Canopy Growth Corporation
Annual Report 2021

Plain-text annual report

Annual Report 2021 Costa Group Holdings Limited Contents Chairman’s Report Managing Director’s Review Company Profile Highlights Harvest Calendar Directors’ Report Lead Auditor’s Independence Declaration Consolidated Statement of Profit and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information Corporate Directory 2 6 10 14 16 19 49 50 51 52 54 55 98 99 105 106 Corporate Governance Statement Costa’s Corporate Governance Statement for the financial year is located at http://investors.costagroup.com.au/investor- centre/?page=corporate-governance Front cover image – Berry farm – Corindi, NSW Costa Group Holdings Limited ABN 68 151 363 129 Costa is Australia’s leading grower, packer and marketer of premium quality fresh fruit and vegetables. Costa Group Holdings Limited Annual Report 2021 1 1 Chairman’s Report Neil Chatfield Chairman 2 Once again, our company was both agile and resilient in actively managing and responding to the many challenges and opportunities presented by COVID-19 over the past year. Our people readily demonstrated a willingness and commitment to ensuring we continued to not only meet the needs of our customers through the production and harvesting of our crops, but also contribute to ensuring the supply of fresh nutritious produce to communities across the globe at a time when it was most needed. Given our farming operations are predominantly in regional and rural areas, across both our Australian and international operations, we were also focused on working with these communities to keep them safe and healthy, while continuing to provide employment and generate economic activity. We as shareholders can be rightly proud of Costa’s efforts, underpinned by a strong company culture in which there is considerable depth to the capabilities of both our management and operational personnel. The 2021 financial year saw Costa deliver on its stated guidance with a $64 million underlying Net Profit After Tax (before fair value movements in biological assets and material items - NPAT-S), a 16.2% increase on CY20. The result saw a record performance from our international segment, with the further development and market penetration of our premium blueberry varieties and genetics across multiple regions. In China, increased plantings are delivering higher volumes, and our premium varieties, including Jumbo Arana have gained further market recognition and continue to attract a significant price premium. This supports the continuing development of our China farming footprint, with a further 150 hectares of planting having been completed over the past year. In Morocco, our strategy to develop early season blueberry plantings in the south at Agadir has positioned us to benefit from this production window through the supply of product into the UK and Europe. The accelerated focus on the scheduled replanting at our northern farms, which includes the replacement of legacy varieties with new premium Costa varieties will further enhance our offering to retailers. We also continue to focus on emerging regions, through breeding varieties suitable for growing in different latitudes and regions, both northern and southern hemisphere. Recognition of our superior blueberry genetics and consumer demand for premium quality fresh produce is driving our own production and third-party activity. There are opportunities to expand our global blueberry footprint both through third party and joint venture growing operations, with potential emerging regions including India, Namibia, Laos and New Zealand. In our domestic segment, product differentiation combined with operating across multiple categories, production scale, geographical diversity and leading IP continue to provide competitive advantages. This is demonstrated by the company’s acquisition of quality citrus assets over the period, including 2PH in Central Queensland and KW Orchards in Sunraysia (VIC). This increases total citrus group revenue contribution, further opens export market opportunities, and expands our production footprint to three key growing regions, namely Riverland (SA), Sunraysia (VIC) and Central Queensland. Construction of our new 10 hectare tomato glasshouse and 2.5 hectare nursery was completed toward the end of the year. This was a significant effort from our Tomato and procurement teams, particularly in the face of COVID-19 related challenges. The additional hectares enhance our capacity to supply premium snacking, cocktail and truss tomatoes to the major retailers, independent supermarkets, wholesale and food service sectors. Our continued investment in protected cropping recognises the advantages of mitigating risk from climate change and in particular extreme weather events. In our domestic Berry category, over 65 per cent of our current plantings are protected by poly tunnels, while the majority of all new plantings and re-plantings are also protected. Our Queensland Mundubbera table grape crop is covered by permanent netting, greatly reducing the risk of damage from extreme weather events and mitigates financial loss from damaged and/or destroyed crops. Costa Group Holdings Limited Annual Report 2021In China and Morocco protected cropping is utilised in both existing and new developments, including replantings. The establishment of protected avocado substrate cropping is also progressing, with an initial 40 hectares being planted across three of our Australian avocado growing regions - Riverland (SA), Far North Queensland and Central Queensland. Sustainable Commercial Farming is integral to our business model and our ability to consistently deliver on our growth strategy, drive return on invested capital and produce superior returns for shareholders. It includes being at the forefront of agricultural innovation, having the agility to manage and mitigate risks associated with climate change, embracing opportunities to improve our productivity and efficiency, reducing all forms of waste in our supply chain, and deploying leading agronomic knowledge through our skilled and passionate workforce, where we increasingly solidify our lead as an industry employer of choice. As announced in our 2021 Sustainability Report, the Board and Executive carefully considered the appropriateness of a quantitative emissions reduction target that ensures Costa makes a meaningful contribution to addressing the environmental and financial risks of climate change. As result, the company announced that it is committed to achieving net zero emissions by 2050, and as part of doing so, Costa plans to pledge to the Science Based Target Initiative (SBTI) and subsequently work with the SBTI to have our emissions reduction targets validated and meet the goals of the Paris Agreement. CY21 Results Costa generated $1,220.6 million in full year revenue, a 4.8% increase on the prior comparative period. EBITDA-S was $218.2m, +10.6% versus CY20, while NPAT-S was $64 million, +16.2% on the prior year. Net debt was $299.2m with a leverage ratio of 1.85x. Dividends The Board determined a fully franked final dividend of 5.0 cents per share for the second half of CY21, bringing the total dividend payment for CY21 to 9.0 cents per share, fully franked. The (CY21) result saw a record performance from our international segment, with the further development and market penetration of our premium blueberry varieties and genetics across multiple regions. 3 Costa Group Holdings Limited Annual Report 2021Chairman’s Report continued Our People In June 2021 Costa published its first Modern Slavery Statement covering the CY20 period, and this outlined the extensive steps we have taken to understand, mitigate and address human rights and modern slavery risks within our operations and supply chain. We also have in place a strong governance approach, with Board and Executive oversight and the operation of a Modern Slavery Working Group. Throughout CY21 our modern slavery activities were focused on developing systems to measure the effectiveness of our actions; formalising a stakeholder working group; expanding our modern slavery training; working with partners to identify opportunities for sector collaboration and further establishing remediation activities in the supply chain. The challenges presented by COVID-19 over the better part of two years have seen our people come to the fore in the way they have successfully managed COVID-19 for not only the good of the business but also the greater community. This included establishing on-site vaccination clinics at a number of sites, in partnership with local health providers. In Victoria, Costa partnered with Sunraysia Community Health Services to assist and encourage people in the region, including our employees, to access COVID-19 vaccinations. An outreach pop-up clinic was established on a local sports field, adjacent to our Colignan and Nangiloc (VIC) farms, to provide an opportunity for people outside the main town areas to receive their vaccination. The effort and organisation required to ensure we had sufficient people to harvest our crops across multiple regions is also a credit to all involved. Due to border closures, we drew more on the harvesting work of seasonal workers than previously. These key people who are from Pacific Island nations deserve particular recognition for their outstanding efforts, many of whom have been away from their home countries and families for prolonged periods and were required to move between borders while also having to quarantine. Community During the year the Board and management considered ways in which to encourage our employees to actively engage with and support the many communities in which we operate. It was agreed that a Workplace Volunteering Program, to be offered from the start of 2022, would help to facilitate such activity and send a clear signal of the company’s support for volunteering in local communities. Permanent full-time, part-time and fixed- term employees are entitled to one day’s paid volunteer leave per year providing them with an opportunity to contribute their time to assist a range of organisations including registered charities and not-for- profit organisations and schools. Providing support for community organisations and in particular donating our healthy fresh produce was a priority during the year in terms of our community engagement. Fruit was donated to the emergency staff at the Royal Children’s Hospital in Melbourne via charity organisation Koala Kids, to recognise the The challenges presented by COVID-19 over the better part of two years have seen our people come to the fore in the way they have successfully managed COVID-19 for not only the good of the business but also the greater community. Grape farm – Colignan, VIC 4 Costa Group Holdings Limited Annual Report 2021work being done by health care workers during the COVID-19 pandemic. Our Costa Farms and Logistics team facilitated a donation of fresh produce to residents in Dubbo through the Not-for-profit organisation LeaderLife, which operates Apollo House, helping Aboriginal children and families. The group delivered food packages to vulnerable families through the COVID-19 lockdown. Other fruit donations were made to schools and community groups including a weekly supply of bananas for school breakfast programs for the Tully State Primary and Feluga schools in Far North Queensland, the South Burnett Pantry and Gympie Homeless organisations and the Macksville Men’s Shed, as well as various charities in the Nambucca Heads, Kempsey and Coffs Harbour regions on the north coast of New South Wales. Board The ongoing COVID-19 environment once again meant the Board was limited in our opportunities to visit farms and meet with our people. In the absence of such opportunities, the Board maintained a full schedule of meetings and active engagement with management across a number of key activities, including approval and oversight of the $185m capital raise for the acquisition of the 2PH citrus business, completion of the new 10 hectares of tomato glasshouse and nursery, and ongoing execution of our international growth plan. The Board also further developed its oversight of climate related risks and opportunities. This is principally achieved through the work of two board subcommittees, namely the Horticultural Innovation and Technology Committee (HIT) which formally began its work in 2021 and the Audit and Risk Committee (ARC). The HIT Committee provides a forum and review group for the Board, management and technical personnel to challenge the traditional horticultural model and to present innovative concepts and programs which aim to significantly advance Costa’s performance and management of climate related risk. The ARC has responsibility for oversight of the company’s Enterprise Risk Management program, which contains climate-related risks that are analysed and reported-on by management. This activity informed the Board’s decision to commit to an emissions reduction target as previously mentioned. Harry Debney was appointed to the Board as a Non – Executive Director in July 2021. Harry served as our CEO for 10 years and Providing support for community organisations and in particular donating our healthy fresh produce was a priority during the year in terms of our community engagement. he is one of the foremost authorities on horticulture practice in Australia, demonstrating a great passion for industry innovation and technology, backed up by considerable experience and knowledge in the development of produce varieties suitable for varying climates. The Board looks forward to Harry making a valuable contribution to its work. Update for CY22 The Board continues to provide qualitative guidance, having commenced doing so in CY20. Over the early months of 2022, the international segment saw the early China berry season performance above expectation both in respect to yields and demand, while the Moroccan harvest was building against a strong demand backdrop. In the domestic segment, industry avocado production is forecast to be below CY21volumes, while foodservice markets have returned strongly. It is a citrus ‘off’ year in the southern production regions, with a rebound from our Colignan farm (post hail event of 1HCY21) expected. Our citrus farms will benefit from a maturing tree age profile and a full year contribution to earnings from 2PH farms. Berry volumes over the earlier part of the year were higher than forecast with pricing favourable across the four berry types. Development of our Far North Queensland blueberry varieties were progressing well. Tomato production volumes have been ahead of the previous comparable period and expectation. Good light conditions have contributed to improved overall yield. Mushroom production volumes have been significantly improved versus the prior year, and focus remains on maximising production capacity. The company continues to manage COVID -19 related challenges across all operations, including sourcing necessary labour to harvest crops and maintaining consistency of supply to customers. Neil Chatfield Chairman 5 Costa Group Holdings Limited Annual Report 2021Managing Director’s Review It was a privilege to commence in the role of Costa Group CEO from the beginning of April 2021. The year saw Costa deliver a record result for our international segment, undertake the acquisition of high-quality citrus assets, including 2PH farms, complete the construction of an additional 10 hectares of tomato glasshouse and deal with the challenges of COVID-19, where we successfully navigated our way through the various lockdowns and border closures, while also sourcing the necessary labour to harvest our crops. Our people yet again demonstrated a commitment and professionalism which saw them continue to be disciplined and rigorous in the way they managed and complied with both the company’s COVID-19 management plans and also the various government mandated activities. The logistics involved in operating across a large number of geographically diverse locations necessitated a coordinated and well-resourced approach and I am pleased to report to shareholders the entire Costa team ably delivered. As a Company we can be proud of the fact that everybody played a part in ensuring we could continue to operate. From the people who work on our farms who were able to successfully produce and harvest our crops, through to those who work across the many support and corporate service roles, no one faltered in their efforts and commitment to a professional and business as usual approach. Our performance over the year was highlighted by the growth in the contribution of the international segment, which delivered a record result through a 30% increase in revenue versus CY20. Both our China and Morocco operations performed strongly, with positive pricing, yield and demand maintained over the entire China season, reflecting our increased production footprint, higher volumes, and demand for our premium quality product. Chinese grown product is sold into the local market under the Driscoll’s brand, with China leading the growth in blueberry consumption in Asia. The demand is fueled by the burgeoning middle class which now numbers 230m plus. In Morocco, there was favourable earlier fruit timing and stronger pricing, which was supported by an increased contribution from our expanded southern plantings located at Agadir. The early season plantings at Agadir as well as earlier season higher volumes across our northern farms, together with strong pricing over the season contributed to a very positive result. Our Moroccan growth plans include a combination of new plantings at Agadir, with 14 hectares having been planted in early 2022, and replantings at our farms in the north. This includes the replacement of legacy varieties with new premium Costa varieties, which we believe will further open up market opportunities in Europe and the UK. We also continued to focus on our emerging regions and opportunities that exist for Costa to not only expand our berry genetics licensing footprint, but also our own production footprint. With respect to licensing activity, there was increased activity in Africa where our third-party grower tonnage from Morocco, South Africa and Zimbabwe was up on the previous year. Planted hectares in these regions are continuing to increase, further building on our 52 week supply volumes out of Africa into Europe and Asia. Costa also signed a new long term exclusive agreement in late CY20 with Driscoll’s for licensing of Costa blueberry genetics in the Americas. This reflects how our international licensing program continues to build in importance, through expanding geographical reach across Africa, China and the Americas. This is in recognition of our superior blueberry genetics and consumer demand for premium quality fresh produce. Even though the year was to again be impacted by the challenges of COVID-19, there were also a number of positive opportunities to further build our business, most notably through the acquisition of 2PH citrus farms. Sean Hallahan Managing Director and CEO 6 Costa Group Holdings Limited Annual Report 2021As a company we can be proud of the fact that everybody played a part in ensuring we could continue to operate in the face of COVID-19 challenges. From the people who work on our farms who were able to successfully produce and harvest our crops, through to those who work across the many support and corporate service roles... Our domestic segment delivered a mixed performance, with a number of factors contributing to this, including positive demand and pricing across several categories, an extreme weather event and fruit fly outbreak, COVID-19 related factors impacting the supply chain and lower than capacity production volumes. Our Berry category continues to make a solid contribution to earnings, and although full volumes were down on expectations, overall favourable demand and pricing saw a positive result. The average percentage price premium received for our Arana blueberry variety over the year was 21%, with a 38% premium achieved over the main growing season in Corindi (NSW). Our citrus season began well with early and mid-season performance being positive, however the later season proved more challenging, with heavy fruit set resulting in smaller fruit size and quality issues. There were also COVID-19 related supply challenges, including reduced vessel and container availability, and shipping delays. This combined with quality issues saw export pricing below expectations. and early season timing, with the 2PH season commencing in mid-March, making it the earliest citrus season in Australia. Weather and other cost challenges ultimately impacted the Citrus category’s performance, including damage from a New Year’s day (2021) hailstorm to our Colignan (VIC) table grape crop, resulting in significantly lower production volumes from this farm, and the costs associated with Riverland (SA) fruit fly restrictions, which necessitated the treatment of product in order to access certain export markets. On a more positive note, Costa successfully completed the acquisition of three quality citrus assets, namely 2PH farms (QLD), KW Orchards (Sunraysia) and Cufari farms (Sunraysia). The 2PH acquisition will deliver a number of key benefits for the business, including greater export supply to key Asian markets, increased citrus category revenue contribution, exclusive rights to selected proprietary mandarin varieties, access to a proven 30-year proprietary breeding program and extended variety The acquisition was completed in July 2021, and pleasingly 2PH delivered against forecast, with 77% of production exported. Performance was underpinned by a positive transition with export customers, including China and the premium variety strategy performed well even in light of COVID-19 related supply chain issues. Demand was especially strong for premium fruit in the China, Thailand, Korea, and Japan markets, consistent with 2PH being a recognised premium brand in Asia. The first commercial planting of our purpose bred tropical Delight blueberry variety in Far North Queensland (FNQ) was completed in late 2021 and is expected to contribute circa 200 tonnes of our total FNQ production in CY22. This will further build out our premium variety production window across the year, and consequently our capacity to attract premium pricing through the Driscoll’s brand. 7 Costa Group Holdings Limited Annual Report 2021 Managing Director’s Review continued Mushroom farm – Mernda, VIC Sustained higher industry avocado volumes across the year contributed to significantly lower pricing and category performance. This was also not helped by food service closures due to COVID-19 lockdowns. Total marketed trays, including our Lovacado brand, were ahead of the previous year, with total exported trays up by circa 80,000 trays. Encouragingly product was exported from Western Australia to Japan over the second half with quality maintained and pricing more favourable than the domestic market. Work continues on opening up access for east coast grown avocados to Japan, with research having been completed on an export protocol and submitted to the Japanese government for their consideration. The Costa Board approved the commercialisation of protected, trellised high density substrate avocado trees, across a number of regions aligned to our existing avocado plantings. The benefits have already been apparent in the earlier trial plantings, and these include production costs significantly less than standard orchard plantings, faster tree maturity, higher yield, better fruit quality and greater efficiency of water use versus conventional plantings. The first harvested crop is expected from CY23/24. The Mushroom category benefited from favourable pricing and an increase in pre-pack product mix as a percentage of overall category sales. However, volume was not optimized due to lower than budgeted production and some COVID-19 related labour supply challenges, which were subsequently addressed. We continue to work on improving our mushroom production capacity, in particular at our recently expanded Monarto (SA) facility. Although our own tomato production volumes were up circa 5% for the full year versus CY20 and demand and pricing were consistent, Tomato category performance was impacted by lower yields in the first half of the year due to sub optimal light conditions. Construction of our new 10 hectare glasshouse and 2.5 hectare nursery at our New England Highway site, Guyra (NSW) was completed and fully commissioned. This increases our total glasshouse tomato production area to 40 hectares, with a production capacity of circa 20 million kilograms per annum. There are currently between 80 – 90 varieties being trialed, with those selected for commercial production contributing to Costa’s enhanced tomato offering. 8 Costa Group Holdings Limited Annual Report 2021Over recent years Costa has undertaken a targeted growth program which has seen investment in both mergers and acquisitions activity and organic growth. This investment has already started to deliver a meaningful return, with 27% of our sales now generated from international customers. Our domestic growth program has seen investment across our categories, highlighted by the acquisition of quality citrus assets, expanding both our mushroom and tomato production capacity and vertically integrating our Avocado category. Our business model is designed to deliver increased earnings and ROIC (Return on invested capital) over the long term. This includes leveraging our competitive advantages driven by scale and geographical diversity – domestic and international; increased production capacity through organic growth and acquisitions; IP and proprietary variety breeding program; lower cost of production at key sites; expanding contribution to revenue growth from international and export activity and unrelenting focus on our customer and consumer needs, supported by quality and a diversity of product offering. Construction of our new 10 hectare glasshouse and 2.5 hectare nursery at our New England Highway site, Guyra (NSW) increases our total glasshouse tomato production area to 40 hectares, with a production capacity of circa 20 million kilograms per annum. Conclusion My first year in the role of CEO has not been without its challenges, but I am proud of what we have been able to achieve in the face of the ongoing fluidity of the COVID-19 pandemic, while also playing a major role in ensuring people have been able to access healthy and nutritious fresh food, which speaks very clearly to one of our key purposes as a company. I again acknowledge the outstanding efforts of our people, who continue to live our Costa values in everything they do, be it dealing with COVID-19 or maintaining day to day operations. Thank you also to the Costa Board and Executive team who have worked closely with me across a number of key areas to ensure the fundamentals of our business remain on track to deliver long term growth and improved returns to shareholders. Sean Hallahan Managing Director and CEO 9 Costa Group Holdings Limited Annual Report 2021Company Profile Costa is Australia’s leading grower, packer and marketer of fresh fruit & vegetables and operates principally in five core categories: • berries • mushrooms • glasshouse tomatoes • citrus • avocados Operations include approximately 7,000+ planted hectares of farmland, 40 hectares of glasshouse facilities and three key mushroom growing facilities across Australia. Costa also has strategic foreign interests, with majority owned joint ventures covering six blueberry farms in Morocco and four berry farms in China, covering approximately 700 planted hectares. For the 12 months financial year ended December 2021: • Costa’s total revenue was $1,220.6 million (CY20: $1,164.9 million); and • NPAT before SGARA and material items (NPAT-S) was $64.0 million (CY20: $55.1 million). Where We Operate WA NT SA China Morocco QLD NSW VIC TAS Bailang – Yunnan Province Bousellham,/Laaouamra Manlai – Yunnan Province Kenitra, Larache region Massa Guangmen – Yunnan Province Agadir (southern) region Manhong – Yunnan Province 10 Costa Group Holdings Limited Annual Report 2021 Victoria Queensland Business Support Centre, Ravenhall Avocado Farm, Atherton Citrus Farm, Colignan Citrus Farm, Nangiloc Avocado Farm, Walkamin Banana Farm, Tully Compost Facility, Nagambie Banana Farm, Walkamin Distribution Centre, Derrimut Berry Farm, Atherton Melbourne Wholesale Market Berry Farm, Tolga Mushroom Farm, Mernda Berry Farm, Walkamin Mushroom Farm, Yarrambat Brisbane Wholesale Market, Rocklea South Australia Adelaide Wholesale Market, Pooraka Amaroo Citrus Farm, Murtho Kangara Citrus Farm and Packhouse, Murtho Mushroom Farm, Monarto Pike Creek Citrus Farm, Lyrup Solora Citrus Farm, Loxton Yandilla Citrus Farm and Packhouse, Renmark Citrus Farm, Emerald Citrus Farm, Dimbulah Table Grape Farm, Mundubbera Tasmania Berry Farm, Dunorlan Berry Farm, East Devonport Berry Farm, Lebrina Berry Farm, Nine Mile Berry Farm, Wesley Vale Berry Distribution Centre and Packhouse, East Devonport New South Wales Devonport Distribution Centre, Quoiba Avocado Farm, Comboyne Avocado Farm, Fishermans Reach Berry Farm, Corindi Berry Farm, Rosewood Western Australia Berry Farm, Tumbarumba Berry Farm, Gingin Citrus Farm, Trentham Cliffs Berry Farm, Neergabby Distribution Centre, Eastern Creek Compost Facility, Mandurah Table Grape Distribution Centre, Distribution Centre, Jandakot Euston Mushroom Farm, Casuarina Tomato Glasshouses, Guyra Perth Wholesale Market, Canning Vale Business Model The Costa business model is built on the optimisation of a diverse 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 market leading technology, targeting produce categories with 52-week production and supply windows, and maintaining high hygiene standards, quality control systems and post-harvest protocols. Costa’s products are predominately grown and sourced from the company’s expansive footprint of domestic and international farms, supplemented with produce sourced through a diverse network of third-party partner growers. 