales with farm expansion in existing regions as well as from plantings in newer regions. Pro forma EBITDA before SGARA growth was $5.0 million, or 78.1%, against FY2015. Figure 6: International Transacted Sales Growth Percentage on FY15 % 4 4 9 . % 6 6 7 . African Blue Royalities Costa Group Holdings Limited | Annual Report 2016 | 27 Directors’ Report continued Reconciliation of Pro Forma Results to Statutory Results The pro forma financial information has been derived from the statutory financial information adjusted for certain items as detailed below. Pro forma results are provided to allow shareholders to make a meaningful comparison with the pro forma Prospectus forecast and to make an assessment of the Group’s performance as a listed company. The table below shows the reconciliation of Costa’s pro forma financial information to the statutory financial information as presented in the Financial Statements. Table 7: Reconciliation of Pro forma EBITDA Before SGARA to Statutory EBITDA Before SGARA FY2016 Consolidated EBITDA before SGARA A$m Statutory EBITDA before SGARA Site closures/exits Historical transaction costs IPO transaction costs Historical governance structure costs Listed company costs Costa Asia Pro forma EBITDA before SGARA Refer Table 8 below for notes. Note 1 2 3 4 5 6 Actual 67.2 - - 21.8 - - 2.0 91.1 Table 8: Reconciliation of Pro Forma Net Profit After Tax to Statutory Net Profit After Tax Prospectus Forecast 63.5 - - 23.8 - - 3.1 90.4 FY2016 FY2015 Actual 60.3 3.7 0.3 5.2 2.6 (2.0) 1.3 71.4 Consolidated net profit after tax A$m Statutory net profit after tax Site closures/exits IPO transaction costs Costa Asia Interest expense adjustment Pro forma NPAT Note 1 3 6 7 Actual 25.3 0.1 15.3 2.0 6.7 49.3 Prospectus Forecast 22.2 - 16.7 3.1 5.6 47.6 1. These adjustments represent the removal of results and impairment losses from closed sites and divested businesses, including: Menindee and St. George grape farms which were closed in FY2015 as part of the downsizing of the grape category. The closures of these sites and divestment of businesses have not impacted the financial performance of the remaining Costa operations. 2. Removal of historical transaction costs paid in relation to previous acquisitions. 3. An adjustment has been made to remove the costs associated with the IPO process, including adviser fees, break costs associated with the Existing Banking Facilities and share-based payment expense relating to the exercise of share options held by Costa Directors and management. 4. An adjustment has been made in FY2015 to remove Board related costs and management share-based payments under the pre-IPO governance structure. 5. An adjustment has been made in FY2015 for estimated costs associated with being a listed public company. Costs include estimated Board costs, management share-based payments and incremental compliance related costs. 6. An adjustment has been made to remove the forecast results from the China operation. Due to the expected start-up of this operation in FY2015 and FY2016, the China operation is forecast to report an operating loss in these years. 7. Pro forma interest expense has been adjusted to reflect the terms of the New Banking Facility post completion of the IPO. 28 | Costa Group Holdings Limited | Annual Report 2016 Balance Sheet Table 9: Selected Consolidated Balance Sheet as at 26 June 2016 Selected Balance Sheet A$m Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets 2016 137.5 431.1 568.5 101.0 107.9 208.9 359.6 2015 130.5 397.1 527.6 94.4 235.8 330.2 197.4 Change 6.9 34.0 40.9 6.6 (127.8) (121.3) 162.2 Net Assets Net assets increased by $162.2 million. This increase was primarily driven by: • reduction in borrowings of $129.1 million as the Group refinanced its finance facility post completion of the IPO; • a net increase in property, plant and equipment of $29.3 million in line with the berry and tomato capital expenditure; and • an increase of $5.8 million in biological assets due to strong yields and pricing from the citrus category and berry footprint expansion. Net Debt Table 10: Consolidated Net Debt as at 26 June 2016 Net Debt A$m Bank loans Capitalised loan establishment fees included in borrowings Gross debt Less: cash and cash equivalents Net debt 2016 104.5 (0.7) 103.8 (4.0) 99.8 2015 241.0 (8.1) 232.9 (9.5) 223.4 Net debt as at 26 June 2016 was $99.8m and consisted of $4.0 million in cash and $103.8 million of borrowings. Net debt decreased by $123.6 million during the year as the Group refinanced its finance facility upon completion of the IPO. Under the new banking facilities in place at 26 June 2016, the Group was required to meet set covenant compliance ratios which included total leverage ratio (TLR) and interest coverage ratio (ICR). Both said covenants were comfortably met during the year. Cash Flow Table 11: Pro Forma Cash Flow Before Financing, Tax and Dividends Consolidated cash flow A$m EBITDA before SGARA Less: Share of profit of JVs Dividends from JVs Non-cash items in EBITDAS Change in working capital Net cash flow from operating activities before interest and tax Maintenance capital expenditure Free cash flow Productivity and growth capital expenditure Payments for business acquisitions Repayment of loans from investments Proceeds from sale of investments Disposal of property, plant and equipment Net cash flow before financing, tax and dividends Cash conversion ratio1 1. Defined as free cash flow divided by EBITDA before SGARA. Pro Forma FY2016 Actual 91.1 (14.4) 8.1 0.7 (5.3) 80.1 (12.1) 68.0 (36.6) (5.3) 1.9 - 0.3 28.3 75% Prospectus Forecast 90.4 (11.5) 7.8 - (2.9) 83.8 (12.2) 71.6 (27.1) - - - - 44.5 79% Change 0.6 (2.9) 0.3 0.7 (2.5) (3.7) 0.1 (3.6) (9.5) (5.3) 1.9 - 0.3 (16.1) Pro Forma FY2015 Actual 71.4 (9.5) 6.1 - (5.9) 62.1 (9.8) 52.3 (73.6) - - - 0.3 (21.0) 73% Change 19.7 (4.9) 2.0 0.7 0.5 18.0 (2.3) 15.7 37.0 (5.3) 1.9 - 0.0 49.3 Costa Group Holdings Limited | Annual Report 2016 | 29 Directors’ Report continued Dividends From Joint Venture Dividends from JVs increased by $2.0 million on FY2015 resulting from strong financial performance by all three joint ventures. Working Capital Working capital increased by $5.3 million in FY2016 primarily as a result of additional exports due to a strong start to the citrus export season. Capital Expenditure Operating capital expenditure increased by $2.3 million against FY2015 to $12.1 million in line with Prospectus forecast. This was mainly due to the relocation of Costa Farms Melbourne to Epping and an upgrade to the packing line at the banana farm at Tully. Growth capital expenditure includes tomato glasshouse (completed) and berries expansion. This expenditure was higher than prospectus forecast due to some expenditure planned for FY2015 being spent in FY2016, and initial expenditure on the second Berry expansion program. Productivity and growth capital expenditure was higher than prospectus forecast due to some timing into Q1 FY2016 on the tomato glasshouse project. Strategy and Growth Costa’s current position, operating platform and world class practices provide it with multiple growth drivers in the Australian domestic market and in highly attractive international markets. Costa’s corporate strategy involves a number of initiatives aimed at sustaining long-term growth, which include: • Continuing to build Costa’s market position and expansion of farming footprints; • Expanding global licensing of Costa’s blueberry varieties; • Continuing to invest in and expand research and development (R&D) capabilities; and • Developing new channels to market through product innovation, new customer development and expansion of export markets. Costa maintains a prudent and disciplined approach to capital deployment and continues to invest in growth opportunities in the medium to long-term that generate shareholder value. Material Business Risks The material business risks faced by the Company that are likely to have an effect on the financial prospects of the Company are: • Production risks: Changes in weather, climate or water availability can cause price and yield volatility for Costa. Prices can also be negatively impacted by excess supply. Costa partially mitigates against weather risk by investing in weather protective growing environments and equipment. Approximately 75% of Costa’s produce related EBITDA before SGARA is derived from crops currently grown under cover indoors or under permanent tunnels. While protected cropping reduces the risk of disease, this risk is still apparent. If Costa’s existing water rights are reduced by regulatory changes or if Costa is unable to secure sufficient water for the implementation of its growth projects, this could negatively impact on Costa’s operational and financial performance. • Brand risk: Quality issues, product recall, contamination, public health issues, disputes or adverse media coverage could damage Costa’s brands or their image which could adversely impact Costa’s financial performance. • Customer risk: Costa’s top three customers comprised approximately 70% of FY2016 produce sales. Most customer arrangements are uncontracted and supplied at market prices which are subject to fluctuation. Any contractual agreements have supply periods typically for one season or one to two years. • Regulatory changes: Costa is a significant beneficiary of the import restrictions in place for fresh fruits and vegetables including mushrooms, bananas, tomatoes and berries. Any changes to these import restrictions could have an adverse impact on margins and volumes. However the perishable nature of certain produce also acts as a natural barrier against imports. As Costa operates in the food sector, it is also required to comply with a wide range of other laws and regulations which include food standards, labelling and packaging, fair trading and consumer protection, environment, quarantine rules, customs, etc. Any change to the rules could adversely impact Costa’s operations in the form of higher costs and lower margins for the business. • Competition from new market entrants: While Costa’s operations currently benefit from scale and access to superior genetics, this competitive landscape may change over time. If one or more competitors or new market entrants obtained access to favourable genetic varieties which compete in the same categories as those of Costa, or if they achieve greater scale, this could have a material adverse impact on the financial performance and prospects of Costa. • Foreign exchange risk: Costa is exposed to foreign exchange risk from a number of sources, namely from the export of produce to various countries including Japan and the United States, and through the earnings it generates from its international operations, including the African Blue and Costa Asia joint ventures. Unfavourable movements in the foreign exchange rates between the Australian dollar and other currencies such as the US dollar, Japanese yen and Moroccan dirham can have a material adverse impact on the overall financial performance of Costa. • Sovereign risk associated with foreign operations: Costa has a significant interest in the African Blue joint venture in Morocco and is in the process of finalising a joint venture with Driscoll’s Strawberry Associates Inc. in China. A change in the laws, regulations, policies, government or political and legal system in Morocco or China could materially and adversely impact Costa’s net assets or profitability. 30 | Costa Group Holdings Limited | Annual Report 2016 Non-IFRS Measures Throughout this report, Costa has included certain non-IFRS financial information, including EBITDA before SGARA and Transacted Sales. Costa believes that these non-IFRS measures provide useful information to recipients for measuring the underlying operating performance of Costa’s business. Non-IFRS measures have not been subject to audit. The table below provides details of the operating and financial Non-IFRS measures used in this report. Table 12: Non-IFRS Measures EBIT EBITDA EBITDA before SGARA Non-IFRS Operating Measures Transacted Sales Earnings before interest and tax. Earnings before interest, tax, depreciation and amortisation. EBITDA adjusted for fair value movements in biological assets. For horticultural companies, EBITDA is typically adjusted for fair value movements in biological assets due to the growing and harvesting cycles for fruit and vegetables, and the accounting treatment of live produce and picked produce. The fair value movement in self-generating or regenerating assets (SGARA) is non-cash; therefore, EBITDA before SGARA is used in preference to EBITDA for Costa. Transacted Sales are used by management as a key measure to assess Costa’s sales and marketing performance and market share. Transacted Sales represent the aggregate volume of sales in which Costa is involved in various capacities (including sales of third party-grown produce marketed by Costa under agency arrangements), as well as royalty income. Transacted Sales are not considered by Costa to be a revenue measure. There are material differences between the calculation of Transacted Sales and the way in which revenue is determined under AAS. Transacted Sales comprise: • statutory revenue; • gross invoiced value of agency sales of third party produce; • Costa’s proportionate share of joint venture sales relating to the African Blue and Polar Fresh joint ventures; • royalty income from the licensing of Costa blueberry varieties in Australia, the Americas and Africa; and • 100% of Driscoll’s JV sales after eliminating Costa produce sales to the Driscoll’s JV. Prior to the formation of Driscoll’s JV in 2010, all of Costa’s domestic sales and marketing activities for the berry category were managed by Costa. 8. Dividends Costa Group Holdings Ltd declared and paid an interim dividend of $0.03 per share during the year ended 26 June 2016. The Board has approved a final dividend of 6.0 cents per share with record date of 28 September 2016 and payment date of 26 October 2016. This dividend will be fully franked. As this dividend was approved after year end, it has not been accrued as at 26 June 2016. This brings the total dividend payment for FY2016 to 9.0 cents per share, in line with Prospectus forecast of approximately 60% of pro forma NPAT. FY2017 dividends will be balanced against the Company’s need to fund growth objectives, but indicatively will be in the range of 50-70% of NPAT (pre-SGARA). 9. Likely Developments The Group will continue to explore opportunities that meet the Group’s long-term growth and development goals. The goal is to provide a superior sustainable increase in profits. Further information about likely developments in the operations of the Group and the expected results of those operations in future financial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the Group. Costa Group Holdings Limited | Annual Report 2016 | 31 Directors’ Report continued 10. Environmental Regulation The Group is committed to conducting business activities and having due respect for the environment while continuing to meet expectations of shareholders, employees, customers and suppliers. The Group is subject to environmental regulations under various federal, state and local laws relating predominately to air, noise and water emission levels. The Group is committed to achieving a level of environmental performance that meets or exceeds Federal, State and local requirements, and improves its use of natural resources and minimises waste. 11. Directors’ Interests The relevant interest of each Director in the shares and options issued by Costa Group Holdings Ltd, as notified by the Directors to the ASX in accordance with S205G(1) of the Corporations Act 2001, at the date of this report is as follows: Neil Chatfield Frank Costa1 Harry Debney Kevin Schwartz 2 Peter Margin Tiffany Fuller Ordinary Shares 22,222 10,432,099 1,032,078 29,242 14,350 10,000 Options Over Ordinary Shares 400,000 - 1,891,944 - - - 1. Frank Costa’s interests represent an indirect interest in approximately 31.67% of the ordinary shares held by Costa AFR Pty Ltd as trustee for the Costa AFR Unit Trust as a result of his shareholding in a series of other entities. 2. Kevin Schwartz’s interests represent an indirect interest in approximately 0.1% of the ordinary shares held by P&P COS Holdings B.V. as a result of his shareholding in a series of other entities. 12. Share Options Unissued Ordinary Shares Under Options Unissued ordinary shares of Costa Group Holdings Ltd under option at the date of this report are as follows: Number of Unissued Ordinary Shares Under Option 400,000 50,000 1,621,428¹ 1,891,944 Issue Price of Shares $1.45 $1.45 $2.25 $2.81 Expiry Date of the Options October 2019 October 2024 June 2020 August 2019 1. These options represent options granted to management under the FY2016 LTI plan, including 282,738 options issued to Linda Kow and 407,738 options issued to George Haggar, as KMP of the Company, and 61,905 options issued to David Thomas, the Company secretary of the Company. All unissued shares are ordinary shares in the Company, or will be converted into ordinary shares immediately after exercise of the relevant option. No option holder has any right under the options to participate in any other share issue of the Group. Shares Issued on Exercise of Options During the financial year, the Company did not issue any ordinary shares as a result of the exercise of options. The Company issued 2,263,649 fully paid ordinary shares in consideration for the disposal of 6,366,531 options, as described in section 6.3.3.2 of the Company’s prospectus dated 25 June 2015. 32 | Costa Group Holdings Limited | Annual Report 2016 13. Indemnification and Insurance of Directors and Officers Pursuant to its constitution, the Company may indemnify Directors and officers, past and present, against liabilities that arise from their position as a Director or officer allowed under law. The Company has entered into deeds of indemnity, insurance and access with its existing and past Directors, its company secretary and the Directors of the Company’s subsidiaries. Under the deeds of indemnity, insurance and access, the Company indemnifies each Director or officer against all liabilities to another person that may arise from their position as a Director or officer of the Company or its subsidiaries, to the extent permitted by law. The deeds stipulate that the Company will meet the full amount of any such liabilities, including reasonable legal costs and expenses. During the financial year, the Group paid premiums to insure all Directors and officers against certain liabilities as contemplated under the Company’s constitution. Disclosure of the total amount of the premiums paid under this insurance policy is not permitted under the provisions of the insurance contract. Further disclosure required under section 300(9) of the Corporations Act 2001 is prohibited under the terms of the contract. 14. Indemnification and Insurance of Auditors No indemnities have been given or insurance premiums paid, during or since the end of the year, for any person who is or has been an auditor of the Group. 