EBOS Group Limited
Annual Report 2018

Plain-text annual report

2018 Annual Report 1 O v e r v i e w B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 Stronger together 2 Stronger together 2 We believe that by helping others we are stronger together, building better communities through our ongoing commitment to the provision of high quality healthcare and animal care products. 3 A n n u a l R e p o r t 2 0 1 8 E B O S G r o u p O v e r v i e w B u s i n e s s i F n a n c a s i l C C o o r r p p o o r r a a t t e e G G o o v v e e r r n n a a n n c c e e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D D i i r r e e c c t t o o r r y y 04 06 08 10 12 17 20 22 24 26 30 77 80 87 Foreword Summary of results EBOS Group overview CEO and Chairman’s report Business highlights Our community Our board Financial summary Financial report Independent auditor’s report Financial statements Corporate governance Directors’ interests & disclosures Directory ProPharma Christchurch pharmaceutical distribution facility 4 foreword Stronger together At EBOS Group, community is central to everything we do – it’s built into the values of every EBOS business and lived each day by our dedicated team across New Zealand and Australia. We believe that by helping others we are stronger together, building better communities through our ongoing commitment to the provision of high quality healthcare and animal care products. EBOS Group continues to pursue a robust strategic investment program designed to strengthen the core of our business, and target new opportunities that extend our capabilities and enable us to deliver more for our stakeholders. The continued financial strength of EBOS Group is the key to our success. We remain steadfast in our commitment to our shareholders, employees, customers and the many New Zealanders and Australians that use our products and services each day. We trust you will enjoy reading this year’s Annual Report as we present what has been another successful period for the Group. highlights $7.6b revenue $63.2m invested in capital works our shareholders 6,959 shareholders* $ 149.6m net profit after tax 68.5c total dividends per share * As at 16 July 2018 Stronger togetherour people 3,320 staff members 45 % 55 % 74% AUS 26% NZ 90% healthcare 10% animal care ECHO program environment, community, helping others 62 charities supported trees planted to offset emissions in FY18: 22,029 52 Green Team members supporting environmental initiatives 5 O v e r v i e w B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 6 summary of results Financial Highlights + $7.6 billion revenue + $272.4 million EBITDA +16.2% increase + $149.6 million net profit after tax +12.2% increase + 98.5 cents earnings per share +12.1% increase + 68.5 cents dividend per share for the year +8.7% increase All figures are in New Zealand dollars, unless otherwise stated. FIVE YEAR EBITDA TREND For the year to 30 June ($millions) . 4 2 7 2 . 4 4 3 2 . 5 5 2 2 . 7 6 9 1 . 4 5 7 1 2018 2017 2016 2015 2014 FIVE YEAR REVENUE TREND For the year to 30 June ($millions) FIVE YEAR NPAT TREND For the year to 30 June ($millions) 9 0 6 7 , 6 2 6 7 , 1 0 1 , 7 8 6 0 6 , 7 5 7 5 , . 6 9 4 1 . 3 3 3 1 . 0 7 2 1 . 9 5 0 1 1 . 2 9 2018 2017 2016 2015 2014 2018 2017 2016 2015 2014 EBITDA Revenue 82% Australia 18% New Zealand 79% Australia 21% New Zealand Stronger togetherSegment & Divisional Earnings Overview Data based on gross operating revenue, which comprises revenue less cost of sales (including any adjustments to inventory). L C A R E 1 4% A A NI M HEALTH C A R E 8 6 % 7 O v e r v i e w B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y 52 locations in Australia and New Zealand 5% Consumer Products 8% Contract Logistics 14% Animal Care 25% Institutional Healthcare 48% Pharmacy (Wholesale and Retail) Healthcare Animal Care EBOS Group Annual Report 2018 8 8 Stronger together EBOS Group overview Healthcare COMMUNITY PHARMACY INSTITUTIONAL HEALTHCARE CONTRACT LOGISTICS Symbion Keysborough pharmaceutical distribution facility Stronger togetherAnimal Care CONSUMER PRODUCTS ANIMAL CARE 9 O v e r v i e w B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 10 CEO and Chairman’s report The 2018 financial year was another successful period for EBOS Group and the results achieved reflect a year of strong organic growth combined with the benefit of the HPS business acquired in the prior year. The results further demonstrate the Board and management’s focus on implementing our core strategy across our Healthcare and Animal Care businesses in both New Zealand and Australia. In recent years, the Group has committed to a major capital investment program involving new distribution centres to cater for growth across our core businesses. In 2018, our major capital projects in both Australia and New Zealand have all seen excellent progress. The new Christchurch and Sydney