13% CF&L 14% International 73% Produce Figure 1: Costa’s revenue by segment for the 12 months financial year ended December 2021. Costa Group Holdings Limited Annual Report 2021 11 Company Profile continued Operational Structure Costa operates across three reportable segments: Produce Operates principally in five vertically integrated core categories; berries, mushrooms, citrus, glasshouse-grown tomatoes, and avocados. Growing locations are situated across multiple Australian states. International Comprises berry farming in Morocco (product exported to Europe, UK and Asia) and China (product sold in China). Also licensing of our proprietary blueberry varieties across several regions, including the Americas and Africa. Costa Farms and Logistics (CF&L) Incorporates interrelated logistics, wholesale, and marketing operations. Strategy & Growth Our Vision for Costa is ‘To be the leader in Sustainable Commercial Farming of premium quality fresh produce’. We strive to find ways in which to make our business more productive and efficient. Agricultural technology is advancing rapidly and Costa is well placed to capitalize, with a variety of external partners across the Group. Working at the forefront of technology also acts as a powerful attraction mechanism for the best and brightest graduates who we are investing in and growing into our future leaders. Our objective can be summarised as driving long term return on invested capital whilst maintaining a strong balance sheet. We believe the capital we have invested over recent years and that which we will invest in the future, will maximise returns for shareholders and we are highly focused on executing against our goals. This includes growing our international footprint, increasing our mushroom and tomato production capacity, and establishing the company as the leading grower and marketer of avocados. Sustainable Commercial Farming is at the heart of our business model, and we continue to sharpen our focus on the fundamentals that will drive our success. This includes using data to better understand our crop performance at the most granular level and building this IP into our proprietary Farm Management Our objective can be summarised as driving long term return on invested capital whilst maintaining a strong balance sheet. System. Technical superiority in agronomy, growing and breeding has positioned us as a leader in the development of protected and substrate cropping, delivering superior product offerings to our customers. Our mushroom, tomato and international berry crops are all fully protected, 65% of our domestic berry crop is protected and we continue to invest in further incrementally expanding the protection of our citrus and table grape crops. Vision ‘To be the leader in sustainable commercial farming of premium quality fresh produce’ APABILITY BJECTIVE USTAINABLE COMMERCIAL FARMING ECHNICAL SUPERIORITY MBITION Investing in technology, leadership & capability development to deliver our vision. Driving long term ROIC and maintaining a strong balance sheet. Executing our optimized yield program on our proprietary technology platform. Leveraging our superior agronomic expertise and genetics to deliver competitive advantage. Expanding our leading go-to market models to win in international markets. 12 Costa Group Holdings Limited Annual Report 2021Our ambition drives us relentlessly forward particularly in international markets. Whether it is expanding our China Berry footprint, building out our third party partner growers in Africa, opening new territories or finding new export markets we will continue to service a growing number of international customers leveraging our unique abilities to win their business. There are a number of earnings growth drivers across the company in CY22, including the commencement of harvesting at our new 50 hectare berry farm in Baoshan, China; full year contributions from our 2PH citrus farms and new 10 hectares of tomato glasshouse; increased volumes of our premium quality blueberry varieties, Arana and Delight, and the rebound expected in our Colignan, Sunraysia grape volumes. The business is committed to maximising these outcomes built on our ability to continue to manage any COVID-19 related challenges including sourcing necessary labour to harvest crops and maintaining consistency of supply to customers. Summary of financial performance Transacted Sales ($m) Total Revenue ($m) 1,598.6 1,658.9 1,164.9 1,220.6 CY20 CY21 CY20 CY21 EBITDA-S ($m) NPAT-S ($m) 197.2 218.2 55.1 64.0 CY20 CY21 CY20 CY21 13 Costa Group Holdings Limited Annual Report 2021Highlights Achieving +30% revenue growth Record result from International segment. 77% of 2PH crop exported Transformative citrus year with successful 2PH business integration. New 10 hectare glasshouse 2.5 hectare nursery at New England Hwy site (Guyra, NSW) – fully commissioned and operational. 1st commercial planting completed of purpose bred tropical ‘Delight’ blueberry variety in Far North Queensland. First harvest in CY22. 114,000 trays of Avocados exported a 68% increase on the prior year. Planted and production hectares as at end Dec 2021 Trees and Vines Berry Domestic and International Hectares Berry (Aust) 721 hectares Avocado/Banana 1,038 Avocado1 Bananas Citrus2 Citrus Table grapes Wine grapes 761 277 5,427 4,592 573 262 Vertical Farming Hectares Mushrooms3 108 Casuarina (WA) Mernda (VIC) Monarto (SA) Tomato Glasshouse 14 54 40 354 35 Soil 248 58 7 0 Substrate 228 108 47 25 Berry type Hectares Blueberry Raspberry Blackberry Strawberry Morocco China Blueberry Raspberry Blackberry 476 166 54 25 345 296 265 22 9 1. Includes 113 hectares of Riverland/Sunraysia plantings 3. Stated as production hectares only 2. Includes 2PH and prospective 2023 Conaghans planting of 210 4. Denotes planting of first five hectares of new 10 hectare glasshouse hectares, KW Orchards and Cufari acquisitions. expansion. Additional 5 hectares planted Jan ‘22 14 Costa Group Holdings Limited Annual Report 2021 Costa Group Holdings Limited Annual Report 2021 15 Harvest Calendar Mushrooms Mushrooms Tomatoes Tomatoes Tomatoes Oranges Oranges Oranges Grapefruit Grapefruit Lemons Limes Mandarins Mandarins Mandarins Mandarins Mandarins Mandarins Mandarins Mandarins Persimmons Persimmons Tangelos Browns Whites Truss Cocktail Snacking Valencia Navels Sweet Blood Orange Marsh Ruby Red Satsuma Clementines Daisy Imperial Afourer Ellendale Ortanique Jiro Fuyu Honey Murcott January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June July August September October November December Avocados Hass (Fishermans Reach) Avocados Avocados Bananas Bananas Raspberries Raspberries Blackberries Blackberries Blackberries Blueberries Blueberries Blueberries Blueberries Blueberries Strawberries Grapes Grapes Grapes Reed Shepard Cavendish Lady Fingers Corindi TAS FNQ Corindi TAS Corindi FNQ WA TAS Tumbarumba TAS Red White Black Raspberries Blackberries Blueberries China China China Blueberries Morocco/ African Blue 1 1 1 1 1. Denotes South Africa and Zimbabwe partner growers blueberry production – June - November. 16 Costa Group Holdings Limited Annual Report 2021Mushrooms Mushrooms Tomatoes Tomatoes Tomatoes Oranges Oranges Oranges Grapefruit Grapefruit Lemons Limes Mandarins Mandarins Mandarins Mandarins Mandarins Mandarins Mandarins Mandarins Persimmons Persimmons Tangelos Browns Whites Truss Cocktail Snacking Valencia Navels Marsh Ruby Red Satsuma Clementines Daisy Imperial Afourer Ellendale Sweet Blood Orange Honey Murcott Ortanique Jiro Fuyu Avocados Avocados Avocados Bananas Bananas Raspberries Raspberries Blackberries Blackberries Blackberries Blueberries Blueberries Blueberries Blueberries Blueberries Strawberries Grapes Grapes Grapes Hass (Fishermans Reach) Reed Shepard Cavendish Lady Fingers Corindi TAS FNQ Corindi TAS Corindi FNQ WA TAS Tumbarumba TAS Red White Black January February March April May June July August September October November December January February March April May June July August September October November December January February March April May June July August September October November December Raspberries Blackberries Blueberries Blueberries China China China Morocco/ African Blue 1 1 1 1 17 Costa Group Holdings Limited Annual Report 202118 Costa Group Holdings Limited Annual Report 2021 Tomato glasshouse – Guyra, NSW Directors’ Report For the year ended 26 December 2021 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 year ended 26 December 2021 (‘CY2021’). 1. Directors The directors of the Company at any time during or since the end of the period are set out below. Current directors 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 Remuneration and Human Resources Committee, Audit and Risk Committee and Horticultural Innovation and Technology Committee and Chair of the Nomination Committee. Neil is an established Executive and Non-Executive Director with extensive experience in company management, and with specific expertise in high growth companies, financial management, capital markets, mergers and acquisitions, and risk management. Neil is currently Non-Executive Chairman of Aristocrat Leisure (Director since November 2017 and Chairman since February 2019). He was previously the Chair and Non-Executive Director of Seek Limited (to 31 December 2018), a Non-Executive Director of Transurban Ltd (to October 2021), Iron Mountain Inc. (to September 2017), Recall Holdings Ltd (to May 2016), Chair and Non-Executive Director of Virgin Australia Holdings Ltd (to May 2015). He was also a Non-Executive Director of Atomos Ltd from September 2017 until 1 February 2019. Neil previously served as an executive director and Chief Financial Officer of Toll Holdings Ltd (from 1997 to 2008). Harry Debney BAppSc (Hons) Non-Executive Director Non-Executive Director since 1 July 2021. Chair of the Horticultural Innovation and Technology Committee and member of the Nomination Committee. Harry was formerly the Company’s CEO (from 2010) and Managing Director (from 2015) until his retirement from the Company’s executive team in March 2021. During his time as CEO, Harry oversaw 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. Harry is currently a Non-Executive Director of Kogan.com Ltd and Lite n’ Easy Pty Ltd. Tim Goldsmith BCom Independent Non-Executive Director Director since 1 September 2018. Chair of the Audit and Risk Committee and member of the Remuneration and Human Resources Committee and Nomination Committee. Tim has extensive corporate experience gained from over three decades of working in Australia and internationally. Tim previously worked as a partner at PricewaterhouseCoopers (PwC) for over 20 years, which included leading PwC’s National China desk. Tim is currently Non-Executive Chairman of Hazer Group Ltd and Angel Seafood Holdings Ltd. 19 Costa Group Holdings Limited Annual Report 2021Directors’ Report continued For the year ended 26 December 2021 Sean Hallahan BSc, MSc Managing Director and CEO Managing Director since 31 March and member of the Horticultural Innovation and Technology Committee. Prior to being appointed as CEO and Managing Director, Sean was the Company’s COO (since October 2017) and drove growth in the business through his leadership of consumer insight and innovation, brands, talent development and customer strategy. Before joining Costa, Sean was Managing Director of Tata Global Beverages – ANZ and Indonesia for 7 years, prior to which he held a number of senior sales and marketing roles with major companies including George Weston Foods, Simplot and SC Johnson. He has extensive experience in growing and integrating businesses, building high performing teams and developing brands. Sean holds a Bachelor degree in Science and a Masters Degree in Sustainability. Janette Kendall B.Bus (Marketing), FAICD Independent Non-Executive Director Director since 11 October 2016. Member of the Audit and Risk Committee, Horticultural Innovation and Technology Committee and Nomination Committee. Janette has held various senior management roles in her career including Senior Vice President of Marketing at Galaxy Entertainment Group in Macau, China; Executive General Manager of Marketing at Crown Melbourne; General Manager, Pacific Brands; Managing Director of emitch Limited; and Managing Director of Clemenger Digital and Clemenger Proximity. Janette is currently a Non-Executive Director of Vicinity Centres, Tabcorp Holdings, Visit Victoria and KM Property Funds. Janette was previously a Director of Nine Entertainment Ltd (to December 2018), Wellcom Group Ltd (to November 2019) and Australian VenueCo (to December 2021) and Chair of the Melbourne Theatre Company Foundation (to December 2020). Peter Margin BSc (Hons), MBA Independent Non-Executive Director Director since 24 June 2015. Chair of the Remuneration and Human Resources 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 Executive Chairman of Asahi Beverages ANZ, Chief Executive of Goodman Fielder Ltd and 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. Peter currently serves as a Non-Executive Director of Nufarm Ltd and Deputy Chair of Bega Cheese Ltd. Peter was previously a Non-Executive Director of the NSX listed company Ricegrowers Ltd (to August 2015), Chairman and Non-Executive Director of Huon Aquaculture Ltd (to August 2016), and a Non-Executive Director of PMP Ltd (to August 2016) and PACT Group Holdings Ltd (to August 2019). Dr Jane Wilson AO Independent Non-Executive Director Director since 1 April 2019 and member of the Remuneration and Human Resources Committee, Horticultural Innovation and Technology Committee and Nomination Committee. Dr Wilson holds a medical degree from The University of Queensland and a Master of Business Administration from Harvard Business School. She is Co-Chair of the Federal Government’s Australian Advisory Board on Technology and Healthcare Competitiveness. She is also a Non-Executive Director of Rugby Australia and ASX listed Transurban Ltd and Sonic Healthcare Ltd. In the early 2000s Dr Wilson was the Inaugural Chair of Horticulture Australia and served on the Council of Rural Research & Development Corporations’ Chairs. 20 Costa Group Holdings Limited Annual Report 20212. Company Secretary David Thomas LLB (Hons), BSc, GAICD 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 25 years’ experience in legal practice. 3. 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 period are: Board Audit and Risk Committee Held 12 92 12 12 12 12 12 Attended 12 9 12 12 12 12 123 Held 6 32 6 6 6 6 6 Attended 6 11 6 6 6 21 61 Remuneration and HR Committee Held 6 52 6 6 6 6 6 Attended 6 31 6 11 6 6 61 Horticultural Innovation and Technology Committee Held 5 5 5 5 5 5 5 Attended 5 5 11 5 21 5 51 Nomination Committee Held 2 12 2 2 2 2 2 Attended 2 1 2 2 2 2 21 Director Neil Chatfield Harry Debney Tim Goldsmith Janette Kendall Peter Margin Jane Wilson Sean Hallahan Notes: 1. Not a member of the Committee at the time that meetings were held and attended the meeting as a guest. 2. Harry Debney was not a director between 1 April and 30 June 2021. Only the meetings held while he was a director are shown. 3. Those Board meetings held in early 2021 prior to Sean Hallahan becoming a director were attended by Sean as a guest. 4. Principal activities Costa Group is Australia’s leading horticulture group and is the largest fresh produce supplier to the major Australian food retailers. The Group’s principal activities during the period were: • the growing of mushrooms, berries, glasshouse grown tomatoes, citrus, avocados 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 period. 5. Significant changes in state of affairs during the period Other than those matters referred to in the ‘Strategy and Growth’ Section of the Operating and Financial Review and the Financial Statements, there have been no other significant changes in the state of affairs of the Group during the period. 6. Operating and financial review Financial and business headlines • Transacted sales1 of $1,659 million, an increase of 4% • Revenue of $1,221 million, an increase of 5% • Net profit before SGARA and material items (NPAT-S2) of $64 million an increase of 16% • EBITDA before SGARA and material items (EBITDA-S2) of $218 million an increase of 11% • Operating cashflows of $101 million, a $16 million decrease • Net debt of $299 million at 26 December 2021, Leverage ratio 1.85x • Three successfully integrated acquisitions: 2PH Farms, KW Orchards and Select Fresh • Capital raise to fund the 2PH Farms acquisition • Renegotiation of Vitalharvest leases 21 Costa Group Holdings Limited Annual Report 2021Directors’ Report continued For the year ended 26 December 2021 Summary of financial performance Table 1: Summary of results for the financial year ended 26 December 2021 compared to CY2020 Consolidated income statement A$m Revenue Other revenue Total Revenue Raw materials, consumables and third party purchases Employee benefits expense Other operating expense Share of associates profit EBITDA-S2 EBITDA-S margin Fair value movements in biological assets EBITDA Depreciation and amortisation Profit/(loss) on sale of assets and investments Impairment losses EBIT Net interest expense Net profit before tax Income tax expense Net profit after tax (before material items) Material items (before tax) Tax on material items Non-controlling interest Net profit after tax attributable to shareholders Transacted sales1 NPAT-S2 Notes: CY2021 1,183.6 37.0 1,220.6 (407.7) (419.0) (185.6) 9.9 218.2 17.9% (7.5) 210.7 (108.5) 0.5 2.4 105.1 (25.0) 80.1 (10.4) 69.7 (19.2) 1.7 (10.8) 41.4 1,658.9 64.0 CY2020 1,140.8 24.2 1,164.9 (408.2) (378.6) (189.9) 9.1 197.2 16.9% 8.0 205.2 (96.6) (1.8) 0.0 106.8 (25.6) 81.2 (13.8) 67.4 0.0 0.0 (6.7) 60.8 1,598.6 55.1 Change $ 42.8 12.8 55.7 0.5 (40.4) 4.5 0.8 21.0 1.0% (15.5) 5.5 (11.9) 2.3 2.4 (1.7) 0.6 (1.1) 3.4 2.3 (19.2) 1.7 (4.1) (19.4) 60.3 8.9 1. Transacted Sales is a non-IFRS operating measure. See Table 9 for a reconciliation of Transacted Sales to revenue. Further details on Transacted Sales are provided in Table 8. 2. EBITDA-S and NPAT-S are non-IFRS financial measures. Further details on EBITDA-S and NPAT-S are provided in Table 8. Review of financial performance CY2021 saw a record result from the International segment, with both African Blue and China posting impressive earnings growth on the prior year. This was largely attributable to higher volumes and pricing improvements in both these markets, with China benefitting from an increased footprint in CY21. The acquisition of the Central Queensland based 2PH Farms in July, increased Costa’s share of the Australian citrus export market, expanded key citrus growing regions from two to three, lengthened the overall growing season and opened access to new export markets and customers. Material items of $17.5 million (after tax) which were recognised in the year related to transaction costs, stamp duty and integration costs for the acquisitions made during the year. Domestic performance was mixed with a solid performance in the Berry category underpinned by favourable demand and strong pricing for blueberries over the second half of the year, in particular the Arana variety attracted a solid price premium. Avocados saw significant price deflation due to record high yields occurring across the year. In addition to the hail event in the first half of the year, the Citrus category faced COVID-related supply chain issues in the second half of the year which resulted in lower than expected export pricing being achieved. Lower than forecast production volumes meant that generally positive demand and pricing in the Mushroom and Tomato categories was not maximised. COVID challenges continued to impact the operations of the Group both domestically and abroad. In Australia, costs for the movement and quarantine of harvest workers between states were incurred across several businesses. The global shipping disruptions negatively impacted citrus exports, to the US market in particular, with significant shipping delays along with vessel and lack of container availability resulting in reduced quality and revenues. In December, the renegotiation of the Vitalharvest Citrus and Berry farm leases (seven farms in total) were concluded with the contracts extended to 2040. The change in terms resulted in the variable rent element of the legacy leases replaced by a fixed rent model, giving rise to an increased lease interest and right of use asset depreciation over the life of the leases. 22 Costa Group Holdings Limited Annual Report 2021        Revenue Revenue increased by $55.7 million against the prior comparative period (CY2020) with the International segment seeing growth of 30% on the prior year, driven by the strong performance seen across both the China and Moroccan operations. Domestic performance was marginally higher as the contribution from acquisitions and one-off other income offset the impact of lower domestic revenues. Operating expenses Raw materials, consumables and third party purchase expenses decreased by $0.5 million. Reduced operating costs from lower grape volumes, lower third party grower costs and one-off impacts of water saving measures adopted in CY2020 were partly offset by the increases in costs from acquisitions made in the year, the footprint growth in China and inflationary increases in freight and other input costs. Employee related expenses increased by $40.4 million. Key drivers were the growth in volumes seen from acquisitions, led by 2PH harvest labour cost, a mix change from third party to more own-grown tomatoes following the new glasshouse coming online and the increased volumes seen in avocados. COVID-related quarantine costs, increased cost pressures and inefficiencies associated with labour supply challenges impacted employee related costs significantly. The $4.5 million reduction in other operating expenses was achieved through reduced water costs in the Citrus category and variable rent expense savings in the Citrus and Berry categories. Share of associates profit Profits increased by 9%, as the Driscoll’s Australia joint venture benefitted from a general increase in blueberry pricing. EBITDA before SGARA (EBITDA-S1) EBITDA -S increased by $21.2 million from CY2020 driven by: • International segment performance led primarily by increased production footprint and improved pricing • Profits from the acquisitions made during the year, 2PH Farms in particular • Strong pricing in the domestic berry market An increased contribution to EBITDA-S by the International category and 2PH Farms, saw the EBITDA-S margin improve by 1%. Fair value movements in biological assets SGARA fair value movement was an expense of $7.5 million during the year, this is largely due to the acquisition timing of 2PH Farms which saw the fair value of biological assets recognised at the date of acquisition reverse during the year as the harvest concluded post acquisition. Depreciation and amortisation The $11.9 million increase in depreciation and amortisation expense is attributed to the footprint increase in China, the commencement of depreciation of the new tomato glasshouse facility in Guyra as well as the acquisitions made during the year. Net interest expense Net interest costs were lower by $0.6 million from CY2020 following the expiry of out of money interest rate swaps during the year. This favourability was partly offset by a rise in lease interest as lease liabilities increased from acquisitions and lease extensions. Tax expense Lower tax expense is reflective of a higher mix of International earnings which attracts a lower effective tax rate. NPAT-S1 NPAT-S increased by $8.9 million from CY2020 due to the earnings drivers described above. The increase in the mix of International earnings resulted in higher allocation of profits to non-controlling interests. Dividends The Board has determined a fully franked, final dividend of 5 cents per share for the financial year ended 26 December 2021. This brings the full year dividend payout to 9 cents per share (CY2020: 9 cents per share). Notes: 1. EBITDA-S and NPAT-S are non-IFRS financial measures. Further details on EBITDA-S and NPAT-S are provided in Table 8. 23 Costa Group Holdings Limited Annual Report 2021Directors’ Report continued For the year ended 26 December 2021 Segment information Produce Table 2: Selected financial information for the Produce segment Produce A$m Transacted Sales Revenue EBITDA-S EBITDA-S margin CY2021 1,374.8 929.5 126.6 13.6% CY2020 1,371.0 930.2 124.9 13.4% Change 3.8 (0.7) 1.7 0.2pts Key factors impacting the revenue and profit drivers for the year were: • Hail event at the start of the year which resulted in the loss of the Sunraysia table grape crop and damage to some citrus crop • Quality issues from the global shipping disruption which affected export citrus sales • Soft avocado pricing as a result of high industry yields and retail volumes seen across the year • The contribution of the 2PH Farms acquisition following a season in line with forecast • Strong pricing in berries, in particular premium blueberry varieties • Increased contribution of pre-pack mushrooms to sales reflected in greater proportion of retail sales as a percentage of revenue Costa Farms and logistics Table 3: Selected financial information for the CF&L segment Costa Farms and Logistics A$m Transacted sales Revenue EBITDA-S EBITDA-S margin CY2021 155.4 159.4 14.6 9.2% CY2020 146.3 150.4 14.8 9.8% Change 9.1 9.0 (0.2) -0.6pts The underlying reduction in Logistic services revenue, was driven by the cessation of a key contract in the prior year and reduced activity in the markets due to the impact of lockdowns on demand from the restaurant and foodservice sector was largely offset by the increased revenues and profits generated from the Select Fresh business acquired during the year. International Table 4: Selected financial information for the International segment International A$m Transacted sales Revenue EBITDA-S EBITDA-S margin CY2021 174.6 177.7 77.0 43.3% CY2020 133.7 136.7 57.5 42.1% Change 40.9 41.0 19.5 1.2pts Results for the International segment were driven by double digit growth in both the China and Morocco businesses. Favourable growing conditions resulted in excellent quality and increased volumes. Both markets also benefitted from competitor countries undergoing major logistical disruptions resulting in less market competition and improved pricing. China’s volume growth was also reflected in new plantings producing their first harvest during the year. On a constant currency basis EBITDA-S improved $25.4 million and revenue improved $50.8 million compared to CY2020. 24 Costa Group Holdings Limited Annual Report 2021Balance Sheet Table 5: Selected consolidated balance sheet as at 26 December 2021 Selected Balance Sheet A$m Cash and cash equivalents Receivables Inventories Biological assets Equity accounted investments Intangibles Property, plant and equipment ROU Assets Other assets Total Assets Payables Borrowings Provisions Lease Liabilities Other liabilities Total Liabilities Net Assets Dec-21 61.9 109.3 30.5 70.5 27.2 289.1 799.9 568.8 45.4 2,002.6 149.3 361.1 46.7 583.0 34.5 1,174.6 828.0 Dec-20 32.5 100.9 27.0 58.3 21.6 209.5 515.7 302.8 37.2 1,305.5 135.1 176.3 30.9 318.1 28.4 688.8 616.7 Change 29.4 8.4 3.5 12.2 5.6 79.6 284.2 266.0 8.2 697.1 14.2 184.8 15.8 264.9 6.1 485.8 211.3 Net working capital1 Net working capital decreased marginally by $2.3 million during the year, with increases in receivables, inventories and payables balances due to acquisitions in the year. Property, plant and equipment Property, plant and equipment increased by $284.2 million during the year and was largely driven by capital expenditure growth from the acquisitions as well as the continued international expansions and berry redevelopment programs. ROU assets and lease liabilities The increase in Right-of-use assets of $266.0 million was largely attributable to the renegotiation and renewal of Berry and Citrus farm leases with Vitalharvest as well as property and water leases acquired as part of the Select Fresh and 2PH Farms acquisitions. Biological assets Biological assets increased by $12.2 million is primarily as a result of the 2PH Farms acquisition. Equity accounted investments Equity accounted investment increased by $5.6 million due to earnings contributions (net of dividends received) from the Driscoll’s Australia marketing joint venture. Intangible assets Acquisitions in the year resulted in increases in goodwill of $48.8 million, and $29.0 million of water rights, customer relationships and brand names intangibles. Other assets, liabilities and provisions The increase in other assets include the creation of assets held for sale relating to a disused property for sale, and current income tax assets. Other liabilities increased by $6.1 million mainly driven by in the recognition of deferred income tax liabilities relating to the business acquisitions in the year. An increase in provisions was primarily due to the recognition of Stage 1 of the Conaghans property acquisition described in note D3 of the Consolidated Financial Report. Notes: 1. Net working capital calculated as receivables and inventories less payables. 