15. Non-audit Services During the year KPMG, the Group’s auditors, has performed certain other services in addition to the audit and review of the financial statements. The Board has considered the non-audit services provided during the year by the auditor and is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services were subject to the corporate governance procedures adopted by the Group and have been reviewed by the Audit and Risk Committee to ensure they do not impact the integrity and objectivity of the auditor; and • the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Group, acting as an advocate for the Group or jointly sharing risks and rewards. Details of the amounts paid to the auditor of the Group, KPMG, and its network firms for audit and non-audit services provided during the year are set out below. Other services provided by KPMG Taxation compliance and other taxation advisory services (including R&D) Other assurance services (including IPO services) Other services (including IPO services) 2016 2015 2014 175,000 - 21,000 196,000 277,030 785,000 575,230 1,637,260 109,160 60,000 14,500 183,660 16. Rounding Off The financial report is presented in Australian dollars with all values rounded to the nearest thousand unless otherwise stated, in accordance with ASIC Corporations Instrument 2016/191. 17. Lead Auditor’s Independence Declaration The Lead auditor’s independence declaration is set out on page 44 and forms part of the Directors’ report for the financial year ended 26 June 2016. Costa Group Holdings Limited | Annual Report 2016 | 33 Directors’ Report continued Remuneration report (audited) 1. Introduction The Directors are pleased to present the FY2016 Remuneration Report, outlining the Board’s approach to the remuneration for key management personnel (KMP). KMP are individuals who have authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly, and comprise the Directors and the senior executives of the Group, as listed below. Name Directors Neil Chatfield Frank Costa Kevin Schwartz Peter Margin Tiffany Fuller Harry Debney Executives Linda Kow George Haggar Position Held Chairman Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director (Appointed 1 October 2015) Chief Executive Officer, Managing Director Chief Financial Officer Chief Operating Officer The information in this report has been audited as required by section 308(3C) of the Corporations Act 2001 (Cth). 2. Corporate Governance 2.1 Remuneration Committee The Group has established a Remuneration Committee that is comprised of Non-Executive Directors, the majority of whom are independent in accordance with the Remuneration Committee Charter. The Remuneration Committee is responsible for assisting and advising the Board on: • Remuneration policies and practices for executives, and employees of the Group; • Incentive schemes and equity-based remuneration plans; and • Shareholder and other stakeholder engagement in relation to the Group’s remuneration policies and practices. A full charter outlining the Remuneration Committee’s responsibilities is available at: http://investors.costagroup.com.au/investor- centre/?page=corporate-governance. 2.2 Use of Remuneration Consultants The Remuneration Committee can engage remuneration consultants to provide it with information on current market practice, and other matters to assist the Committee in the performance of its duties. The Board did not use any remuneration consultants for the purposes of remuneration for FY2016. The Remuneration Committee has engaged Ernst and Young to undertake a review of the Long Term Incentive Plan (‘LTIP’) for FY2017. The objectives in the review include benchmark material and market positioning of the LTIP to align participant performance with the long-term growth and business strategy delivering shareholder value. 2.3 Associated Policies The Group has established a number of policies to support a strong governance framework, including a Diversity Policy, Disclosure Policy and Securities Trading Policy. These policies and procedures have been implemented to uphold ethical behaviour and responsible decision making. Further information on the Group’s policies is available at: http://investors.costagroup.com.au/investor-centre/?page=corporate-governance. 34 | Costa Group Holdings Limited | Annual Report 2016 Remuneration report (audited) continued 3. Executive Remuneration 3.1 Remuneration Framework The remuneration framework adopted by the Board is designed to attract and retain key talent, reward the achievement of strategic objectives and align reward with the creation of shareholder wealth. The key principles supporting the Group’s remuneration framework are: Principle Competitive Remuneration Objective Reward employees fairly and competitively for their contributions to the Group’s success. Application • Total remuneration is set having regard to the individual’s capabilities and experience. Performance Driven Executives are rewarded for achieving strategic goals that create sustainable growth in shareholder wealth. • Remuneration is set with regard to an appropriate comparator group of companies within the consumer discretionary and consumer staples sectors of the S&P/ASX Small Ordinaries Index. • The Board obtains independent advice on the appropriateness of total remuneration package. • Significant ‘at risk’ reward ensures executive’s interests remain aligned with creation of shareholder value. Equity is used as a key element of the variable remuneration to align executives and shareholders. • At risk rewards are driven by the Group’s short and long-term performance incentives. Performance measures are designed to ensure a focus on long-term sustainable growth. • Equity is used as a key element of the variable remuneration to align executives and shareholders. 3.1.1 Remuneration overview for FY2016 The FY2016 remuneration for the CEO, CFO and COO (‘Executive KMP’) includes a combination of fixed remuneration, short-term incentives and long-term incentives in the form of options over shares. 3.1.2 Remuneration mix for FY2016 Total remuneration for the Executive KMP includes both fixed and ‘at risk’ reward components. ‘At risk’ reward includes short and long-term incentives, which are based on individual and group performance outcomes. In FY2016, the Executive KMP received fixed remuneration, together with the following ‘at risk’ components: • short-term incentives, as outlined in section 3.2.2; and • long-term incentives, as outlined in sections 3.3 and 3.4, as outlined in Section 7 – Directors’ and Executive Officers’ Remuneration. The mix of fixed versus variable ‘at risk’1 remuneration payable for FY2016 for the Executive KMP was as follows: CEO CFO COO 59% 68% 68% Fixed At risk 41% 32% 32% 1. Includes cash and deferred equity component of FY2016 STI plan (section 3.2.2) and share-based payments associated with the FY2016 LTI arrangements (sections 3.3 and 3.4). Costa Group Holdings Limited | Annual Report 2016 | 35 Directors’ Report continued Remuneration report (audited) continued 3.2 Remuneration Components 3.2.1 Fixed Remuneration Total fixed remuneration (‘TFR’) is comprised of cash salary, superannuation contributions, and other non-monetary benefits such as car leasing arrangements and additional superannuation contributions. TFR is reviewed annually by the Remuneration Committee with regard to individual and Group performance. The Committee’s review of TFR has consideration for the Executive KMP’s total remuneration package. 3.2.2 Short Term Incentive (STI) Plan FY2016 STI Plan Overview The STI Plan enables Executive KMP and other members of senior management to receive an incentive payment calculated as a percentage of total fixed remuneration (TFR) conditional on achieving EBIT hurdles as set out below. Solely for the purposes of this section 3.2.2 all references to EBIT mean management EBIT-S: • If the Group achieves less than 90% of budget EBIT for the year, no STI will be paid. • Target STI is paid to a participant on the Group achieving 100% of budget EBIT and the participant satisfying their other STI performance measures, with pro rata payments if EBIT is between 90% and 100% of budget EBIT. • Stretch STI is payable if the Group achieves over 100% of budget EBIT, with the maximum STI being payable at 110% of budget EBIT (and the participant satisfying their other STI performance measures). The stretch STI component is measured solely on EBIT and is calculated on a straight line basis between 100% and 110% of budget EBIT. The EBIT hurdle was selected on the basis that it has a direct correlation to the financial performance of the Group. 2016 Short Term Incentive Plan features The table below outlines the key features of the FY2016 STI Plan, as it applied to the Executive KMP and other members of senior management: Objective Participants Performance Period Opportunity To reward participants for achieving goals directly linked with the Group’s business strategy All executives and selected senior management Financial year ending 26 June 2016 • CEO – Target STI is 40% of TFR, with a maximum opportunity of 60% TFR for exceeding stretch targets. • CFO, COO – Target STI is 30% of TFR, with a maximum opportunity of 50% TFR for exceeding stretch targets. Performance Measures STI will be assessed against both financial and non-financial measures, and will be weighted as follows: Payment Method Measure EBIT Cash Flow Individual Performance Weighting 50% 30% 20% Individual Performance will be measured against KPIs appropriate for the executive’s role and will include key business measures such as market share, innovation, safety, quality and people. • Cash – Two thirds will be paid in cash following the end of the performance year; and • Deferred – One third will be deferred for 12 months and settled in equity, if the participant remains employed by the Group at that time (or has ceased employment in circumstances where they are regarded as a ‘good leaver’). 36 | Costa Group Holdings Limited | Annual Report 2016 Remuneration report (audited) continued The performance against the key targets identified under the STI Plan resulted in each KMP receiving an incentive as follows: KMP CEO CFO COO Target STI $380,000 $142,500 $205,500 % of Target STI Achieved in the Year 123% 131% 131% 3.3 LTIP – Legacy arrangements for CEO implemented prior to Listing In July 2015, the CEO was granted 1,891,944 options as part of his LTIP. The Options included an exercise price that was set at a 25% premium to the Listing Price. The key terms of this grant are outlined below. Term Consideration for grant Instrument Number of options granted Exercise price Description Nil Option to acquire ordinary shares in Costa Group Holdings Ltd 1,891,944 $2.81 Performance and vesting period This is a 25% premium to the share price on Listing. July 2015 to August 2017 Vesting condition Entitlements Service conditions Options will vest following the announcement of the Group’s FY2017 results. Fifty percent (50%) of the Options (or shares acquired by exercising the Options) will remain in escrow until the announcement of the Group’s FY2018 results. Successful Listing of the Group’s shares on the ASX within a specified time period and the CEO’s continued employment at the date of vesting. Options will not carry rights to dividends or voting rights prior to vesting. The options will be subject to tenure conditions and will be forfeited where the CEO resigns or is dismissed prior to the vesting date, except that the options will not be forfeited where the CEO is deemed a ‘good leaver’, unless otherwise determined by the Board. The CEO did not participate in the FY2016 LTIP disclosed in section 3.4. The CEO will participate in future LTIPs beyond FY2016. Costa Group Holdings Limited | Annual Report 2016 | 37 Directors’ Report continued Remuneration report (audited) continued 3.4 LTIP for FY2016 The Board introduced an LTIP in FY2016 for the executive KMP (other than the CEO) and other senior executives. Term Eligibility Description CFO, COO and selected members of the senior management team. Consideration for grant Instrument Number of options granted Exercise price Performance period Performance measure Performance assessment The CEO will not be entitled to participate in the LTIP due to the options that were issued to the CEO in FY2016 prior to the Company’s Listing (as described in section 3.3 above). Nil Options to acquire ordinary shares in Costa Group Holdings Limited. The number of options was determined based on a set percentage of the participant’s TFR (‘LTI Incentive Amount’). The options were valued by an independent external valuer, using a Monte Carlo simulation model. The number of options issued to each participant was determined by dividing that participant’s LTI Incentive Amount by the value per Option as determined by the independent valuer. $2.25 per share This was the market value of Costa Group Holdings shares at date of Listing. The FY2016 LTI performance period will be from the date of Listing to June 2017. Fifty percent (50%) of options (or shares acquired by exercising options) will be subject to an additional sale restriction until August 2018 (following release of the FY2018 results). For all future grants, it is intended that the performance period will be three years. 50% – Earnings Per Share (EPS) (basic) compound annual growth rate (CAGR) over the performance period. 50% – Relative total shareholder return (TSR). The LTI will be tested at the end of the vesting period, and will vest in line with the below schedule: 50% EPS Less than 15% CAGR 15% CAGR Between 15% and 18% CAGR Above 18% CAGR 50% Relative TSR % of options that vest Nil 50% 50% – 100% on a straight line sliding scale 100% % of options that vest Nil 50% 50% – 100% on a straight line sliding scale 100% Less than 50th percentile 50th percentile Between 50th percentile and 75th percentile 75th percentile and above The comparator group for relative TSR is comprised of companies in the consumer discretionary and consumer staples sectors of the S&P/ASX Small Ordinaries Index. Each company’s (and Costa’s) share price will be measured using the average closing price over 60 days up to (but excluding) the first day of the performance period, and the average closing price over 60 days up to and including the last day of the performance period. Options will not carry rights to dividends or voting rights prior to vesting. Participants must not sell, transfer, encumber, hedge or otherwise deal with their options granted under the LTIP. Participants will be free to deal with the Shares allocated on exercise of the options, following payment of the exercise price, subject to the requirements of the Company’s securities trading policy and the escrow on the FY2016 options until August 2018 (as outlined above). Any unvested options granted under the LTIP will be forfeited where the participant is dismissed during the performance period, or resigns in circumstances where they are not considered to be a ‘good leaver’. Where the participant is considered a ‘good leaver’ (which includes death, disability or redundancy), the unvested options and/or performance rights will remain on foot subject to Board discretion. Entitlements Restrictions on dealing Service conditions 38 | Costa Group Holdings Limited | Annual Report 2016 Remuneration report (audited) continued 4. Executive Remuneration Disclosure 4.1 Executives’ Contract Terms A summary of the key terms of employment for executives as at 30 June 2016 is presented in the below table: Executive Harry Debney Linda Kow George Haggar Role Chief Executive Officer Chief Financial Officer Chief Operating Officer Notice by the Group 6 Months 3 Months 3 Months Notice on Resignation 6 Months 3 Months 3 Months 5. Non-Executive Directors The details of fees paid to Non-Executive Directors in FY2016 are included in Section 7 of this report. Non-Executive Directors’ fees were fixed and they did not receive any performance based remuneration. The table below outlines the fee structure for Non-Executive Directors in FY2016. The annual aggregate fee pool for Non-Executive Directors is $1,200,000. Board and committee fees, which are inclusive of statutory superannuation contributions, are included in this aggregate fee pool. Table 5.1 Board/Committee Board base fee Audit and Risk Committee Remuneration Committee Nomination Committee Chairman Fee ($) 230,000 (inclusive of Committee fees) 20,000 15,000 - Member Fee ($) 100,000 10,000 7,500 - 6. Relationship Between Remuneration Policy and Group Performance Key Performance Indicator ‘000 Revenue EBITDA before SGARA EBIT Dividend paid for the year (cents per ordinary share) Notes in relation to KMP transactions: 1. The pro forma information presented above is unaudited. FY2016 Actual 809,027 67,248 50,477 3.00 FY2016 Pro forma1 809,027 91,059 71,915 3.00 FY2015 Restated2 Actual 727,029 60,226 25,551 nil FY2015 Restated2 Pro forma1 723,500 71,000 54,900 nil FY2014 Actual 699,075 64,536 31,142 nil FY2014 Pro forma1 662,300 70,200 59,700 nil 2. FY2015 has been restated as a result of the early adoption of the amendments made to Accounting Standards AASB 116 Property, plant and equipment and AASB 141 Agriculture in relation to bearer plants. Costa Group Holdings Limited | Annual Report 2016 | 39 Directors’ Report continued Remuneration report (audited) continued 7. Directors’ and Executive Officers’ Remuneration Details of the nature and amount of each major element of remuneration of each Director of the Company, and other KMP of the consolidated entity are: Short-Term Post-Employment Long-Term Benefits Termination Share-Based Payments Total Non-Executive Directors4,5 Neil Chatfield3 Frank Costa1 Kevin Schwartz2 Peter Margin Tiffany Fuller 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 Managing Director and Executive Officers Harry Debney Linda Kow George Haggar 2016 2015 2016 2015 2016 2015 Salary and Fees $ STI (Cash) $ 210,321 104,423 98,173 - 100,000 - 108,947 7,403 82,192 - 931,217 931,217 455,692 406,217 665,692 616,217 - - - - - - - - - - 312,770 399,691 124,718 143,047 179,857 212,047 Non-Monetary Benefits $ - - 167 201,063 - - - - - - - 7,592 - - - - Sub-Total $ 210,231 104,423 98,340 201,063 100,000 - 108,947 7,403 82,192 - 1,243,987 1,338,500 580,410 549,264 845,549 828,264 Notes in relation to the table of Directors’ and executive officers’ remuneration: 1. In FY2015, the aggregate Directors’ fees paid to Frank Costa and Robert Costa was $500,000. By agreement between those Directors, this amount was paid to State Logistics Pty Ltd (2016: nil) and then distributed between the two Directors. The Group is unable to confirm the individual amounts paid to Frank Costa. 2. In FY2015, the aggregate Directors’ fees paid to Kevin Schwartz, Bruno Ferrari Garcia de Alba, Greg Hunt and Angelos Dassios were $400,000 (2016: nil). By agreement between those Directors, this amount was paid to Paine & Partners LLC, and then distributed between the three Directors. The Group is unable to confirm the individual amounts paid to these Directors. 3. In FY2015, $100,000 of the Directors’ fees paid to Neil Chatfield were paid through State Logistics Pty Ltd. In FY2016, the amounts were paid directly to Neil Chatfield. 4. Bruno Ferrari Garcia De Alba, Robert Costa, Greg Hunt and Angelos Dassios were Non-Executive Directors in the prior year but resigned as Non-Executive Directors effective 24 June 2015. 