contract logistics facilities are now operational and our new Brisbane distribution facility will go live before the end of the 2018 calendar year. These investments are a key part of our strategy to provide the most efficient warehousing and distribution facilities for our expanding portfolio of businesses. MARK WALLER Chairman JOHN CULLITY Chief Executive Officer We remain confident in the ability of our Group to expand and are always exploring new opportunities for growth in our key markets. Financial results EBOS Group’s financial results saw strong earnings growth, with Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) increasing 16.2% on last year, assisted by the full-year contribution of HPS which was acquired in June 2017. Headline revenue growth in the year was flat due to the impact of lower hepatitis C medicine sales in our Healthcare segment. This was driven by a decline in the number of patients taking these highly specialised medicines since the previous year. Net Profit After Tax (NPAT) attributable to shareholders increased by 12.2% to $149.6 million. Underlying NPAT (excluding one-off costs incurred on completing acquisitions undertaken in FY17) increased by 7.9%, and underlying earnings per share grew by 7.8% to 98.5 cents per share. Reported growth rates were positively impacted by a weaker NZD/AUD exchange rate for the financial year. Our profit performance has allowed us to deliver another increase in our dividend to shareholders. The directors have declared a final dividend of 35.5 cents per share, taking our full year dividend to 68.5 cents per share, an increase of 8.7% on the prior year. While these are just a few highlights from the full report, they demonstrate the ongoing performance across our healthcare and animal care segments. Stronger together11 O v e r v i e w B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y Post Balance Date Announcement In July 2018, EBOS announced it had won the tender to act as the exclusive third party distributor of pharmaceutical products to more than 400 Chemist Warehouse and My Chemist stores in Australia. EBOS expects to enter into a five-year supply agreement, to take effect from 1 July 2019, with the potential for an extension of a further three years. EBOS estimates that sales to the Chemist Warehouse Group stores will generate approximately AUD$1 billion in revenue in the first year of the agreement. To be selected as a trusted partner by Chemist Warehouse Group reinforces our capital investment strategy and reflects the efficiencies we have made over a number of years to our operations. It also reflects the high level of expertise and service standards that we offer the industry. Our Future We are very fortunate to have over 3,300 employees who are committed to our business and to servicing our customers’ needs every day. We could not deliver such growth across our Group without the efforts of our staff and we sincerely thank them for their ongoing commitment. We remain confident in the ability of our Group to expand and are always exploring new opportunities for growth in our key markets. Healthcare Healthcare remains the core business of EBOS Group and once again performed strongly, generating a 13% increase in EBITDA to $235.9 million. While Australian revenue declined 1.7% due to lower hepatitis C medicines sales, key investments including HPS and a full 12-month contribution from the Terry White Group, contributed to earnings growth and demonstrate the benefits of our diversified portfolio of healthcare businesses. In the Community Pharmacy business, revenue growth (excluding sales of hepatitis C medicines and acquisitions) of 1.4% (constant currency) was moderate due to the ongoing impact of PBS reforms. Sales in the non-prescription over- the-counter (OTC) channel were marginally above last year, which reflects challenging retail environments. The business continues to generate efficiency savings from its previous capital investments and has a renewed focus on reducing operating costs in the current deflationary price environment. Our New Zealand Healthcare business continues to deliver solid results, increasing revenue by 6.2% and EBITDA up 4.6%, driven by Red Seal’s strong New Zealand performance in toothpastes, teas and supplements and the acquisition of Gran’s Remedy in March 2018. Animal Care The Animal Care segment recorded 11.3% EBITDA growth for the period as the business continues to benefit from excellent growth in our branded products, with annual Black Hawk sales in Australia up 23% from last year. Black Hawk continues to be one of Australia’s fastest growing premium pet food brands and is a market leader in the pet specialty retail channel. In July 2017, the Group launched Black Hawk in New Zealand and sales have continued to grow over the course of the financial year. The brand’s strong acceptance and support from