25 Costa Group Holdings Limited Annual Report 2021Directors’ Report continued For the year ended 26 December 2021 Net debt Table 6: Consolidated net debt as at 26 December 2021 Net debt A$m As at 26 Dec 2021 Bank loans Capitalised loan establishment fees included in borrowings Gross debt Less: Cash and cash equivalents Net debt Leverage ratio1 Dec-21 361.7 (0.6) 361.1 (61.9) 299.2 1.85x Dec-20 177.2 (0.9) 176.3 (32.5) 143.9 0.99x Notes: 1. Leverage ratio defined as net debt divided by EBITDA-S excluding the straight-lined lease expense calculated under the pre AASB 16 methodology. Net debt as at 26 December 2021 increased by $155.3 million to $299.2 million as existing debt facilities assisted with funding the portion of the 2PH Farms acquisition not funded by the equity raising and further investments in growth projects such as the acquisition of KW Orchards and Select Fresh and the commencement of the avocado trellis project. The impact of the increased debt levels saw the leverage ratio increase from 0.99x to 1.85x which is still well within the Group’s stated preferred ratio range of 1.5x to 2.0x. Under the existing domestic banking facilities in place during the year, the Group was required to meet set covenant compliance ratio’s which included total leverage ratio (TLR) and interest coverage ratio (ICR). The Group remains in compliance with all covenant measures. Cash flow Table 7: Cash flow showing movement in net debt Consolidated cash flow A$m EBITDA-S before material items Less: Share of profit of JVs Dividends from JVs Non-cash items in EBITDAS Payment for leases Change in working capital Tax (Payment)/Refund Borrowing Costs (excluding amortised costs) Cashflow from Operating Activities Maintenance capital expenditure Productivity and growth capital expenditure Payments for business acquisitions (incl material items) Acquisition of non-controlling interest in subsidiary Disposal of property, plant and equipment Cashflow from Investing Activities Proceeds from issue of shares Payment of Dividends Loans and Advances Cashflow from Financing Activities Total Net Debt Movement 26 CY2021 218.2 (9.9) 4.2 1.1 (61.5) (8.0) (23.1) (6.3) 114.7 (43.2) (84.4) (291.4) (0.1) 1.1 (418.0) 185.2 (38.6) 1.7 148.3 CY2020 197.2 (9.1) 4.2 (0.7) (52.6) 6.1 0.3 (7.5) 137.9 (28.6) (50.3) - - 1.1 (77.8) (0.3) (24.0) - (24.3) (155.0) 35.8 Costa Group Holdings Limited Annual Report 2021                  Dividends from joint ventures Dividends from joint ventures were in line with CY2020 given consistent earnings from the Driscoll’s Australia joint venture. Working capital The outflow in working capital of $8.8 million for the year reflects increased activity at year end from business acquisitions. Capital expenditure and acquisitions Maintenance capital expenditure increased by $14.6 million against CY2020, driven largely by a packshed rebuild in Tumbarumba following bushfire damage in the prior year and continued capitalisation of farming expenditure related to developing orchards in the Citrus category (including new lots acquired as part of the 2PH Farms acquisition). Additionally, the prior year was impacted by conservative cashflow management in the early period of COVID-19 impacts. Domestic growth capex over the year included completion of the new 10-hectare tomato glasshouse facility and 2.5 hectare nursery at Guyra. As mentioned, there was also the acquisition of quality citrus assets including 2PH Farms and KW Orchards, comprising land and orchards, which increases the domestic citrus production footprint from two to three main growing regions. International growth capex is largely attributed to the Agripark development in China. Combined cashflows for growth capex and acquisitions amounted to $375.8 million of which $185.2 million was funded by an equity raise in the year for the 2PH Farms acquisition, and the remaining $190.6 million being funded from a mix of operating cashflows and existing debt facilities. Figure 1: Growth capital expenditure and acquisitions (A$m) Select Fresh 13.8 KW Orchards 40.8 Domestic Growth 59.7 International Growth 24.8 Growth Capex 84.4 Acquisitions 291.4 2PH 236.8 27 Costa Group Holdings Limited Annual Report 2021Directors’ Report continued For the year ended 26 December 2021 Non-IFRS measures Throughout this report, the Group has included certain non-IFRS financial information, including EBITDA before SGARA and material items, NPAT before SGARA and material items, and Transacted Sales. The Group believes that these non-IFRS measures provide useful information to recipients for measuring the underlying operating performance of the 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 8: Non-IFRS measures Non-IFRS Financial measures EBIT EBITDA EBITDA before SGARA (EBITDA-S) Earnings before interest and tax Earnings before interest, tax, depreciation, and amortisation EBITDA adjusted for fair value movements in biological assets (SGARA) and material items. 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 SGARA is non-cash; therefore, EBITDA before SGARA is used in preference to EBITDA for Costa. Material items are acquisition and integration expenses, relating to acquisition of 2PH Farms, KW Orchards and Select Fresh in the period. Given the non-recurring and materiality of these expenses, the Group considers it appropriate to adjust the for these amounts in considering the underlying performance of the business. NPAT before SGARA (NPAT-S) Net profit attributable to members of Costa before fair value movements (SGARA) in biological assets and material items. Non-IFRS operating measures  Transacted Sales Transacted Sales are used by management as a key measure to assess the Group’s sales and marketing performance and market share. Transacted sales represent the aggregate volume of sales in which the Group 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 the Group to be a revenue measure. There are material differences between the calculation of Transacted Sales and the way in which revenue is determined under IFRS. Transacted Sales comprise: • statutory sales revenue; • gross invoiced value of agency sales of third-party produce; • royalty income from the licensing of Costa blueberry varieties in Australia, the Americas and Africa; and • 100% of the Driscoll’s Australia joint venture sales after eliminating the Group’s produce sales to the Driscoll’s Australia JV. Prior to the formation of Driscoll’s Australia JV in 2010, all of the Group’s domestic sales and marketing activities for the berry category were managed by the Group. Table 9: Reconciliation of Transacted Sales to revenue Reconciliation of Transacted Sales A$m Transacted Sales Agency revenue adjustments Driscoll’s Australia Partnership consolidation adjustments Other revenue Total revenue Notes: Note 1 2 3 CY2021 1,658.9 (93.0) (373.4) 28.1 1,220.6 CY2020 1,598.6 (87.4) (362.9) 16.6 1,164.9 1. Under IFRS, the invoiced value of agency sales is excluded from revenue with only the commission associated with the agency sales recognised. 2. Costa owns 50% of the equity of Driscoll’s JV. Transacted Sales includes 100% of Driscoll’s Australia JV sales, after eliminating Costa produce sales to the Driscoll’s Australia JV. 3. Other revenue (with the exception of royalty income) not included in Transacted Sales. 28 Costa Group Holdings Limited Annual Report 2021    Table 10: Reconciliation EBITDA-S to profit for the period Reconciliation of EBITDA-S to profit for the period A$m EBITDA-S Fair value movements in biological assets Material Items (before tax) EBITDA Depreciation and amortisation Profit/(loss) on sale of assets Impairment reversal Net finance costs Income tax expense Profit for the period CY2021 218.2 (7.5) (19.2) 191.5 (108.5) 0.5 2.4 (25.0) (8.7) 52.2 CY2020 197.2 8.0 - 205.2 (96.6) (1.8) - (25.6) (13.8) 67.4 Material business risks There are various risks that could have a material impact on the achievement of Costa’s strategies and future performance. Set out in the table below are the risks that Costa considers having the greatest impact to the business and an outline of what Costa is doing to mitigate these risks. Although the material risks to Costa’s business did not fundamentally change in 2021, focus on the following risks, which are described in more detail in the table below, continues to be elevated due to COVID-19: • Health, safety and wellbeing of workers as they continue to attend work in-person in order to maintain the provision of the critical food Costa grows for customers and consumers. • Labour sourcing models traditionally utilised by Costa in an environment of domestic and international border restrictions. • Changing market landscape of consumption habits during government-imposed lockdown periods, and sustained changes in consumer behaviour resulting from the pandemic and associated global economic impacts. • Restrictions on the movement of people or goods as countries and states implement measures to manage the pandemic, and associated disruption to global supply-chains. From experiences dealing with COVID-19 at the beginning of the pandemic, the Group proactively established a COVID-19 Steering Committee early in 2020. This Committee continues to operate and is responsible for designing and implementing comprehensive and agile response practices to address the risks to the business from the pandemic, including but not limited to those described above. Risk Weather: Description Mitigation Changes in weather can cause price and yield volatility for Costa. Severe weather events can also cause damage to operational assets of both Costa and key third party growers which could have an impact on Costa’s financial performance. Costa partially mitigates against weather risk by investing in weather protective growing environments and equipment. Approximately two-thirds of Costa’s produce related EBITDA before SGARA is derived from crops grown under cover indoors or under permanent tunnels. While protected cropping reduces the risk of disease and the impact of weather, this risk is still relevant. Water: Insufficient supply of good quality water, whether due to drought or otherwise, and fluctuating water prices have the ability to impact on Costa’s business. Costa’s geographic diversification of its operations and third-party grower network (both within Australia and internationally) is also a key strategy in minimising the impact of this risk. Costa has primarily sought to manage the impact of this risk by increasing the geographic diversity of its operations (both within Australia and internationally). Costa proactively forecasts water usage and availability and maintains a focus on reducing water inputs per unit of crop output through efficiency of water use, water capture and recycling. Costa also actively monitors the Group’s water security position and water prices. Where appropriate forward water contracts are entered into to partially protect against the effect of potential water price increases. 29 Costa Group Holdings Limited Annual Report 2021Directors’ Report continued For the year ended 26 December 2021 Risk Climate: Description Mitigation Changes in climate present physical risk to Costa’s business primarily in the form of an increased frequency of severe weather events and changing temperatures, which could have an impact on Costa’s production, assets and financial performance. Geographic diversification of Costa’s operations plays a key role in minimising the impact of the physical risks of climate change, along with developing new crop varieties more suited to a changing climate, continually improving water security and management practices, finding new technological solutions, and adopting the use of renewable energy sources. Risk associated with transitioning to a low- carbon economy such as government actions to reduce the impacts of climate change may also impact Costa’s operational costs. Costa’s Board committee – the Horticultural Innovation and Technology Committee – oversees strategies relating to horticultural innovation, with one of its areas of focus being the company’s adaptation to the impacts of climate change. Supplier risk: Costa relies on a number of suppliers to support the achievement of its objectives and therefore inability to access key supply inputs at the right time and at the right price could impact Costa’s harvest outcomes. Additionally, there is a risk that practices in our supply chain are misaligned to Costa’s values. Brand risk: Quality issues, product recall, contamination, public health issues, disputes or adverse media coverage could damage Costa’s brands or reputation which could adversely impact Costa’s financial performance. Customer risk: Costa’s top three customers comprised just over two thirds of Australian produce revenue. Costa utilises the TCFD framework as a tool to aid the analysis of the impacts of climate change and is continually developing and implementing strategies to manage this risk. Procurement, operations and Costa’s Ethical Sourcing group work closely to manage and mitigate risks related to key supply inputs. To manage the delivery of the right product, at the right time and cost, from the right suppliers Costa primarily utilises the following mechanisms: sharing of operational plans and forecasts with key suppliers and ongoing engagement and relationship management; diversification of supply base to reduce dependency; pre-engagement requirements and defined terms of engagement and periodic supplier performance reviews. Additionally, through the Group’s Ethical Sourcing Programme, Costa is focused on understanding the social sustainability practices of our supply chain. The first stage of the programme requires key suppliers to complete self-assessment questionnaires to enable systematic monitoring of risk indicators within our supply chain in relation to labour (including Modern Slavery), health and safety, environmental and business ethics. Additionally, third-party audits are conducted for selected suppliers to better understand, and remediate where necessary, standards and practices. Costa has zero tolerance for circumstances which may result in food safety concerns and employs strict food safety and quality assurance standards across its business. In order to achieve these standards, Costa has a dedicated Food Safety & Quality team, consisting of senior specialist managers from all Costa categories. Costa has foreign object control standards and processes to ensure it is well prepared to deal with foreign object contamination risks. During 2021 Costa also launched Costa Care – a culture program which builds on the Costa Values and People First ethos of the Company which is about all employees doing their very best for Costa’s people, its produce and the community. Costa enters into contractual arrangements where possible with its major customers, with any such agreements typically having supply periods for 1 season or 1 to 2 years. However, within Australia, the nature of the market means that most customer arrangements are uncontracted. Costa actively explores alternative sales channels, both within Australia and internationally, with non-Australian customers comprising around one third of sales revenue. 30 Costa Group Holdings Limited Annual Report 2021Risk Description Mitigation Labour sourcing: Costa has complex labour demands due to the nature of growing and harvesting a product that is perishable. There is a risk that the Group is unable to source the appropriate volume of labour at the appropriate time to meet demand and quality standards. Labour arrangements: Costa uses labour hire firms to meet production and harvest peaks. Costa has less direct control over employment arrangements for persons employed by labour hire firms than it does over its direct employees. Poor practices by labour hire firms may impact workers engaged at Costa sites, which in turn could damage Costa’s reputation and/or adversely impact Costa’s financial performance. Workplace health, safety and wellbeing: Given the nature of the industry in which Costa operates, workers at Costa sites are at risk of workplace incidents. In addition to the potential for harm to any worker, the occurrence of workplace incidents has the potential to harm both the reputation and financial performance of Costa. 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. Changing market landscape: An inability to anticipate or respond to changes in the consumption habits and preferences of consumers would have an adverse impact on Costa’s business. Costa labour planning is a foundational component of operational planning in order to ensure adequate personnel are available, and sufficiently trained and engaged, to harvest produce, at the right time, to meet quality standards and customer and consumer demand. To manage the risk of insufficient labour Costa proactively utilises multiple employment models including direct hire, labour hire firms and being an Approved Employer under the Australian Federal Government’s Seasonal Worker Programme. As the programme transitions to the Pacific Australia Labour Mobility programme Costa will maintain its Approved Employer status. Costa continually assesses its mix of employment models to ensure the most advantageous outcomes for the Group and for the workers who provide services to Costa. Accordingly, the Group is seeking to employ more of its workers directly and reduce its reliance on labour hire providers, which is expected to, over time, result in Costa having increased control over our labour sourcing. Third party labour hire firms are processed by Costa through a rigorous pre-qualification process. Costa requires their employment practices and instruments satisfy all applicable employment laws and pay conditions and Costa monitors their compliance. In addition, Costa communicates Costa’s Supplier Code of Conduct to each labour provider, and contractually obliges compliance with the Code. This Code seeks to ensure that human rights issues are understood, respected and upheld. Not only does Costa conduct routine audits and interviews with labour hire staff to ensure compliance with Costa’s expected standards, but labour hire firms are subject to additional risk assessments and audits through the Group’s Ethical Sourcing Programme. All workers entering a Costa work site are inducted and made aware of Costa’s WHS expectations and policies. Costa conducts training across sites for contractors, workers, employees and leaders on safety expectations. Costa’s critical rules are communicated at all sites, informing workers of high-risk areas and safe work instructions are deployed throughout the workplace to reduce risk and hazards. Workers are encouraged and expected to undertake hazard identification and near miss reporting, as well as tracking the time taken to mitigate those hazards identified. Since the beginning of the COVID-19 pandemic, Costa has implemented thorough COVID protocols across all sites, both in Australia and internationally, to ensure the safety and care of workers and the community. These protocols are updated regularly as the pandemic evolves. Costa maintains strong relationships with licensors of key genetic varieties and regularly trials and assesses new varieties. Costa also has an active blueberry breeding program at multiple locations worldwide, which assists Costa to continually develop new and superior varieties that are suitable for growing in key geographic regions. Costa monitors new market entrants and actively employs strategies to maintain its competitive advantage. Costa utilises multiple mechanisms to quantitatively and qualitatively analyse consumer demands to identify emerging trends. The Group has systems in place to continuously review panel insights and focus group information, transactional and questionnaire data and domestic and international industry research. The results of this analysis not only inform strategic planning, but also allow Costa to adjust and tailor existing initiatives and operational processes to quickly respond to changes in demand patterns. 31 Costa Group Holdings Limited Annual Report 2021Directors’ Report continued For the year ended 26 December 2021 Risk Description Mitigation Costa is exposed to foreign exchange risk from a number of sources, namely from the export of produce to various countries, and through the earnings it generates from its international operations, including the African Blue and China joint ventures. Unfavourable movements in the foreign exchange rates between the Australian dollar and other currencies such as the US Dollar, Japanese Yen, Moroccan Dirham and Chinese Yuan can have a material adverse impact on the overall financial performance of Costa. Costa has significant interests in the African Blue JV in Morocco and its joint venture with Driscoll’s Inc in China. Costa’s operations may be adversely affected by the risks associated with operation in such jurisdictions, which may impact on its ability to grow the business by expansion into other overseas markets. Jurisdictions in which Costa operates may in the future experience sudden civil unrest or major change to their government or political or legal systems and the nature of the legal and regulatory systems in those jurisdictions can result in a lack of certainty regarding the interpretation and enforcement of local laws and regulations. Costa’s operations are subject to various environmental laws and regulations, and a range of licences and permits are required for Costa to operate its farming operations. If Costa is responsible for any environmental pollution or contamination or is found to be in breach of any of its licences or permits, Costa may incur substantial costs (including fines and remediation costs), its operations may be interrupted, and it may suffer reputational damage. Costa operates in many regional communities and a failure to successfully integrate with those communities could impact on its operations. Plant and crop health is vital to Costa’s ability to grow and harvest high quality produce to meet the demands of consumers. If the quality of seeds, spawn, nursery plants or crops were compromised this could have a major impact on Costa’s production output and in turn reputation and financial outcomes. Foreign exchange risk: Risks associated with international operations: Environmental risk: Community: Plant and crop quality: 32 Costa actively employs financial hedging strategies to manage this risk. As with its Australian operations, Costa has instituted certain internal controls to regulate the operations of its activities outside Australia, and reviews and monitors these controls for effectiveness. Costa has a program of close engagement with local and regional governments and local advisers in relevant jurisdictions to assist with any legal, regulatory and political changes within those jurisdictions. Costa actively seeks to reduce its environmental impact, including by applying measures across its business designed to reduce waste, reduce migration of any nutrients applied to crops, improve water usage efficiency and reduce chemical usage. In line with Costa’s Sustainable Commercial Farming objective, Costa continually reviews its operations to identify ways in which it can minimise the environmental impact of its operations. Costa is actively involved in supporting the social fabric of the many regional communities in which it operates, both in Australia and internationally. In addition to acting and behaving as a responsible corporate citizen, Costa works closely with communities so that they can benefit both economically and socially from Costa’s presence. Community is one of three core elements of the 2021 launched Costa Care culture program which will continue to build on community engagement activity across our sites. Through expert personnel and leading technology, Costa utilises a number of agronomic practices across the business to manage the quality of seeds, spawn, nursery plants and crop health. Seed, tree and fruit tests and assessments are conducted prior to commercial- scale planting to monitor the integrity of plant material. Once planted, Costa conducts constant quality monitoring through systematic inspection processes, tree health assessments, and rigorous irrigation management. Weather sensing and yield assessment technology is deployed to optimise water rates and yield outcomes. A key component of plant health is the ability to provide necessary water inputs, and Costas first sustainable commercial farming principle centres around this need – focusing on efficiency of water use and improving water security. Costa Group Holdings Limited Annual Report 2021Risk Description Mitigation Intellectual Property (‘IP’) risk: Costa’s superior genetics are a key driver of competitive advantage in some produce segments in which it operates. An inability to protect or maintain this IP would have adverse impacts on financial outcomes and growth aspirations. Partner risk: Information security/ Cyber risk: Restriction on movement of people or goods: Costa has a number of joint venture and partnership agreements. If any of these key relationships break down, or agreements are terminated or amended in a manner unfavourable to Costa there could be an adverse impact on Costa’s financial performance. Costa’s business relies on IT infrastructure, systems and processes to support the operation and growth of the business. Should such infrastructure, systems and processes fail or become compromised then there is a risk that the efficiencies, synergies and data that give the business a competitive advantage will be reduced or lost. Unplanned restrictions, such as those imposed due to widespread illness (e.g. COVID-19) or the result of armed conflict or sudden geopolitical changes, have the potential to have a significant impact on Costa’s operations. Additionally, prolonged supply chain disruptions could impact on Costa’s operations. Costa licenses its superior blueberry genetics to third parties in Australia and internationally. Before commercialising varieties in a new jurisdiction there is an analysis of the protection mechanisms that exist in that jurisdiction to manage the protection of our competitive IP. Costa’s primary mechanism for the management of IP is through registration of patents or plant breeders’ rights (PBRs). Additionally, Costa imposes strict physical security requirements and physical access to and inspection of growing facilities. By their nature, joint ventures, partnerships and alliances present the possibility of diverging objectives between members. With key joint ventures and partnerships Costa aims to maintain close and mutually prosperous relationships through ongoing formal and informal communications and strong governance structures. Costa implements various strategies to mitigate cyber risk across our applications, networks and websites. Costa focuses on employee education, network defence, enterprise-wide testing, disaster recovery and the segregation of sensitive data. These strategies are internally and externally periodically reviewed, audited and updated. Costa seeks to maintain a diverse supplier base so that it is not overly reliant on any one supplier. Costa also continues to actively explore alternative sales and distribution channels, to minimise the impact of this risk. Additionally, Costa’s COVID-19 Steering Committee continues to plan for, monitor and take steps to mitigate supply chain disruptions. 7. Dividends During the year ended 26 December 2021, Costa Group Holdings Ltd declared and paid a fully franked final dividend of 5.0 cents per share for CY2020 (as previously disclosed in the Directors Report for that period) and a fully franked interim dividend of 4.0 cents per share for CY2021. The Board has approved a final dividend for CY2021 of 5.0 cents per share with a record date of 10 March 2022 and payment date of 7 April 2022. This dividend will be fully franked. As this dividend was approved after year end, it has not been accrued for as at 26 December 2021. This brings the total dividend payment for CY2021 to 9.0 cents per share. CY2022 dividends will be determined after taking into account earnings performance during CY2022 and will be balanced against the company’s need to fund growth objectives. 8. 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. 9. Environmental regulation The Group is committed to conducting business activities and investing in farming practices that are innovative, cost efficient, promote sustainable horticulture and focus on the need for responsible environmental stewardship with respect to its use of natural resources, while continuing to meet expectations of shareholders, employees, customers, suppliers and communities in which the Group conducts business. The Group is subject to environmental regulations under various federal, state and local laws relating predominantly to water use and air and noise emission levels. The Group’s operations are also subject to conditions of its licences and permits (such as those for manufacturing compost for its mushroom operations) and its environmental management plans. During CY2021, the Group paid a civil penalty due to the overflow of water from holding dams at the Monarto mushroom farm during a period of civil construction on the site. All of the water that overflowed from the dam was contained within the Monarto site. 33 Costa Group Holdings Limited Annual Report 2021Directors’ Report continued For the year ended 26 December 2021 The Group reports under the National Greenhouse and Energy Reporting Act 2007 (Cth) and the key emissions target Costa is committed to achieving is net-zero carbon emissions by 2050. To assist in progressing towards this commitment, Costa plans to pledge to the Science Based Target Initiative (SBTi) and subsequently work with SBTi to have our emission reduction targets validated. The adoption of renewable energy sources and in particular solar energy together with other emerging technologies to reduce emissions will play a role in meeting this target. This includes at present the operation of a solar farm at the Group’s Monarto mushroom farm and the use of solar arrays to power irrigation pumps. The Group publishes an annual Sustainability Report in which it reports on initiatives that are aimed at improving environmental performance. Reflecting the importance of its sustainable farming initiatives, Costa’s 2021 Sustainability Report is a separate report, rather than being included in its Annual Report. The Group is committed to achieving a level of environmental performance that meets or exceeds Federal, State and local requirements. 10. 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 Harry Debney Tim Goldsmith Sean Hallahan Janette Kendall Peter Margin Dr Jane Wilson 11. Share options Ordinary shares 464,242 341,142 73,425 30,118 42,612 86,986 43,425 Options over ordinary shares - 568,253 - 737,382 - - - 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 50,000 151,141 67,905 1,856,6151 1,417,032 1,432,5282 Notes: Issue price of shares $1.45 $4.77 $6.53 $7.37 $2.39 $3.95 Expiry date of the options October 2024 September 2022 March 2023 March 2024 March 2025 March 2026 1. This represents the number of outstanding options under the Company’s CY19 LTI Plan as at the date of this report. However, the Board has determined that the vesting conditions for the options granted under the CY19 LTI plan were not met and accordingly all of these options will lapse on 1 March 2022. 2. These options represent unvested options granted to management (including the CEO) during the period under the Group’s CY21 LTI plan, including 258,695 options issued to Sean Hallahan, 150,469 options issued to Wayne Johnston and 81,521 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 period, the Company issued 187,389 shares as a result of the exercise of options by current and former members of the Company’s Executive management team. 34 Costa Group Holdings Limited Annual Report 202112. 