5. Reasonable travel, accommodation and other costs incurred by Directors in the course of their duties are reimbursed to Directors, in addition to the remuneration noted above. Superannuation Benefits Long Service Leave Termination Benefits $ $ 19,679 9,327 - - - - - - 11,053 7,808 19,308 18,783 19,308 18,783 19,308 18,783 $ - - - - - - - - - - 15,547 24,939 11,295 8,154 15,990 13,044 - - - - - - - - - - - - - - - - 68,800 $ - - - - - - - - - 272,275 357,194 75,071 134,759 108,260 173,060 $ 230,000 173,223 107,667 201,063 100,000 120,000 7,403 90,000 - - 1,551,117 1,739,416 686,084 710,960 989,107 1,033,151 40 | Costa Group Holdings Limited | Annual Report 2016 Remuneration report (audited) continued 7. Directors’ and Executive Officers’ Remuneration Details of the nature and amount of each major element of remuneration of each Director of the Company, and other KMP of the consolidated entity are: Remuneration report (audited) continued Salary and Fees STI (Cash) Short-Term Non-Monetary Benefits Post-Employment Superannuation Benefits $ Long-Term Benefits Long Service Leave $ Termination Termination Benefits $ 19,679 - 9,327 - - - 11,053 - 7,808 - 19,308 18,783 19,308 18,783 19,308 18,783 - - - - - - - - - - 15,547 24,939 11,295 8,154 15,990 13,044 - - - - - - - - - - - - - - - - Non-Executive Directors4,5 Neil Chatfield3 Frank Costa1 Kevin Schwartz2 Peter Margin Tiffany Fuller Harry Debney Linda Kow George Haggar Managing Director and Executive Officers 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 $ 210,321 104,423 98,173 100,000 108,947 7,403 82,192 - - - 931,217 931,217 455,692 406,217 665,692 616,217 $ - - - - - - - - - - 312,770 399,691 124,718 143,047 179,857 212,047 167 201,063 7,592 $ - - - - - - - - - - - - - Sub-Total $ 210,231 104,423 98,340 201,063 100,000 108,947 7,403 82,192 - - 1,243,987 1,338,500 580,410 549,264 845,549 828,264 Notes in relation to the table of Directors’ and executive officers’ remuneration: 1. In FY2015, the aggregate Directors’ fees paid to Frank Costa and Robert Costa was $500,000. By agreement between those Directors, this amount was paid to State Logistics Pty Ltd (2016: nil) and then distributed between the two Directors. The Group is unable to confirm the individual amounts paid to Frank Costa. 2. In FY2015, the aggregate Directors’ fees paid to Kevin Schwartz, Bruno Ferrari Garcia de Alba, Greg Hunt and Angelos Dassios were $400,000 (2016: nil). By agreement between those Directors, this amount was paid to Paine & Partners LLC, and then distributed between the three Directors. The Group is unable to confirm the individual amounts paid to these Directors. 3. In FY2015, $100,000 of the Directors’ fees paid to Neil Chatfield were paid through State Logistics Pty Ltd. In FY2016, the amounts were paid directly to Neil Chatfield. 4. Bruno Ferrari Garcia De Alba, Robert Costa, Greg Hunt and Angelos Dassios were Non-Executive Directors in the prior year but resigned as Non-Executive Directors effective 24 June 2015. 5. Reasonable travel, accommodation and other costs incurred by Directors in the course of their duties are reimbursed to Directors, in addition to the remuneration noted above. Share-Based Payments Total $ - 68,800 - - - - - - - - 272,275 357,194 75,071 134,759 108,260 173,060 $ 230,000 173,223 107,667 201,063 100,000 - 120,000 7,403 90,000 - 1,551,117 1,739,416 686,084 710,960 989,107 1,033,151 Costa Group Holdings Limited | Annual Report 2016 | 41 Directors’ Report continued Remuneration report (audited) continued 8. Equity Instruments 8.1 Movements in Shares The movement during the reporting period in the number of ordinary shares in Costa Group Holdings Ltd held, directly, indirectly or beneficially, by each key management person, together with shares held by their close family members, is set out below: Neil Chatfield (directly and indirectly held) Neil Chatfield (close family members) Peter Margin (indirectly held) Tiffany Fuller (directly held) Frank Costa1, 2 Kevin Schwartz 3, 4 Harry Debney (directly and indirectly held) Linda Kow (directly held) George Haggar (directly held) Notes in relation to Table 8.1 (Movement in shares) Other Shares Converted to Ordinary Shares - - - - 10,432,099 38,990 - - - Held at 28 June 2015 - - - - - - - - - Shares Acquired 22,222 29,222 14,350 10,000 - - 23,041 - - Shares Sold - 15,222 - - - 9,748 - - - Other Changes5 - - - - - - 1,009,037 213,404 327,336 Held at 26 June 2016 22,222 14,000 14,350 10,000 10,432,099 29,242 1,032,078 213,404 327,336 1. At 28 June 2015 (prior to the Company’s Listing on the ASX), Frank Costa held an indirect interest in Class B shares and redeemable preference shares in the Company. 2. Frank Costa‘s interests represent an indirect interest in approximately 31.67% of the ordinary shares held by Costa AFR Pty Ltd as trustee for the Costa AFR Unit Trust as a result of his shareholding in a series of other entities. 3. At 28 June 2015 (prior to the Company’s Listing on the ASX), Kevin Schwartz held an indirect interest in Class A shares and redeemable preference shares in the Company. 4. Kevin Schwartz’s interests represent an indirect interest in approximately 0.1% of the ordinary shares held by P&P COS Holdings B.V. as a result of his shareholding in a series of other entities. 5. Other changes represent shares that were issued in consideration for disposal of legacy LTI options, as described in section 6.3.3.2 of the Company’s prospectus dated 25 June 2015. 8.2 Options Over Equity Instruments Granted as Compensation The movement during the reporting period, in the number of options over ordinary shares granted as compensation to KMP, is as follows: Number of Options Granted During 2016 1,891,944 282,738 407,738 Grant Date 15 July 2015 26 October 2015 26 October 2015 Fair Value Per Option $ 0.230 0.390 0.390 Exercise Price Per Option $ 2.81 2.25 2.25 Expiry Date 31 August 2019 30 June 2020 30 June 2020 Number of Options Vested During 2016 - - - Harry Debney Linda Kow George Haggar 8.3 Details of Equity Incentives Affecting Current and Future Remuneration The table below outlines each KMP’s unvested options at the end of the reporting period. Details of vesting profiles of the options held by each KMP are detailed below: Harry Debney Linda Kow George Haggar Instrument Options Options Options Number 1,891,944 282,738 407,738 Grant Date % Vested in Year % Forfeited in Year - 15 July 2015 - 26 October 2015 - 26 October 2015 - - - Financial Year in Which Grant Vests 2018 2018 2018 42 | Costa Group Holdings Limited | Annual Report 2016 Remuneration report (audited) continued 8.4 LTI Grants and Movement During the Year The movement during the reporting period, of options over ordinary shares held, directly, indirectly or beneficially, by each KMP, including their related parties, is as follows: Held at Granted as 26 June 2015 Compensation - 1,891,944 282,738 407,738 400,000 9,459,722 2,000,677 3,068,778 Neil Chatfield Harry Debney Linda Kow George Haggar Exercised - - - - Other Changes1 - (9,459,722) (2,000,677) (3,068,778) Held at Vested During the Year 400,000 9,459,722 2,000,677 3,068,778 26 June 2016 400,000 1,891,944 282,738 407,738 Vested and Exercised or Disposed of at 26 June 2016 - 9,459,722 2,000,677 3,068,778 Vested and Exercisable 26 June 2016 400,000 - - - 1. Other changes represent options that were disposed of in July 2015 in consideration for a cash payment (30%) and shares (70%), as described in section 6.3.3.2 of the Company’s prospectus dated 25 June 2015. 8.5 Key Management Personnel Transactions Mr Frank Costa (Director) • Payment of rent by Costa’s Pty Ltd to Frank Costa for the lease of 1111 Aviation Road, Werribee of AUD $1 (2015: AUD $1). • Costa Asset Management Pty Ltd as trustee for Costa Asset Management Unit Trust provided advisory services to the Group in relation to the Company’s ASX Listing, for which an advisory fee was paid totalling $5,374,474 GST inclusive (2015: Nil). Although Costa Asset Management Unit Trust is not a related party of Frank Costa, it is understood that Costa Asset Management Unit Trust subsequently paid part of that advisory fee to entities associated with Frank Costa. The Group is unable to determine how much was paid to Frank Costa. Mr Kevin Schwartz (Director) • An employee of Paine and Partners, LLC, an entity associated with P&P COS Holdings B.V. P&P COS Holdings B.V. is a 9.16% shareholder in Costa Group Holdings Ltd. Paine and Partners, LLC provided advisory services to the Group in relation to the Company’s ASX Listing, for which advisory fees of AUD $6,433,312 (2015: AUD $nil) were paid. This Directors’ Report is made in accordance with a resolution of the Directors. Neil Chatfield Chairman Dated at Melbourne 24 August 2016 Costa Group Holdings Limited | Annual Report 2016 | 43 Auditor’s Independence Declaration 44 | Costa Group Holdings Limited | Annual Report 2016 Consolidated Statement of Profit and Loss and Other Comprehensive Income For the Year Ended 26 June 2016 Revenue Sales revenue Other revenue Less: expenses Raw materials, consumables and third party purchases Depreciation and amortisation expenses Employee benefits expenses Occupancy expenses Finance costs Profit on sale of assets Impairment losses Leasing expenses Freight and cartage Gain on fair value adjustments – biological assets Gain/(loss) on fair value of derivatives Other expenses Share of net profits of associates and joint ventures accounted for using the equity method Profit before income tax Income tax expense Profit for the year Total comprehensive income for the year Profit attributable to owners of Costa Group Holdings Ltd Total comprehensive income attributable to owners of Costa Group Holdings Ltd Earnings per share for profit attributable to ordinary equity holders: Basic earnings per share Diluted earnings per share 2016 $‘000 809,027 12,834 821,861 (311,761) (22,507) (276,376) (52,716) (14,283) 1,387 - (9,117) (49,346) 4,349 (870) (69,382) (800,622) 14,442 35,681 (10,423) 25,258 25,258 25,258 25,258 2016 Cents 8.04 7.96 2015 Restated1 $‘000 727,029 9,202 736,231 (283,728) (19,554) (243,755) (49,852) (20,895) 470 (18,941) (8,095) (44,731) 3,350 58 (55,120) (740,793) 9,515 4,953 (640) 4,313 4,313 4,313 4,313 2015 Cents 0.11 0.11 Notes A2 A2 A2 A2 A2 A2 D1 E2 A3 A3 1. Refer to note E3 for details regarding the restatements as a result of the early adoption of the amendments made to Accounting Standards AASB 116 Property, plant and equipment and AASB 141 Agriculture in relation to bearer plants. The above Consolidated Statement of Profit and Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. Costa Group Holdings Limited | Annual Report 2016 | 45 Consolidated Statement of Financial Position As at 26 June 2016 ASSETS Current assets Cash and cash equivalents Receivables Inventories Biological assets Other assets Assets classified as held for sale Total current assets Non-current assets Receivables Other financial assets Equity accounted investments Intangible assets Deferred tax assets Property, plant and equipment Total non-current assets Total assets LIABILITIES Current liabilities Payables Borrowings Provisions Derivative financial liabilities Current tax liabilities Total current liabilities Non-current liabilities Borrowings Redeemable preference shares Provisions Derivative financial liabilities Total non-current liabilities Total liabilities NET ASSETS EQUITY Share capital Profit reserve Share based payment reserve Accumulated losses TOTAL EQUITY Notes B1 B2 B3 B6 B5 E5 B2 E6 D1(b) B8 E2 B7 B4 C1 B9 C8 E2 C1 C2 B9 C8 C3 C4 E1 2016 $‘000 2015 Restated1 $‘000 4,002 72,807 17,904 37,408 5,333 - 137,454 - 327 33,665 142,782 4,957 249,324 431,055 568,509 81,638 - 13,217 242 5,879 100,976 103,766 - 4,172 - 107,938 208,914 9,504 62,551 16,124 31,571 6,517 4,242 130,509 125 2,036 27,587 141,865 5,504 219,987 397,104 527,613 74,495 4,885 13,483 - 1,563 94,426 228,004 1,119 3,290 3,337 235,750 330,176 359,595 197,437 395,688 20,005 523 (56,621) 359,595 238,564 4,313 1,759 (47,199) 197,437 1. Refer to note E3 for details regarding the restatements as a result of the early adoption of the amendments made to Accounting Standards AASB 116 Property, plant and equipment and AASB 141 Agriculture in relation to bearer plants. The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 46 | Costa Group Holdings Limited | Annual Report 2016 Consolidated Statement of Changes in Equity As at 26 June 2016 Consolidated Balance as at 30 June 2014 Profit for the year Transfer to profit reserve Total comprehensive income for the year1 Transactions with owners in their capacity as owners: Options granted/vested during the year Balance restated as at 28 June 20151 Balance as at 29 June 2015 Profit for year Transfer to profit reserve Total comprehensive income for the year Transactions with owners in their capacity as owners: Options granted/vested during the year Conversion of redeemable preference shares Issue of ordinary shares net of transaction costs Dividend paid on redeemable preference shares Dividend paid on ordinary shares Disposal of share options Settlement of share based payment Balance as at 26 June 2016 Share Capital $‘000 238,564 - - - - 238,564 238,564 - - - 1,126 166,200 - - (11,884) 1,682 395,688 Share Based Payment Reserve $‘000 Accumulated Losses $‘000 Profit Reserve $‘000 - - 4,313 4,313 Total Equity $‘000 191,814 4,313 - 4,313 (47,199) 4,313 (4,313) - 449 - - - 1,310 1,759 1,759 - - - (47,199) - 4,313 1,310 197,437 (47,199) 25,258 (25,258) - 4,313 - 25,258 25,258 197,437 25,258 - 25,258 446 - - - - - (1,682) 523 - - - (9,422) - - - (56,621) - - - - (9,566) - - 20,005 446 1,126 166,200 (9,422) (9,566) (11,884) - 359,595 1. Refer to note E3 for details regarding the restatements as a result of the early adoption of the amendments made to Accounting Standards AASB 116 Property, plant and equipment and AASB 141 Agriculture in relation to bearer plants. The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. Costa Group Holdings Limited | Annual Report 2016 | 47 Consolidated Statement of Cash Flows For the Year Ended 26 June 2016 Cash flow from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid Dividends received Income taxes paid Net cash provided by operating activities Cash flow from investing activities Payments for property, plant and equipment Proceeds from sale of investments Dividends from equity accounted investments Acquisition of investments Payment for intangible assets Acquisition of business (net of cash acquired) Proceeds from sale of intangible assets Proceeds from sale of property, plant and equipment Net cash used in investing activities Cash flow from financing activities Settlement of derivatives Proceeds from share issue, net of transaction costs Acquisition of shares Dividend payments on ordinary shares Dividend payments on redeemable preference shares Redemption of options Proceeds from loans from related party associates Repayment of borrowings Proceeds from borrowings Net cash provided by/used in financing activities Reconciliation of cash Cash at beginning of the financial year Net decrease in cash held Cash at end of financial year Notes 2016 $‘000 2015 $‘000 B1(a) 815,709 (743,863) 115 (6,774) 113 (2,523) 62,777 (48,433) 150 8,109 - (249) (5,272) 3,772 2,725 (39,198) (3,957) 518,730 (377,370) (9,566) (9,422) (11,884) 1,884 (676,502) 539,006 (29,081) 746,337 (698,330) 209 (18,218) 42 (2,064) 27,976 (80,762) 4,034 6,099 (4) (2,217) - 4,855 298 (67,697) - - - - - - - - 22,994 22,994 9,504 (5,502) 4,002 26,231 (16,727) 9,504 B1 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 48 | Costa Group Holdings Limited | Annual Report 2016 Notes to the Consolidated Financial Statements Index to Notes Overview Reporting Entity Basis of Preparation of the Financial Report Critical Accounting Estimates and Judgements New Standards Adopted by the Group Note Index A. Group Performance A1. Segment Performance A2. Revenue and Expenses A3. Earnings Per Share A4. Subsequent Events B. Operating Assets And Liabilities B1. Cash and Cash Equivalents B2. Receivables B3. Inventories B4. Payables B5. Other Assets B6. Biological Assets B7. Property, Plant and Equipment B8. B9. Provisions B10. Contingent Liabilities Intangible Assets 50 50 52 52 52 52 54 56 56 57 57 58 58 59 59 59 61 63 66 67 C. Capital Structure and Financing C1. Borrowings C2. Redeemable Preference Shares C3. Share Capital C4. Reserves C5. Dividends C6. Capital and Risk Management C7. Capital and Leasing Commitments C8. Derivative Financial Instruments D. Group Structure D1. Joint Ventures and Associates D2. List of Subsidiaries D3. Related Party Disclosures D4. Parent Entity Disclosures D5. Deed of Cross Guarantee E. Other E1. Share-based Payments E2. Taxation E3. New Accounting Standards E4. Auditor’s Remuneration E5. Assets Classified as Held for Sale E6. Other Financial Assets E7. Other Accounting Policies 67 67 68 69 70 70 70 76 76 77 77 78 79 80 80 82 82 84 86 88 88 89 90 Costa Group Holdings Limited | Annual Report 2016 | 49 Notes to the Consolidated Financial Statements continued Overview Reporting Entity The financial report is for Costa Group Holdings Ltd and its controlled entities (the ‘Group’). Costa Group Holdings Ltd (the ‘Company’) is a company limited by shares, incorporated and domiciled in Australia. Costa Group Holdings Ltd is a for profit entity for the purpose of preparing the financial statements. The Group’s registered office is Unit 1, 275 Robinsons Road, Ravenhall, VIC, Australia, 3023. The financial report is a general purpose financial report which has been prepared in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The financial report complies with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB). The financial report was authorised for issue by the Directors as at 24 August 2016. Basis of Preparation of the Financial Report The notes to the financial report include additional information required to understand the Group’s financial statements that is material and relevant to its operations, financial position and performance. Information is considered material and relevant if, the amount in question is significant because of its size or nature or it helps to explain the impact of significant changes in the business, for example, acquisitions and asset write-downs. The notes are organised into the following sections: Group Performance: focuses on the Group’s financial results and performance. It provides disclosures relating to income, expenses, segment information, material items and earnings per share. Operating assets and liabilities: provides information regarding the physical assets and non-physical assets used by the Group to generate revenues and profits. This section also explains the accounting policies applied and specific judgements and estimates made by management in arriving at the value of these assets and liabilities. Capital structure and financing: provides information about capital management practices. Particularly, how much capital is raised from shareholders (equity) and how much is borrowed from financial institutions (debt) in order to finance our activities both now and in the future. Group structure: explains aspects of the Group’s structure. Other: provides information on other items relevant to the Financial Report. Historical Cost Convention The financial report has been prepared under the historical cost convention, except for revaluations to fair value for certain classes of assets and liabilities as described in the accounting policies. Rounding The financial report is presented in Australian dollars with all values rounded to the nearest thousand unless otherwise stated, in accordance with ASIC Corporations Instrument 2016/191. Going Concern The financial report has been prepared on a going concern basis. 