both specialty retailers and veterinary clinics has resulted in a steady increase in market share. Total Animal Care revenue declined 2.7% for the year, principally due to the business ceasing sales of low-margin wholesale products to a major Australian retail chain and discontinuing sales of other products upon the introduction of Black Hawk into New Zealand. The business has strategically realigned its focus on developing its own brands to drive greater margin and shareholder value. EBOS Group’s 50% owned Animates business also performed very well with our share of NPAT increasing 13% on last year. Acquisitions During the year we fully transitioned HPS into the Group, further expanding our leading position in the Institutional Healthcare market. In October 2017, we acquired a strategic 14.1% shareholding in MedAdvisor Ltd, an Australian digital medication management company and in March 2018, we acquired one of New Zealand’s leading iconic footcare consumer brands, Gran’s Remedy. EBOS Group Annual Report 2018 1212 Stronger together business highlights Finish in sight for Symbion’s new $55m Brisbane home Symbion’s new wholesale facility in Acacia Ridge, Brisbane is nearing completion and is due to open towards the end of 2018. The $55 million investment underlines EBOS’ ongoing commitment to, and confidence in, the future of Australia’s pharmacy industry. Incorporating some of the latest automation technology, the Acacia Ridge facility is expected to operate with industry-leading accuracy and efficiency, ensuring that EBOS can continue to support the delivery of healthcare by our customers. Building on the success of the Keysborough facility in Melbourne, the Acacia Ridge development represents a long-term commitment by EBOS to the health and wellbeing of communities across Queensland. The facility features some of the latest security and storage arrangements for fridge lines, dangerous goods and specialty medicines, as well as being built to withstand and continue operations during adverse weather conditions and floods. The facility features LED lighting, energy-efficient air-conditioning and solar panels that are expected to supply 20-25% of the site’s energy requirements. New Symbion Acacia Ridge pharmaceutical distribution facility Stronger together13 O v e r v i e w B u s i n e s s i F n a n c a s i l sector as discerning consumers increasingly seek premium quality products for their pets. In line with these trends and as part of its commitment to long- term value creation, Black Hawk recently launched DogCheck - an innovative online tool designed to educate dog owners about animal health and nutrition. Already, 139,000 Australians have signed up to use DogCheck and the launch event in Sydney generated more than one million social media views. Black Hawk continues to leverage targeted campaigns through breeders, kennels and catteries to connect its products with more people and create a community that shares the brand organically through a shared belief in the benefits of premium quality animal care products. Black Hawk leading the real pet food charge Black Hawk continued its rapid growth trajectory in FY18, delivering record financial results and further strengthening both its Australian and international market presence. The range of Original and Grain Free dog and cat food varieties achieved record sales in Australia, maintaining Black Hawk’s position as one of the leading real pet food brands in Australia. Following its launch into New Zealand in July 2017, Black Hawk has achieved swift sales uptake and built the foundations to establish itself as a leading animal care brand, with its Working Dog and Large Breed Original recipes gaining a strong foothold in the market. The Black Hawk brand reflects broader health food trends that have permeated the animal care C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 14 Stronger together Red Seal grows global footprint The past financial year has been another successful period for Red Seal with the business expanding into new retail markets and further reinforcing its position as a consumer brand of choice in New Zealand. Red Seal continues to increase its presence in Australia with its fruit tea range made available through leading supermarket retailer Woolworths from January 2018. Woolworths is currently stocking Red Seal fruit tea in more than 950 stores across the country and the launch was supported by a large promotional campaign across TV, social media and digital, public relations and in-store marketing. Toothpaste remains a strong driver of growth for Red Seal in Asian markets, with the business introducing two new products into South Korea. Red Seal products are now stocked in Costco stores across South Korea and Japan. China remains a key market for Red Seal with the business introducing updated packaging for its Raspberry Leaf Tea and partnering