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 period, 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. 13. Indemnification and insurance of auditors No indemnities have been given or insurance premiums paid, during or since the end of the period, for any person who is or has been an auditor of the group. 14. Non-audit services During the period 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 period by the auditor and is satisfied that the provision of those non- audit services during the period 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 period are set out below. Audit and review services Services provided by KPMG Australia Services provided by associate firms of KPMG Australia Other services provided by KPMG Taxation compliance and other taxation advisory services (including R&D) Other services CY2021 $ ’000 CY2020 $ ’000 524 259 783 210 148 358 535 222 757 207 23 230 15. Rounding off The Consolidated 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. 16. Lead auditor’s independence declaration The Lead auditor’s independence declaration is set out on page 39 and forms part of the directors’ report for the financial period ended 26 December 2021. 35 Costa Group Holdings Limited Annual Report 2021    Directors’ Report continued For the year ended 26 December 2021 Remuneration report (audited) 1. Introduction The directors are pleased to present the Remuneration Report for the financial year commencing on 28 December 2020 and ending 26 December 2021 (“CY2021”), 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 Non-executive Directors Neil Chatfield Tim Goldsmith Janette Kendall Peter Margin Dr Jane Wilson AO Harry Debney1 Executive KMP Harry Debney1 Sean Hallahan2 Wayne Johnston Notes in relation to Table 1 Position Held Chairman, Non-executive director Non-executive director Non-executive director Non-executive director Non-executive director Non-executive Director (commenced on 1 July 2021) Chief Executive Officer, Managing Director (ceased on 31 March 2021) Chief Executive Officer, Managing Director (commenced on 31 March 2021) Chief Financial Officer 1. Harry Debney was Chief Executive Officer and Managing Director until he ceased employment on 31 March 2021, at which time he ceased to form part of Executive KMP. He was subsequently appointed as a non-executive director from 1 July 2021. 2. Sean Hallahan commenced as Chief Executive Officer and Managing Director on 31 March 2021. Prior to that he was the Company’s Chief Operating Officer. He formed part of Executive KMP for the full financial year. 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 and Human Resources Committee The Company has established a Remuneration and Human Resources Committee that is comprised of Non-executive Directors, all of whom are independent in accordance with the Remuneration and Human Resources Committee Charter. The Remuneration and Human Resources 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; • diversity and inclusion; • human resource policy and practices across the Group; • workplace health and safety across the Group; and • shareholder and other stakeholder engagement in relation to the Group’s remuneration policies and practices. A full charter outlining the Remuneration and Human Resources Committee’s responsibilities is available at: http://investors.costagroup.com.au/investor-centre/?page=corporate-governance. 2.2 Use of Remuneration Consultants The Remuneration and Human Resources 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. During CY2021, Costa did not receive any remuneration recommendations as defined in section 9B of the Corporations Act 2021. 2.3 Associated Policies The Group has established a number of policies to support a strong governance framework, including a Whistleblower Policy, Anti-Bribery and Anti-Corruption Policy, Diversity and Inclusion Policy, Disclosure Policy, Securities Trading Policy, Human Rights Policy, Supplier Code of Conduct and Non-Executive Director Share Ownership 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. 36 Costa Group Holdings Limited Annual Report 2021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 Objective Application Competitive Remuneration Reward employees fairly and competitively for their contributions to the Group’s success. Performance Driven Executives are rewarded for achieving strategic goals that create sustainable growth in shareholder wealth. • Total remuneration is set having regard to the individual’s capabilities and experience. • Remuneration for CY2021 was 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 may at times obtain independent advice on the appropriateness of total remuneration package. • Significant ‘at risk’ reward ensures executives’ interests remain aligned with creation of shareholder value. • 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 CY2021 The remuneration for CY2021 for the Executive KMP comprised fixed remuneration, short-term incentives (STI) and long-term incentives (LTI) in the form of options over shares. 3.1.2 Remuneration Mix for CY2021 In CY2021, total remuneration for the Executive KMP included both fixed and ‘at risk’ reward components. The ‘at risk’ reward components included STI’s (as outlined in section 3.2.2) and LTI’s (as outlined in section 3.2.3), which are based on individual and group performance outcomes. Further details of the remuneration mix are outlined in Section 7 – Directors’ and Executive Officers’ Remuneration. The remuneration potential for the Executive KMP for CY2021 (with the total at risk remuneration, including the maximum potential stretch STI benefit for CY2021) is set out below: CEO remuneration – at ‘potential’ 17% 51% 34% 49% 49% CFO remuneration – at ‘potential’ 18% 48% 30% 52% 52% Fixed At-Risk STI LTI 37 Costa Group Holdings Limited Annual Report 2021Directors’ Report continued For the year ended 26 December 2021 As noted in section 3.2.2 below, the STI minimum performance threshold for CY2021 was met and a partial STI payment was made for that period. In addition, it was determined that the earnings per share (EPS) hurdle that is applicable to the majority of the options under the CY19 LTI Plan (see section 3.3.1 below) was not met and that all of the options subject to the growth hurdle under that LTI Plan will be forfeited. This resulted in an accounting reversal of the associated share-based payments in CY2021, and hence a reduction in the amount of ‘at risk’ remuneration, for the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). As a result, the mix of fixed versus variable ‘at risk’1 remuneration payable in respect of CY2021 for the Executive KMP was as follows: CEO remuneration – at actual 21% 39% 18% 61% 61% CFO remuneration – at actual 21% 36% 15% 64% 64% Fixed At-Risk STI LTI Notes in relation to Figure 3.1.2 1. Includes share-based payments associated with unvested LTI arrangements (including those in section 3.3). Harry Debney did not participate in the short term or long term incentive plans for CY2021, as he had announced his intention to retire as CEO and Managing Director prior to the commencement of CY2021. 3.2 CY2021 Remuneration Components 3.2.1 Fixed Remuneration Total fixed remuneration (“TFR”) for CY2021 comprised 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 and Human Resources Committee with regard to individual and Group performance. The Committee’s review of TFR takes into account the Executive KMP’s total remuneration package. 3.2.2 Short Term Incentive (“STI”) Plan CY21 STI Plan Overview The CY21 STI Plan was designed to enable Executive KMP and other members of senior management to receive a performance-based incentive payment calculated as a percentage of TFR conditional on achieving Group EBIT-S hurdles as set out below. The Group EBIT-S hurdles were: • If the Group achieves less than 90% of budgeted Group EBIT-S for the 12 month period, no STI will be paid. • Target STI is paid to a participant on the Group achieving 100% of budgeted Group EBIT-S and the participant satisfying their other STI performance measures, with pro rata payments for the EBIT-S component if Group EBIT-S is between 90% and 100% of budgeted Group EBIT-S. • Stretch STI is payable if the Group achieves over 100% of budgeted Group EBIT-S, with the maximum STI being payable at 110% of budgeted Group EBIT-S (and the participant meets expectations of their individual performance STI measures). The stretch STI component is measured solely on Group EBIT-S and is calculated on a straight line basis between 100% and 110% of budgeted Group EBIT-S. EBIT-S is a non-IFRS measure, which is calculated as earnings before interest, tax, fair value movement in biological assets (SGARA) and material items. For the purposes of assessing performance under the CY21 STI Plan, EBIT-S was calculated prior to any earnings from, and costs associated with, the acquisition of 2PH Farms. To provide meaningful comparison against the budgeted Group EBIT-S in determining the performance hurdles, it is considered appropriate to exclude the earnings and acquisition and integration related costs of 2PH Farms. The Company prefers the EBIT-S hurdle for executive performance assessments as it believes it has a more direct correlation to the financial performance of the Group than other statutory earnings measures by removing the impact of SGARA and material items. SGARA is an area of estimates and judgements and allows for profit to be recognised on produce that is not yet in a saleable condition, harvested or sold. As such, a pre-SGARA measure is chosen as the relevant hurdle metric as it rewards executives on earnings that have been ‘realised’. 38 Costa Group Holdings Limited Annual Report 2021CY21 STI Plan Features Objective Participants To reward participants for achieving goals directly linked with the Group’s business strategy All Executive KMP and selected senior management Performance Period CY2021 Opportunity CEO – Target STI was 45% of TFR, with a maximum opportunity of 70% TFR for achieving stretch targets. CFO – Target STI was 35% of TFR, with a maximum opportunity of 60% TFR for exceeding stretch targets. Performance Measures Consistent with prior years, STI was assessed against both financial and non-financial measures, and for the Executive KMP was weighted as follows: Measure Group EBIT-S Cash Flow Individual Performance Weighting 50% 30% 20% Individual Performance was measured against KPIs appropriate for the Executive’s role and included key measures such as safety, personal commitment to the Company’s values, project execution, risk management, quality, customer satisfaction and people leadership. Cash Flow was based on the Group’s free cash flow. This is calculated as cash from operations less operating capital expenditure. Payment Method • Cash – Two thirds of the STI payable will be paid in cash following the end of the performance year; and • Deferred – One third of the STI payable will be delivered in the form of performance rights on 1 March 2022. No dividends or voting rights are attached to performance rights, but cash payments equivalent to dividends will be paid to holders of performance rights. A participant’s performance rights will vest on 1 March 2023 and the participant will receive an equivalent number of shares, 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’). Calculation methodology The STI incentive is assessed annually at the end of the financial year. The stretch opportunity is based on overachievement against the budgeted Group EBIT-S only, with the opportunity capped at 25% of the participant’s TFR. Every 1% of actual Group EBIT-S over budgeted Group EBIT-S increases the incentive by 2.5%. The stretch STI component is calculated on a straight line basis between 100% and 110% of budgeted Group EBIT-S. Calculations Each of the three measures (Group EBIT-S, Cash flow and Individual performance) has been evaluated. The outcome of the evaluation of these performance measures for each of the participants was as follows: Personal: The CEO assessed the individual performance of the CFO and the Board assessed the individual performance of the CEO, in each case against the relevant KPIs as described above. All KMPs were regarded as having substantially achieved their individual performance KPIs and received the majority of the individual performance component. In the case of the CEO the Board assessed that 80% of the personal component should be awarded, noting that the CEO was officially appointed to the role in March 2021. Cash flow: As noted above, the metric used for this performance measure is the Group’s free cash flow. For CY2021, budget free cash flow was $97.2 million and the actual free cash flow was $100.8 million. Group EBIT-S: Budgeted Group EBIT-S for CY2021 was $110.7 million. The actual Group EBIT-S for CY2021 (excluding the impact of the 2PH acquisition) was $103.8 million, being 93.8% of budgeted Group EBIT-S. 39 Costa Group Holdings Limited Annual Report 2021Directors’ Report continued For the year ended 26 December 2021 Based on the calculation methodology outlined above, the STI payable for the KMP was calculated in accordance with the table below. Participant Sean Hallahan Wayne Johnston CY21 STI payable at target $382,500 $173,040 CY21 STI payable if full stretch targets achieved $595,000 $296,640 CY21 STI paid based on performance against Group and individual measures $247,993 $117,381 3.2.3 CY21 LTI Plan The CY21 LTI Plan that governs the LTI options issued during CY2021 is designed to reward the Executive KMP and other senior executives for long term performance and long term value creation for shareholders. The features of this LTI Plan are as follows: Term Eligibility Description CEO, CFO and selected senior management Consideration for grant Nil Instrument Options to acquire ordinary shares in Costa Group Holdings Limited Number of options granted Exercise price The number of options was determined based on a set percentage of the participant’s current TFR (“LTI Incentive Amount”), being 35% for each of the CEO and CFO. The options were indicatively valued by an independent external valuer (Ernst & Young). The number of options issued to each participant was determined by dividing that participant’s LTI Incentive Amount by the indicative value per Option as determined by the independent valuer. The final fair value of the options was determined on the grant date. $3.95 per share, being the volume weighted average price of an ordinary fully paid share in the capital of the Company recorded on the ASX over 10 ASX trading days ending on the day prior to the commencement of the performance period as subsequently adjusted to reflect the impact of the Company’s entitlement offer in CY2021 (in accordance with the ASX announcement lodged on 29 November 2021). Performance Period The performance period is the three-year period commencing from 28 December 2020 to the end of the Company’s 2023 financial year. The three-year performance period is consistent with performance periods adopted for previous LTI plans. Performance Measure (EPS) 75% of the options (“EPS Options”) are subject to a performance hurdle based on the Company’s Earnings Per Share (basic) compound annual growth rate (“CAGR”) over the performance period, with performance and vesting outcomes as follows: Company’s EPS CAGR over performance period Less than the minimum EPS growth threshold Equal to the minimum EPS growth threshold Greater than the minimum EPS growth threshold, up to the maximum EPS threshold At or above the maximum EPS growth threshold Percentage of LTIP Options (subject to the EPS hurdle) that will vest 0% 50% 50%-100%, on a straight line sliding scale 100% In setting the EPS hurdle the Board noted that the proposed hurdle was reflective of the Company’s target of generating low double digit annual EPS growth over the longer term horizon. The Board retains discretion to adjust the calculation of EPS (for example, to exclude the impact of significant events that may occur during the Performance Period). EPS will be measured using NPAT-S. The EPS growth threshold is considered commercially sensitive and will be disclosed following the end of the Performance Period. 25% of the options (“Growth Target Options”) are subject to a performance hurdle based on geographic and category diversification and growth designed to support sustainable long term value creation linked to return on capital. The number of Growth Target Options that vest will be determined by the Board (with the Managing Director not voting) based on an assessment of the Company’s performance during the Performance Period against the growth and diversification targets set by the Board. The Company considers the performance targets for this hurdle to be commercially sensitive, with the result that publication of that information prior to the end of the Performance Period may be prejudicial to the interests of the Company. Accordingly, complete details regarding the outcomes of vesting will be disclosed at the end of the Performance Period. Performance Measure (Growth) 40 Costa Group Holdings Limited Annual Report 2021Term Description Entitlements Options will not carry rights to dividends or voting rights prior to vesting. Option exercise Vested options must be exercised prior to 1 March 2026 (“expiry date”). Prior to the expiry date, an option holder can exercise by either: • providing the Company with an exercise notice that specifies the number of options to be exercised, together with the exercise price in respect of those exercised options; or • electing a cashless exercise in respect of some or all of his/her options. If an option holder provides the exercise price, he/she will be issued with one share per exercised option. If an option holder elects a cashless exercise, he/she will be issued with a lower number of shares, calculated in accordance with the following formula: (A minus B) divided by C, where: A = Number of Shares to which each Vested Option relates (i.e. 1) x Number of Vested Options exercised x Market Price per Share B = Number of Vested Options exercised x Exercise Price per Option C = Market Price per Share, being an amount equal to the volume weighted average price of a Share recorded on the ASX over 10 ASX trading days immediately preceding the date on which the Market Price is to be calculated or, if no sale occurred during such period, the last sale price of a Share recorded on the ASX. Restrictions on Dealing Participants must not sell, transfer, encumber, hedge or otherwise deal with their options granted under the LTI Plan. Service conditions Shares delivered on the exercise of 50% of the options will be subject to a restriction period (during which the shares cannot be sold or otherwise dealt with) for 12 months following vesting. Any unvested options granted under the LTI Plan 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), a pro rata proportion of the unvested options (reflecting the portion of the Performance Period served) will remain on foot subject to Board discretion and be tested at the end of the original vesting date against the relevant performance conditions. Change of Control The Board has discretion to determine an appropriate treatment for unvested and/or vested, but unexercised, options. 3.3 Prior Period LTI Plans LTI Plans for previous years are also tested over a three-year performance period, meaning that the performance period for a prior LTI Plan will end, and the associated performance hurdles will be tested, during each financial year. The performance period for the CY19 LTI Plan ended during CY2021. 3.3.1 CY19 LTI Plan The performance period for the CY19 LTI Plan ended on 26 December 2021 and details of the relevant performance hurdles are as follows: • 75% of the options issued under the CY19 LTI Plan were subject to a performance hurdle based on the Company’s EPS (basic) compound annual growth rate (“CAGR”) over the performance period. As the Company’s EPS CAGR over the performance period was below the minimum 18% threshold that had been set at the time of the options being granted, all CY19 LTI Plan options subject to the EPS hurdle will lapse. • 25% of the options issued under the CY19 LTI Plan were subject to a performance hurdle based on geographic and category diversification and growth designed to support sustainable long term value creation. For testing of the performance hurdle, the Board reviewed the current and expected investment returns in relation to the Company’s key strategic growth and diversification measures implemented over the performance period. The Board noted that the Company had continued its growth agenda during the performance period, including the acquisition of the 2PH Farms business and continued growth in the China berry business. However, the Board recognised that expected returns from capital investment during the period had not yet been achieved. Based on this review of the performance hurdle, the Board (excluding the CEO) determined that all CY19 LTI Plan options subject to the growth hurdle will lapse. 41 Costa Group Holdings Limited Annual Report 2021 Directors’ Report continued For the year ended 26 December 2021 The table below shows the vesting outcomes for the KMP’s options granted under the CY19 LTI plan. Harry Debney1 Sean Hallahan2 Wayne Johnston3 Notes in relation to Table 3.3.1 CY19 EPS options held 271,900 189,729 N/A CY19 EPS options vesting - - N/A CY19 Growth options held 90,633 63,243 N/A CY19 Growth options vesting - - N/A Total CY19 LTI options lapsing 362,533 252,972 N/A 1. Harry Debney was granted 362,534 EPS options and 120,844 growth options under the CY19 LTI Plan and forfeited 25% of those options upon his retirement, due to only serving 75% of the performance period. The option numbers shown above are after that earlier forfeiture of options. 2. Options were granted to Sean Hallahan under the CY19 LTI Plan in February 2019, in his capacity as COO. 3. Wayne Johnston commenced employment with the Group after 2019 and hence did not receive options under the CY19 LTI Plan. Section 8.3 below includes details of options that have been granted under prior period LTI Plans for which the performance periods have not yet ended. 4. Executive KMP Contract Terms A summary of the key terms of employment for Executive KMP as at 26 December 2021 is presented in the below table: Executive Sean Hallahan Wayne Johnston Role Chief Executive Officer Chief Financial Officer Notice by the Group 6 Months 6 Months Notice on Resignation 6 Months 6 Months 5. Non-executive Directors The details of fees paid to Non-executive Directors in CY2021 are included in Section 7 of this report. Non-executive Directors’ fees were fixed and they did not receive any performance-based remuneration. During CY2021 the Company undertook a benchmarking exercise for non-executive director fees, which had not been subject to a review since the Company’s listing in July 2015, and as result the fees were increased with effect from 1 October 2021. The table below outlines the revised annual fees for non-executive directors following that review. The annual aggregate fee pool for non-executive directors remained at $1,200,000. Board and committee fees, which are inclusive of statutory superannuation contributions, are included in this aggregate fee pool. Board/Committee Board base fee Audit and Risk Committee Remuneration and Human Resources Committee Horticultural Innovation and Technology Committee Nomination Committee Annual Chairman Fee ($) 275,000 (inclusive of committee fees) 28,000 25,000 20,000 - Annual Member Fee ($) 130,000 14,000 12,500 10,000 - 42 Costa Group Holdings Limited Annual Report 20216. Relationship between remuneration policy and Group performance Key performance indicator Revenue ($’000) Statutory EBIT3 ($’000) EBIT-S3 ($’000) NPAT-S4 ($’000) Dividend paid or determined to ordinary shareholders ($’000) CY20192 1,047,873 (10,142) 59,037 22,664 19,238 CY20181 990,282 77,466 86,578 56,538 43,186 CY20202 1,164,916 106,787 98,774 55,065 36,075 CY20212 1,220,597 85,813 112,593 63,989 41,794 Notes in relation to Table 6 1. The CY2018 information represents a proforma period from 1 January 2018 to 30 December 2018 as the Group changed its reporting period from a June year end to a December year end in 2018 and have been included to allow a comparative against subsequent calendar years. The amounts disclosed for Revenue, Statutory EBIT, EBIT-S and NPAT-S are consequentially unaudited results. Additionally, the CY2018 amounts are prior to the adoption of AASB16 Leases. 2. CY2019 onwards reflects the adoption of AASB 16 Leases. 3. EBIT is defined as earnings before interest and tax. EBIT-S is calculated as EBIT before fair value movements in biological assets and material items. 4. NPAT-S is net profit after tax attributable to ordinary shareholders but excluding impacts of fair value movements in biological assets and material items. CY2019 to CY2021 performance Total Revenue ($’m) NPAT-S ($’m) Total dividend to ordinary shareholders ($’m) 1,250 1,200 1,150 1,100 1,050 1,000 950 CAGR 6% CY19 CY20 CY21 80 60 40 20 0 CAGR 68% CY19 CY20 CY21 50 40 30 20 10 0 CAGR 47% CY19 CY20 CY21 From the time of the Company’s ASX listing in FY2016, the Board has adopted a remuneration framework that is designed to attract and retain key talent, reward the achievement of strategic objectives and align reward with the creation of shareholder wealth. The table and charts above set out information about the Group’s performance, earnings and dividend for CY2021 compared to the preceding year and CY2019. Group EBIT-S performance for CY2021 was higher than the 90% threshold but less than budgeted EBIT-S, a partial STI payment was made to the CEO and Executive KMP for this period. This highlights a close alignment between the Group’s financial performance and remuneration policy for Executive KMP. 43 Costa Group Holdings Limited Annual Report 2021Post-employment Long-term benefits Termination Share-based payments Total Superannuation benefits $ Long service leave Termination benefits $ 9,679 7,001 12,858 25,814 13,177 11,749 12,264 10,395 2,093 5,639 12,047 10,159 22,631 21,348 22,631 11,183 - 8,489 4,074 16,723 $ - - - - - - - - 25,019 10,897 7,943 3,896 - 2,826 - - - - - - - - - - - - - - - (74,350) (161,716) $ - - - - - - - - 99,711 (100,668) 130,709 46,816 - (225,293) $ 262,083 250,425 261,097 1,235,560 148,039 135,419 137,808 119,814 146,225 130,669 135,360 117,099 1,107,670 752,998 717,671 361,816 - (38,457) Directors’ Report continued For the year ended 26 December 2021 7. Directors’ and Executive Officers’ Remuneration Outcomes Details of the nature and amount of each major element of remuneration1 of each director of the Company, and other KMP of the consolidated entity are: Non-executive Directors Neil Chatfield Harry Debney2 Peter Margin Janette Kendall Tim Goldsmith Jane Wilson Current Managing Director and Executive Officers Sean Hallahan Wayne Johnston Former Executive Officers Linda Kow (resigned 1 May 2020) Notes in relation to table 7: CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 Short-term Non- monetary benefits $ - - 4,983 -  STI (cash) $ - -  - 353,326 Other Monetary Benefits $ - - - - Salary and fees $ 252,404 243,424 313,532 1,001,413 134,862 123,670 125,544 109,419 144,132 125,031 123,313 106,940 - - - - - - Total $ 252,404 243,424 318,515 1,354,739 134,862 123,670 125,544 109,419 144,132 125,031 123,313 106,940 - - - - - - 2,615 - 943 - 960,309 821,421 556,388 299,922 - - - 175,521 - - - - - - - - - - - - 792,365 636,021 477,191 233,029 165,328 185,400 78,254 66,893 CY2021 CY2020 - 175,521 - - 1. 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. 2. Harry Debney’s remuneration includes remuneration as CEO and Managing Director for the period until 31 March 2021 and as non-executive director for the period from 1 July 2021. 3. Sean Hallahan was appointed as Managing Director (previously Chief Operating Officer) from 31 March 2021. 44 Costa Group Holdings Limited Annual Report 2021                                                                                                  Salary and fees $ 252,404 243,424 313,532 1,001,413 134,862 123,670 125,544 109,419 144,132 125,031 123,313 106,940 CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 CY2021 CY2020 - 175,521  STI (cash) Short-term Non- monetary benefits $ Other Monetary Benefits $ 4,983 353,326 $ - -  - - - - - - - - - - - - - - - - - - - - - - - - Total $ 252,404 243,424 318,515 1,354,739 134,862 123,670 125,544 109,419 144,132 125,031 123,313 106,940 960,309 821,421 556,388 299,922 - 175,521 - - - - - - - - - - - - - - 792,365 636,021 477,191 233,029 165,328 185,400 78,254 66,893 2,615 943 Non-executive Directors Neil Chatfield Harry Debney2 Peter Margin Janette Kendall Tim Goldsmith Jane Wilson Current Sean Hallahan Wayne Johnston Former Executive Officers Linda Kow (resigned 1 May 2020) Notes in relation to table 7: noted above. from 1 July 2021. Managing Director and Executive Officers 1. Reasonable travel, accommodation and other costs incurred by Directors in the course of their duties are reimbursed to Directors, in addition to the remuneration 2. Harry Debney’s remuneration includes remuneration as CEO and Managing Director for the period until 31 March 2021 and as non-executive director for the period 3. Sean Hallahan was appointed as Managing Director (previously Chief Operating Officer) from 31 March 2021. 