50 | Costa Group Holdings Limited | Annual Report 2016 Goods and Services Tax (GST) Revenues, expenses, liabilities and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST. Cash flows are presented in the Statement of Cash Flows on a gross basis. Basis of Consolidation Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the financial report from the date that control commences until the date that control ceases. Investments in Associates and Joint Ventures (Equity Accounted Investments) Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. Significant influence is presumed to exist when the Group holds between 20 and 50 per cent of the voting power of another entity. Joint ventures are those entities over whose activities the Group has joint control established by contractual agreement and requiring unanimous consent for strategic, financial and operating activities. Investments in associates and joint ventures are accounted for under the equity method and are initially recognised at cost. The cost of the investment includes transaction costs. The financial report includes the Group’s share of the profit or loss and other comprehensive income of equity accounted investments after adjustments to align the accounting policies with those of the Group, from the date that significant influence commences until the date that significant influence ceases. Transactions Eliminated on Consolidation Intercompany balances and transactions, and any unrealised income and expenses arising from intercompany transactions, are eliminated in preparing the financial report. Unrealised gains arising from transactions with equity accounted investments are eliminated against the investment to the extent of the Group’s interest in the investments. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Foreign Currency Translations and Balances Functional and Presentation Currency The financial statements of each entity within the Group are measured using the currency of the primary economic environment in which that entity operates (the functional currency). The financial report is presented in Australian dollars which is the Group’s functional and presentation currency. Transactions and Balances Transactions in foreign currencies of entities within the consolidated Group are translated into functional currency at the applicable exchange rate at the date of the transaction. Foreign currency monetary items that are outstanding at the reporting date (other than monetary items arising under foreign currency contracts where the exchange rate for that monetary item is fixed in the contract) are translated using the spot rate at the end of the reporting period. All resulting exchange differences arising on settlement or restatement are recognised as revenues and expenses for the reporting period. Entities that have a functional currency different from the presentation currency are translated as follows: • Assets and liabilities are translated at reporting period end exchange rates prevailing at that reporting date; • Income and expenses are translated at actual exchange rates or average exchange rates for the reporting period, where appropriate; and • All resulting exchange differences are recognised as a separate component of equity. Costa Group Holdings Limited | Annual Report 2016 | 51 Notes to the Consolidated Financial Statements continued Critical Accounting Estimates and Judgements The preparation of the financial report requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year can be found in the following notes: Accounting Estimates and Judgements Revenue recognition (agency commission) Valuation of biological assets Recoverability of goodwill Recoverability of non-financial assets other than goodwill Fair value measurement Income tax Note A2. Revenue and expenses B6. Biological assets B8. Intangible assets C6. Capital and risk management C6. Capital and risk management E2. Taxation Page 54 60 66 75 75 85 New Accounting Standards Adopted by the Group The Group has elected to early adopt the amendments made to AASB 116 Property, Plant and Equipment and AASB 141 Agriculture in relation to bearer plants. The resulting changes to the accounting policies and retrospective adjustments made to the financial statements are explained in Note E3. A. Group Performance A1. Segment Performance Segment information is reported in a manner consistent with internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, is the Chief Executive Officer (CEO). (a) Basis for Segmentation The reportable segments are based on the aggregation of operating segments determined by the similarity of the nature of products, the production process, types of customers and the method used to distribute the products. The Group has three reportable segments, as described below, based on the internal reports that are reviewed and used by the CEO in assessing performance and in determining the allocation of resources. The following summary describes the operations in each of the Group’s reportable segments: Produce The Produce segment operates in four core categories: berries, mushrooms, glasshouse grown tomatoes and citrus. These operations are vertically integrated in terms of farming, packing and marketing, with the primary domestic sales channel being the major Australian food retailers. Costa Farms and Logistics (‘CF&L’) The CF&L segment incorporates interrelated logistics, wholesale avocado marketing and banana farming and marketing operations within Australia. These categories share common infrastructure, such as warehousing and ripening facilities, and are predominantly trading and services focused. International The International segment comprises royalty income from licensing of Costa’s blueberry varietals in Australia, the Americas and Africa, and international berry farming operations in Morocco and China. 52 | Costa Group Holdings Limited | Annual Report 2016 (b) Information About Reportable Segments Performance is measured based on segment EBITDA before SGARA, as included in the internal management reports that are reviewed by the CEO. Group financing costs and income taxes are managed at the Group level and are not allocated to operating segments. The information presented to the CEO does not report on segment assets and liabilities and as such is not presented in this report. It is the Group’s policy that business support costs that are not directly attributable to a specific segment are allocated to the Produce segment, which is the Group’s largest reportable segment, on the basis that it utilises the majority of these resources. Inter-segment revenue is eliminated on consolidation, however, is shown within the segment revenue to reflect segment level performance. Inter-segment transactions are on commercial terms. Information regarding the results of each reportable segment is included below. 2016 Revenue External customers Inter-segment Total revenue Produce CF&L International Adjustments and Eliminations Total 593,215 37,842 631,057 215,812 1,975 217,787 - - - - (39,817) (39,817) 809,027 - 809,027 EBITDA before SGARA 69,103 10,547 9,401 - 89,051 2015 Restated1 Revenue External customers Inter-segment Total revenue Produce Restated1 CF&L Restated1 International Adjustments and Eliminations 498,155 37,129 535,284 228,874 2,651 231,525 - - - - (39,780) (39,780) Total 727,029 - 727,029 EBITDA before SGARA 51,268 9,345 5,060 - 65,673 The Group principally supplies fresh produce to the major supermarkets in Australia, including Coles, Woolworths and ALDI, which collectively comprise approximately 70% of the Group’s Australian based produce sales in the 2016 financial year (2015: 70%). (c) Reconciliation of Segment EBITDA Before SGARA to Profit Before Tax EBITDA before SGARA for reportable segments IPO and other transaction costs FV movements in biological assets Depreciation and amortisation Impairment losses Profit on sale of assets Interest income Finance costs Gain/(loss) on fair value of derivatives Income tax expense Profit after tax (i) IPO and other transaction costs have not been allocated to reportable segments. (ii) Fair value movements on derivatives relating to the pre-IPO finance facility. Notes (i) (ii) 2016 $‘000 89,051 (21,803) 4,349 (22,507) - 1,387 115 (14,283) (628) (10,423) 25,258 2015 Restated1 $‘000 65,673 (5,447) 3,350 (19,554) (18,941) 470 239 (20,895) 58 (640) 4,313 1. Refer to note E3 for details regarding the restatements as a result of the early adoption of the amendments made to Accounting Standards AASB 116 Property, plant and equipment and AASB 141 Agriculture in relation to bearer plants. Costa Group Holdings Limited | Annual Report 2016 | 53 Notes to the Consolidated Financial Statements continued A2. Revenue and Expenses Revenue Sales revenue Sale of goods and commissions received Rebates and discounts provided Rendering of services Total sales revenue Total other revenue Total revenue Recognition and Measurement Sale of Goods 2016 $‘000 781,477 (13,308) 40,858 809,027 2015 $‘000 701,677 (12,379) 37,731 727,029 12,834 9,202 821,861 736,231 Revenue from sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Revenue is usually recognised when goods are despatched or at the time of delivery of the goods to the customer when the title is transferred. Rendering of Services Revenue from the rendering of services is recognised upon the delivery of the service to the customers. Dividends Dividend income 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. Interest Income Interest income is recognised when it becomes receivable on a proportional basis taking into account the interest rates applicable to the financial assets. Rental Income Rental income is recognised on a straight line basis over the rental term. Royalty Income Royalty income is recognised on an accrual basis in accordance with the substance of the relevant agreements. Royalty income is recognised in relation to rights provided to entities external to the Group to sell plants and produce that arise from the Group’s operations. Commission Income Commission income is recognised by the Group for sale of goods undertaken by the Group in its capacity as an agent of the transaction. In respect of commissions, management considers that the following factor indicates that the Group acts as an agent: • the Group neither takes title to nor is exposed to inventory risk related to the goods, and has no significant responsibility in respect of the goods sold. All revenue is stated net of the amount of GST. Critical Accounting Estimate and Judgement Revenue Recognition (Agency Commission) Certain sales undertaken by the Group are performed in their capacity as an agent, and not merchant relationship. The Group identifies these agency relationships when the Group pays the grower any proceeds that are received for the sale of the produce, after deduction of the commission and expenses applicable to the produce sold (and, if elected by the Group, after deducting any amounts owing by the grower under any other agreement.) The Group acknowledges that the deduction of commission or expenses constitutes payment of these amounts by the grower. 54 | Costa Group Holdings Limited | Annual Report 2016 Expenses Finance costs Bank charges Interest expense on borrowings Amortisation/write off of borrowing costs1 Interest expense on redeemable preference shares Impairment losses2 Property, plant and equipment Goodwill 2016 $‘000 92 5,642 8,542 7 14,283 - - - 2015 $‘000 89 18,275 2,448 83 20,895 11,992 6,949 18,941 1. The Group refinanced its borrowings during the year under a new banking facility and wrote off its loan establishment costs in relation to the previous facility. Refer to note C1 for further detail. 2. The impairment losses for FY2015 were attributed to the produce segment and relates to the downsizing of the grape category. Borrowing Costs Borrowing costs can include interest, amortisation of discounts or premiums relating to borrowings, ancillary costs incurred in connection with arrangement of borrowings and foreign exchange losses net of hedged amounts on borrowings. Borrowing costs are expensed as incurred, except for borrowing costs incurred as part of the cost of the construction of a qualifying asset which are capitalised until the asset is ready for its intended use or sale. Loan establishment costs have been capitalised and amortised over the life of the loan facility. Establishment costs relating to loans extinguished during the reporting period have been expensed. Employee expenses Salaries, contractors and wages (including on costs) Superannuation costs Leave entitlements Share-based payments expense Other employee expenses Other expenses Repair and maintenance expenses Legal and consulting expenditure1 Insurance Other2 1. In FY2016, legal and consulting expenditure includes $19.6m of costs associated with the IPO (2015: $3.8 million). 2. Other expenses includes telecommunications, marketing, information technology and general administration expenditure. 2016 $ ‘000 250,086 14,455 7,998 446 3,391 276,376 15,225 24,271 6,787 23,099 69,382 2015 $ ‘000 218,305 12,399 7,569 1,310 4,172 243,755 13,656 9,797 6,330 25,337 55,120 Costa Group Holdings Limited | Annual Report 2016 | 55 Notes to the Consolidated Financial Statements continued A3. Earnings Per Share Basic EPS Basic EPS (cents) based on net profit attributable to members of Costa Group Holdings Limited Diluted EPS Diluted EPS (cents) based on net profit attributable to members of Costa Group Holdings Limited Weighted average number of shares (in thousands) Weighted average number of ordinary shares on issue used in the calculation of basic EPS Effect of potentially dilutive securities Redeemable preference shares Equity-settled share options Weighted average number of ordinary shares on issue used in the calculation of diluted EPS Earnings reconciliation Basic EPS Net profit attributable to owners of Costa Group Holdings Limited Dividends on redeemable preference shares Adjusted profit/(loss) attributable to ordinary shareholders of Costa Diluted EPS Earnings used in calculating basic EPS Interest expense on Redeemable preference shares (net of tax) Net profit attributable to owners of Costa Group Holdings Limited (diluted) 2016 Cents Per Share 20151 Restated Cents Per Share 8.04 0.11 7.96 0.11 2016 Number 2015 Number 310,345 194,600 3,091 200 313,636 45,000 - 239,600 2016 $‘000 20151 Restated $‘000 25,258 (294) 24,964 24,964 7 24,971 4,313 (4,098) 215 215 58 273 1. Refer to note E3 for details regarding the restatements as a result of the early adoption of the amendments made to Accounting Standards AASB 116 Property, plant and equipment and AASB 141 Agriculture in relation to bearer plants. Calculation of Earnings Per Share Earnings per share is the amount of post-tax profit attributable to each share. Basic earnings per share is computed using the weighted average number of shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of shares outstanding during the period plus the dilutive effect of redeemable preference shares and share options outstanding during the period. A4. Subsequent Events There have been no matters or circumstances other than those referred to in the financial statements or notes thereto, that have arisen since the end of the financial year, that have significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in subsequent financial years. 56 | Costa Group Holdings Limited | Annual Report 2016 B. Operating Assets and Liabilities B1. Cash and cash Equivalents Cash on hand Cash at bank Cash on deposit (a) Reconciliation of Profit After Tax to Net Cash Flows from Operating Activities Profit for the year Non-cash adjustments to reconcile profit before tax to net cash flows: Depreciation and amortisation (Profit)/loss on sale of assets Borrowing costs written-off/amortised Impairment losses (Gain)/loss on fair value adjustments – biological assets (Gain)/loss on fair value of derivatives Share-based payments expense (Gain)/loss on fair value of assets Transaction costs on issuance of shares Share of profit of equity-accounted investees, net of tax Change in working capital and tax balances: (Increase)/decrease in inventories (Increase)/decrease in receivables (Increase)/decrease in biological assets (Increase)/decrease in other assets Increase/(decrease) in interest payable Increase/(decrease) in payables Increase/(decrease) in provisions (Increase)/decrease in deferred taxes Increase/(decrease) in current tax payables Net cash generated from operating activities 2016 $‘000 25 3,927 50 4,002 2016 $‘000 25,258 22,507 (1,387) 8,373 - (4,349) 870 446 - 21,803 (14,442) 59,079 (1,762) (10,256) (804) 1,184 (873) 7,693 616 3,584 4,316 62,777 2015 $‘000 26 9,435 43 9,504 2015 $‘000 4,313 19,554 (470) - 18,941 (3,350) (58) 1,310 2 - (9,515) 30,727 (1,430) 4,687 - (3,620) 83 61 (1,108) (886) (538) 27,976 Recognition and Measurement Cash comprises cash on hand and demand deposits. Cash equivalents comprise short-term and highly liquid cash deposits that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. For the purposes of the Statement of Cash Flows, cash includes cash on hand, demand deposits and cash equivalents. All cash on deposit has maturing terms of less than 90 days. Costa Group Holdings Limited | Annual Report 2016 | 57 Notes to the Consolidated Financial Statements continued B2. Receivables CURRENT Trade debtors Less: Allowance for impairment losses on trade receivables Other receivables1 NON CURRENT Other receivables 1. Other receivables comprise GST receivable and accrued income. 2016 $ ‘000 65,939 (419) 65,520 7,287 72,807 2015 $ ‘000 51,248 (1,009) 50,239 12,312 62,551 - - 125 125 Recognition and Measurement Trade receivables are recognised initially at invoice value (fair value) and subsequently measured at amortised cost, less allowance for doubtful debts. Credit terms are generally between 15-60 days depending on the nature of the transaction. An allowance for doubtful debt is raised to reduce the carrying amount of trade receivables based on a review of outstanding amounts at reporting date where there is credit risk. B3. Inventories CURRENT At cost Raw materials Finished goods 2016 $‘000 2015 $‘000 12,003 5,901 17,904 10,706 5,418 16,124 Recognition and Measurement Inventories are measured at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: • Raw materials and consumables: purchase cost on a first in, first out basis and weighted average; and • Finished goods and work in progress: cost of direct material and labour and a proportion of manufacturing overheads based on normal operating capacity. Raw materials and consumables include packaging, supplies and other materials not consumed in the production or growing processes. Finished goods include purchased agricultural produce and own farm fruit held for sale and other stock held for sale. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of production and the estimated costs necessary to complete the sale. 58 | Costa Group Holdings Limited | Annual Report 2016 B4. Payables CURRENT Unsecured liabilities Trade creditors Sundry creditors and accruals 2016 $‘000 2015 $‘000 37,237 44,401 81,638 29,909 44,586 74,495 Recognition and Measurement Trade and other payables including accruals are recorded as future payments required to be made as a result of purchases of goods or services. Trade and other payables are carried at cost less accumulated amortisation (if applicable). B5. Other Assets CURRENT Prepayments B6. Biological Assets CURRENT Produce – at fair value Produce – at cost Total biological assets Reconciliation of Changes in Carrying Amount of Biological Assets Opening balance Gain arising from changes in fair value Increases due to purchases Decreases due to harvest Increase resulting from acquisition of business Closing balance 2016 $‘000 5,333 5,333 2016 $ ‘000 31,650 5,758 37,408 2015 $‘000 6,517 6,517 2015 $ ‘000 25,512 6,059 31,571 31,571 4,349 155,834 (155,030) 684 37,408 28,054 3,350 144,254 (144,087) - 31,571 Recognition and Measurement Biological assets are measured at their fair value less costs to sell at each reporting date. The fair value is determined as the net present value of cash flows expected to be generated by these crops (including a risk adjustment factor). Where fair value cannot be measured reliably, biological assets are measured at cost. Net increments and decrements in the fair value of the growing assets are recognised as income or expense in the statement of profit/loss and other comprehensive income, determined as: • The difference between the total fair value of the biological assets recognised at the beginning of the reporting period and the total fair value of the biological assets recognised at reporting date. • Costs incurred in maintaining or enhancing the biological assets recognised at the beginning of the reporting period and the total fair value of the biological assets recognised at the reporting date. • The market value of the produce picked during the reporting period is measured at their fair value less estimated costs to be incurred up until the time of picking. Market price is determined based on underlying market prices of the product. Costa Group Holdings Limited | Annual Report 2016 | 59 Notes to the Consolidated Financial Statements continued Measurement of Fair Values Fair Value Hierarchy The fair value measurements for the Group’s hanging crop have been categorised as Level 3 fair values based on the inputs to the valuation techniques used, which are not based on observable market data. Valuation Techniques and Significant Unobservable Inputs The following table provides a description of the various biological asset types, shows the valuation techniques used in measuring Level 3 fair values, as well as the significant unobservable inputs used. Refer to note C6 for further detail on Level 3 fair value measurement. Type Hanging crop (citrus, grapes, avocados, tomatoes, blueberries, raspberries and bananas). Description These are crops from trees and bushes that have an annual crop production cycle and a reasonably stable development cycle. Valuation Technique Discounted cash flows: Significant Unobservable Inputs Inclusive of: • Estimated future crop prices. • Estimated cash inflows based on forecasted sales. • Estimated yields per hectare. • Estimated remaining farming, harvest and transportation costs. • Risk adjustment factor. The valuation model considers the present value of the net cash flows expected to be generated by the plantation. The cash flow projections include specific estimates for one year. The expected net cash flows are discounted using a risk-adjustment factor to factor in volatility for weather, production and pricing and future farming costs. Inter-Relationship Between Key Unobservable Inputs and Fair Value Measurement The estimated fair value would increase (decrease) if: • the estimated fruit prices were higher (lower); • the estimated yields per hectare were higher (lower); • the estimated harvest and transportation costs were lower (higher); or • the risk-adjusted discount rates were lower (higher). Measurement of Biological Assets at Cost Short lived crops (mushrooms) are measured at cost. These crops typically have a short term development cycle of less than three months. The calculation of market value for these crops is based on total cost due to the inherent difficulty in accurately determining the biological advancement percentage of the crop. As such, the cost approach takes into account actual costs for preparation and cultivation. Risk Management Strategy Related to Biological Activities Regulatory and Environmental Risks The Group is subject to laws and regulations in the various locations in which it operates. The Group has established environmental policies and procedures aimed at compliance with local environmental and other laws. Supply and Demand Risk The Group is exposed to risks arising from fluctuations in the price and sales volume of all its fruit and vegetables. Management performs regular industry trend analysis to project harvest volumes and pricing. Where possible, the Group manages this risk by aligning its harvest volume to market supply and demand. Climate and Other Risks The Group’s biological assets are exposed to the risk of damage from climatic changes, diseases and other natural forces. The Group has extensive processes in place aimed at monitoring and mitigating these risks, including protected cropping techniques across most crops, and geographical diversification. Critical Accounting Estimate and Judgement Valuation of Biological Assets The valuation takes into account expected sales prices, yields, growth profile, picked fruit quality and expected direct costs related to the production and sale of the assets and management must make a judgement as to the trend in these factors. 60 | Costa Group Holdings Limited | Annual Report 2016 B7. Property, plant and equipment Land and buildings at cost Accumulated depreciation and impairment Assets under construction at cost Plant and equipment at cost Accumulated depreciation and impairment Leased plant and equipment at cost Accumulated depreciation and impairment Improvements at cost Accumulated depreciation and impairment Bearer plants at cost Accumulated depreciation and impairment 2016 $ ‘000 149,114 (42,501) 106,613 20151 Restated $ ‘000 113,791 (42,043) 71,748 13,996 58,959 202,015 (95,166) 106,849 166,164 (90,072) 76,092 1,728 (1,728) - 20,133 (5,047) 15,086 11,346 (4,566) 6,780 1,728 (1,714) 14 13,394 (4,148) 9,246 8,240 (4,312) 3,928 Total property, plant and equipment 249,324 219,987 1. Refer to note E3 for details regarding the restatements as a result of the early adoption of the amendments made to Accounting Standards AASB 116 Property, plant and equipment and AASB 141 Agriculture in relation to bearer plants. Costa Group Holdings Limited | Annual Report 2016 | 61 Notes to the Consolidated Financial Statements continued (a) Reconciliations Reconciliation of the carrying amounts of property, plant and equipment at the beginning and end of the current financial year. Land and buildings Opening carrying amount Additions Disposals Depreciation expense Impairment Transfers, reclassifications and adjustments Closing carrying amount Assets under construction Opening carrying amount Additions Disposals Transfers, reclassifications and adjustments Closing carrying amount Plant and equipment Opening carrying amount Additions Disposals Depreciation expense Impairment Transfers, reclassifications and adjustments Closing carrying amount Leased plant and equipment Opening carrying amount Depreciation expense Closing carrying amount Leasehold improvements Opening carrying amount Additions Disposals Depreciation expense Transfers, reclassifications and adjustments Closing carrying amount Bearer plants Opening carrying amount Additions Depreciation expense Impairment Closing carrying amount Total property, plant and equipment Opening carrying amount Additions Disposals Depreciation expense Impairment Transfers, reclassifications and adjustments Closing carrying amount 2016 $‘000 71,748 1,936 - (4,863) - 37,792 106,613 58,959 38,474 (276) (83,161) 13,996 76,092 4,875 (598) (13,684) - 40,164 106,849 14 (14) - 9,246 1,515 (199) (882) 5,406 15,086 3,928 4,660 (1,808) - 6,780 219,987 51,460 (1,073) (21,251) - 201 249,324 20151 Restated $‘000 83,100 922 (16) (4,835) (5,800) (1,623) 71,748 13,008 60,893 - (14,942) 58,959 63,607 17,827 (518) (12,296) (2,954) 10,426 76,092 137 (123) 14 5,350 1,121 (3) (346) 3,124 9,246 6,009 2,230 (1,073) (3,238) 3,928 171,211 82,993 (537) (18,673) (11,992) (3,015) 219,987 1. Refer to note E3 for details regarding the restatements as a result of the early adoption of the amendments made to Accounting Standards AASB 116 Property, plant and equipment and AASB 141 Agriculture in relation to bearer plants. 62 | Costa Group Holdings Limited | Annual Report 2016 Recognition and Measurement Each class of property, plant and equipment is carried at cost less, where applicable, any accumulated depreciation and any accumulated impairment losses. Depreciation The depreciable amount of all fixed assets is depreciated over their estimated useful lives commencing from the time the asset is held ready for use. Land owned by the Group is freehold land and accordingly is not depreciated. Leasehold improvements are depreciated over the shorter of either the unexpired period of the lease or the estimated useful lives of the improvements. Class of Fixed Asset Land and buildings at cost Plant and equipment at cost Leased plant and equipment at cost Bearer plants at cost Depreciation Rates 3% – 10% 5% – 33% 10% – 20% 4% – 25% Depreciation Basis Straight line Straight line Straight line Straight line Assets under construction are measured at cost and not depreciated until the assets are ready for use. Capital Commitments As at 26 June 2016, the Group has capital commitments amounting to $673,306 (2015: $16,636,525) in relation to the purchase of property, plant and equipment, which are contracted for but not provided for. B8. Intangible assets Goodwill at cost Capitalised software costs Accumulated amortisation and impairment Brand names at cost Lease premiums at cost Accumulated amortisation and impairment Water rights at cost Total intangible assets 2016 $‘000 131,495 8,697 (2,883) 5,814 2015 $‘000 131,285 8,457 (1,636) 6,821 1,730 1,730 1,665 (643) 1,022 1,665 (643) 1,022 2,721 1,007 142,782 141,865 Costa Group Holdings Limited | Annual Report 2016 | 63 Notes to the Consolidated Financial Statements continued Reconciliations Reconciliation of the carrying amounts of intangible assets at the beginning and end of the current financial year. Goodwill Opening balance Additions from acquisitions Impairment Transfers, reclassifications and adjustments Closing balance Capitalised software costs Opening balance Additions Amortisation expense Transfers, reclassifications and adjustments Closing balance Brand names Opening balance/closing balance Lease premiums Opening balance/closing balance Water rights Opening balance Additions Transfers, reclassifications and adjustments Closing balance 2016 $‘000 131,285 210 - - 131,495 6,821 249 (1,255) (1) 5,814 2015 $‘000 138,258 - (6,949) (24) 131,285 5,623 2,071 (881) 8 6,821 1,730 1,730 1,022 1,022 1,007 1,714 - 2,721 3,176 146 (2,315) 1,007 Amortisation expense in relation to intangible assets is included within depreciation and amortisation expenses in the statement of profit or loss and other comprehensive income. Impairment losses in relation to intangible assets are included within impairment losses in the statement of profit or loss and other comprehensive income. Recognition and Measurement Goodwill Goodwill is recognised initially as the excess over the aggregate of the consideration transferred, the fair value of the non-controlling interest, and the acquisition date fair value of the acquirer’s previously held equity interest (in case of step acquisition), less the fair value of the identifiable assets acquired and liabilities assumed. Goodwill is not amortised, but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Brand names Brand names are measured initially at their cost of acquisition. Brand names are an indefinite useful life intangible asset as there is no expiry date associated with the underlying assets in terms of its generation of future economic benefits to the Group, and are therefore tested for impairment annually. The carrying amount of brand names is supported by a value in use calculation. Lease Premiums The value of market lease premiums is recorded in the financial report at cost. Market lease premiums are an indefinite life intangible asset as there is no expiry date associated with the underlying assets in terms of its generation of future economic benefits to the Group, and are therefore tested for impairment annually. The carrying amount of market lease premiums is supported by a value in use calculation. 64 | Costa Group Holdings Limited | Annual Report 2016 Water Rights Water rights are measured initially at their cost of acquisition. Water rights are an indefinite life intangible asset as there is no expiry date associated with the underlying assets in terms of its generation of future economic benefits to the Group, and are therefore tested for impairment annually. The carrying amount of water rights is supported by a value in use calculation. Software Software is measured initially at the cost of acquisition and amortised over the useful life of the software. Expenditure on software development activities is capitalised only when it is expected that future benefits will exceed the deferred costs, and these benefits can be reliably measured. Capitalised development expenditure is stated at cost less accumulated amortisation. Amortisation is calculated using the straight line method to allocate the cost of the intangible asset over its estimated useful life (not exceeding seven years) commencing when the intangible asset is available for use. Other development expenditure is recognised as an expense when incurred. Acquisitions Intangible assets acquired separately are capitalised at cost. Intangible assets acquired through a business combination are capitalised at fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets are capitalised when the Group is certain that there are future economic benefits that will arise from these assets. Other internally generated intangible assets that do not fit this recognition criteria are charged against the statement of comprehensive income in the reporting period in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in the statement of comprehensive income in the expense category consistent with the nature of the intangible asset. Allocation of Goodwill The allocation of goodwill across the Group’s reportable segments is provided below: Goodwill Carrying amount at start of year Additions for the year Carrying amount at end of year Goodwill Carrying amount at start of year Impairment losses for the year Reclassification Carrying amount at end of year Impairment Testing Produce 2016 $‘000 127,444 210 127,654 Produce 2015 $‘000 134,417 (6,949) (24) 127,444 CF&L 2016 $‘000 3,841 - 3,841 CF&L 2015 $‘000 3,841 - - 3,841 International 2016 $‘000 - - - International 2015 $‘000 - - - - Total 2016 $‘000 131,285 210 131,495 Total 2015 $‘000 138,258 (6,949) (24) 131,285 Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash generating unit (CGU) level. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportable. If not, the change in useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis. In FY2016, the recoverable amount of our CGUs exceeds their carrying values and as a result no impairment loss has been recognised (2015: $6,949,027). Costa Group Holdings Limited | Annual Report 2016 | 65 Notes to the Consolidated Financial Statements continued Critical Accounting Estimate and Judgement Projected Cash Flows Goodwill is allocated to CGUs according to applicable business operations. The recoverable amount of a CGU is based on value in use calculations that are based on the Board approved budget covering a one year period together with management prepared cash flow through to FY2019. For FY2020 onwards, the Group assumes a long-term growth rate to allow for organic growth on the existing asset base. Management’s determination of cash flow projections and gross margins are based on past performance and its expectation for the future. Long-term Growth Rate An average growth rate of 2.5% to 3.0% (2015: 2.5%) has been used for cash flows for FY2020 onwards with a terminal value growth rate of 2.5% to 3.0% (2015: 3.0%). Discount Rate A post-tax discount rate to post-tax cash flows has been applied as the valuation calculated using this method closely approximates applying pre-tax discount rates to pre-tax cash flows. The Group used a pre-tax discount rate of 13.0% to 14.0% for financial year 2016 which was revised for post IPO capital structure (2015: 12.8% to 13.4%). Sensitivity Analysis Other than as discussed below, the Group believes that for all other CGUs, any reasonable possible change in the key assumptions would not cause the carrying value of the CGUs to exceed their recoverable amount. For the tomato CGU included within the Produce segment, a reasonable possible change in the underlying assumptions could result in the carrying value of the CGU exceeding its recoverable amount. The tomato category experienced a challenging year in FY2016 with price deflation impacting the earnings from that category. The cash flow projections used in the valuation of recoverable amount assumes that prices will progressively recover towards a more longer-term average. Should prices not recover as anticipated, absent any changes in other assumptions the carrying value of the CGU could exceed its recoverable amount. B9. Provisions CURRENT Employee benefits Onerous leases Restructuring and other NON-CURRENT Employee benefits Provision for make good costs (a) Aggregate employee benefits liability These consist of provisions for annual leave and long service leave. (b) Reconciliations Reconciliation of the carrying amounts of provisions at the beginning and end of the current financial year: Employee benefits Opening balance Amounts used Additional amounts recognised Closing balance Restructuring and other Opening balance Amounts used Additional amounts recognised Closing balance Onerous leases Opening balance Amounts used Additional amounts recognised Closing balance 66 | Costa Group Holdings Limited | Annual Report 2016 (a) (c) (d) (a) 2016 $‘000 13,217 - - 13,217 4,042 130 4,172 2015 $‘000 12,452 908 123 13,483 3,290 - 3,290 17,259 15,742 15,742 (5,313) 6,830 17,259 123 (172) 49 - 908 (908) - - 15,804 (7,299) 7,237 15,742 2,077 (1,968) 14 123 - - 908 908 (c) Onerous Leases As part of the Group’s decision to downsize its growing exposure in the grape category, Costa ceased farming operations on a leased property adjacent to its Mundubbera grape farm in January 2015. The expected payout costs associated with the lease have now been settled. (d) Restructuring Estimated restructuring costs mainly included employee termination benefits. Recognition and Measurement Provisions are recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost. Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. Short-term Employee Benefit Obligations Liabilities arising in respect of wages and salaries, annual leave, long service leave and any other employee benefits expected to be settled within 12 months of the reporting date are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. The expected cost of short-term employee benefits in the form of compensated absences such as annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. Long-term Employee Benefit Obligations Liabilities arising in respect of long service leave and annual leave which is not expected to be settled within 12 months of the reporting date are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. Termination Benefits Termination benefits are payable when employment of an employee or group of employees is terminated before the normal retirement date, or when the Group provides termination benefits as a result of an offer made and accepted in order to encourage voluntary redundancy. The Group recognises a provision for termination benefits when the entity can no longer withdraw the offer of those benefits, or if earlier, when the termination benefits are included in a formal restructuring plan that has been announced to those affected by it. B10. Contingent Liabilities From time to time, the Group is party to claims from customers and suppliers arising from operations in the ordinary course of business. At the date of this report there are no claims or contingent liabilities that are expected to materially impact, either individually or in aggregate, the Group’s financial position or results from operations. C. Capital Structure and Financing C1. Borrowings CURRENT Unsecured liabilities Bank loans Hire purchase liability NON-CURRENT Unsecured liabilities Bank loans 2016 $ ‘000 2015 $ ‘000 - - - 4,884 1 4,885 103,766 103,766 228,004 228,004 Costa Group Holdings Limited | Annual Report 2016 | 67 Notes to the Consolidated Financial Statements continued Terms and Conditions Relating to the Above Financial Instruments The Group refinanced its borrowings during the year under a new banking facility. Details of the key terms and conditions of the banking facility available at year end are as follows: • Facility A – $125 million facility that can be drawn upon as required. This facility matures three years from July 2015. $104.5 million was drawn down at the end of the 2016 financial year. • Facility B – $125 million facility that can be drawn upon as required. This facility matures four years from July 2015 with nil balance drawn at the end of the 2016 financial year. • The nominal rate for each facility consists of a floating cash rate plus a margin dependant on the amount of leverage. • Lending covenants for both facilities include Interest Cover Ratio and Total Gearing Ratio. The Group met all its lending covenants during the 2016 financial year. • It is noted that the banking facility is unsecured. The Group has financial guarantees to other persons of $12.2 million that could be called up at any time in the event of a breach of our financial obligations. We do not expect any payments will eventuate under these financial guarantees as we expect to meet our respective obligations to the beneficiaries of these guarantees. The financial guarantees are applied against the available drawdown limit for Facility A and B as detailed above. Recognition and Measurement Borrowings are initially recognised at fair value of the consideration received, net of directly attributable costs. After initial recognition, borrowings are measured at amortised cost, using the effective interest rate method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on issuance. Gains and losses are recognised in the statement of profit or loss and other comprehensive income if borrowings are derecognised. The fair value approximates carrying value as borrowings are fully variable. Borrowings are presented net of capitalised loan establishment costs. C2. Redeemable Preference Shares Redeemable preference shares (RPS) 2016 $‘000 - 2015 $‘000 1,119 All RPS on issue at the end of 2015 were converted to ordinary shares in July 2015 prior to the completion of the initial public offering (IPO). 68 | Costa Group Holdings Limited | Annual Report 2016 C3. Share Capital Issued and paid up capital Ordinary shares Transaction costs for issued share capital (net of tax) Settlement of share based payment Redeemable preference shares (a) Ordinary shares Opening balance Ordinary shares issued on 24 July 2015 Conversion of redeemable preference shares to ordinary shares Settlement of share based payment Disposal of share options Issue of new shares on disposal of options Transaction costs incurred in respect of initial public offering (net of tax) Closing balance (b) Redeemable preference shares Opening balance Redeemable preference shares liability converted to equity Conversion of redeemable preference shares to ordinary shares Closing balance 2016 $‘000 401,093 (7,087) 1,682 - 395,688 2016 2015 Number ‘000 194,600 77,017 45,000 - - 2,263 - 318,880 45,000 - (45,000) - $ ‘000 194,600 173,287 45,090 1,682 (11,884) - (7,087) 395,688 43,964 1,126 (45,090) - Number ‘000 194,600 - - - - - - 194,600 45,000 - - 45,000 2015 $‘000 194,600 - - 43,964 238,564 $‘000 194,600 - - - - - - 194,600 43,964 - - 43,964 Total share capital 318,880 395,688 239,600 238,564 Ordinary Shares Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of shares held. At shareholders meetings, each ordinary share is entitled to one vote when a poll is called; otherwise each shareholder has one vote on a show of hands. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. Costa Group Holdings Limited | Annual Report 2016 | 69 Notes to the Consolidated Financial Statements continued C4. Reserves The profit reserve comprises the transfer of net profit for the year and characterises profits available for distribution as dividends in future years. The profit reserve balance as at balance sheet date (in thousands) is $20,005 (2015: $4,313). C5. Dividends Dividends declared and paid during the year: Dividends on redeemable preference shares (equity component): Dividend paid upon completion of the IPO on 24 July 2015 Dividends on ordinary shares: Interim franked dividend for 2016 2016 $‘000 9,422 9,566 2015 $‘000 - - The Board has approved a final dividend of 6.0 cents per share with record date of 28 September 2016 and payment date of 26 October 2016. This dividend will be fully franked. As this dividend was approved after year end, it has not been accrued as at 26 June 2016. C6. Capital and Risk Management The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. Financial assets Loans and receivables Current receivables Cash and cash equivalents Loans to related party associates Available for sale Shares in unlisted corporations Designated at fair value Interest rate swap-option Financial liabilities Designated at fair value Interest rate swaps Forward exchange contracts Other financial liabilities not measured at fair value Payables Bank loans Hire purchase liabilities Redeemable preference shares (liability component) 70 | Costa Group Holdings Limited | Annual Report 2016 Fair Value Hierarchy 2016 $‘000 2015 $‘000 - - - 72,807 4,002 80 76,889 Level 3 Level 2 Level 2 Level 2 - Level 2 Level 2 Level 2 247 247 - - - 242 242 81,638 103,766 - - 185,404 62,551 9,504 1,631 73,686 397 397 8 8 3,337 - 3,337 74,495 232,888 1 1,119 308,503 Classification The Group classifies its financial assets into the following categories: financial assets at fair value through profit and loss, loans and receivables and available for sale financial assets. The classification depends on the purpose for which the instruments were acquired. Management determines the classification of its financial instruments at initial recognition. Derivative Financial Instruments Derivatives are recognised initially at fair value; any directly attributable transaction costs are recognised in the statement of comprehensive income as they are incurred. Subsequent to initial recognition, derivatives are measured at fair value, and changes therein are generally recognised in the statement of comprehensive income. Foreign Exchange Contracts The Group enters into foreign exchange contracts to hedge its exposure against foreign currency risk in line with the Group’s risk management strategy. Non-derivative Financial Instruments Non-derivative financial instruments consist of investments in equity securities, trade and other receivables, cash and cash equivalents, borrowings, and trade and other payables. Non-derivative financial instruments are initially recognised at fair value, plus directly attributable transaction costs (if any). After initial recognition, non-derivative financial instruments are measured as described below. Loans and Receivables Loans and receivables are measured at fair value at inception and subsequently at amortised cost using the effective interest rate method. Loan and receivables include trade receivables. Available-for-sale Available-for-sale financial assets include any financial assets not included in the above categories and are measured at fair value. Unrealised gains and losses arising from changes in fair value, other than impairment losses, are recognised in other comprehensive income and presented in equity. The cumulative gain or loss is held in equity until the financial asset is disposed of, at which time the cumulative gain or loss held in equity is recognised in profit and loss. Financial Liabilities Financial liabilities include trade payables, other creditors and loans from third parties and loans from or other amounts due to related entities. Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisation. Financial liabilities 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 period. Impairment Non-derivative Financial Assets Financial Assets Measured at Amortised Cost The Group considers evidence of impairment for financial assets measured at amortised cost (loans and receivables) at both a specific asset and collective level. All individually significant assets are assessed for specific impairment. Those found not to be specifically impaired are then collectively assessed for any impairment that has been incurred but not yet identified. Assets that are not individually significant are collectively assessed for impairment by grouping together assets with similar risk characteristics. In assessing collective impairment, the Group uses historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted for management’s judgement as to whether current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends. An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in the statement of comprehensive income and reflected in an allowance account against loans and receivables. Interest on the impaired asset continues to be recognised. When an event occurring after the impairment was recognised causing the amount of the impairment loss to decrease, the decrease in impairment loss is reversed through the statement of comprehensive income. Costa Group Holdings Limited | Annual Report 2016 | 71 Notes to the Consolidated Financial Statements continued Non-financial Assets The carrying amounts of the Group’s non-financial assets, other than biological assets, equity accounted investments, inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. Goodwill and indefinite life intangible assets are tested annually for impairment. An impairment loss is recognised if the carrying amount of an asset or cash-generating unit (CGU) exceeds its recoverable amount. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows or other assets or CGUs. Subject to an operating segment ceiling test, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment testing is performed reflects the lowest level at which goodwill is monitored for internal reporting purposes. Impairment losses are recognised in the statement of comprehensive income. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU (group of CGUs), and then to reduce the carrying amounts of the other assets in the CGU (group of CGUs) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss has been recognised. The Group’s financial risk management objective is to minimise the potential adverse effects of financial performance arising from changes in financial risk. Financial risks are managed centrally by the Group’s finance team under the direction of the Directors and the Board’s Risk and Audit Committee. Management regularly monitors the Group’s exposure to any of these financial risks and reports to the Board. The Group’s activities expose it to a number of financial risks, including market risk (interest rate risk and foreign currency risk), liquidity risk and credit risk. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. (a) Market Risk Market risk is the risk that changes in market prices, such as interest rates, foreign exchange rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. Interest Rate Risk Interest rate risk is the risk that the fair value of future cash flows of a financial asset or financial liability will change as a result of changes in market interest rates. The Group’s exposure to market interest rate risk relates primarily to its borrowings. The Group has historically managed its cash flow interest rate risk by using floating to fixed interest rate swaps for a portion of variable rate borrowings. Such interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. As at reporting date, the Group had the following financial assets and liabilities exposed to variable interest rate risk: Variable rate instruments Assets Cash and cash equivalents Derivative financial assets Liabilities Bank loans Derivative financial liabilities 2016 $‘000 4,002 - 4,002 104,500 - 104,500 2015 $‘000 9,504 8 9,512 54,500 3,337 57,837 Net financial liabilities 100,498 48,325 72 | Costa Group Holdings Limited | Annual Report 2016 Sensitivity Analysis for Variable Rate Instruments At 26 June 2016, if interest rates had changed by -/+ 100 basis points from the year end rates with all other variables held constant, profit or loss would have increased/(decreased) by: Increase of 100 basis points in interest rate Decrease of 100 basis points in interest rate 2016 $‘000 (1,005) 1,005 2015 $‘000 (483) 483 Foreign Currency Risk The Group’s exposure to the risk of changes in foreign exchanges rates relates to the Group’s operating activities and investments in foreign joint ventures. The Group imports and exports produce and is exposed to foreign exchange risk, primarily movements in exchange rates of US dollar and Japanese Yen. In addition, it is also exposed to exchange rate movements in Moroccan Dirhams (‘MAD’) through its investment in the African Blue joint venture. The Group also makes purchases and capital expenditure that expose it to movements in exchange rates of US dollar and Euro. The Group enters into forward contracts to hedge some of its exposure against foreign currency risk. The Group’s exposure to foreign exchange risk at the end of the reporting period, expressed in Australian dollars, was as follows: 2016 Cash Trade and other receivables Trade and other payables Derivative financial liabilities Net exposure 2015 Cash Trade and other receivables Trade and other payables Net exposure Sensitivity Analysis USD $‘000 1,130 4,610 (3) 13 5,750 USD $‘000 1,720 3,417 (4) 5,133 JPY $‘000 298 4,231 - (255) 4,274 JPY $‘000 7 322 - 329 EUR $‘000 - - (7) - (7) EUR $‘000 - - (100) (100) At 26 June 2016, had the Australian dollar weakened/strengthened by 10% against the MAD, the US dollar, the Euro and Japanese Yen, with all other variables held constant, the impact to profit or loss and equity would be an increase/(decrease) of: Australian dollar weakened by 10% Australian dollar strengthened by 10% MAD $‘000 672 (672) USD $‘000 575 (575) JPY $‘000 427 (427) EUR $‘000 (1) 1 (b) Liquidity Risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity risk is to ensure it always has sufficient liquidity to meet its liabilities when due without incurring unacceptable losses or risking damage to the Group’s reputation. The Group manages its liquidity risk using a recurring planning tool, and maintaining, at all times, an appropriate minimum level of liquidity, comprising committed, unused bank facilities and cash resources, to meet the Group’s financial obligations as and when they fall due. The Group manages liquidity risk by maintaining sufficient cash reserves, banking facilities and standby borrowing facilities and by monitoring forecast and actual cash flows. As at reporting date, unused credit facilities net of bank guarantees of the Group were $133.3 million. In addition, the Group maintains an overdraft facility of $3.0 million. The Group is in compliance with all undertakings under its various financial arrangements. Costa Group Holdings Limited | Annual Report 2016 | 73 Notes to the Consolidated Financial Statements continued The following are the remaining contractual maturities at the end of the reporting period of financial liabilities, including estimated interest payments and excluding the impact of netting agreements. 2016 Non-derivative financial liabilities Bank loans1 Finance lease liabilities Trade payables Derivative financial liabilities Forward exchange contracts Less Than 6 Months 6 – 12 Months 1 – 5 Years Over 5 Years Total 104,500 1 81,638 186,139 242 242 - - - - - - - - - - - - - - - - - - 104,500 1 81,638 186,139 242 242 1. Bank loans consist of commercial bills. The Group expects to and has the discretion to refinance or rollover the bank loans for at least 12 months after the end of the reporting period under the existing banking facility. Refer to note C1 for details of terms and conditions on bank loans. 2015 Non-derivative financial liabilities Bank loans Redeemable convertible preference shares (CPS50) Finance lease liabilities Trade payables Derivative financial liabilities Interest rate swaps Less Than 6 Months 6 – 12 Months 1 – 5 Years Over 5 Years Total 9,931 - 1 74,495 84,427 - - 10,464 - - - 10,464 - - 266,660 - - - 266,660 3,337 3,337 - 45,000 - - 45,000 287,055 45,000 1 74,495 406,551 - - 3,337 3,337 (c) 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 is exposed to counterparty credit risk arising from its operating activities, primarily from trade receivables. Trade receivable balances are monitored on a weekly basis. The finance function assesses the credit quality of the customer, taking into account its financial position, past experience and other factors. Individual risk limits are set based on internal or external ratings and regularly monitored by management. The maximum exposure to credit risk is as follows: Cash and cash equivalents Receivables 2016 $‘000 4,002 72,807 76,809 2015 $‘000 9,504 62,676 72,180 The ageing analysis of trade receivables is set out in the table below. The credit quality of financial assets that are neither past due nor impaired is assessed based on the application of the credit risk policies described above. Neither past due nor impaired Past due 1 – 30 days Past due 31 – 60 days Past due over 60 days 2016 $‘000 54,427 9,829 939 744 65,939 2015 $‘000 39,784 11,045 269 150 51,248 Management believes that the unimpaired amounts that are past due by more than 30 days are still collectible in full, based on historical payment behaviour and extensive analysis of customer credit risk, including underlying customers’ credit ratings if they are available. Major Australian supermarkets, including Coles, Woolworths, Aldi and IGA comprise approximately 47% of the Group’s trade debtors at 26 June 2016. 