to relaunch its TMall store – an ecommerce platform in China that has more than 500 million monthly active users. Despite increased competition in the New Zealand market, Red Seal remains a leader in the Specialty Tea category. Red Seal launched three new tea variants in April 2018 and has also partnered with the Breast Cancer Foundation to offer Pink Ribbon teas, with $1 from every product sold donated to the foundation. Toothpaste has also been a strong contributor for Red Seal in New Zealand with the business continuing to grow its market share in this category. Red Seal is well resourced to maintain its strong position in the New Zealand market, where it continues to be a leading natural consumer health brand. Combined with a strong emerging presence in Australia and several key Asian countries, Red Seal is now well positioned to target further opportunities in these exciting markets as consumers gravitate towards the natural product portfolio. 15 E B O S G r o u p A n n u a l R e p o r t 2 0 1 8 O v e r v i e w B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y HPS moves ahead adding new sites and i.Pharmacy technology HPS has enjoyed a successful first full financial year as part of EBOS Group following its acquisition in June 2017. It has been a period of evolution for HPS that has seen the business build upon its position as a leading provider of outsourced pharmacy services to hospitals and further leverage its relationship with EBOS’ network of businesses to target new opportunities. HPS has continued to maintain its focus on growth with the opening of five new HPS approved pharmacies on-site at hospitals in Victoria, the Australian Capital Territory and the Northern Territory. With the addition of the new pharmacy in Darwin, there is now a HPS approved pharmacy in every Australian state and territory. HPS’ pharmacy, St Vincent’s Private Hospital, Werribee, Victoria Over the past financial year, HPS has successfully completed the Australia- wide integration of DXC Technology’s leading inventory management software, i.Pharmacy. The completion of the rollout helps the HPS approved pharmacy network with seamless stock management and integrated business operations. Combined with HPS’ proprietary systems ClinPod and MACI, i.Pharmacy provides HPS’ network of approved pharmacies with best in class software systems, while the launch of a new website has improved the online ordering functionality for compounded medication clients. With an Australia-wide presence, HPS is well positioned to target further business opportunities. The business is focussed on accelerating growth and realising market opportunities which continue to capitalise on being a part of EBOS Group to increase supply chain efficiencies and realise better service delivery. 16 Healthcare Logistics takes up residence in new flagship Sydney distribution centre At the end of FY18, Healthcare Logistics (HCL) moved its Australian operations from Rydalmere, Sydney to a new purpose-built distribution centre in Pemulwuy, Sydney. The $15 million development represents a significant investment by EBOS Group and at 25,000m2 it is the largest facility in the Group. HCL’s new temperature controlled distribution centre features modern warehousing technology with ample storage for up to 30,000 pallets, as well as innovative security measures for controlled medicines, management of cold chain products and storage of dangerous goods. Additionally, the facility’s extensive roof infrastructure includes solar power and water recycling. The new HCL facility has been developed in consultation with international experts in supply chain logistics and in response to market demand. At nearly double the size of the previous facility, HCL’s new home allows for substantial growth in the business and capacity to better serve the needs of a larger range of principal partners. The distribution centre will also house specially designed Clinical Trials storage and Secondary Packaging areas. Healthcare Logistics’ facility, Pemulwuy, Sydney Stronger togetherour community The health and welfare of communities across New Zealand and Australia is central to everything we do at EBOS Group. We take our commitment to helping others seriously and we believe in going above and beyond to support people and communities in need. This past financial year, EBOS Group has contributed money and goods to 62 charitable organisations through a wide variety of initiatives. Members of the EBOS family are also active organisers and participants in fundraising events, contributing monetary donations and clocking up countless hours volunteering to help those in need. Together we can make a real difference to the lives of New Zealanders and Australians in need and use our position as a healthcare and animal care leader for good – because at EBOS Group we believe that Life Matters. 