7. Directors’ and Executive Officers’ Remuneration Outcomes Details of the nature and amount of each major element of remuneration1 of each director of the Company, and other KMP of the consolidated entity are: Post-employment Long-term benefits Termination Share-based payments Total Superannuation benefits $ 9,679 7,001 12,858 25,814 Long service leave $ - - 4,074 16,723 Termination benefits $ - - - - 13,177 11,749 12,264 10,395 2,093 5,639 12,047 10,159 22,631 21,348 22,631 11,183 - 8,489 - - - - - - 25,019 10,897 7,943 3,896 - 2,826 - - - - - - - - - - - $ - - (74,350) (161,716) - - - - - - 99,711 (100,668) 130,709 46,816 - (225,293) $ 262,083 250,425 261,097 1,235,560 148,039 135,419 137,808 119,814 146,225 130,669 135,360 117,099 1,107,670 752,998 717,671 361,816 - (38,457) 45 Costa Group Holdings Limited Annual Report 2021                                                                                                  Directors’ Report continued For the year ended 26 December 2021 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 KMP, together with shares held by their close family members, is set out below: Neil Chatfield Tim Goldsmith (indirectly held) Janette Kendall (indirectly held) Peter Margin (indirectly held) Dr Jane Wilson Harry Debney (directly and indirectly held) Sean Hallahan (directly and indirectly held) Wayne Johnston Notes in relation to Table 8.1: Held at 28 December 2020 375,000 37,500 36,798 75,118 37,500 723,013 10,990 - Shares acquired 89,242 35,925 5,814 11,868 5,925 46,542 19,128 - Shares sold - - - - - 550,0001 - - Shares delivered under STI or LTI plans - - - - - 121,587 - - Held at 26 December 2021 464,242 73,425 42,612 86,986 43,425 341,142 30,118 - 1. Shares were sold by Harry Debney at a time when he was not a KMP, namely after he had ceased to be CEO and Managing Director and prior to his appointment as non-executive director. 8.2 Options over equity instruments granted as compensation The number of options over ordinary shares granted as compensation to KMP during CY2021 was as set out below. Shareholder approval for the issue of options to Sean Hallahan under the LTIP was obtained in accordance with ASX Listing Rule 10.14 at the Company’s AGM held in May 2021 prior to the options being issued. Sean Hallahan Wayne Johnston Notes in relation to Table 8.2: Options granted during CY2021 Grant date 258,695 150,469 19 February 2021 1 June 20211 Fair Value per option $ 1.15 1.15 Exercise price per option $ 3.95 3.95 Expiry date 1 March 2026 1 March 2026 1. The grant date for valuation purposes for all options granted to Executive KMP (including the CEO) during CY2021 was 19 February 2021, being the date on which the Board approved the establishment of the CY21 LTI Plan. 46 Costa Group Holdings Limited Annual Report 20218.3 Details of equity incentives affecting current and future remuneration The table below outlines each KMP’s unvested options and performance rights at the end of the reporting period. Details of vesting profiles of the options and performance rights held by each KMP are detailed below: Instrument Options Options Performance Rights Options Options Options Performance Rights Options Options Performance Rights Harry Debney Sean Hallahan Wayne Johnston Notes in relation to Table 8.3 Number1 Grant date 362,533 155,251 38,758 252,972 199,875 258,695 20,337 125,000 150,469 7,337 30 May 20192 29 May 20202 1 March 2021 26 February 2019 26 February 2020 1 June 20211 1 March 2021 20 July 20202 19 February 2021 1 March 2021 Vesting date 1 March 2022 1 March 2023 1 March 2022 1 March 2022 1 March 2023 1 March 2024 1 March 2022 1 March 2023 1 March 2024 1 March 2022 Exercise price $7.37 $2.39 N/A $7.37 $2.39 $3.95 N/A $2.39 $3.95 N/A 1. This Table sets out the options held as at the end of the reporting period. However, as set out in Table 3.3.1, the Board has determined that all of the options that were due to vest on 1 March 2022 will lapse on that date. 2. The grant date for valuation purposes for options granted to Executive KMP (including the CEO) during CY2021 was 19 February 2021, for options granted during CY2020 was 26 February 2020 and for options granted during CY2019 was 26 February 2019. 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 27 December 2020 1,165,029 547,623 125,000 Granted as compensation - 258,695 150,469 Exercised 121,587 - - Harry Debney Sean Hallahan Wayne Johnston Value of exercised options (at time of exercise) $ 190,892 - - Forfeited/ lapsed during the year 475,189 68,936 - Held at 26 December 2021 568,253 737,382 275,469 Vested during the year 15,221 7,659 Nil Vested and exercisable at 26 December 2021 50,469 25,840 Nil 8.5 Key Management personnel transactions There were no transactions between members of the Group and any KMP (or their related parties) that resulted in any personal financial benefit to the KMP. The Group had certain transactions during the financial year with companies of which the KMP were directors. These transactions were on arm’s length terms and were entered into for the benefit of the Group, at the request of the Group’s Board of Directors. These are disclosed in note D4 of the financial statements. 47 Costa Group Holdings Limited Annual Report 2021Directors’ Report continued For the year ended 26 December 2021 8.6 Director independence The Board regularly monitors and assesses the independence of each Director by considering whether the Director is allied with management or a substantial securityholder or other stakeholder and whether the Director is free of any other interest, position, association or relationship that might influence, or reasonably be perceived to influence, in a material respect his or her capacity to bring an independent judgement to bear on issues before the Board and to act in the best interests of the entity and its securityholders generally. The Board considers numerous factors as part of this process, including those identified by the ASX Corporate Governance Council, namely whether the Director: • is, or recently has been, employed by the Group in an executive capacity and whether there was at least 3 years between ceasing such employment and serving on the Board; • receives performance-based remuneration (including options or performance rights) from, or participates in an employee incentive scheme of the Group; • • is, or has been within the last three years, in a material business relationship (e.g. as a supplier, professional adviser, consultant or customer) with the Group or is an officer of, or otherwise associated with, someone with such a relationship; is, represents, or is or has been within the last three years an officer or employee of, or professional adviser to, a substantial security holder of the Company; • has close family ties with someone who falls within the above categories; or • has been a Director for such a period that his or her independence from management and substantial holders may have been compromised. On this basis the Board has made the following assessments in respect of the Company’s Directors: • Independent: Neil Chatfield, Tim Goldsmith, Janette Kendall, Peter Margin, and Dr Jane Wilson. Specifically, it is noted that none of these directors is a related party of any substantial shareholder of the Company (or any entities associated with substantial shareholders), nor have they provided any services to the Company (other than in their capacity as director) nor been an employee or officer of any such service provider. • Not independent: Harry Debney (due to his former executive role) and Sean Hallahan (due to his current executive role). This Directors’ Report is made in accordance with a resolution of the Directors. Neil Chatfield Chairman Dated at Melbourne 21 February 2022 48 Costa Group Holdings Limited Annual Report 2021Lead Auditor’s Independent Declaration Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Costa Group Holdings Ltd I declare that, to the best of my knowledge and belief, in relation to the audit of Costa Group Holdings Ltd for the financial year ended 26 December 2021 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Gordon Sangster Partner Melbourne 21 February 2022 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. 39 49 Costa Group Holdings Limited Annual Report 2021Consolidated Statement of Profit and Other Comprehensive Income For the financial year ended 26 December 2021 Revenue Total revenue Less: expenses Raw materials, consumables and third-party purchases Depreciation and amortisation expenses Impairment reversal Employee benefits expenses Occupancy expenses Net finance costs Profit/(loss) on sale of assets Freight and cartage Leasing expenses Other expenses (Loss)/gain on fair value adjustments – biological assets Impairment loss on trade receivables Business acquisitions and integration costs Share of net profits of joint ventures and associates accounted for using the equity method Profit before income tax expense Income tax expense Profit for the period Other comprehensive income/(loss) for the period Foreign currency translation differences Cash flow hedges – effective portion of changes in fair value Total other comprehensive income/(loss) for the period Total comprehensive income for the period Profit attributable to: Owners of Costa Group Holdings Ltd Non-controlling interests Total comprehensive income attributable to: Owners of Costa Group Holdings Ltd Non-controlling interests Earnings per share for profit attributable to ordinary equity holders: Basic earnings per share Diluted earnings per share Notes December 2021 $ ‘000 December 2020 $ ‘000 A2 1,220,597 1,220,597 1,164,916 1,164,916 B7, B8 A2 A2 A2 A3, D3 D1 E2 (407,710) (108,459) 2,357 (420,284) (30,630) (24,986) 484 (69,600) (5,264) (78,582) (7,498) (198) (19,188) (1,169,558) 9,881 60,920 (8,696) 52,224 (408,203) (96,610) - (378,649) (41,925) (25,550) (1,803) (61,543) (4,231) (81,543) 8,015 (705) - (1,092,747) 9,070 81,239 (13,790) 67,449 12,335 (2,292) 10,043 (8,773) 2,720 (6,053) 62,267 61,396 41,396 10,828 52,224 51,439 10,828 62,267 60,774 6,675 67,449 54,721 6,675 61,396 December 2021 Cents December 2020 Cents A4 A4 9.47 9.47 15.16 15.16 The above Consolidated Statement of Profit and Other Comprehensive Income should be read in conjunction with the accompanying notes. 50 Costa Group Holdings Limited Annual Report 2021 Consolidated Statement of Financial Position As at 26 December 2021 ASSETS Current assets Cash and cash equivalents Receivables Inventories Biological assets Other assets and financial assets Current tax assets Assets held for sale Total current assets Non-current assets Receivables Equity accounted investments Intangible assets Deferred tax assets Property, plant and equipment Right-of-use assets Total non-current assets Total assets LIABILITIES Current liabilities Borrowings Payables Provisions Other financial liabilities Current tax liabilities Lease liabilities Total current liabilities Non-current liabilities Borrowings Provisions Deferred tax liabilities Lease liabilities Total non-current liabilities Total liabilities NET ASSETS EQUITY Share capital Other equity reserve Other reserves Profit reserve Accumulated losses Equity attributable to owners of the parent Non-controlling interests Total equity Notes December 2021 $ ‘000 December 2020 $ ‘000 B1 B2 B3 B6 B5 E2 B8 B2 D1 B9 E2 B7 B11 C1 B4 B12 B4 E2 B11 C1 B12 E2  B11 61,887 108,032 30,538 70,543 12,700 8,554 3,207 295,461 1,274 27,248 289,146 21,302 799,933 568,751 1,707,654 2,003,115 13,704 149,310 21,011 - 542 64,125 248,692 347,419 25,652 34,467 518,927 926,465 1,175,157 32,450 96,900 26,987 58,312 13,258 - - 227,907 4,024 21,567 209,450 23,894 515,688 302,803 1,077,426 1,305,333 14,320 135,100 22,123 879 10,526 34,119 217,067 162,013 8,766 16,976 283,949 471,704 688,771 C2 C2  C4, E1 C3 827,958 616,562 768,074 (13,422) 15,602 112,021 (92,692) 789,583 38,375 827,958 580,734 (13,117) 4,783 109,242 (92,692) 588,950 27,612 616,562 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 51 Costa Group Holdings Limited Annual Report 2021                                                                                      Consolidated Statement of Changes in Equity For the financial year ended 26 December 2021 Consolidated Balance as at 27 December 2020 Share capital $ ‘000 580,734 Other equity reserve $ ‘000 (13,117) Share-based payment reserve $ ‘000 8,119 Profit for the year Other comprehensive income/(loss) Transfer to profit reserve Total comprehensive income for the year Transactions with owners in their capacity as owners: Issue of shares (gross) Costs of equity raise (net of tax) Shared-based payment expense during the period Share options exercised Dividend paid on ordinary shares Dividend paid to NCI Tax effect of share plan payment through equity - - - - 190,083 (3,680) - 937 - - - - - - - -  - - (305) - - - - - - - - - 1,056 (300) - - 20 Other reserves Foreign currency translation reserve $ ‘000 (4,233) Hedge reserve $ ‘000 2,469 - 12,335 - 12,335 - (2,292) - (2,292) - - - - -  - - - - - - -  - - General reserve $ ‘000 (1,572) - - - - - - - - -  - - Balance as at 26 December 2021 768,074 (13,422) 8,895 8,102 177 (1,572) Balance as at 29 December 2019 580,831 (13,093) 8,697 4,540 (251) (4,730) Profit for the year Other comprehensive (loss)/income Transfer to profit reserve Total comprehensive income for the year Transactions with owners in their capacity as owners: Issue of shares (net of issue costs) Net options forfeited during the period Share options exercised Dividend paid on ordinary shares Tax effect of share plan payment through equity Tax effect of equity raise Exercise of put and call option - - - - (296) - 111 - - 88 - - - - - (111) - 87 - - - - - - - - - (655) (87) - 164 - - - (8,773) - (8,773) - 2,720 - 2,720 - - - - - - - - - - - - - - - - - - - - - - - - 3,158 Profit reserve $ ‘000 109,242 41,396 41,396 (38,617) 112,021 72,517 60,774 60,774 (24,049) - - - - - -  - - - - - - - - - - Accumulated Non-controlling losses $ ‘000 (92,692) 41,396 (41,396) (92,692) (92,692) 60,774 (60,774) - - - - - - - - - - - - - - - - - - Total $ ‘000 588,950 41,396 10,043 - 51,439 190,083 (3,680) 1,056 332 (38,617) - 20 789,583 555,819 60,774 (6,053) - 54,721 (407) (655) 111 (24,049) 164 88 3,158 interests $ ‘000 27,612 10,828 10,828 (65) 38,375 20,937 6,675 6,675 - - - - - - - - - - - - - - - - - Total equity $ ‘000 616,562 52,224 10,043 - 62,267 190,083 (3,680) 1,056 332 (38,617) (65) 20 827,958 576,756 67,449 (6,053) - 61,396 (407) (655) 111 (24,049) 164 88 3,158 Balance as at 27 December 2020 580,734 (13,117) 8,119 (4,233) 2,469 (1,572) 109,242 (92,692) 588,950 27,612 616,562 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 52 Costa Group Holdings Limited Annual Report 2021                                                                      Consolidated Balance as at 27 December 2020 Profit for the year Other comprehensive income/(loss) Transfer to profit reserve Total comprehensive income for the year Transactions with owners in their capacity as owners: Issue of shares (gross) Costs of equity raise (net of tax) Shared-based payment expense during the period Share options exercised Dividend paid on ordinary shares Dividend paid to NCI Tax effect of share plan payment through equity Profit for the year Other comprehensive (loss)/income Transfer to profit reserve Total comprehensive income for the year Transactions with owners in their capacity as owners: Issue of shares (net of issue costs) Net options forfeited during the period Share options exercised Dividend paid on ordinary shares Tax effect of share plan payment through equity Tax effect of equity raise Exercise of put and call option Share Other equity payment translation Share-based capital $ ‘000 580,734 reserve $ ‘000 (13,117) reserve $ ‘000 8,119 Other reserves Foreign currency reserve $ ‘000 (4,233) Hedge reserve $ ‘000 2,469 General reserve $ ‘000 (1,572) 12,335 (2,292) 12,335 (2,292) 190,083 (3,680) 937 (305) 1,056 (300) 20 - - - - -  - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  - - - - - - - - - - - - - - - - - -  - - - - - - - - - - -  - - - - - - - - - - - - - - - - - - - - - 3,158 (8,773) 2,720 (8,773) 2,720 (296) 111 88 (111) 87 (655) (87) 164 - - - - - - - - - - - - - - - - Balance as at 29 December 2019 580,831 (13,093) 8,697 4,540 (251) (4,730) Profit reserve $ ‘000 109,242 - - 41,396 41,396 - - - - (38,617)  - - Accumulated losses $ ‘000 (92,692) 41,396 - (41,396) - - - - - - - - Balance as at 26 December 2021 768,074 (13,422) 8,895 8,102 177 (1,572) 112,021 (92,692) 72,517 - - 60,774 60,774 - - - (24,049) - - - (92,692) 60,774 - (60,774) - - - - - - - - Total $ ‘000 588,950 41,396 10,043 - 51,439 190,083 (3,680) 1,056 332 (38,617) - 20 789,583 555,819 60,774 (6,053) - 54,721 (407) (655) 111 (24,049) 164 88 3,158 Non-controlling interests $ ‘000 27,612 10,828 - - 10,828 - - - - - (65) - 38,375 20,937 6,675 - - 6,675 - - - - - - - Total equity $ ‘000 616,562 52,224 10,043 - 62,267 190,083 (3,680) 1,056 332 (38,617) (65) 20 827,958 576,756 67,449 (6,053) - 61,396 (407) (655) 111 (24,049) 164 88 3,158 Balance as at 27 December 2020 580,734 (13,117) 8,119 (4,233) 2,469 (1,572) 109,242 (92,692) 588,950 27,612 616,562 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 53 Costa Group Holdings Limited Annual Report 2021                                                                      Consolidated Statement of Cash Flows For the financial year ended 26 December 2021 Cash flow from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid Income taxes paid Net cash provided by operating activities Cash flow from investing activities Payments for property, plant and equipment Dividends from equity accounted investments Dividends paid to non-controlling interest Acquisition of businesses Proceeds from sale of property, plant and equipment Net cash used in investing activities Cash flow from financing activities Proceeds from share issue, net of issue costs Dividend payments on ordinary shares Loans and advances Proceeds from borrowings Repayment of borrowings Payment of lease liability Net cash provided by/(used in) financing activities Reconciliation of cash Cash at beginning of year Net increase/(decrease) in cash held Effect of movement in foreign exchange rate Cash at end of year Notes December 2021 $ ‘000 December 2020 $ ‘000 B1 D3 1,223,442 (1,022,071) 66 (24,553) (23,090) 153,794 1,154,164 (959,831) 382 (25,778) (507) 168,430 (127,583) 4,200 (65) (291,387) 1,134 (413,701) (78,921) 4,175 - - 1,098 (73,648) 185,167 (38,617) 1,722 2,321,965 (2,139,090) (43,341) 287,806 (296) (24,049) 6 2,076,380 (2,115,000) (34,784) (97,743) 32,450 27,899 1,538 61,887 35,962 (2,961) (551) 32,450 B1 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 54 Costa Group Holdings Limited Annual Report 2021                                                            Notes to the Consolidated Financial Statements Index to Notes Overview Reporting entity Basis of preparation Financial reporting impacts of COVID-19 Critical accounting estimates and judgements Note Index A. Group Performance A1. Segment performance A2. Revenue and expenses A3. Material items A4. Earnings per share A5. Subsequent events B. Operating assets and liabilities B1. Cash and cash equivalents B2. Receivables B3. Inventories B4. Payables and other financial liabilities B5. Other assets and financial assets B6. Biological assets B7. Property, plant and equipment B8. Assets held for sale B9. B10. Impairment B11. Leases B12. Provisions B13. Contingent liabilities Intangible assets C. Capital structure and financing C1. Borrowings C2. Share capital C3. Profit reserve C4. Other reserves C5. Dividends C6. Financial instruments – fair values and risk management D. Group Structure D1. Joint ventures and associates D2. List of subsidiaries D3. Business acquisitions D4. Related party disclosures D5. Parent entity disclosures D6. Deed of cross guarantee E. Other E1. Share-based payments E2. Taxation E3. New accounting standards E4. Auditor’s remuneration E5. Other accounting polices 56 56 57 58 58 58 60 62 62 62 63 63 64 65 65 65 66 67 69 70 72 74 76 77 77 77 78 79 79 79 80 85 85 86 87 89 90 91 93 93 94 96 97 97 55 Costa Group Holdings Limited Annual Report 2021Notes to the Consolidated Financial Statements continued Overview Reporting entity Costa Group Holdings Ltd (‘the Company’) is a company limited by shares, incorporated and domiciled in Australia. The Company’s shares are publicly traded on the Australian Securities Exchange. The Company and its controlled entities (referred to as “the Group”) is a for profit entity. The nature of the operations and principal activities of the Group are described in the segment information. The Group’s registered office is Unit 1, 275 Robinsons Road, Ravenhall, VIC, Australia, 3023. Basis of preparation of the consolidated financial report The consolidated 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 consolidated financial report complies with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board. The consolidated financial report was authorised for issue by the directors on 21 February 2021. The notes to the consolidated 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 activities both now and in the future. Group structure: explains aspects of the Group’s structure, including acquisitions and divestments during the period. Other: provides information on other items relevant to the Consolidated Financial Statements. Historical Cost Convention The consolidated 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 and the business acquisitions that are required to be recorded on acquisition at fair value. Rounding The consolidated 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 consolidated financial report has been prepared on a going concern basis. Goods and services tax (GST)/Value Added Tax (VAT) Revenues, expenses, liabilities and assets are recognised net of the amount of GST/VAT, except where the amount of GST/VAT incurred is not recoverable from the relevant tax office. In these circumstances the GST/VAT 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 Consolidated Statement of Financial Position are shown inclusive of GST/VAT. Cash flows are presented in the Consolidated Statement of Cash Flows on a gross basis. 56 Costa Group Holdings Limited Annual Report 2021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 consolidated 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 percent 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 joint ventures and associates are accounted for under the equity method and are initially recognised at cost. The cost of the investment includes transaction costs. The consolidated 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 consolidated 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 consolidated 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 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. Subsidiaries 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. Financial reporting impacts of COVID-19 The onset of the COVID-19 pandemic in CY20 has continued to severely disrupt global supply chains, increased economic uncertainty and changed consumer behaviours. Governments across the world enacted unprecedent levels of restrictions, which included social distancing, closure of non-essential businesses and activities and stay at home orders. The Group has considered the impact of the COVID-19 pandemic across its businesses. Details about the impact of COVID-19 are included in the following notes: • Note A1 – Segment performance • Note A2 – Revenue and expenses • Note B2 – Receivables • Note B6 – Biological assets • Note B10 – Impairments 57 Costa Group Holdings Limited Annual Report 2021Notes to the Consolidated Financial Statements continued Critical accounting estimates and judgements The preparation of the consolidated 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 Valuation of biological assets Recoverability of goodwill Recoverability of non-financial assets other than goodwill Leases Fair value measurement Fair value measurement Income tax Note B6 – Biological assets B9 – Intangible assets B9 – Intangible assets B11 – Leases C6 – Financial instruments – fair values and risk management D3 – Business Acquisitions E2 – Taxation Page 66 70 70 74 80 87 94 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 five core categories: berries, mushrooms, glasshouse grown tomatoes, citrus and avocados. 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, and marketing operations within Australia. These categories share common infrastructure, such as warehousing and ripening facilities, and are trading and services focused. International The International segment comprises royalty income from licensing of the Group’s blueberry varietals in Australia, the Americas, China and Africa, and international berry farming operations in Morocco and China. (b) Information about reportable segments Performance is measured based on segment EBITDA1 before Self Generating and Regenerating Assets (“SGARA”) and material items (“EBITDA-S”), 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 to allocate any direct attributable Business Support costs to the respective segment. Any unallocated or not directly attributable costs are allocated to the produce segment. 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. Notes: 1. Earnings before interest, tax, depreciation and amortisation. 58 Costa Group Holdings Limited Annual Report 2021December 2021  Revenue External customers Inter-segment Total revenue EBITDA-S December 2020 Revenue External customers Inter-segment Total revenue EBITDA-S Notes Produce $'000 891,195 38,304 929,499 CF&L International $'000 $'000 Adjustments and eliminations $'000 Total $'000 151,745 7,644 159,389 177,657 - 177,657 - (45,948) (45,948) 1,220,597 - 1,220,597 126,640 14,577 76,993 - - - - 218,210 (7,498) (19,188) 191,524 - - - - 197,187 8,015 - 205,202 Fair value movements in biological assets Material items (before tax) EBITDA B6 A3 (12,634) (18,376) 95,630 - (812) 13,765 5,136 - 82,129 885,060 45,172 930,232 143,110 7,245 150,355 136,746 - 136,746 - (52,417) (52,417) 1,164,916 - 1,164,916 124,872 14,805 57,510 Fair value movements in biological assets Material items (before tax) EBITDA B6 A3 5,708 - 130,580 - - 14,805 2,307 - 59,817 Financial Reporting Impacts of COVID-19 COVID-19 challenges continued to impact the operations of the group both domestically and abroad. Demand for the Group’s products and services remained largely unaffected by the ongoing pandemic. In Australia, costs for the movement and quarantine of harvest workers between states were incurred across several businesses. The global shipping disruptions negatively impacted citrus exports with significant shipping delays along with vessel and container availability resulting in reduced quality and revenues. Internationally, major logistical disruptions in competitor countries resulted in less market competition and improved pricing across both the Chinese and Moroccan businesses (c) Reconciliation of segment EBITDA to profit for the period EBITDA for reportable segments Depreciation and amortisation Profit/(loss) on sale of assets Impairment reversal Net finance costs Income tax expense Profit for the period  Notes B7 E2 December 2021 $ ‘000 191,524 (108,459) 484 2,357 (24,986) (8,696) 52,224 December 2020 $ ‘000 205,202 (96,610) (1,803) - (25,550) (13,790) 67,449 59 Costa Group Holdings Limited Annual Report 2021                                                Notes to the Consolidated Financial Statements continued (d) Geographical segment of non-current assets Non-current assets excluding financial assets (including equity accounted investment) and deferred tax balance by geography Australia China Morocco Reconciliation of segment non-current assets to Statement of Financial Position Non-current assets Deduct: Equity accounted investments Deferred tax assets Non-current receivables A2. Revenue and expenses Revenue Sale of goods and commission income received Rendering of services Rebates and discounts provided Other income Total revenue Sale of goods and commissions received December 2021 $ ‘000 December 2020 $ ‘000 1,399,662 102,622 155,546 1,657,830 798,735 80,263 148,943 1,027,941 1,707,654 1,077,426 (27,248) (21,302) (1,274) 1,657,830 (21,567) (23,894) (4,024) 1,027,941 December 2021 $ ‘000 1,158,028 41,937 (16,408) 37,040 1,220,597 December 2020 $ ‘000 1,111,767 44,336 (15,338) 24,151 1,164,916 Revenue from sale of goods is measured at the fair value of the consideration received or receivable. Revenue is recognised when performance obligations are satisfied, and control of the goods or services have passed or provided to the buyer. 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 factors indicate 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. Rendering of services Rendering of services revenue relates to logistics, farm and ripening services provided to customers. Similarly, revenue is recognised when performance obligation is satisfied or upon the delivery of the service to the customers. Rebates and discount provided Rebates and discounts include volume-based rebates and discounts, and payment settlement discounts are recognised when earned. Other income Other income includes dividends, rental income, royalty income, insurance income and net foreign exchange gains or losses. 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. Rental income is recognised on a straight-line basis over the rental term. These are for operating leases. Insurance income is recognised when recovery is virtually certain. Royalty income is recognised on an accruals 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. 60 Costa Group Holdings Limited Annual Report 2021              Foreign exchange gain or losses are recognised when monetary assets or liabilities denominated in foreign currency are settled or are translated at rates different from those at which they were translated when initially recognised. All revenue is stated net of the amount of GST/VAT. Expenses Net finance costs Interest income Interest expense on borrowings Interest expense on lease liabilities Amortisation of borrowing costs Interest income Note  B11 December 2021 $ ‘000 (72) 6,113 18,191 754 24,986 December 2020 $ ‘000 (422) 7,156 17,856 960 25,550 Interest income is recognised when it becomes receivable on a proportional basis taking into account the interest rates applicable to the financial assets. Borrowing costs Borrowing costs can include interest, amortisation of discounts or premiums relating to borrowings, interest on lease liabilities, 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. To determine the amount of borrowing costs to be capitalised, the Group uses the interest rate applicable to its outstanding borrowings during the period. For the year ended December 2021, the borrowing costs capitalised as part of property, plant and equipment was $0.8 million using a weighted average interest rate of 2.54% (December 2020: $1.4 million, 2.99%). Loan establishment costs of $2.7 million have been capitalised in prior periods and amortised over the life of the loan facility. Establishment costs relating to loans extinguished during the reporting period are expensed. Loan establishment costs of $0.3 million (December 2020: Nil) were recognised during the period. Employee benefits expenses Salaries, contractors and wages (including oncosts) Superannuation costs Leave entitlements Other employee expenses Other expenses Repair and maintenance expenses Legal and consulting expenditure Insurance Other1 Notes: December 2021 $ ‘000 383,961 19,508 11,194 5,621 420,284 December 2021 $ ‘000 23,826 6,709 12,715 35,332 78,582 December 2020 $ ‘000 345,358 17,596 10,727 4,968 378,649 December 2020 $ ‘000 21,709 7,860 11,709 40,265 81,543 1. Other expenses include telecommunications, marketing, information technology and general administration expenditure. Financial Reporting Impacts of COVID-19 The Group did not receive any JobKeeper incentive payments from the Australian Federal Government during the period (December 2020: Nil). 