74 | Costa Group Holdings Limited | Annual Report 2016 Impairment Losses on Trade Receivables Trade receivables are non-interest bearing with credit terms generally between 15 and 60 day terms. An impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired. The impairment losses have been included within other expenses in the statement of profit or loss and other comprehensive income. All trade receivables that are not impaired are expected to be received within credit terms. Movements in the accumulated impairment losses were: Opening balance at 29 June 2015 Impairment loss (recognised)/reversed Amounts written off Closing balance at 26 June 2016 2016 $‘000 2015 $‘000 (1,009) 518 72 (419) (1,083) (665) 739 (1,009) (d) Capital Management The primary objective of the Group’s capital management is to maintain investor, creditor and market confidence and a strong credit rating and healthy capital ratios to support its business and maximise shareholder value. Capital includes equity attributable to the equity holders of the parent. The Group manages its capital structure and makes adjustments to it in light of changes in economic conditions. To maintain or adjust the capital structure, the Group may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. Various financial ratios and internal targets are assessed and reported to the Board on a regular basis by management to monitor and support the key objectives as set out above. These ratios and targets include: • an earnings to net interest expense ratio; • a total net indebtedness to earnings ratio; and • adjusted earnings to interest expense ratio. Critical Accounting Estimates and Judgements Recoverability of Non-financial Assets Other than Goodwill All assets are assessed for impairment at each reporting date by evaluating whether indicators of impairment exist in relation to the continued use of the asset by the consolidated entity. Impairment triggers include declining product or manufacturing performance, technology changes, adverse changes in the economic or political environment or future product expectations. If an indicator of impairment exists the recoverable amount of the asset is determined. Fair Value Measurement The Group measures certain financial instruments, including derivatives, and certain biological assets, at fair value at each balance sheet date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in its principal or most advantageous market at the measurement date. It is measured using the assumptions that market participants would use when pricing the asset of liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial item assumes it is put to its highest and best use. The Group utilises valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Accounting standards prescribe a fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: • Level 1: Quoted (unadjusted) market prices in active markets for identical assets of liabilities. • Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly (i.e. as prices) or indirectly (i.e. derived by prices) observable. • Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. Costa Group Holdings Limited | Annual Report 2016 | 75 Notes to the Consolidated Financial Statements continued C7. Capital and Leasing Commitments (a) Operating Lease Commitments Non cancellable operating leases contracted for but not capitalised in the financial statements: Payable – not later than one year – later than one year and not later than five years – later than five years 2016 $‘000 31,006 110,995 101,807 243,808 2015 ‘000 29,343 107,233 116,016 252,592 Operating lease commitments are in relation to property rentals and various rentals of plant and equipment. (b) Bank Guarantees The Group maintains bank guarantees of $12,171,871 (2015: $8,481,174). In addition to the above, bank guarantees of $2.5 million are committed in relation to an overdraft facility for the Driscoll’s Australia joint venture. Leases Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. Finance Leases Leases of fixed assets, where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership, are transferred to the Group are classified as finance leases. Finance leases are capitalised, recording an asset and a liability equal to the present value of the minimum lease payments, including any guaranteed residual values. The interest expense is calculated using the interest rate implicit in the lease and is included in finance costs in the statement of profit and loss and other comprehensive income. Leased assets are depreciated on a straight line basis over their estimated useful lives where it is likely that the Group will obtain ownership of the asset, or over the term of the lease. Lease payments are allocated between the reduction of the lease liability and the lease interest expense for the period. Operating Leases Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are recognised as an expense on a straight line basis over the term of the lease. Lease incentives received under operating leases are recognised as a liability and amortised on a straight line basis over the life of the lease term. C8. Derivative Financial instruments CURRENT Forward foreign currency contracts NON-CURRENT Interest rate swaps 2016 $ ‘000 242 242 2015 $ ‘000 - - - - 3,337 3,337 Measurement of fair values The fair value of the financial assets and financial liabilities is the amount at which the asset could be sold or the liability transferred in a current transaction between market participants, other than in a forced or liquidation sale. The financial liabilities above disclosed in Note E6 are the only financials assets and liabilities of the Group that are measured at fair value. The carrying amounts of financial assets and financial liabilities not measured at fair value are a reasonable approximation of fair value. Fair Value Hierarchy When measuring the fair values of financial assets and financial liabilities, the Group uses market observable data for identical assets or liabilities, which are Level 2 with reference to the AASB 13 Fair Value Hierarchy. The fair values of the derivative financial instruments are based on mark-to- market valuations. 76 | Costa Group Holdings Limited | Annual Report 2016 D. Group Structure D1. Joint Ventures and Associates (a) Details of Associates and Joint Ventures Equity Instrument Ownership Interest 2016 % Ownership Interest 2015 % Measurement Basis Principal Place of Business and Country of Incorporation Associates African Blue SARL Ordinary shares Polar Fresh Partnership Ordinary shares Joint ventures Driscolls Australia Partnership Ordinary shares 49 50 50 (b) Summarised Financial Information for Associates and Joint Ventures Reconciliation of carrying amount in joint ventures and associates: Opening balance at 29 June 2015 Total share of profit Reclassification Other (FX movement against loan) Dividends paid Closing balance at 26 June 2016 (a) African Blue SARL 49 Equity Accounted Moulay-Bousselham, Morocco 50 Equity Accounted Victoria, Australia 50 Equity Accounted Victoria, Australia African Blue SARL $‘000 Polar Fresh Partnership $‘000 Driscoll’s Australia Partnership $‘000 12,244 7,204 (333) 78 (1,649) 17,544 8,534 3,398 - - (3,460) 8,472 6,809 3,840 - - (3,000) 7,649 Total $‘000 27,587 14,442 (333) 78 (8,109) 33,665 In 2007, the Group entered into a joint venture to establish African Blue, a Moroccan-based grower and marketer of blueberries. The African Blue joint venture holds an exclusive licence to grow Costa blueberry varieties in Morocco for sale worldwide (excluding Americas). In financial year 2016, sales revenue for African Blue was $47,339,352 (2015: $26,813,125), and net assets were $30,137,457 (2015: $19,375,918). (b) Polar Fresh Partnership The Polar Fresh Partnership is a provider of cold storage, warehousing and distribution solutions. Polar Fresh Partnership operates three cold storage sites throughout Australia. In financial year 2016, sales revenue for the Polar Fresh Partnership was $8,714,674 (2015: $7,175,041), and net assets were $2,145,569 (2015: $2,270,072). (c) Driscoll’s Australia Partnership In 2010, the Group entered into a partnership with Driscoll Strawberry Associates Inc. to form Driscoll’s Australia Partnership, which is an Australian berry marketing business. The majority of the Groups’ berries grown are marketed in Australia through the Driscoll’s brand. In financial year 2016, sales revenue for the Driscoll’s Australia Partnership was $78,160,839 (2015: $80,416,042), and net assets were $15,640,287 (2015: $13,850,964). Recognition and Measurement Investments in Joint Ventures Investments in joint ventures are accounted for using the equity method of accounting. Investments in Associates Investments in entities over which the Group has the ability to exercise significant influence, but not control, are accounted for using equity method of accounting. The investment in associates is carried at cost plus post-acquisition changes in the Group’s share of the associates’ net assets, less any impairment in value. Costa Group Holdings Limited | Annual Report 2016 | 77 Notes to the Consolidated Financial Statements continued D2. List of Subsidiaries The following are the Group’s significant subsidiaries: Subsidiaries of Costa Group Holdings Ltd Country of Incorporation Ownership Interest Held by the Group 2016 % 2015 % Costa Group Holdings (Finance) Pty Ltd Costa’s Pty Ltd ACN 151 702 251 Pty Ltd Costa Exchange Holdings Pty Ltd Costa Asia Pty Ltd (formerly ACN 125 158 741 Pty Ltd) Grape Exchange Management Euston Pty Ltd North Fresh Pty Ltd Vinefresh Pty Ltd Southern Cross Overseas Pty Ltd CostaExchange Pty Ltd (formerly CostaExchange Ltd) Costa Berry Holdings Pty Ltd Costa Berry Pty Ltd Blueberry Investments Morocco Pty Ltd Raspberry Fresh Pty Ltd CBSP Pty Ltd FruitExpress Pty Ltd ACN 057 689 246 Pty Ltd Exchange Innisfail Pty Ltd Freshexchange Pty Ltd Yandilla Park Pty Ltd East Africa Coffee Plantations Pty Ltd AgriExchange Pty Ltd Vitor Marketing Pty Ltd AgriExchange Farm Management Pty Ltd Mushroom Holdings Exchange Pty Ltd Mushroom Exchange Pty Ltd Costa Fresh Logistics Pty Ltd Tomato Exchange Pty Ltd Grape Exchange Farming Pty Ltd Grape Exchange Pty Ltd Grape Exchange Farming Mundubbera Pty Ltd Costa Group Finance Pty Ltd Costa Farms Pty Ltd Costa Logistics Pty Ltd AgriExchange Murtho Pty Ltd Hillston Investments Pty Ltd Banana Exchange Pty Ltd Innisfail Holdings Pty Ltd Exchange Brisbane Pty Ltd Costa Asia Ltd Costa China (Hong Kong) Ltd 78 | Costa Group Holdings Limited | Annual Report 2016 Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Hong Kong Hong Kong 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 D3. Related Party Disclosures (a) Transactions with Associates and Joint Ventures The group transacted with jointly controlled entities during the 2016 financial period as follows: • African Blue SARL – Accrual of royalty income on blueberry sales of $1,247,250 (2015: $764,000). • African Blue SARL – Dividends received amounting to $1,648,773 (2015: $1,353,810). • African Blue SARL – Other costs charged of $173,705 (2015: $130,986). • Polar Fresh Partnership – Dividends received amounting to $3,460,029 (2015: $2,745,143) and $125,000 (2015: $125,000) for transactional and management services provided. • Polar Fresh Partnership – Receivable of $19,097 (2015: $3,819) for management fees. • Driscoll’s Australia Partnership – Commission paid on sale of berries $17,903,083 (2015: $13,820,539). • Driscoll’s Australia Partnership – Sales of produce $136,592,526 (2015: $109,126,476). • Driscoll’s Australia Partnership – Receivable of $6,376,880 (2015: $4,471,199) for sale of produce. • Driscoll’s Australia Partnership – Dividends received amounting to $3,000,000 (2015: $2,000,000). The Group has a loan to African Blue (Joint Venture). This is to fund working capital and was incurred in prior years. The balance as at 26 June 2016 is AUD $80,230 (2015: AUD $1,630,585). (b) Transactions with Key Management Personnel of the Entity or its Parent and their Personally Related Entities Mr Kevin Schwartz (Director) • An employee of Paine and Partners, LLC, an entity associated with a 9.16% shareholder in Costa Group Holdings Ltd. Paine and Partners, LLC provided advisory services to the Group in relation to the Company’s ASX Listing, for which advisory fees of AUD $6,433,312 (2015: AUD $Nil) were paid. Mr Frank Costa (Director) • Payment of rent by Costa’s Pty Ltd to Frank Costa for the lease of 1111 Aviation Road, Werribee of AUD $1 (2015: AUD $1). • Costa Asset Management Pty Ltd as trustee for Costa Asset Management Unit Trust provided advisory services to the Group in relation to the Company’s ASX Listing, for which an advisory fee was paid totalling $5,374,474 GST Inclusive (2015: Nil). Although Costa Asset Management Unit Trust is not a related party of Frank Costa, it is understood that Costa Asset Management Unit Trust subsequently paid part of that advisory fee to entities associated with Frank Costa. The Group is unable to determine how much was paid to Frank Costa. Compensation received by key management personnel of the Group: – Short-term employee benefits – Post-employment benefits – Long-term employee benefits – Share-based payment benefits 2016 $’000 3,591 106 43 301 4,041 2015 $’000 3,341 65 46 742 4,194 Costa Group Holdings Limited | Annual Report 2016 | 79 Notes to the Consolidated Financial Statements continued D4. Parent Entity Disclosures (a) Summarised Presentation of the Parent Entity, Costa Group Holdings Ltd Assets Current assets Non current assets Total assets Liabilities Current liabilities Non current liabilities Total liabilities Net assets Equity Share capital Profit reserve Share based payment reserve Accumulated losses Total equity (b) Summarised Statement of Comprehensive Income Loss for the year Total comprehensive loss for the year (c) Parent Entity Guarantees in Respect of Debts of its Subsidiaries 2016 $‘000 2015 $‘000 28 414,649 414,677 211 264,944 265,155 5,879 43,879 49,758 2,017 39,803 41,820 364,919 223,335 395,688 20,005 523 (51,297) 364,919 238,564 4,313 1,759 (21,301) 223,335 (4,882) (4,882) (2,152) (2,152) The parent entity has entered into a Deed of Cross Guarantee with the effect that the Company guarantees debts in respect of certain subsidiaries. Further details of the Deed of Cross Guarantee and the subsidiaries subject to the Deed are disclosed in Note D5. D5. Deed of Cross Guarantee The wholly owned subsidiaries listed in Note D2 (excluding Hillston Investments Pty Ltd and Innisfail Holdings Pty Ltd) are parties to a deed of cross guarantee under which each company guarantees the debts of the others. These parties to the deed of cross guarantee consist of only the Australian wholly owned subsidiaries. Pursuant to ASIC Class Order 98/1418 (as amended), these wholly owned subsidiaries listed in Note D2 (excluding Hillston Investments Pty Ltd and Innisfail Holdings Pty Ltd) are relieved from the Corporations Act requirements to prepare a financial report and Director’s report. A consolidated statement of profit or loss and other comprehensive income and a consolidated statement of financial position for the year ended 26 June 2016, comprising the above listed parties to the deed which represent the ‘closed group’, are set out below: (a) Consolidated Statement of Comprehensive Income of the Closed Group Revenue Less: Expense Profit/(loss) before income tax expense Income tax expense Total loss/total comprehensive loss for the year 80 | Costa Group Holdings Limited | Annual Report 2016 2016 $‘000 821,861 (800,622) 21,239 2015 $‘000 736,231 (740,763) (4,532) (10,423) (640) 10,816 (5,172) (b) Consolidated Statement of Financial Position of the Closed Group ASSETS Current assets Cash and cash equivalents Receivables Inventories Biological assets Other assets Assets classified as held for sale Total current assets Non-current assets Receivables Other financial assets Equity accounted investments Intangible assets Deferred tax assets Property, plant and equipment Total non-current assets Total assets LIABILITIES Current liabilities Payables Borrowings Provisions Derivative financial liabilities Current tax liabilities Total current liabilities Non-current liabilities Borrowings Redeemable preference shares Provisions Derivative financial liabilities Total non-current liabilities Total liabilities NET ASSETS EQUITY Contributed equity Share based payment reserve Profit reserve Accumulated losses Total equity 2016 $‘000 2015 Restated1 $‘000 4,002 72,458 17,904 37,408 5,333 - 137,105 - 327 33,665 142,782 4,957 249,324 431,055 568,160 81,638 - 13,217 242 5,879 100,976 103,766 - 4,172 - 107,938 208,914 9,504 62,201 16,124 31,571 6,517 4,242 130,159 125 2,036 27,587 141,865 5,504 219,987 397,104 527,263 74,495 4,885 13,483 - 1,563 94,426 228,004 1,119 3,290 3,337 235,750 330,176 359,246 197,087 384,098 523 20,005 (45,380) 359,246 226,975 1,759 4,313 (35,960) 197,087 1. Refer to note E3 for details regarding the restatements as a result of the early adoption of the amendments made to Accounting Standards AASB 116 Property, plant and equipment and AASB 141 Agriculture in relation to bearer plants. Costa Group Holdings Limited | Annual Report 2016 | 81 Notes to the Consolidated Financial Statements continued E. Other E1. Share-based Payments Share-based payments reserve 2016 $‘000 523 2015 $‘000 1,759 The share-based payments reserve is used to record the fair value of shares or equity-settled share-based payment options issued to employees. Share-Based Payment Plan – Employee Share Option Plan The Group continued to offer equity-settled share-based payments via employee participation in long-term incentive schemes as part of the remuneration packages for the key management personnel and executives of the Company. During the financial year 2016, 3,513,372 (2015: 2,455,000) options have been granted to key management personnel and the executive team under new option plans. Recognition and Measurement The Group provides benefits to its employees and Directors in the form of share-based payment transactions, whereby services are rendered in exchange for shares or options (‘equity-settled transactions’). The fair value of options and performance rights is recognised as an expense with the corresponding increase in equity (share-based payments reserve). The fair value is measured at grant date and recognised over the period during which the holder becomes unconditionally entitled to the options. Measurement of Fair Values The fair value of the options issued under this Option Plan was measured on using a Black-Scholes pricing model. The inputs used in the measurement of the fair values at grant date of the options were as follows: Employee Share Option Programs Number issued Fair value at grant date Share price at grant date Exercise price Expected volatility Expected dividend yield Risk-free rate CEO 1,891,944 $0.23 $2.16 $2.81 27.00% 3.75% 1.98% 2016 KMP and Executives 1,621,428 $0.39 $2.30 $2.25 27.00% 3.75% 1.81% 2015 KMP and Executives 2,005,000 $0.19 $1.29 $1.45 28.43% 0.00% 2.67% Non-Executive Directors 450,000 $0.17 $1.29 $1.45 28.43% 0.00% 2.58% The expected volatility has been based on an evaluation of the historical volatility using comparable companies to the Group. The Group has accounted for the options as equity settled share based payments. Reconciliation of Outstanding Share Options The number and weighted average exercise prices of options under the employee share option program are as follows: Opening balance Disposed for cash or settled for shares during the year Granted during the year Closing balance Exercisable at year end Number of Options 2016 21,671,752 (21,221,752) 3,513,372 3,963,372 450,000 Weighted Average Exercise Price 2016 1.45 1.45 2.51 2.39 1.45 Number of Options 2015 19,216,752 - 2,455,000 21,671,752 - Weighted Average Exercise Price 2015 1.45 1.45 1.45 1.45 - The options outstanding as at 26 June 2016, which have not been vested, have an exercise price of $2.51 (2015: $1.45). All outstanding options in 2015 vested as part of the IPO undertaken on 24 July 2015. 