17 O v e r v i e w B u s i n e s s EBOS Match Funding EBOS staff show a strong connection to their community and causes. The company has seen this through consistent fundraising and charitable activities over the years. To recognise and support staff fundraising efforts, in February 2018, EBOS Group launched Match Funding. Match Funding is an initiative to support employees who organise or take part in charitable events or activities, by matching the donations made by EBOS employees. To align with EBOS’ mission and activities, eligible charities include registered health and animal welfare charities. 500 hygiene bags donated to MALPA Young Doctors Up to lives saved through blood donations 2,000 dental kits donated to Clontarf Foundation i F n a n c a s i l C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 18 Stronger together Masterpet helping young Aussies get back on track Masterpet is a firm believer in the role pets can play in helping people achieve their full potential. The bond we share with our pets is one of the purest examples of unconditional love and is built into our core values as a leading animal care company. As part of its commitment to living these values, Masterpet has partnered with Australian youth organisation BackTrack, to help fund its life- changing Paws Up program. BackTrack was founded by inspirational youth worker Bernie Shakeshaft in 2006 and delivers programs designed to help at-risk youth make meaningful connections, build job pathways and lead happier and healthier lives. Based at Bernie’s farm in the regional city of Armidale in northern New South Wales, The Paws Up program sees youth handlers partnered with dogs to teach them high jump and learn many other valuable life skills in the process. Paws Up has developed into a highly successful dog high jumping team that travels to shows and invitational events throughout New South Wales and interstate. Masterpet believes it’s important to give back to rural Australia, the home of our ingredients and where our food is made, and has donated $40,000 to give Paws Up dogs access to the range of Black Hawk real food and Masterpet pet necessities, plus an additional $10,000 towards veterinary costs for dogs involved in the program. Thanks to Masterpet, the Paws Up team is now also outfitted with official team wear and the dogs are healthier and happier than ever. BackTrack’s Paws Up team at DogCheck Day 2017 biographers with HPS staff HPS – a decade of empowering the terminally ill Everyone has a fascinating story to tell. For people who have been diagnosed with a terminal illness, telling their story can be a really meaningful and rewarding experience in their final months and weeks of life. Since 2008, with the support of HPS, The Mary Potter Foundation has been empowering people in palliative care to record their remarkable life stories for themselves and their families through the Calvary Biography Service. The Mary Potter Foundation supports the Mary Potter Hospice and Calvary Cancer Services located at Calvary Hospital, North Adelaide, South Australia. With the help of trained volunteers, the Biography Service records patients’ stories and presents the narrative in a bound booklet that patients can leave to their families and friends – the everlasting gift of a life story told. “One of the main aims of the biography service is to give positive affirmation of a life lived by a patient, a sense of who they are and to achieve a healing, peaceful state of being,” said Cathy Murphy, Executive Director of The Mary Potter Foundation. “It is what happens to a patient through the telling of the story that makes creating a biography such a valued process.” HPS has supported The Mary Potter Foundation’s Calvary Biography Service as the sole sponsor since its inception ten years ago. The company makes an annual donation to fund the purchase of equipment and booklet supplies and training courses for volunteers. As an Australian healthcare leader, HPS recognises the importance of supporting community initiatives such as the Calvary Biography Service. 19 E B O S G r o u p A n n u a l R e p o r t 2 0 1 8 O v e r v i e w B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y 100+ pallets of stock donated each year 2,500+ ice packs donated to Foodbank 3,293 cans collected and recycled at Onelink Yennora, NSW 1000+ warehouse lights changed to LED globes at Symbion, Greystanes, NSW Symbion supports Foodbank Waste management is becoming an increasingly pertinent issue in our society. As cities grow and the demand for goods increases, it is important we take steps to better manage and prevent unnecessary waste. Symbion takes this responsibility seriously and is committed to minimising preventable waste through quality stock management processes. While some stock write-offs are inevitable, as part of our commitment to reducing waste, we have partnered with Foodbank to donate