61 Costa Group Holdings Limited Annual Report 2021                          Notes to the Consolidated Financial Statements continued A3. Material items Material items are acquisition and integration expenses which are one-off costs as a result of the 2PH Farms, KW Orchards and Select Fresh acquisition, refer to note D3 for further details. A4. 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 Weighted average number of ordinary shares on issue used in the calculation of basic EPS Effect of potentially dilutive securities Equity-settled share options Weighted average number of ordinary shares on issue used in the calculation of diluted EPS Earnings reconciliation Basic and diluted EPS Net profit attributable to owners of Costa Group Holdings Limited December 2021 Cents per share December 2020 Cents per share 9.47 15.16 9.47 15.16 Number (‘000) Number (‘000) 437,291 400,822 30 437,321 74 400,896 $ ‘000 $ ‘000 41,396 60,774 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 share options outstanding during the period. A5. Subsequent events Dividends On 21 February 2022, the directors determined a final dividend of 5.0 cents per ordinary shares payable on 7 April 2022. The dividends have not been provided for and there are no income tax consequences. Except for the matters disclosed in the preceding paragraph, there are no matters or circumstances that have arisen since the financial year ending 26 December 2021, that have significantly affected, or may affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in subsequent financial years. 62 Costa Group Holdings Limited Annual Report 2021                                    B. Operating Assets and Liabilities B1. Cash and cash equivalents Cash on hand Cash at bank Cash on deposit Reconciliation of profit after tax to net cash flows from operating activities Profit for the period Costs associated with non-operating activities Acquisition and integration costs Non-cash adjustments to reconcile profit for the period to net cash flows: Depreciation and amortisation (Profit)/Loss on sale of assets Borrowing costs written-off/amortised Impairment reversal Foreign exchange differences Loss/(Gain) on fair value adjustments – biological assets Share-based payments expense/(benefit) Share of profit of equity-accounted investees, net of tax Change in working capital and tax balances: Increase in inventories Increase in receivables Increase in biological assets Increase in other assets Decrease in interest payable Increase in payables Decrease in provisions Decrease/(Increase) in deferred taxes (Decrease)/Increase in current tax payables Net cash generated from operating activities December 2021 $ ‘000 42 61,781 64 61,887 December 2020 $ ‘000 44 32,342 64 32,450 December 2021 $ ‘000 52,224 December 2020 $ ‘000 67,449 19,188 - 108,459 (484) 605 (2,357) 1,840 7,498 1,056 (9,881) 178,148 (1,167) (5,882) (964) (1,912) (72) 918 (1,003) 2,250 (16,522) 153,794 96,610 1,803 780 - (2,969) (8,015) (656) (9,070) 145,932 (2,731) (9,309) (1,312) (671) (631) 24,558 (663) (2,211) 15,468 168,430 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 Consolidated 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. 63 Costa Group Holdings Limited Annual Report 2021              Notes to the Consolidated Financial Statements continued B2. Receivables CURRENT Trade debtors Less: Allowance for impairment losses on trade receivables Other receivables NON-CURRENT Other receivables Recognition and measurement Trade receivables December 2021 $ ‘000 December 2020 $ ‘000 74,669 (582) 74,087 33,945 108,032 69,336 (652) 68,684 28,216 96,900 1,274 4,024 Trade receivables are recognised initially at invoice value (fair value) and subsequently measured at amortised cost, using the effective interest method, less a loss allowance. They generally have credit terms between 15-60 days depending on the nature of the transaction. Impairment of trade and other receivables The Group assesses the expected credit losses associated with its trade and other receivables on a forward-looking basis. The Group applies the simplified approach to measuring expected credit losses, as disclosed in detail in note C6 (c). Other receivables Other current and non-current receivables relate to amounts generally arising from transactions outside the usual operating activities of the Group. It is expected that these other balances will be received when due. Also included in other receivables is sales tax receivable. A portion of the sales tax receivable includes value added tax credits sold with recourse to a bank for cash proceeds by the Group’s subsidiary, African Blue. These value added tax credits have not been derecognised from the Consolidated Statement of Financial Position, because African Blue retains substantially all of the risk and rewards – primarily credit risk. The amount received on transfer has been recognised as a secured bank loan (refer note C1). The following information shows the carrying amount of other receivables at reporting date that have been transferred but have not been derecognised and the associated liabilities. Carrying amount of other receivables transferred to a bank Carrying amount of associated liabilities Financial Reporting Impacts of COVID-19 Note  C1 December 2021 $ ‘000 2,660 (2,660) December 2020 $ ‘000 2,580 (2,580) The Group’s primary sales channel is retail. Demand in general for the Group’s products has remained strong across this channel during the pandemic, resulting in this segment performing strongly during the COVID-19 pandemic. As such, COVID-19 has had no material impact on the credit losses allowances recognised at the end of the period. 64 Costa Group Holdings Limited Annual Report 2021                          B3. Inventories CURRENT At cost Raw materials Finished goods December 2021 $ ‘000 December 2020 $ ‘000 23,740 6,798 30,538 17,884 9,103 26,987 Recognition and measurement Inventories are measured at the lower of cost and net realisable value. 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. B4. Payables and other financial liabilities  Payables CURRENT Unsecured liabilities Trade creditors Sundry creditors and accruals1 Notes: December 2021 $ ‘000 December 2020 $ ‘000 68,929 80,381 149,310 59,007 76,093 135,100 1. Includes deferred consideration for business acquisitions of $3.1 million, refer to note D3 for further details 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). Other financial liabilities CURRENT Put and call options liability Interest rate swap Recognition and measurement Recognition and measurement of other financial liabilities above are further detailed in note C6. B5. Other assets and financial assets CURRENT Prepayments Forward exchange contracts December 2021 $ ‘000 December 2020 $ ‘000 - - - 493 386 879 December 2021 $ ‘000 December 2020 $ ‘000 12,448 252 12,700 10,426 2,832 13,258 65 Costa Group Holdings Limited Annual Report 2021                                            Notes to the Consolidated Financial Statements continued 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 (Loss)/Gain arising from changes in fair value Increases due to purchases Increase resulting from business acquisitions Decreases due to harvest Closing balance Note December 2021 $ ‘000 December 2020 $ ‘000 64,201 6,342 70,543 52,267 6,045 58,312 58,312 (7,498) 211,539 18,839 (210,649) 70,543 49,208 8,015 214,200 - (213,111) 58,312 D3 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 Consolidated Statement of Profit 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 estimated market prices of the product. 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. 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. Type Description Valuation technique Hanging crop (citrus, grapes, avocados, tomatoes, blueberries, raspberries and bananas) These are crops from trees and bushes that have an annual crop production cycle and a reasonably stable development cycle. Discounted cash flows: 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. 66 Significant unobservable inputs Inter-relationship between key unobservable inputs and fair value measurement Inclusive of: • Estimated future crop prices. • Estimated cash inflows based The estimated fair value would increase/(decrease) if: • the estimated fruit prices were on forecasted sales. higher/(lower); • Estimated yields per hectare. • Estimated remaining farming, harvest and transportation costs. • Risk adjustment factor. • 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). Costa Group Holdings Limited Annual Report 2021                      Measurement of biological assets at cost Short lived crops (mushrooms and strawberries) 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. Financial Reporting Impacts of COVID-19 Demand and pricing for the Group’s products have remained strong throughout the pandemic. Risks associated with any labour supply/harvest challenges have been factored into the biological asset fair value calculations, where appropriate. Overall, COVID-19 has not had a material impact on the fair value of the Group’s hanging crop. 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. 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 Improvements at cost Accumulated depreciation and impairment Bearer plants at cost Bearer plants in progress at cost Accumulated depreciation and impairment December 2021 $ ‘000 398,878 (73,292) 325,586 December 2020 $ ‘000 228,919 (63,753) 165,166 88,309 82,464 505,788 (238,251) 267,537 399,075 (197,014) 202,061 46,338 (17,044) 29,294 100,664 25,167 (36,624) 89,207 42,047 (13,661) 28,386 64,816 - (27,205) 37,611 Total property, plant, and equipment 799,933 515,688 67 Costa Group Holdings Limited Annual Report 2021                                Notes to the Consolidated Financial Statements continued 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 Assets acquired through business combination Disposals Depreciation expense Impairment reversal Transfers to assets held for sale Other transfers, reclassifications and adjustments and effect of movement in FX rate3 Closing carrying amount Assets Under Construction Opening carrying amount Additions1,2 Disposals Other transfers, reclassifications and adjustments and effect of movement in FX rate3 Closing carrying amount Plant and equipment Opening carrying amount Additions Assets acquired through business combination Disposals Depreciation expense Impairment reversal Transfers to assets held for sale Other transfers, reclassifications and adjustments and effect of movement in FX rate3 Closing carrying amount Leasehold Improvements Opening carrying amount Additions Assets acquired through business combination Disposals Depreciation expense Transfers, reclassifications and adjustments and effect of movement in FX rate Closing carrying amount Bearer Plants Opening carrying amount Additions Mature bearer plants acquired through business combination Immature bearer plants, acquired through business combination Disposals Depreciation expense Transfers, reclassifications and adjustments and effect of movement in FX rate Closing carrying amount Note December 2021 $ ‘000 December 2020 $ ‘000 D3 B8 D3 B8 D3 D3 D3 165,166 15,115 106,848 (17) (9,202) 1,370 (2,220) 48,526 325,586 82,464 89,783 (10) (83,928) 88,309 202,061 27,054 39,611 (596) (42,472) 987 (987) 41,879 267,537 28,386 3,212 311 - (3,239) 624 29,294 37,611 13,132 21,280 25,167 (214) (8,913) 1,144 89,207 153,161 1,780 - (392) (7,874) - - 18,491 165,166 93,991 56,573 (149) (67,951) 82,464 189,199 3,618 - (1,691) (34,991) - - 45,926 202,061 27,706 768 - (33) (2,869) 2,814 28,386 34,858 8,356 - - (285) (8,834) 3,516 37,611 Notes: 1. Includes Conaghans asset acquisition $15.9 million. Refer notes B11 and D3 for details. 2. Includes capitalised borrowing costs of $0.8 million (December 2020: $1.4 million). Refer note A2 for details. 3. Includes completion and transfer of Glasshouse 4 of $79.5m from asset under construction to buildings, plant and equipment in 2021. 68 Costa Group Holdings Limited Annual Report 2021                                                  Total property, plant, and equipment Opening carrying amount Additions1,2 Assets acquired through business combination Disposals Depreciation expense Impairment reversal Transfers to assets held for sale Transfers, reclassifications and adjustments and effect of movement in FX rate Closing carrying amount Notes: 1. Includes Conaghans asset acquisition $15.9 million. Refer note D3 for details. Note  December 2021 $ ‘000 December 2020 $ ‘000 A2, D3 D3 515,688 148,296 193,217 (837) (63,826) 2,357 (3,207) 8,245 799,933 498,915 71,096 (2,550) (54,568) - 2,795 515,688 2. Includes capitalised borrowing costs of $0.8 million (December 2020: $1.4 million). Refer note A2 for details. 3. Includes completion and transfer of Glasshouse 4 of $79.5m from asset under construction to buildings, plant and equipment. 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 Bearer plants at cost Depreciation rates 0% – 10% 4% – 33% 4% – 25% Depreciation basis Straight line Straight line Straight line Assets under construction are measured at cost and not depreciated until the assets are ready for use. Capital and other commitments As at 26 December 2021, the Group has capital commitments amounting to $52.1 million (December 2020: $25.8 million) in relation to the purchase of property, plant and equipment, which are contracted for but not provided for. Note that included in the above capital commitment amount is: a. Deferred consideration relating to business acquisitions of $3.1 million is included in above capital commitment, refer to note D3 for further details. b. Conaghans property put and call option of $31.4 million. Management believes the put and call option is highly probable and likely to be exercised and included such amount in the commitment above, even though the put and call option is only exercisable in 2023 and value subject to certain conditions. $15.9m of the value has been recognised as other commitments and balance to be recognised when option is exercised. Refer note D3 for further details. B8. Assets held for sale Assets held for sale Note  December 2021 $ ‘000 December 2020 $ ‘000 B7 3,207 -  During the year, the Group commenced an active program to sell a disused property. The Group is actively seeking a buyer and expects to complete a sale of the disused property in the next 12 months. Therefore, the Consolidated Financial Statements for the period included a reversal of impairment to the extent where the reversal did not exceed the carrying amount that would have been determined (net of depreciation), had no impairment loss been recognised in CY2019. Accordingly, the associated assets have been reclassified to Assets held for sale from Property, plant and equipment. 69 Costa Group Holdings Limited Annual Report 2021                Notes to the Consolidated Financial Statements continued B9. Intangible assets Goodwill at cost, less accumulated impairment Brand names at cost Lease premiums at cost Water rights at cost Capitalised software costs Accumulated amortisation and impairment Reacquired rights at cost Accumulated amortisation and impairment Customer relationship at cost Accumulated amortisation and impairment December 2021 $ ‘000 December 2020 $ ‘000 250,060 198,165 14,984 3,015 11,631 10,068 (9,057) 1,011 3,600 (3,600) - 20,700 (12,255) 8,445 3,137 2,955 3,796 9,852 (8,455) 1,397 3,600 (3,600) - 11,700 (11,700) - Total intangible assets 289,146 209,450 Reconciliations Reconciliation of the carrying amounts of intangible assets at the beginning and end of the current financial year. Goodwill Opening balance Acquired through business combinations Net exchange differences on translation of foreign subsidiaries Closing balance Capitalised software costs Opening balance Additions Amortisation expense Transfers, reclassifications, and adjustments Closing balance Brand names and trademarks Opening balance Acquired through business combinations Amortisation expense Net exchange differences on translation of foreign subsidiaries Closing balance Lease premiums Opening balance Net exchange differences on translation of foreign subsidiaries Closing balance 70 Note D3 December 2021 $ ‘000 December 2020 $ ‘000 198,165 48,778 3,117 250,060 201,073 - (2,908) 198,165 D3 1,397 213 (598) (1) 1,011 3,137 12,200 (353) - 14,984 2,955 60 3,015 2,302 31 (1,265) 329 1,397 3,169 - - (32) 3,137 3,011 (56) 2,955 Costa Group Holdings Limited Annual Report 2021                                                                                              Water rights Opening balance Additions Acquired through business combinations Closing balance Customer relationships Opening balance Acquired through business combinations Amortisation expense Closing balance Total Intangible assets Opening carrying amount Additions Acquired through business combinations Amortisation expense Transfers, reclassifications and adjustments Net exchange differences on translation of foreign subsidiaries Closing carrying amount Recognition and measurement Goodwill December 2021 $ ‘000 December 2020 $ ‘000 Note D3 D3 D3 3,796 35 7,800 11,631 - 9,000 (555) 8,445 209,450 248 77,778 (1,506) (1) 3,101 289,146 3,796 - - 3,796 - - - - 213,351 31 - (1,265) 329 (2,996) 209,450 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 and trademarks Brand names are measured initially at their cost of acquisition. Brand names, except for trademarks, 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. Trademarks are amortised on a straight-line basis over their useful lives ranging between 15 to 25 years and tested for impairment whenever there is an indication that they may be impaired. 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. 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. Capitalised Software Costs Capitalised software costs 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 software development expenditure is recognised as an expense when incurred. Customer relationships Customer relationships assets are measured at cost less accumulated amortisation and impairment losses. Where acquired in a business combination, cost represents the fair value at the date of acquisition. The Group customer relationships assets are amortised over period ranging between five to ten years. 71 Costa Group Holdings Limited Annual Report 2021                          Notes to the Consolidated Financial Statements continued Acquisitions Intangible assets acquired separately are capitalised at cost. Intangible assets acquired through a business combination are recognised 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 recognised 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 Consolidated Statement of Profit and Other 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 Consolidated Statement of Profit and Other 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: December 2021 $’000 Goodwill Carrying amount at start of year Acquired through business combinations Net exchange differences on translation of foreign subsidiaries Carrying amount at end of year December 2020 $’000 Goodwill Carrying amount at start of year Net exchange differences on translation of foreign subsidiaries Carrying amount at end of year B10. Impairment Note Produce CF&L International Total D3 96,390 39,991 - 136,381 1,674 8,787 - 10,461 100,101 - 3,117 103,218 198,165 48,778 3,117 250,060 Produce CF&L International Total 96,390 - 96,390 1,674 - 1,674 103,009 (2,908) 100,101 201,073 (2,908) 198,165 Recoverability of non-financial assets other than goodwill All non-current 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 Group. 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. Goodwill 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 or 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 discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. 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 or 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. 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 of other assets or CGU’s. Subject to an operating segment ceiling test, CGU’s 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. 72 Costa Group Holdings Limited Annual Report 2021                      Impairment losses are recognised in the Consolidated Statement of Profit and Other Comprehensive Income. Impairment losses recognised in respect of CGU’s 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 CGU’s) 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. Useful life Intangibles with indefinite useful life 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. Critical accounting estimate and judgement Projected cash flows Goodwill is allocated to CGU’s according to applicable business operations. The recoverable amount of the Group’s Australian CGU’s are based on value in use calculations. For the African Blue CGU, the recoverable amount was determined through a fair value less costs to sell calculation using a detailed 10 year- cash flow financial model, with management best estimate to determine ‘mature state’ for the CGU’s terminal year. The fair value measurement was categorised as a Level 3 fair value based on the inputs in the valuation technique used (refer note C6 for further details on fair value measurements). The recoverable amounts are based on financial budgets approved by the Board for 2022 together with detailed management forecasts for future years: • For the Australian CGU’s, cash flow forecasts are projected over a 5-year period • For the African Blue CGU, cash flow forecasts are projected over a 10-year period Management’s determination of cash flow projections and gross margins are based on past performance and its expectation for the future. Terminal growth rate The terminal growth rate represents estimates of the CGU’s growth to perpetuity. This ranges between the country’s inflation and GDP growth rate. 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. Sensitivity Analysis Increases in discount rates or changes in other key assumptions, such as operating conditions or financial performance, may cause the recoverable amount to fall below carrying values. For the African Blue CGU, the recoverable amount exceeds the carrying value by $35.7 million. A reasonable possible change to the financial performance above in terms of pricing and discount rate could lead to an impairment. For the Group’s remaining CGU’s, based on current economic conditions and CGU performances, there are no reasonably possible changes to key assumptions used in the determination of CGU recoverable amounts that would result in an impairment to the Group. The ranges of rates used in determining recoverable amounts of the rest of the business are set out below: Terminal growth rate Pre-tax discount rate (Australian CGU’s) Pre-tax discount rate (African Blue CGU) 2021 2020 2.5% – 3.0% 2.5% – 3.0% 11% 12% 11% 12% Financial Reporting Impacts of COVID-19 There is significant degree of uncertainty associated with the impacts of COVID-19. The Group has considered the impacts of COVID-19 in its budgeting and planning process. COVID-19 related costs such as protective equipment, increased cleaning and sanitary cost, and labour arrangements have been included in the budgets and projected cash flows. 73 Costa Group Holdings Limited Annual Report 2021Notes to the Consolidated Financial Statements continued B11. Leases The Group leases various properties, equipment, and motor vehicles. Rental contracts are typically made for fixed periods and may have extension options. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants, but leased assets may not be used as security for borrowing purposes. The Group assesses whether a contract is or contains a lease at inception of the contract. A contract is, or contains, a lease if the contract conveys a right to control the use of an identified asset for a period in exchange for consideration. The Group allocates the consideration in the contract to each lease and non-lease component on the basis of their relative stand-alone prices. However, for leases of properties in which it is a lessee, the Group has elected not to separate non-lease components and will instead account for the lease and non-lease components as a single lease component. The Group recognises leases as a right-of-use asset and a corresponding lease liability at the date at which the leased asset is available for use. Each lease payment is allocated between the liability and finance costs. The finance cost is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. Assets and liabilities arising from a lease are initially measured on a present value basis. Right-of-use assets Right-of-use assets are measured at cost comprising the following: • The amount of the initial measurement of lease liability; • Any lease payments made at or before the commencement date and lease premiums, less any lease incentives received; • Any initial direct costs; and • Restoration or dismantling costs. Subsequently, the right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. The assets are tested for impairment in accordance with policy adopted for non-financial assets as disclosed in note B10. Lease liabilities Lease liabilities include the net present value of the following lease payments: • Fixed payments (including in-substance fixed payments) and lease premiums, less any lease incentives receivable; • Amounts expected to be payable by the lessee under residual value guarantees; • The exercise price of a purchase option if the lessee is reasonably certain to exercise that option; and • Payments of penalties for terminating the lease, if the lease term reflects the lessee exercising those options The lease payments are discounted using the Group’s incremental borrowing rate, adjusted for geographical risk, asset type and tenure and is reviewed on an annual basis. The lease liability is subsequently measured at amortised cost using the effective interest method. It is remeasured when there is: • Change in future lease payments arising from a change in an index or rate; • Change in the Group’s estimate of the amount expected to be payable under a residual value guarantee; • Changes in Group’s assessment of whether it will exercise a purchase, extension or termination option; or • Revision of in-substance fixed lease payments. Right-of-use Assets Opening carrying amount Depreciation expenses Additions1 Acquired through business combination Effect of foreign exchange rates Closing carrying amount Note D3 December 2021 $’000 302,803 (43,127) 270,822 36,668 1,585 568,751 December 2020 $’000 324,272 (40,777) 19,853 - (545) 302,803 Right-of-use assets consist of $554.9 million (2020: $290.1 million) relating to property and $13.9 million (2020: $12.7 million) relating to vehicle and equipment leases. 74 Costa Group Holdings Limited Annual Report 2021 Lease liabilities Opening carrying amount Interest expense Additions1 Acquired through business combination Repayments Effect of foreign exchange rates Closing carrying amount Lease liabilities Current2 Non-current Notes Note D3 December 2021 $’000 318,068 18,191 270,822 36,151 (62,145) 1,965 583,052 December 2021 $’000 64,125 518,927 583,052 December 2020 $’000 333,762 17,856 19,853 - (52,840) (563) 318,068 December 2020 $’000 34,119 283,949 318,068 1. As a consequence of Macquarie Asset Management acquiring 100% of Vitalharvest Unit Trust during the period, the Group renegotiated the existing leases with Vitalharvest that resulted in the old leases being surrendered and replaced with fixed rent lease agreements. The lease modification resulted in an addition of $252.2 million during the period of Right of Use Assets and Lease Liabilities during the period. 2. Increase in current lease liability also reflects 53 weeks in period ending December 2022 (December 2021: 52 weeks). The following table sets out the maturity analysis of lease payments, showing the undiscounted lease payments to be paid after the reporting date.  Lease liabilities Payable – not later than one year – later than one year and not later than five years – later than five years December 2021 $’000 December 2020 $’000 92,996 207,779 533,226 834,001 50,072 169,378 210,058 429,508 Financial Reporting Impacts of COVID-19 There has been no impairment on the Group’s right-of-use assets or onerous leases, nor any rent concessions received as a result of COVID-19. Short term leases, low-value assets and variable lease payments not based on index or rate The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and short-term leases, including IT equipment. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term. Variable lease payments not based on index or rate are expensed when incurred. The amounts recognised as at 26 December 2021 are $5.3 million (December 2020: $12.9 million). 