82 | Costa Group Holdings Limited | Annual Report 2016 E2. Taxation (a) Components of Tax Expense Current tax Deferred tax Over provision in prior years (b) Prima Facie Tax Payable The prima facie tax payable on profit before income tax is reconciled to the income tax expense as follows: Profit before income tax Prima facie income tax expense on profit before income tax at 30.0% Add tax effect of: – non-deductible entertainment – deferred tax asset not recognised on capital losses – goodwill impairment loss – share-based payments expense – other assessable items – other non-deductible items Less tax effect of: – research and development tax credits – non-assessable, non-exempt income – over provision in prior years Income tax expense attributable to profit (c) Current Tax Current tax relates to the following: Current tax liabilities/(assets) Opening balance Current year tax expense Tax refunds/(payments) Foreign withholding tax credits received Under/(over) provisions Closing balance 2016 $‘000 7,387 3,101 (65) 10,423 2015 $‘000 3,296 (886) (1,770) 640 35,681 4,953 10,704 1,486 146 1,726 - 134 44 28 35 - 2,085 394 - 25 2,078 2,539 750 1,544 65 2,359 750 865 1,770 3,385 10,423 640 1,563 7,387 (2,389) (207) (475) 5,879 2,101 3,296 (2,064) - (1,770) 1,563 Costa Group Holdings Limited | Annual Report 2016 | 83 Notes to the Consolidated Financial Statements continued E2. Taxation continued (d) Deferred Tax Deferred tax relates to the following: Deferred tax assets The balance comprises: Property, plant and equipment Provisions Trade and other payables Capital (black hole) deductions (section 40-880) Borrowings Other Derivative financial liabilities Deferred tax liabilities The balance comprises: Property, plant and equipment Trade and other receivables Biological assets Intangible assets Derivative financial assets Net deferred tax assets (e) Deferred Tax Expense Included in Income Tax Comprises Decrease/(increase) in deferred tax assets Increase/(decrease) in deferred tax liabilities (f ) Deferred Tax Movement Opening balance – net deferred tax asset Other (Decrease)/increase in DTA recognised in P&L (Decrease)/increase in DTA recognised in equity Closing balance – net deferred tax asset The Group’s franking account balance as at 26 June 2016 is $11,284,609 (2015: $17,310,771). 2016 $‘000 2015 $‘000 - 5,343 2,973 8,534 - 760 73 17,683 1,362 260 9,495 1,609 - 12,726 4,957 (650) 3,751 3,101 5,504 (483) (3,101) 3,037 4,957 1,550 5,357 3,167 2,574 725 60 1,043 14,476 - 68 6,554 2,306 44 8,972 5,504 (2,188) 1,302 (886) 4,618 - 886 - 5,504 84 | Costa Group Holdings Limited | Annual Report 2016 Recognition and Measurement Current income tax expense or benefit is the tax payable or receivable on the current period’s taxable income based on the applicable income tax rate adjusted by changes in deferred tax assets and liabilities. Deferred tax assets and liabilities are recognised for temporary differences at the applicable tax rates when the assets are expected to be recovered or liabilities are settled. No deferred tax asset or liability is recognised in relation to temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Tax Consolidation The parent entity Costa Group Holdings Ltd and its subsidiaries have implemented the tax consolidation legislation and have formed a tax consolidated Group. The parent entity and subsidiaries in the tax consolidated Group have entered into a tax funding agreement such that each entity in the tax consolidated Group recognises the assets, liabilities, expenses and revenues in relation to its own transactions, events and balances only. This means that: • the parent entity recognises all current and deferred tax amounts relating to its own transactions, events and balances only; • the subsidiaries recognise current or deferred tax amounts arising in respect of their own transactions, events and balances; and • current tax liabilities and deferred tax assets arising in respect of tax losses are transferred from the subsidiary to the head entity as inter-company payables or receivables. The tax consolidated Group also has a tax sharing agreement in place to limit the liability of subsidiaries in the tax consolidated Group arising under the joint and several liability requirements of the tax consolidation system, in the event of default by the parent entity to meet its payment obligations. Critical accounting Estimate and Judgement Income Tax Income tax benefits are based on the assumption that no adverse change will occur in the income tax legislation and the anticipation that the Group will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise those temporary differences. Costa Group Holdings Limited | Annual Report 2016 | 85 Notes to the Consolidated Financial Statements continued E3. New Accounting Standards Amendments to AASB 116 Property, Plant and Equipment and AASB 141 Agriculture distinguish bearer plants from other biological assets. Bearer plants are solely used to grow produce over their productive lives and are seen to be similar to an item of machinery. They will therefore now be accounted for under AASB 116 Property, Plant and Equipment, and will be measured using the cost less accumulated depreciation method. Agricultural produce growing on bearer plants will remain within the scope of AASB 141 Agriculture and continue to be measured at fair value less costs to sell. As required under the standards, these changes have been applied retrospectively to the earliest period presented in the financial statements (FY2015). As permitted under the transitional rules, the fair value of the bearer plants at 29 June 2014 will be the deemed opening cost value at the start of FY2015. They will then be depreciated over their remaining useful life using the straight line method. Furthermore, costs associated with re-planting will now be capitalised instead of expensed as they are incurred. The table below summarises the impact of these changes on the Group’s financial statements. Consolidated statement of profit and loss and other comprehensive income (extract) Other expenses Gain on fair value adjustments – biological assets Depreciation and amortisation expense Impairment losses Profit before income tax Income tax benefit/(expense) NPAT attributable to shareholders Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Consolidated statement of financial position (extract) Biological assets (non-current) Property, plant and equipment Deferred tax assets Total assets 2015 Previously Stated $‘000 Increase/ (Decrease) $‘000 2015 Restated $‘000 (55,452) (252) (18,481) (15,703) 5,330 (753) 4,577 0.25 0.22 4,305 216,059 5,391 527,876 332 3,602 (1,073) (3,238) (377) 113 (264) (0.14) (0.11) (4,305) 3,928 113 (264) (55,120) 3,350 (19,554) (18,941) 4,953 (640) 4,313 0.11 0.11 - 219,987 5,504 527,612 Net assets 197,701 (264) 197,437 Statement of changes in equity (extract) Profit reserve Total equity 4,577 197,701 (264) (264) 4,313 197,437 86 | Costa Group Holdings Limited | Annual Report 2016 New Accounting Standards and Interpretations Since 29 June 2015, the Group has adopted the following new and revised Accounting Standards issued by the Australian Accounting Standards Board (AASB) that are relevant to the Group’s operations: • AASB 2014-6 Amendments to Australian Accounting Standards – Agriculture: Bearer Plants • AASB 2015-3 Amendments to Australian Accounting Standards arising from the Withdrawal of AASB 1031 Materiality • AASB 2015-4 Amendments to Australian Accounting Standards – Financial Reporting Requirements for Australian Groups with a Foreign Parent The adoption of these standards did not have a significant impact on the Group’s financial position or performance. Recently Issued or Amended Accounting Standards The following relevant Australian Accounting Standards and Interpretations have been issued or amended but are not yet effective and the Group has not yet adopted them: • AASB 15 Revenue from Contracts with Customers • AASB 9 Financial Instruments • AASB 16 Leases • AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture • AASB 2016-1 Amendments to Australian Accounting Standards – Recognition of Deferred Tax Assets or Unrealised Losses • AASB 2016-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 107 • AASB 1057 Application of Australian Accounting Standards • AASB 2015-5 Amendments to Australian Accounting Standards – Investment Entities: Applying the Consolidation Exception • AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101 • AASB 2015-1 Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012-2014 Cycle • AASB 2014-9 Amendments to Australian Accounting Standards – Equity method in Separate Financial Statements • AASB 2014-4 Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation • AASB 2014-3 Amendments to Australian Accounting Standards – Accounting for Acquisitions of Interests in Joint Operations The Group is currently assessing the impact of these standards to its financial position and performance. Costa Group Holdings Limited | Annual Report 2016 | 87 Notes to the Consolidated Financial Statements continued E4. Auditor’s Remuneration Audit and review services provided by KPMG Audit and review of financial reports Other services provided by KPMG Taxation compliance and other taxation advisory services (including R&D) Other assurance services (including IPO services) Other services (including IPO services) Total remuneration of KPMG Australia E5. Assets Classified as Held for Sale Water licences Property, plant and equipment 2016 2015 340,700 245,700 175,000 - 21,000 196,000 277,030 785,000 575,230 1,637,260 536,700 1,882,960 (a) (b) 2016 $‘000 - - - 2015 $‘000 2,315 1,927 4,242 (a) In 2015, the Group held Water access licenses (water rights) across various locations in Australia, in which the following two were classified as assets held for sale: – St George (Western Queensland) – Darling River, Menindee (New South Wales) During 2016, these rights have been sold to external parties in accordance with the closure of these farms. (b) In 2015, the Group also had property, plant and equipment held for sale from the Mushroom sites which were no longer operational. One of the two sites was sold in 2016. 88 | Costa Group Holdings Limited | Annual Report 2016 Assets Held for Sale Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale or held-for-distribution if it is highly probable that they will be recovered primarily through sale rather than through continuing use. This condition is regarded as met when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from date of classification. Immediately before classification as held-for-sale, the assets, or components of a disposal group, are remeasured in accordance with the Group’s accounting policies. Thereafter, the assets, or disposal group, are measured at the lower of their carrying amount and fair value less costs to sell. Impairment losses on initial classification as held-for-sale and subsequent gains or losses on re-measurement are recognised in the statement of comprehensive income. Gains are not recognised in excess of any cumulative impairment loss. Once classified as held-for-sale or held-for-distribution, intangible assets and property, plant and equipment are no longer amortised or depreciated, and any equity accounted investments are no longer equity accounted. Critical Accounting Estimate and Judgement Valuation of Assets Held-for-sale Assets held-for-sale are valued at the lower of cost and fair value less costs to sell upon classification. There are no indicators that assets held-for-sale are impaired. Based on recent market transactions entered into by the Group, the sales price of these assets are higher than the carrying value E6. Other Financial Assets NON-CURRENT Loans to related party associates Interest rate swap-option1 Available-for-sale financial assets Shares in unlisted corporations 1. Refer to Note C8 for disclosure on fair valuation technique of this asset. 2016 $‘000 80 - 247 327 2015 $‘000 1,631 8 397 2,036 Costa Group Holdings Limited | Annual Report 2016 | 89 Notes to the Consolidated Financial Statements continued E7. Other Accounting Policies Research and Development Expenditure Expenditure on research activities is recognised as an expense when incurred. Expenditure on development activities is capitalised only when technical feasibility studies demonstrate that the project will deliver future economic benefits and these benefits can be measured reliably. Capitalised development expenditure is stated at cost less accumulated amortisation. Amortisation is calculated using the straight line method to allocate the cost of its estimated useful life commencing when the intangible asset is available for use. Other development expenditure is recognised as an expense when incurred. Bonus Plan The Group recognises a provision when a bonus is payable in accordance with the employee’s contract of employment, and the amount can be reliably measured. Government Grants Government grants are initially recognised as deferred income at fair value when there is recoverable assurance that they will be received and that the Group will comply with the conditions associated with the grant. Subsequently, they are recognised in the statement of comprehensive income to offset the applicable expenses incurred by the Group as stated in the provisions of the government grants. 90 | Costa Group Holdings Limited | Annual Report 2016 Directors’ Declaration 1. In the opinion of the Directors of Costa Group Holdings Ltd (‘the Company’): (a) the consolidated financial report and notes A1 to E6 and the Remuneration Report in the Directors’ Report, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 26 June 2016 and of its performance, for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. There are reasonable grounds to believe that the Company and the Group entities identified in Note D5 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 between the Company and the Group entities pursuant to ASIC Class Order 98/1418. 3. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 26 June 2016. 4. The Directors draw attention to the ‘Overview’ section of the consolidated financial report, which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the Directors: Dated at Melbourne 24th day of August 2016. Harry Debney Managing Director and CEO Neil Chatfield Chairman Costa Group Holdings Limited | Annual Report 2016 | 91 Independent Auditor’s Report This is the original version of the audit report over the financial statements signed by the Directors on 24 August 2016. Page references should be read as follows to reflect the correct references now that the financial statements have been presented in the context of the annual report in its entirety: – the Overview is now set out on pages 50 to 52 as opposed to pages 39 to 41 below; and – the Remuneration Report is now set out on pages 34 to 43 as opposed to pages 22 to 32 below. 92 | Costa Group Holdings Limited | Annual Report 2016 Costa Group Holdings Limited | Annual Report 2016 | 93 Shareholder Information Twenty Largest Registered Shareholders (as at 30 August 2016) Rank Name of Shareholder Number of Shares % of Issued Capital 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited Costa AFR Pty Ltd as trustee for the Costa AFR unit trust National Nominees Limited J P Morgan Nominees Australia Limited Citicorp Nominees Pty Limited BNP Paribas Noms Pty Ltd Citicorp Nominees Pty Limited UBS Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited National Nominees Limited Mr Harry Debney UBS Nominees Pty Ltd Lord Mayor’s Charitable Fund Mirrabooka Investments Limited Mr John Paterson BNP Paribas Nominees Pty Ltd National Nominees Limited AMP Life Limited Mr George Haggar 72,944,250 53,547,978 32,940,002 32,902,282 29,205,002 18,440,646 6,309,386 2,796,241 2,472,762 2,322,220 1,094,784 1,009,037 950,000 614,578 600,000 550,000 548,238 391,103 372,322 327,336 22.88 16.79 10.33 10.32 9.16 5.78 1.98 0.88 0.78 0.73 0.34 0.32 0.30 0.19 0.19 0.17 0.17 0.12 0.12 0.10 94 | Costa Group Holdings Limited | Annual Report 2016 Distribution of Holdings (as at 30 August 2016) Range 100,001 and over 10,001 to 100,000 5,001 to 10,000 1,001 to 5,000 1 to 1,000 Total Number of Holders 62 1,367 1,208 2,846 903 6,386 Number of Shares 267,626,966 33,175,331 9,139,347 8,350,388 588,405 318,880,437 % of Issued Capital 83.93 10.40 2.87 2.62 0.18 100.00 The number of shareholders holding less than a marketable parcel of shares (as at 30 August 2016) is 66 and they hold 1,998 shares. Substantial Shareholders (as Disclosed in Substantial Holder Notices Given to the Company at 30 August 2016) Shareholder Mondrian Investment Partners Limited (as fund manager) Costa AFR Pty Ltd as trustee for the Costa AFR Unit Trust P&P COS Holdings B.V. Challenger Limited and associated entities1 Alphinity Investment Management Pty Ltd1 1. Interest of Challenger Limited includes the relevant interest of Alphinity Investment Management Pty Ltd. Escrow Shares As at 30 August 2016, the shares subject to voluntary escrow arrangements are: Number of Shares 36,486,039 32,940,002 29,205,002 23,089,747 16,340,782 % of Issued Capital 11.44% 10.33% 9.16% 7.24% 5.12% Number of Shares 504,519 Escrow End Date 4.15pm on the date on which the Company’s financial results for the year ending 25 June 2017 are announced to ASX Early Release Date and Conditions (if Applicable) Nil Unquoted Securities As at 30 August 2016, there were 3,963,372 options over unissued shares of Costa Group Holdings Ltd, as described in item 12 of the Directors’ Report. These options are held by 11 members of management, directors and former Directors of the Company. All of the unissued shares which are the subject of these options are ordinary shares in the Company, or will be converted into ordinary shares immediately after exercise of the relevant option. Shares and Voting Rights All issued shares in the Company are ordinary shares. Voting rights for ordinary shares are: • on a show of hands, one vote for each shareholder; and • on a poll, one vote for each fully paid ordinary share. There is no current on-market buy-back. Costa Group Holdings Limited | Annual Report 2016 | 95 Corporate Directory Directors Neil Chatfield (Chairman) Harry Debney (CEO and Managing Director) Frank Costa Kevin Schwartz Peter Margin Tiffany Fuller Auditor KPMG 147 Collins Street Melbourne Victoria 3000 Australia Stock Exchange Costa Group Holdings Limited shares are quoted on the Australian Securities Exchange (ASX code: CGC) Company Secretary David Thomas Registered Office Unit 1, 275 Robinsons Road Ravenhall Victoria 3023 Australia T +613 8363 9000 E investors@costagroup.com.au Share Registry Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Locked Bag A14, Sydney South NSW 1235 T +61 1300 554 474 (toll free within Australia) F +61 2 9287 0303 F +61 2 9287 0309 (for proxy voting) E registrars@linkmarketservices.com.au www.linkmarketservices.com.au 96 | Costa Group Holdings Limited | Annual Report 2016 C o s t a G r o u p H o l d i n g s L i m i t e d | A n n u a l R e p o r t 2 0 1 6
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