damaged and discontinued over-the-counter (OTC) products from our South Australian, Victorian and Queensland sites. Foodbank is a not-for-profit organisation that provides essential food, grocery and health products to people in need. The organisation collects, sorts, stores and distributes donated food and other items through more than 2,600 community partners across Australia, and is supported by volunteers, fundraisers, state governments and philanthropic partners. Symbion donates over 100 pallets of goods to Foodbank each year, helping to support Australians who cannot afford food and basic supplies. Partnering with Foodbank extends Symbion’s support for the health and wellbeing of Australian communities and forms part of our commitment to minimise our environmental footprint. Symbion wants to ensure that quality products aren’t being wasted simply due to minor imperfections that render them unfit for sale when they can help make a real difference in the lives of Australians who need them. Foodbank SA CEO Greg Pattinson said that the support of organisations such as Symbion enables Foodbank to make a real impact in the lives of disadvantaged Australians. “Poverty doesn’t discriminate and Foodbank believes that all Australians should have access to fresh food and basic healthcare supplies, which is only possible with the support of generous partners such as Symbion.” 20 our board 3. 4. 1. 2. 5. Stronger togetherBrewery Company Limited in Tasmania and Managing Director of San Miguel Brewery Hong Kong Limited. In the public sector, he served as Chief of Staff to a Minister for Industry and Commerce in the Federal Government and as Chief Executive of the Tasmanian Government’s Economic Development Agency. He was formerly a director of Primelife Limited from 2001 to 2004. 5. Sarah Ottrey Independent Director BCOM Sarah Ottrey was appointed to the EBOS Group Limited Board in September 2006. She is a member of the Remuneration Committee. She is a director of Whitestone Cheese Limited, Skyline Enterprises Limited, Mount Cook Alpine Salmon Limited and Sarah Ottrey Marketing Limited. She is a past board member of the Public Trust and the Smiths City Group. Sarah has held senior marketing management positions with Unilever and Heineken. 1. Mark Waller Independent Chairman BCOM, FACA, FNZIM, CMinstD Mark Waller was appointed as Chairman of the Board in October 2015 and was formerly the Chief Executive and Managing Director of EBOS Group Limited from 1987 to 30 June 2014. He is a member of the Audit and Risk Committee and Chairman of the Remuneration Committee. He is also a director of EBOS Group Limited subsidiaries. Mark was the recipient of the Leadership Award at the INFINZ Industry Awards in May 2014 and the Chief Executive of the Year Award at the Deloitte 200 Awards in 2011. 2. Elizabeth Coutts Independent Director ONZM, BMS, FCA Elizabeth Coutts was appointed to the EBOS Group Limited Board in July 2003. She is Chairman of the Audit and Risk Committee and a member of the Remuneration Committee. She is Chair of Ports of Auckland Ltd, Urwin & Co Limited, Oceania Healthcare Ltd and Skellerup Holdings Limited and Director of the Yellow Pages group of companies and Tennis Auckland Region Incorporated and Member, Marsh New Zealand Advisory Board. She is President of the Institute of Directors Inc. Elizabeth is a former Chairman of Meritec Group, Industrial Research, and Life Pharmacy Limited, former director of Air New Zealand Limited, the Health Funding Authority and Sanford Limited, former Deputy Chairman of Public Trust, former board member of Sport NZ, former member of the Pharmaceutical Management Agency (Pharmac), former Commissioner for both the Commerce and Earthquake Commissions, former external monetary policy adviser to the Governor of the Reserve Bank of New Zealand and former Chief Executive of the Caxton Group of Companies. 3. Peter Williams Peter Williams was appointed to the EBOS Group Limited Board in July 2013. Peter has been an executive of The Zuellig Group since 2000. Peter is a director of Pharma Industries Limited, Green Cross Health Limited and CB Norwood Pty Ltd. He is also a director of Cambert, a company marketing health and personal care products in South East Asia. 4. Stuart McGregor BCOM, LLB, MBA Stuart McGregor was appointed to the EBOS Group Limited Board in July 2013. He is a member of the Audit and Risk Committee. Stuart was educated at the University of Melbourne and the London School of Business Administration, gaining degrees in Commerce and Law. He also completed a Masters of Business Administration at the University of Melbourne. Currently Stuart is Chairman of Donaco International Limited, an ASX listed company. He is also director of Symbion Pty Ltd and other EBOS Group subsidiaries. Over the last 30 years, Stuart has been Company Secretary of Carlton United Breweries, Managing