75 Costa Group Holdings Limited Annual Report 2021      Notes to the Consolidated Financial Statements continued B12. Provisions CURRENT Employee benefits Other NON-CURRENT Employee benefits Other commitments Other December 2021 $ ‘000 December 2020 $ ‘000 20,093 918 21,011 6,909 15,941 2,802 25,652 18,479 3,644 22,123 6,777 - 1,989 8,766 (a) (b) (a) (c) (b) (a) Employee benefits liability These consist of liabilities recognised for benefits accruing to employees in respect of annual leave and long service leave. (b) Other provisions This relates to closure costs in relation to the Mushroom sites and lease make good. (c) Other commitments The other commitments relates to the Conaghans property put and call option. Despite the put and call option is yet to be exercised, the Group has recognised an asset and provision for Stage 1 of this development given it has control of this stage. Refer note D3 for details. (d) Reconciliations Reconciliation of the carrying amounts of provisions at the beginning and end of the current financial year: Note  December 2021 $ ‘000 December 2020 $ ‘000 D3 25,256 (10,753) 818 11,681 27,002 - - 15,941 15,941 5,633 (2,745) 832 3,720 22,027 (7,049) - 10,278 25,256 - - - - 9,535 (3,902) - 5,633 Employee benefits Opening balance Amounts used Acquired through business acquisitions Additional amounts recognised Closing balance Other commitments Opening balance Amounts used Additional amounts recognised1 Closing balance Other provisions Opening balance Amounts used Additional amounts recognised Closing balance Notes: 1. Relates to Conaghans asset acquisition of $15.9 million. Refer notes B7 and D3 for details. 76 Costa Group Holdings Limited Annual Report 2021                                                          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 and/or supplier 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 twelve 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 twelve 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. B13. 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 Secured liabilities Bank loans Unsecured liabilities Bank loans NON-CURRENT Secured liabilities Bank loans Unsecured liabilities Bank loans Total borrowings December 2021 $ ‘000 December 2020 $ ‘000 1,863 1,807 11,841 13,704 12,513 14,320 2,660 4,385 344,759 347,419 361,123 157,628 162,013 176,333 77 Costa Group Holdings Limited Annual Report 2021                                Notes to the Consolidated Financial Statements continued Terms and conditions relating to the above financial instruments The key terms of the Group’s banking facilities detailed as below: Secured • Secured bank loan with $7.4 million facility drawn down to $1.9 million as at 26 December 2021 and can be further drawn upon as required. This facility matures in November 2023. • Secured bank loan of $2.7 million that is currently fully drawn and matures in January 2023 The above secured bank loans are secured over buildings and VAT receivables (see note B2) Unsecured • A $450m syndicated debt facility is split as below: i. Facility A – $300 million facility that can be drawn upon as required. During the period the Group extended this facility’s maturity date from August 2022 to August 2023. ii. Facility B – $150 million facility that can be drawn upon as required. This facility matures in August 2023. 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. 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 Leverage Ratio. • A $20.2 million term loan facility with $9.1 million maturing in July 2022 and $11.1 million maturing in July 2023. Bank guarantees The Group maintains bank guarantees of $12.0 million (December 2020: $9.6 million) that could be called up at any time in the event of a breach of our financial obligations. The Group does not expect any payments will eventuate under these financial guarantees as the Group expects to meet its respective obligations to the beneficiaries of these guarantees. The financial guarantees are applied against the available drawdown limit for Facility A 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. Share Capital Ordinary shares Opening balance Ordinary shares issued (net of issue costs)1 Settlement of share-based payment At reporting date December 2021 Number $ ‘000 December 2020 Number $ ‘000 400,830,387 63,360,845 187,389 464,378,621 580,734 186,403 937 768,074 400,791,811 - 38,576 400,830,387 580,831 (208) 111 580,734 During the period, the Company undertook a capital raising through a rights issues to all shareholders. A fully underwritten pro rata accelerated institutional entitlement offer, retail entitlement offer and retail shortfall bookbuild completed, jointly issuing 63.4 million ordinary shares and, raising $186.4 million (net of issue costs and tax). Ordinary shares Ordinary shares participate in dividends and the proceeds on winding up of the Company in proportion to the number of shares held. At members’ meetings, each ordinary share is entitled to one vote when a poll is called; otherwise, each member 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. Other equity reserve The other equity reserve comprises the payments made to meet the Group’s obligation through acquisition of shares on market for the purpose of options or performance rights exercised by eligible executives under the long-term and short-term incentive plans. 78 Costa Group Holdings Limited Annual Report 2021     C3. Profit reserve The profit reserve comprises the transfer of net profit of $41.4 million for the period and characterises available profits to enable payment of franked dividends in future years. The profit reserve balance as at balance sheet date is $112.0 million (December 2020: $109.2 million). C4. Other reserves The nature and purpose of other reserves is as follows: Share-based payment reserve The share-based payment reserve is used to recognise the value of equity-settled share-based payments provided to employees, including key management personnel, as part of their remuneration. Refer to E1 for further details of these plans. Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. Cash flow hedge reserve The hedging reserve records the portion of the gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge relationship. General reserve The general reserve consists of put and call option as part of the acquisition of African Blue measured under the present-access method and legal reserve. Refer note C6 for further details. C5. Dividends Dividends paid or determined by the Company to members since the end of the previous financial year were: Declared and paid during the 12 months ended 26 December 2021 Final December 2020 ordinary Interim December 2021 ordinary Cents per share Total amount $’000 Date of payment 5.0 4.0 20,042 8 April 2021 18,575 7 October 2021 Determined after end of year After the balance sheet date, the following dividends were determined by the directors of the Company. The dividends have not been provided for and there are no income tax consequences. Cents per share Total amount $’000 Date of payment Final December 2021 ordinary 5.0 23,219 7 April 2022 79 Costa Group Holdings Limited Annual Report 2021    Notes to the Consolidated Financial Statements continued C6. Financial instruments – fair values and risk management (A) Valuation of financial instruments 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 Amortised costs Current receivables Non-current receivables Cash and cash equivalents Fair value through other comprehensive income Forward exchange contracts Financial liabilities Fair value through other comprehensive income Interest rate swaps Other financial liabilities not measured at fair value Payables Bank loans Put and call options Recognition, classification, and measurement Fair value hierarchy December 2021 $ ‘000 December 2020 $ ‘000 - - - 108,032 1,274 61,887 171,193 96,900 4,024 32,450 133,374 Level 2 252 2,832 Level 2 - 386 - - - 149,310 361,123 - 510,433 135,100 176,333 493 311,926 On initial recognition, the Group classifies its financial assets and liabilities into the following categories: amortised costs, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). The classification depends on the purpose for which the instruments were acquired. Financial assets are not reclassified subsequent to their initial recognition unless the Group changes its business model for managing financial assets, in which case all affected financial assets are reclassified on the first day of the first reporting period following the change in the business model. Amortised costs Financial assets or liability with contractual cash flows that comprise the payment of principal and interest only and which are held in a business model whose objective is to collect their cash flows are measured at amortised costs. Fair value through other comprehensive income (FVOCI) Financial assets or liability with contractual cash flows that comprise the payment of principal and interest only and which are held in a business model whose objective is to both collect their cash flows and sell them are measured at FVOCI. Fair value through profit or loss (FVTPL) Other financial assets or liability that do not fall in the above categories are measured at FVTPL. For all fair value measurement and disclosures, the Group uses the following to categorise the method used: Level 1: the fair value is calculated using quoted prices in active markets Level 2: the fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) Level 3: the fair value is estimated using inputs for the asset or liability that are not based on observable market data Derivative financial instruments The Group enters into derivative financial instruments with various counterparties, principally financial institutions with investment grade credit ratings. Foreign exchange forward contracts and interest rate swap contracts are all valued using forward pricing techniques. This includes the use of market observable inputs, such as foreign exchange spot, forward rates and interest rate curves. Accordingly, these derivatives are classified as Level 2. 80 Costa Group Holdings Limited Annual Report 2021                                                      Cash flow hedges When a derivative is designated as a cash flow hedging instrument, the effective portion of the fair value of the derivative is recognised in other comprehensive income and accumulated in the hedging reserve. Any ineffective portion of the fair value of the derivative is recognised immediately in the profit or loss. The amount accumulated in equity is retained in other comprehensive income and reclassified to profit or loss in the same period or periods during which the hedge forecast cash flow affect profit or loss or the hedged item affects profit or loss. If the forecast transaction is no longer expected to occur, the hedge no longer meets the criteria for hedge accounting, the hedging instrument expires or is sold, terminated or exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. If the forecast transaction is no longer expected to occur, then the amount accumulated in equity is reclassified to profit or loss. 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 prescribed above. Other 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 twelve months after the reporting period. African Blue put and call options On 27 November 2017, the Group acquired an 86% interest in African Blue SA (African Blue). As part of the agreement, the Group was required to make further payments to the existing shareholders, if certain earnings targets were achieved over the three years from acquisition date, by way of a put and call option, which also increases the Group’s interest in African Blue by 4% over three years. The final payment of $0.4 million was made in January 2021 bring the Group’s interest in African Blue to 90%. No further payments are required under the option. Impairment Non-derivative financial assets Financial assets measured at amortised cost At each reporting date, the Group assesses whether a loss allowance is required for financial assets carried at amortised costs, using the expected credit loss model. Any losses are recognised in the Consolidated Statement of Profit and Other 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 Consolidated Statement of Profit and Other Comprehensive Income. (B) Risk management 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 monitors the Group’s exposure to any of these financial risks and regularly 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. 81 Costa Group Holdings Limited Annual Report 2021Notes to the Consolidated Financial Statements continued 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 Liabilities Bank loans1 Net financial liabilities exposed to interest rate risk Sensitivity analysis for variable rate instruments December 2021 $ ‘000 December 2020 $ ‘000 61,887 32,450 (361,123) (299,236) (126,333) (93,883) At 26 December 2021, if interest rates had changed by -/+ 100 basis points from the year end rates with all other variables held constant, profit would have increased/(decreased) by: Increase of 100 basis points in interest rate Decrease of 100 basis points in interest rate Notes: 1. As at reporting date, the Group has no hedging for interest rate risk (December 2020: $50.0 million) December 20211 $ ‘000 (2,992) 2,992 December 2020 $ ‘000 (939) 939 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 (USD) and Japanese Yen (JPY). The Group also makes purchases and capital expenditure that expose it to movements in exchange rates of USD, Euro (EUR), and British Pound (GBP). The Group enters into forward contracts to hedge some of its exposure against foreign currency risk. In addition, it is also exposed to exchange rate movements in Moroccan Dirhams (MAD) and Chinese Yuan (CNY) through its investment in these international subsidiaries. The Group’s exposure to foreign exchange risk at the end of the reporting period, expressed in Australian dollars, was as follows: December 2021 Cash Trade and other receivables Trade and other payables Derivative financial assets Net exposure December 2020 Cash Trade and other receivables Trade and other payables Derivative financial assets Net exposure Sensitivity analysis USD $ ‘000 3,542 4,531 (291) 90 7,872 USD $ ‘000 824 1,501 (457) 1,561 3,429 JPY $ ‘000 131 138 - 162 431 JPY $ ‘000 287 156 - 1,270 1,713 EUR $ ‘000 507 103 (320) - 290 EUR $ ‘000 658 - (240) - 418 GBP $ ‘000 927 2,416 (59) - 3,284 GBP $ ‘000 74 1,947 - - 2,021 CNY $ ‘000 18,474 6,741 (249) - 24,966 CNY $ ‘000 8,797 2,905 (86) - 11,616 MAD $ ‘000 18,915 1,310 (6,778) - 13,447 MAD $ ‘000 6,989 4,712 (6,436) - 5,265 At 26 December 2021, had the Australian dollar weakened/strengthened by 10% against these currencies 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 10% USD $ ‘000 787 (787) JPY $ ‘000 43 (43) EUR $ ‘000 29 (29) GBP $ ‘000 328 (328) CNY $ ‘000 2,497 (2,497) MAD $ ‘000 1,345 (1,345) 82 Costa Group Holdings Limited Annual Report 2021                          (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. As at reporting date, unused Australian credit facilities net of bank guarantees of the Group was $100.9 million. In addition, the Group maintains a domestic overdraft facility of $3.0 million. The Group is in compliance with all undertakings under its various financial arrangements. 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. December 2021 Non-derivative financial liabilities Bank loans Trade payables Interest payable Derivative financial liabilities Interest rate swaps December 2020 Non-derivative financial liabilities Bank loans Trade payables Interest payable Derivative financial liabilities Interest rate swaps (c) Credit Risk Less than 6 months $’000 6 – 12 months $’000 1 – 5 years Over 5 years $’000 $’000 340,855 149,310 865 491,030 - - Less than 6 months $’000 158,479 135,100 592 294,171 386 386 9,288 - - 9,288 - - 6 – 12 months $’000 14,320 - - 14,320 - - 10,980 - - 10,980 -  -  - - - - - - 1 – 5 years Over 5 years $’000 $’000 4,385 - - 4,385 -  - - - - - - - Total $’000 361,123 149,310 865 511,298 - - Total $’000 177,184 135,100 592 312,876 386 386 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 continually monitored. 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 Group also takes out trade credit insurance in relation to its citrus export sales. The maximum exposure to credit risk is as follows: Cash and cash equivalents Receivables Forward exchange contracts December 2021 $ ‘000 61,887 109,306 252 171,445 December 2020 $ ‘000 32,450 100,924 2,832 136,206 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. 83 Costa Group Holdings Limited Annual Report 2021                                    Notes to the Consolidated Financial Statements continued Neither past due nor impaired Past due 1 – 30 days Past due 31 – 60 days Past due over 60 days December 2021 $ ‘000 58,928 6,832 1,105 7,804 74,669 December 2020 $ ‘000 48,705 14,785 1,452 4,394 69,336 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. At 26 December 2021, major Australian retailers, including Coles, Woolworths, Aldi and IGA comprise approximately 41% of the Group’s trade debtors. Expected credit loss assessment for trade receivables The Group uses an allowance matrix to measure the expected credit losses of trade receivables from individual customers. Loss rates are calculated using combination of estimated potential bad debts for debts past due more than 90 days and actual write-offs in the past three years. The movement in the allowance for impairment in respect of trade receivables during the period was as follows. Movements in the accumulated impairment losses were: Opening balance Impairment loss recognised Amounts written off Closing balance (d) Capital management December 2021 $ ‘000 December 2020 $ ‘000 (652) (1) 71 (582) (482) (383) 213 (652) 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 Company. 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. 84 Costa Group Holdings Limited Annual Report 2021            D. Group Structure D1. Joint ventures and associates (a) Details of joint ventures and associates Equity instrument Joint Ventures Driscoll’s Australia Partnership Ordinary shares Associates Polar Fresh Partnership Ordinary shares Ownership interest December 2021 % 50 50 Measurement basis Principal place of business and country of incorporation Ownership interest December 2020 %   50 Equity Accounted Victoria, Australia 50 Equity Accounted Victoria, Australia (b) Summarised financial information for joint ventures and associates Reconciliation of carrying amount in joint ventures and associates: Opening balance Total share of profit Dividends received Closing balance (a) Driscoll’s Australia Partnership December 2021 $ ‘000 December 2020 $ ‘000 21,567 9,881 (4,200) 27,248 16,672 9,070 (4,175) 21,567 In 2010, an entity of the Group entered a partnership with Driscoll’s Inc. to form Driscoll’s Australia Partnership, which is an Australian berry marketing business. The majority of the Group’s Australian grown berries are marketed in Australia through the Driscoll’s brand by this joint venture. In the period, gross sales revenue for the Driscoll’s Australia Partnership was $542.5 million (12 months ended December 2020: $532.8 million), and net assets were $54.3 million (December 2020: $42.9 million). (b) Polar Fresh Partnership The Polar Fresh Partnership is a provider of cold storage, warehousing and distribution solutions. As previously disclosed, Polar Fresh Partnership‘s final service contract was completed in October 2017 and operations have now ceased and is in the process of winding down. 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. 85 Costa Group Holdings Limited Annual Report 2021                                    Notes to the Consolidated Financial Statements continued D2. List of subsidiaries The following are the Group’s subsidiaries: Subsidiaries of Costa Group Holdings Ltd: Country of incorporation 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 Costa Berry International Pty Ltd (formerly 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 Blueberry Investments Africa Pty Ltd (formerly ACN 057 689 246 Pty Ltd) Exchange Innisfail Pty Ltd FreshExchange Pty Ltd Yandilla Park Pty Ltd East African 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 Farming Mundubbera Pty Ltd Grape Exchange 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 Costa (Honghe) Fruit Planting Co. Ltd Costa (Yunnan) Agricultural Development Co. Ltd Costa (Baoshan) Agricultural Development Co Ltd African Blue S.A. Sweet Berry S.A. Blue Flavor African Blue (UK) Ltd 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 China China China Morocco Morocco Spain United Kingdom 86 Ownership interest held by the Group December 2021 % 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 70 70 70 70 90 90 81 81 December 2020 % 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 70 70 70 70 89 89 80 80 Costa Group Holdings Limited Annual Report 2021    D3. Business Acquisitions Acquisition of 2PH farms On 23 June 2021, the Group entered into a binding agreement with the Pressler group of entities (Vendors) to acquire the business and assets of 2PH Farms Pty Ltd and its related entities (2PH), a Central Queensland based citrus grower for an upfront consideration of $220.8 million. In addition, the Group will pay an additional $31.4 million in July 2023 for the purchase of the ‘Conaghans’ property, where a new citrus crop is currently being planted by the vendor, subject to exercise of put or call options. The transaction was funded by $190 million (pre costs) in equity by way of a fully underwritten 1 for 6.33 pro rata accelerated renounceable entitlement offer, and the balance by existing debt facilities. Refer note C2 for further details on the capital raising. The acquisition completed on 19 July 2021. Acquisition of KW Orchards On 19 April 2021, the Group acquired the farming operations of KW Orchards and an associated packing operation, EJT citrus packing facility for a total consideration of $40.0 million. The acquired business represents an institutional scale citrus farming business located in Trentham Cliffs, NSW Australia and further adds to the Group’s citrus category’s growing footprint in the Sunraysia region. The acquisition completed on 19 April 2021. Acquisition of Select Fresh On 7 June 2021, the Group entered into an agreement to acquire Select Fresh, a leading Western Australian based wholesale and distribution business specialising in the supply of fresh produce to foodservice and independent supermarkets for a total consideration of $12.9 million. The acquisition completed on 1 July 2021. These acquisitions involve taking control of the assets and operations of the acquired businesses (land and buildings, plant and equipment, intangible assets (brand names and customer relationships) biological assets, organised workforce amongst others). The acquisition did not involve acquiring any equity interest of the vendor companies. The following table summarises the fair value of consideration transferred, net assets and liabilities acquired and resulting goodwill on acquisition date: Consideration transferred Cash paid1 Deferred consideration Total consideration Identifiable assets acquired and liabilities assumed Property plant and equipment Right-of-use assets Intangible assets Biological assets Receivables Inventories Lease liabilities Employee entitlements Accruals and provisions Deferred tax liabilities Net identifiable assets and liabilities acquired Goodwill Notes: 2PH Farms $’000 KW Orchard $’000 Select Fresh $’000 220,852 1,6202 222,472 162,960 32,240 15,800 17,611 2,782 1,156 (31,723) (272) (650) (14,798) 185,106 38,457 1,5303 39,987 29,417 - 7,800 1,228 - 641 - (77) (500) (1,147) 37,362 12,890 - 12,890 840 4,428 5,400 - 16 168 (4,428) (469) (512) (1,340) 4,103 Total $’000 272,199 3,150 275,349 193,217 36,668 29,000 18,839 2,798 1,965 (36,151) (818) (1,662) (17,285) 226,571 37,366 2,625 8,787 48,778 1. The cash paid on acquisition in the Consolidated Statement of Cash Flows of $291.4 million, includes the $272.2 million cash paid and business acquisition and integration costs of $19.2 million as disclosed below (Material item – acquisition related costs). 2. 2PH Farms deferred consideration relates to planting retention held by the Group, pending completion of 36 hectares of Phoenix citrus trees by the Vendor. This is expected to be completed by 30 June 2022. 3. KW Orchards deferred consideration relates to two lots of land pending subdivision. The Group is currently operating on the land and has controls over the relevant lots. Conversion and settlement of the deferred consideration is expected to occur in the next 12 months. 87 Costa Group Holdings Limited Annual Report 2021                              Notes to the Consolidated Financial Statements continued Measurement of fair values The valuation techniques used for measuring the fair value of material assets acquired were as follows: Property, plant, and equipment (excluding bearer plants) and Intangible assets (water licenses) For property, plant and equipment and intangible assets, the market comparison technique and cost technique were used. The valuation considers market prices for similar items when they are available, and depreciated replacement costs when appropriate. Depreciated replacement cost reflects adjustment for physical deterioration as well as functional and economic obsolescence. Bearer plants For bearer plants, the valuation model considers cost of acquiring the plants as well as any directly attributable cost incurred for planting. These include soil preparation, labour, costs of pots and soil mix. Further, the aging profile of the plants are taken into consideration to arrive at final valuations. Intangible assets For brand names and customer relationships, the relief-from-royalty method (RRM) and multi-period excess earnings method (MEEM) is used respectively. RRM considers the discounted estimated royalty payments that are expected to be avoided as a result of the patents being owned. The MEEM considers the present value of net cash flows expected to be generated by the customer relationships, by excluding any cash flows related to contributory assets. Biological assets For biological assets, the valuation is based on fair value less cost to sell determined as the net present value of cash flows expected to be generated by the crops. Where fair value cannot be measured reliably, biological assets are measured at costs. Inventories Market comparison technique where the fair value is determined based on the estimate selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on the effort require to complete and sell the inventories. Receivables Trade receivables comprises gross contractual amounts due, net of claims provisions (export) at date of acquisition. Goodwill The goodwill is attributable mainly to the skills and technical talent of the acquirees workforce and the synergies expected to be achieved from integrating the respective farms and businesses into the Group’s existing category portfolio. None of the goodwill recognised is expected to be deductible for tax purposes. The asset and liabilities acquired above have been provisionally accounted and are subject to review for up to 12 months from the date of the acquisition. If new information obtained within one year of the date of acquisition identifies adjustments to the above amounts, the acquisition accounting will be revised accordingly. Conaghans property and put and call options On the same day the 2PH Farms were acquired, the Group entered into a put and call deed (Deed) with the vendor for the potential future acquisition of the Conaghans property. The Deed specifies that the purchase price payable upon exercise of the put and call option is $31.4 million exercisable in 2023. This value is further subject to certain conditions including that the development of activities are to be performed by the Vendor in accordance with the Deed. The put and call option of the Conaghans property does not meet the definition of a financial derivative or financial instrument and will be accounted as an asset acquisition separately from the business acquisition of 2PH Farms above. The Deed further distinguishes Stage 1 and Stage 2 of the property as follows: • Stage 1: Developed portion of the property covering 216 hectares of immature citrus trees planted and includes the associated water and ancillary infrastructure works; and • Stage 2: In-development portion of the property whereby the vendor will plant an additional 210 hectares of Citrus and includes the associated water and ancillary infrastructure works required to support the plantings. The Group has been given access and control by the Vendor over Stage 1 plantings and is responsible for maintaining the plantings and infrastructure, even though the Deed will be exercisable in 2023. Resultingly, the Group has accounted for Stage 1 as a stand-alone asset acquisition with estimated value of $15.9 million and a corresponding other commitment as disclosed in note B11. 88 Costa Group Holdings Limited Annual Report 2021Material items – Acquisition related costs Material items fully relate to acquisition and integration expenses, relating to the 2PH Farms, KW Orchards and Select Fresh acquisitions. This includes one-off costs such as stamp duty, consulting and valuation costs, and salaries for time spent on integration and site visits. The before and after tax impact of material items are as follow: Individually material items included in profit before income tax: Acquisition and integration expenses Total material items (before tax) Tax effect of material items Total material items (after tax) Pro forma revenue and profit and losses December 2021 $ ‘000 December 2020 $ ‘000 (19,188) (19,188) 1,728 (17,460) - - - - From the date of acquisition to 26 December 2021, the acquisitions above contributed revenue of $67.9 million and EBITDA-S of $14.8 million to the Group’s results. Had the acquisition occurred on 28 December 2020, management estimates that the consolidated revenue would have been $1,268.2 million and EBITDA-S of $228.2 million. In determining these amounts, management has assumed that the fair value adjustments, determined provisionally, that arose on the date of acquisitions would have been the same if the acquisitions had occurred on the commencement of the period on 28 December 2020. D4. Related party disclosures (a) Transactions with joint ventures and associates The Group transacted with jointly controlled entities during the period as follows: • Driscoll’s Australia Partnership – Commission paid on sale of berries $25.3 million (December 2020: $25.1 million) • Driscoll’s Australia Partnership – Sales of produce $189.2 million (December 2020: $187.6 million) • Driscoll’s Australia Partnership – Receivable of $7.5 million (December 2020: $12.5 million) for sale of produce and logistic services • Driscoll’s Australia Partnership – Dividends received amounting to $4.2 million (December 2020: $4.2 million) (b) Transactions with key management personnel (KMP) of the entity or its parent and their personally related entities There were no transactions between members of the Group and any KMP (or their related parties) that resulted in any personal financial benefit to the KMP. The Group had the following transactions during the financial year ended December 2021, all of which were on arm’s length terms and were entered into for the benefit of the Company, at the request of the Company’s Board of Directors:  Mr Harry Debney • Capital expenditure payment of $1,670,000 to The Yield Technology Solutions Pty Ltd (CY2020: $1,360,000), of which Harry Debney served as Chairman of the Board, representing the Group until 22 April 2021. The Yield is an Australian agricultural technology company that invest, builds and secure scalable digital agriculture technology. The Yield’s services were provided pursuant to written contract on arm’s length terms and Harry abstained from the negotiation and all board discussions and voting in relation to entry into the contract.  • No income was received from the Yield Technology Solutions Pty Ltd (CY2020: $37,500) on behalf of Harry Debney’s services as Chairman of the Board. As Harry Debney’s services were provided to The Yield on behalf of the Group, any income for these services was received by the Group rather than by Mr Debney personally. Mr Sean Hallahan  • Payment of membership fee of $200,000 to Australian Fresh Produce Alliance (AFPA) (CY2020: $200,000) of which Sean Hallahan is a Director, representing the Group. The AFPA is made up of Australia’s major fresh produce growers and suppliers and serves as the industry body that retailers and government go to for discussion and outcomes on issues involving the growing and supply of fresh produce. Each member of AFPA is entitled to appoint a Director and each member has only one vote under AFPA’s Constitution.  89 Costa Group Holdings Limited Annual Report 2021        Notes to the Consolidated Financial Statements continued Key Management Personnel Compensation received by key management personnel of the group: – Short-term employee benefits – Post-employment benefits – Other monetary benefits – Long-term employee benefits – Share-based payment expenses/benefits2 December 20211 $ ‘000 December 2020 $ ‘000 1,767 46 4 33 230 2,080 2,651  67  -  34  (441)  2,311 Notes: 1. Included in the compensation received for the year ended December 2021 is Harry Debney’s three-month salary as CEO prior to his retirement. 2. The share-based payment benefits for the period ended December 2021 includes reversal of previously accrued share-based payment expense, due to the non-achievement performance hurdles of prior years’ long-term incentive plans. D5. 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 Contributed equity Share-based payment reserve Profit reserve Accumulated losses Total equity (b) Summarised statement of comprehensive income Profit/(Loss) for the period Total comprehensive profit for the period December 2021 $ ‘000 December 2020 $ ‘000 8,754 990,835 999,589 630 186,273 186,903 167 709,194 709,361 4,862 135,508 140,370 812,686 568,991 768,074 8,895 94,329 (58,612) 812,686 580,734 8,119 38,750 (58,612) 568,991 December 2021 $ ‘000 94,188 94,188 December 2020 $ ‘000 36,610 36,610 (c) Parent entity guarantees in respect of debts of its subsidiaries The Company 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 D6. 90 Costa Group Holdings Limited Annual Report 2021                                  D6. Deed of cross guarantee The Australian wholly owned subsidiaries listed in note D2 (excluding Hillston Investments Pty Ltd, Agri Exchange Farm Management Pty Ltd, and Costa Group Finance Pty Ltd) are parties to a deed of cross guarantee under which each company guarantees the debts of the others. Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785, the wholly-owned subsidiaries listed in note D2 (excluding Hillston Investments Pty Ltd, Agri Exchange Farm Management Pty Ltd, and Costa Group Finance Pty Ltd) are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and directors’ report. Hillston Investments Pty Ltd, Agri Exchange Farm Management Pty Ltd, and Costa Group Finance Pty Ltd are non-trading, dormant subsidiaries. A Consolidated Statement of Profit and Other Comprehensive Income and a Consolidated Statement of Financial Position for the financial year ended 26 December 2021 for the deed of cross guarantee group are set out below: (a) Consolidated Statement of Profit or Loss and Other Comprehensive Income of the deed of cross guarantee group Revenue Less: Expenses Share of net profits of associates and joint ventures accounted for using the equity method Profit before income tax expense Income tax (expense)/benefit Profit for the year Other comprehensive income/(loss) for the year Foreign currency translation differences Cash flow hedges – effective portion of changes in fair value Total other comprehensive income/(loss) for the year Total comprehensive income for the year December 2021 $ ‘000 1,006,237 (1,006,450) 9,881 9,668 (5,765) 3,903 December 2020 $ ‘000 1,000,870 (959,325) 9,070 50,615 (13,396) 37,219 12,335 (2,292) 10,043 (8,773) 2,720 (6,053) 13,946 31,166 91 Costa Group Holdings Limited Annual Report 2021              Notes to the Consolidated Financial Statements continued (b) Consolidated Statement of Financial Position of the deed of cross guarantee group ASSETS Current assets Cash and cash equivalents Receivables Inventories Biological assets Other assets & financial assets Current tax asset Asset 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 Right-of-use assets Total non-current assets Total assets LIABILITIES Current liabilities Payables Provisions Other financial liabilities Current tax liabilities Lease liabilities Total current liabilities Non-current liabilities Borrowings Provisions Deferred tax liabilities Lease liabilities Total non-current liabilities Total liabilities NET ASSETS EQUITY Share capital Other equity reserve Other reserves Profit reserve Accumulated losses Total equity 92 December 2021 $ ‘000 December 2020 $ ‘000 23,064 90,786 22,860 50,389 8,038 8,554 3,207 206,898 1,177 28,239 27,248 284,368 20,353 674,186 542,162 1,577,733 1,784,631 126,724 20,404 - - 64,125 211,253 336,439 25,652 33,205 493,673 888,969 1,100,222 16,094 87,489 20,814 43,219 10,954 - - 178,570 3,958 28,247 21,567 207,476 20,630 412,187 279,930 973,995 1,152,565 119,823 21,534 879 5,374 34,119 181,729 149,149 8,765 16,836 261,683 436,433 618,162 684,409 534,403 768,074 (13,422) 7,151 60,019 (137,413) 684,409 580,734 (13,117) 8,130 85,908 (127,252) 534,403 Costa Group Holdings Limited Annual Report 2021                                          E. Other E1. Share-based payments Share-based payments reserve December 2021 $ ‘000 December 2020 $ ‘000 8,895 8,119 The share-based payments reserve is used to record the fair value of shares or equity-settled share-based payment options issued to employees. The Group continued to offer equity-settled share-based payments via employee participation in long-term and short-term incentive plans as part of the remuneration packages for the key management personnel and other executives of the Company. Recognition and measurement The Group provides benefits to its employees in the form of share-based payment transactions, whereby services are rendered in exchange for shares or options. 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 and performance rights. The amount recognised as expense over the vesting period is adjusted to reflect the actual number of options and performance rights that vest except where forfeiture is due to failure to achieve market-based performance indicators. Share-Based Payment Plan – Employee Share Option Plan During the period, a total of 1,542,433 options (December 2020: 1,826,631 options) have been granted under new option plans. Measurement of fair values of options The fair value of the options issued under this option plan was measured on using a binomial tree 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 Grant date Number issued Fair value at grant date Share price at grant date Exercise price Expected volatility Expected dividend yield Risk-free rate December 2021   KMP and executives 19/02/2021 1,542,433 $1.15 $4.01 $3.95 44% 2.80% 0.35% December 2020 KMP and executives 27/10/2020 6,550 $0.96 $3.55 $2.39 44% 2.80% 0.63% 23/07/2020 125,000 $0.96 $3.10 $2.39 44% 2.80% 0.63% 26/02/2020 1,695,081 $0.96 $2.86 $2.39 44% 2.80% 0.63% 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. Measurement of fair values of performance rights The fair value of the performance rights issued in the period under the short-term incentive plan was based on the 5-day market volume weighted average price of the shares of the Costa Group Holdings Ltd ending on 26 February 2021. Details are as follows: Numbers issued Fair value at grant date December 2021 KMP and Executives 167,845 $4.49 December 2020 KMP and Executives - - 93 Costa Group Holdings Limited Annual Report 2021        Notes to the Consolidated Financial Statements continued 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 Forfeited during the year Granted during the year Closing balance Exercisable at year end December 2021 December 2020 Number of options 5,009,277 (342,348) (1,234,141) 1,542,433 4,975,221 269,046 Weighted average exercise price $5.08 $2.73 $5.11 $3.95 $4.88 $4.60 Number of options 5,372,573 (178,571) (2,011,356) 1,826,631 5,009,277 598,342 Weighted average exercise price $5.84 $2.25 $4.97 $2.39 $5.08 $3.18 The options outstanding as at 26 December 2021, which have not vested, have an average exercise price of $4.83 (December 2020: $5.32). E2. Taxation (a) Components of tax expense Current tax Deferred tax Over provision in prior years Profit before income tax Prima facie income tax expense on profit before income tax at 30.0% – Effect of tax rates in foreign jurisdictions Tax effect of: Non-deductible expenses Net deferred tax asset recognised Non-creditable foreign withholding tax Over provision in prior years Research and development tax credits Non-assessable income Income tax expense attributable to profit (b) Current tax Current tax relates to the following: Current tax liabilities/(assets) Opening balance Current year tax expense Tax payments Foreign withholding tax credits claimable Tax benefits recognised against equity Over provisions Closing balance 94 December 2021 $ ‘000 8,145 2,451 (1,900) 8,696 December 2020 $ ‘000 19,165 (2,351) (3,024) 13,790 60,920 81,239 18,276 (11,649) 24,372 (7,029) 5,957 (596) 115 (1,900) (800) (707) 8,696 691 (307) 125 (3,024) (800) (238) 13,790 December 2021 $ ‘000 December 2020 $ ‘000 10,526 8,145 (21,718) (1,372) (2) (3,591) (8,012) (5,186) 19,165 279 (786) - (2,946) 10,526 Costa Group Holdings Limited Annual Report 2021                  (c) Deferred tax Deferred tax relates to the following: Deferred tax assets The balance comprises: Provisions Trade and other payables Inventories Capital deductions (section 40-880) Borrowings Equity Accounted Investments Future deductible share plan trust payment Leased assets and liabilities Property, plant and equipment Deferred tax liabilities The balance comprises: Biological assets Property, plant and equipment Intangible assets Trade and other receivables Other financial liabilities Net deferred tax (liability)/assets (d) Deferred tax expense included in income tax comprises Decrease/(increase) in deferred tax assets (Decrease)/increase in deferred tax liabilities (e) Deferred tax movement Opening balance – net deferred tax asset Under provision in prior years Increase in net deferred tax asset recognised in profit or loss Increase in net deferred tax liability as a result of acquisitions Increase/(decrease) in deferred tax asset recognised in equity FX revaluation Closing balance – net deferred tax (liability)/asset December 2021 $ ‘000 December 2020 $ ‘000 9,899 3,786 105 2,089 30 423 281 4,537 152 21,302 14,125 10,978 7,644 1,645 75 34,467 (13,165) 2,784 (333) 2,451 6,918 (1,777) (2,451) (17,285) 1,516 (86) (13,165) 10,158 6,826 41 1,138 30 332 477 4,765 127 23,894 11,676 610 1,647 2,923 120 16,976 6,918 (3,723) 1,372 (2,351) 4,161 (78) 2,351 - 253 232 6,918 The Company’s franking account balance as at 26 December 2021 is $1,128,845 (December 2020: $293,781). The Company has unrecognised deferred tax assets relating to carried forward capital losses, because it is not probable that future taxable profit will be available against which the Company can use the benefits therefrom. The unrecognised deferred tax assets on capital losses in Australia is $2.5 million (2020: $2.5 million). The Company does not have any carried forward revenue losses. 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. 95 Costa Group Holdings Limited Annual Report 2021                                            Notes to the Consolidated Financial Statements continued Tax Consolidation The Company and its Australian wholly owned subsidiaries have formed a tax consolidated group. The Company 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 Company 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 Company 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 Company 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. E3. New accounting standards 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. Effective Date New Standards or amendments Reference 1 April 2021 COVID-19 Related Rent Concessions beyond 30 June 2021 (Amendment to AASB 16) AASB 16 1 January 2022 Onerous Contracts – Cost of Fulfilling a Contract (Amendments to AASB 137) Annual Improvement to IFRS Standards 2018 – 2020 Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to AASB 10 and AASB 128) Property, plant and equipment: Proceeds before intended use (amendments to AASB 116) AASB 137 Various AASB 10 and AASB 128 AASB 116 1 January 2023 Classification of liabilities as current or non-current (Amendments to AASB 1) Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28) AASB 1, AASB 10 and AASB 128 Disclosure of Accounting Policies (Amendments to AASB 1 and IFRS Practise Statement 2) Various Definition of accounting estimates (Amendments to AASB 108) Deferred tax related to Assets and Liabilities arising from a single transaction (Amendments to AASB 112) AASB 108 AASB 112 The Group is currently assessing the impact of these standards on its financial position and performance. 96 Costa Group Holdings Limited Annual Report 2021E4. Auditor’s remuneration Audit and review services Services provided by KPMG Australia Services provided by associate firms of KPMG Australia Other services provided by KPMG Australia Taxation compliance and other taxation advisory services (including R&D) Other services1 Total remuneration of KPMG Notes: 1. Includes business acquisition due diligence services of $138,297. E5. Other accounting policies Research and development expenditure Expenditure on research activities is recognised as an expense when incurred. December 2021 $ ‘000 December 2020 $ ‘000 524 259 783 210 148 358 1,141 535 222 757 207 23 230 987 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 reasonable 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 Consolidated Statement of Profit and Other Comprehensive Income to offset the applicable expenses incurred by the Group as stated in the provisions of the government grant. 97 Costa Group Holdings Limited Annual Report 2021                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 E5 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 December 2021 and of its performance, for the financial period year 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 D6 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 those Group entities pursuant to ASIC Corporations (Wholly owned Companies) Instrument 2016/785. 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 12 months ended 26 December 2021. 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 21st day of February 2022. Neil Chatfield Chairman Sean Hallahan Managing Director and CEO 98 Costa Group Holdings Limited Annual Report 2021Independent Auditor’s Report Independent Auditor’s Report To the shareholders of Costa Group Holdings Ltd Report on the audit of the Financial Report Opinion We have audited the Financial Report of Costa Group Holdings Ltd (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including • giving a true and fair view of the Group's financial position as at 26 December 2021 and of its financial performance for the year ended on that date; and • complying with Australian Accounting Standards the Corporations Regulations 2001. and Basis for opinion The Financial Report comprises: • Consolidated Statement of Financial Position as at 26 December 2021 • Consolidated Statement of Profit or Loss and Other Comprehensive Income, Consolidated Statement of Changes in Equity, and Consolidated Statement of Cash Flows for the year then ended • Notes including a summary of significant accounting policies • Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation. Liability limited by a scheme approved under Professional Standards Legislation. 95 99 Costa Group Holdings Limited Annual Report 2021 Independent Auditor’s Report continued Key Audit Matters The Key Audit Matters we identified are: • Recoverability of non-current assets including property, plant and equipment and intangible assets • Business acquisitions Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Recoverability of non-current assets including property, plant and equipment ($799.9m AUD) and intangible assets ($289.1m AUD) Refer to Note B7. Property, plant and equipment and Note B8. Goodwill and Intangible Assets to the Financial Report. The key audit matter How the matter was addressed in our audit A key audit matter for us was the Group’s assessment of the recoverability of non- current assets, including annual testing of goodwill for impairment, given the size of the balances (being 54% of total assets) and the level of judgement required by us when evaluating the evidence available. In addition, the ongoing COVID-19 global pandemic increases estimation uncertainty when applying forward-looking assumptions. We focussed on the significant forward- looking assumptions the Group applied in their Value in Use (VIU) and Fair Value Less Costs of Disposal (FVLCD) models (the cash flow models), including: • • forecast operating cash flows, impacted by pricing, yield, growth rates and terminal growth rates - the Group’s models are sensitive to changes in these assumptions, potentially reducing available headroom or indicating possible impairment. This drives additional audit effort specific to their feasibility and consistency of application. discount rates – these are complicated in nature and vary according to the conditions and environment the specific CGU is subject to from time to time. The Group’s modelling is sensitive to small changes in Our procedures included: • We considered the appropriateness of the value in use and fair value less costs of disposal methods applied by the Group to perform the test of non-current assets for impairment against the requirements of the accounting standards. • We assessed the integrity of the cash flow models used, including the accuracy of the underlying calculation formulas. • We compared the forecast cash flows and capital expenditure contained in the cash flow models to Board approved forecasts. • We challenged the Group’s significant forecast cash flow and growth assumptions considering past performance of each CGU, and the forecast impact on cash flows from the Moroccan growth and replanting strategy. We compared key events to the Board approved plan and strategy. We compared forecast growth rates and terminal growth rates to published studies of industry trends and expectations and considered differences for the Group’s operations. We used our knowledge of the Group, its past performance, business and customers, and our experience regarding the feasibility of these in the industry in which they operate. 100 96 Costa Group Holdings Limited Annual Report 2021 • the discount rate. We involved our valuation specialists with this assessment. forecast capital expenditure – the African recoverable amount was Blue CGU determined through a FVLCS model, inclusive of significant forecast capital expenditure to reflect the Morocco growth strategy and replanting program. Our testing focussed on the implications of these plans and their impact on the cash flow model. The Group uses complex models to assess impairment. The for non-current assets models are largely manually developed, use adjusted historical performance, and a range of internal and external sources as inputs to the assumptions. increasing our The Group’s CGUs have not always met prior focus on forecasts, the reliability of current forecasts. Complex modelling, using forward-looking assumptions tends to be prone to greater risk for potential bias, error, and inconsistent application. These conditions necessitate additional scrutiny by us, to address the objectivity of sources used for assumptions, and their consistent application. • We assessed the accuracy of previous Group forecasts inform our evaluation of forecasts incorporated in the cash flow models. to • We considered the sensitivity of the models by varying key assumptions, such as forecast growth rates and terminal growth rates, pricing, and discount rates, within a reasonably possible range. We did this to identify those CGUs at higher risk of impairment, assumptions at higher risk of bias or inconsistency in application and to focus our further procedures. • Working with our valuation specialists, we: • • • comparable analysed the Group’s discount rates against publicly available data of a group of entities. We independently developed a discount rate range considered comparable using publicly available market data for comparable entities, adjusted by risk factors specific to the Group and the industry it operates in; compared the implied multiples from comparable market transactions to the implied multiple from the Group’s fair value less costs of disposal model; and compared the Group’s terminal growth rates against publicly available market data for each relevant geography. • We assessed the disclosures in the financial report using our understanding of the matter obtained from our testing and against the requirements of the accounting standards. 97 101 Costa Group Holdings Limited Annual Report 2021 Independent Auditor’s Report continued Business acquisitions ($275.4m AUD) Refer to Note D3. Business acquisitions to the Financial Report. The key audit matter How the matter was addressed in our audit During 2021 the Group acquired 2PH Farms, Trentham (KW Orchards) and Select Fresh for considerations of $222.5m, $40m and $12.9m respectively, resulting in $48.8m of total goodwill acquired. This is a key audit matter due to the: • Significant impact financial statements. The acquisitions resulted in an increase in total assets of $275.4m. the on • Judgement involved in estimating the fair value of assets and liabilities acquired, in particular the identifiable intangible assets such as customer relationships and trade names, and property, plant and equipment acquired. The Group engaged external experts to advise identification and measurement of on the acquired assets and in particular liabilities, determining allocation of purchase consideration to goodwill, separately identifiable intangible assets and certain items of property, plant and equipment. the We involved our valuation specialists supplement our senior team members assessing this key audit matter. to in Working with our valuation specialists, our procedures included: • Reading the transaction documents to understand the key terms and conditions of the acquisitions. • Evaluating the methodologies used for the acquisitions accounting against accounting standard requirements. • Assessing the scope, competency, and objectivity of the external experts engaged by the Group to advise on the identification and valuation of relevant assets. • Assessing the appropriateness of the methodology applied by the Group to account the consideration for deferred requirements of the accounting standards. against • Evaluating the valuation methodology used by the Group to determine the fair value of assets and liabilities acquired, considering accounting standard requirements, and observed industry practices. • Challenging the key assumptions used by the Group and their external experts in determining the fair value of assets acquired by: o Assessing the useful life allocated to identified assets, using our knowledge its business and of customers, and our industry experience. the Group, o Comparing the inputs used by the to underlying independent expert documentation. o Analysing the discount rates applied against our knowledge of the industry and publicly available data of comparable entities. o Assessing the competence, experience, the independence of skills, and independent experts. • Assessing the adequacy of the Group’s 98 102 Costa Group Holdings Limited Annual Report 2021 disclosures in respect of the acquisitions based on accounting standard requirements, using understanding obtained from our audit testing. Other Information Other Information is financial and non-financial information in Costa Group Holdings Ltd’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors are responsible for the Other Information. The Other Information we obtained prior to the date of this Auditor’s Report was the Directors’ Report including the Remuneration Report. The Chairman’s Report, Managing Director’s Review, Company Profile, Harvest Calendar, Shareholder Information and Corporate Directory are expected to be made available to us after the date of the Auditor's Report. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 • implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error • assessing the Group and Company's ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group and Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: • • to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in 99 103 Costa Group Holdings Limited Annual Report 2021 Independent Auditor’s Report continued accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our Auditor’s Report. Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Costa Group Holdings Ltd for the year ended 26 December 2021 complies with Section 300A of the Corporations Act 2001. The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in the Directors’ report for the year ended 26 December 2021. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPMG Gordon Sangster Partner Melbourne 21 February 2022 100 104 Costa Group Holdings Limited Annual Report 2021 Shareholder Information Twenty Largest Registered Shareholders (as at 15 March 2022) Rank Name of Shareholder 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 Pty Limited Citicorp Nominees Pty Limited Neweconomy Com Au Nominees Pty Limited BNP Paribas Noms Pty Ltd BNP Paribas Nominees Pty Ltd National Nominees Limited UBS Nominees Pty Ltd Hoxton Pty Ltd 3rd Wave Investors Pty Ltd Invia Custodian Pty Limited First Samuel Ltd Acn 086243567 BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd Anthony Costa Superannuation Pty Ltd Elaine Costa Superannuation Pty Ltd BNP Paribas Nominees Pty Ltd Six Sis Ltd Netwealth Investments Limited BNP Paribas Nominees Pty Ltd Citicorp Nominees Pty Limited Mr John Paterson Number of Shares % of Issued Capital 30.76 11.82 7.67 4.63 3.11 2.92 2.64 1.80 1.08 0.97 0.65 0.57 0.50 0.34 0.34 0.31 0.29 0.25 0.23 0.22 142,881,287 54,887,946 35,639,908 21,505,156 14,452,001 13,557,031 12,247,835 8,342,645 5,004,721 4,500,000 3,033,934 2,640,031 2,301,644 1,576,581 1,561,581 1,432,185 1,368,906 1,174,277 1,071,907 1,000,000 Distribution of Holdings (as at 15 March 2022) 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 114 2,720 3,027 8,534 6,544 20,939 Number of Shares 352,811,740 63,908,286 22,295,416 22,370,530 3,160,494 464,546,466 % of Issued Capital 75.95 13.76 4.80 4.82 0.68 100.00 The number of shareholders holding less than a marketable parcel of shares (as at 15 March 2022) is 1,145 and they hold 124,098 shares. Substantial Shareholders (as disclosed in substantial holder notices given to the Company as at 15 March 2022) Shareholder Perpetual Limited and its related bodies corporate Number of Shares % of Issued Capital 14.59 67,771,650 Escrowed Shares As at 15 March 2022, there are no shares subject to voluntary escrow arrangements. Unquoted Securities As at 15 March 2022, there are 2,800,119 options over unissued shares of Costa Group Holdings Ltd. These options are held by 20 current and former members of management (including the CEO) and a current and former director 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. More details of these options are set out below. Number of unissued ordinary shares under option 50,000 151,141 67,905 1,287,648 1,243,425 Issue price of shares $1.45 $4.77 $6.53 $2.39 $3.95 Expiry date of the options October 2024 September 2022 March 2023 March 2025 March 2026 As at 15 March 2022, there are 154,484 performance rights held by 15 members of management (including the CEO), which on vesting will give the holders a right to receive one fully paid ordinary share in the Company for each performance right held. 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. As at 15 March 2022, there is no current on-market buy-back. 105 Costa Group Holdings Limited Annual Report 2021Corporate Directory Directors Neil Chatfield (Chairman) Sean Hallahan (CEO) Tim Goldsmith Janette Kendall Peter Margin Dr Jane Wilson AO Harry Debney Company Secretary David Thomas Registered Office Unit 1, 275 Robinsons Road Ravenhall Victoria 3023 Australia T +613 8363 9000 E investors@costagroup.com.au W https://investors.costagroup.com.au/investor-centre/ 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 Auditor KPMG Tower Two, Collins Square 727 Collins Street Melbourne Victoria 3008 Australia Australian Securities Exchange Costa Group Holdings Limited shares are quoted on the Australian Securities Exchange (ASX code: CGC) 106 Costa Group Holdings Limited Annual Report 2021

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