Director of Cascade 21 O v e r v i e w B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 22 financial summary strategically realigned its focus on developing its own brands to drive greater margin and shareholder value. Our Animates business, in which we hold a 50% equity interest, continues to perform strongly with our share of NPAT increasing 13% on last year. Acquisitions and investments completed In October 2017, we acquired a 14.1% shareholding in MedAdvisor Ltd, an Australian digital medication management company. This is was a strategic investment and during the year, EBOS’ subsidiaries Zest and TerryWhite Group Limited have worked closely with MedAdvisor to formalise commercial agreements. In March 2018, we acquired one of New Zealand’s leading footcare consumer brands, Gran’s Remedy. The acquisition of this iconic New Zealand brand further strengthens our Consumer Products business. Gran’s Remedy is manufactured and sold in New Zealand and is exported worldwide to many international markets, including China and South Korea. EBOS Group has delivered another year of strong financial results, with record profit achieved. Group revenue was broadly in line with last year at $7.6 billion, negatively impacted by a $338 million reduction in hepatitis C medicine sales, offset by growth in our core businesses. During the year we fully transitioned HPS into the Group, further expanding our position in the Institutional Healthcare market. In October 2017, we acquired a strategic 14.1% shareholding in MedAdvisor Ltd, an Australian digital medication management company, and in March 2018, we acquired one of New Zealand’s leading footcare consumer brands, Gran’s Remedy. In FY17, the business incurred $7 million of transaction costs incurred on acquisitions. The business did not incur these costs in FY18. For clarity, the comparative results below are shown on both a reported and an underlying basis. Earnings Before Net Finance Costs, Tax, Depreciation and Amortisation (EBITDA) grew by $38 million to $272.4 million representing an increase of 16.2%. Underlying EBITDA growth for the year was 12.8%. Net Profit After Tax (NPAT) attributable to shareholders increased by 12.2% to $149.6 million. Underlying NPAT increased by $11 million or 7.9% due to solid growth in operating earnings. Healthcare The Healthcare segment generated a 13% increase in EBITDA on flat sales revenue to last year. The Australian business recorded a decline of 1.7% in revenue, although EBITDA grew 15.2%. The revenue decline was driven by a $338 million reduction in hepatitis C medicine sales. EBITDA growth was assisted by the full-year contribution of HPS which is performing solidly and in line with expectations. The New Zealand Healthcare operations again delivered a solid performance over the period with revenue increasing 6.2% and EBITDA increasing 4.6% with growth across all New Zealand business units. Animal Care The Animal Care segment recorded 11.3% EBITDA growth for the year as the business continues to benefit from excellent growth in our branded products, with annual Black Hawk sales in Australia up 23% on the prior year. Black Hawk continues to be one of Australia’s fastest growing premium pet food brands with a leading market position in the pet specialty retail channel and in July 2017, we successfully launched Black Hawk into the New Zealand market. Total Animal Care revenue declined for the year principally due to the business ceasing sales of low-margin wholesale products to a major Australian retail chain and discontinuing sales of other products upon the introduction of Black Hawk into New Zealand. The business has Stronger together23 Outlook EBOS Group has recorded a strong financial performance in FY18, and the Group is confident of further profit growth into FY19 on an underlying, constant currency basis. O v e r v e w i B u s i n e s s A performance update will be provided to shareholders at the Annual Meeting on 16 October 2018. i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y Currency and Change in Presentation Currency for 2019 The Group generates approximately 82% of its earnings in Australia and the lower average exchange rate (-2.7 cents to last year) used to translate our Australian dollar earnings during the year, positively impacted reported EBITDA by approximately $5.4 million. In order to reduce this volatility for future periods, the Board has decided to change the Group’s presentation currency from New Zealand dollars to Australian dollars, effective 1 July 2018. Dividends The directors are pleased to announce a final dividend of 35.5 cents per share, which takes full year dividends to 68.5 cents per share, an increase of 8.7% on the prior year. The record date for the final dividend will be 28 September 2018 and the dividend will be paid on 12 October 2018. The final dividend will again be imputed to 25% for New Zealand tax-resident shareholders and fully franked for Australian tax-resident shareholders. Operating Cash Flow and Capital Expenditure The Group achieved very strong operating cashflow (before capex) of $176.2 million, representing a $32.2 million increase on the prior year. Capital expenditure for the period was $63.2 million, with $24.6 million spent on the new highly automated distribution facility in Brisbane, Queensland, and $14.6 million on the new contract logistics facility in Sydney, New South Wales. The contract logistics facility became operational in June 2018, and the new Brisbane distribution facility is expected to commence operations in the second quarter of FY19. Net Debt and Return On Capital Employed The Group’s net debt was $471 million at 30 June 2018, an increase of $36.4 million on the prior year, with a net debt to EBITDA ratio of 1.74x, down from 1.79x as at June 2017. The increase in net debt for the year was primarily attributable to investments made, including the capital expenditure program. The business generated a return on capital employed of 15.8%. This is slightly lower than last year (16.4%), due to a higher investment in net working capital and the cost of the recently acquired HPS business. The Group’s strategy continues to include a strong focus on mergers and acquisitions for both its Healthcare and Animal Care businesses and recognises that the initial returns from acquisitions may not exceed the Group’s threshold ROCE target in the first year post acquisition. EBOS Group Annual Report 2018 24 financial report Contents DIRECTORS’ RESPONSIBILITY STATEMENT INDEPENDENT AUDITOR’S REPORT FINANCIAL STATEMENTS Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS INTRODUCING THIS REPORT SECTION A: EBOS PERFORMANCE A1. Revenue and expenses A2. Segment information A3. Taxation A4. Earnings per share SECTION B: KEY JUDGEMENTS MADE B1. Goodwill and intangibles B2. Acquisition information SECTION C: OPERATING ASSETS AND LIABILITIES USED BY EBOS C1. Trade and other receivables C2. Inventories C3. Trade and other payables SECTION D: CAPITAL ASSETS USED BY EBOS TO OPERATE OUR BUSINESS D1. Property, plant and equipment D2. Capital work in progress ADDITIONAL STOCK EXCHANGE INFORMATION 25 26 30 30 31 32 34 35 36 59 60 60 61 62 64 66 68 69 72 72 72 73 73 74 75 36 38 40 43 45 46 51 55 56 57 57 58 SECTION E: HOW WE FUND THE BUSINESS E1. Share capital E2. Dividends E3. Borrowings E4. Borrowing facilities maturity profile E5. Operating cash flows SECTION F: EBOS GROUP STRUCTURE F1. Subsidiaries F2. Investment in associates SECTION G: HOW WE MANAGE RISK G1. Financial risk management G2. Financial instruments SECTION H: OTHER DISCLOSURES H1. Contingent liabilities H2. Commitments for expenditure H3. Subsequent events H4. Related party disclosures H5. Remuneration of auditors H6. Changes in financial reporting standards Key Key judgements and other judgements made Accounting policy Subsequent event Explanatory note Risks Stronger together Directors’ Responsibility Statement The directors of EBOS Group Limited are pleased to present to shareholders the financial statements for EBOS Group Limited and its controlled entities (together the ‘Group’) for the year to 30 June 2018. The directors are responsible for presenting financial statements in accordance with New Zealand law and generally accepted accounting practice, which give a true and fair view of the financial position of the Group as at 30 June 2018 and the results of their operations and cash flows for the year ended on that date. The directors consider the financial statements of the Group have been prepared using accounting policies which have been consistently applied and supported by reasonable judgements and estimates and that all relevant financial reporting and accounting standards have been followed. The directors believe that proper accounting records have been kept which enable with reasonable accuracy, the determination of the financial position of the Group and facilitate compliance of the financial statements with the Financial Markets Conduct Act 2013. The directors consider that they have taken adequate steps to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Internal control procedures are also considered to be sufficient to provide reasonable assurance as to the integrity and reliability of the financial statements. The financial statements are signed on behalf of the Board by: MARK WALLER Chairman ELIZABETH COUTTS Director 22 August 2018 25 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 26 independent auditor’s report to the shareholders Report on the Audit of the Consolidated Financial Statements Opinion Basis for Opinion Audit Materiality We have audited the consolidated financial statements of EBOS Group Limited and its subsidiaries (the ‘Group’), which comprise the consolidated balance sheet as at 30 June 2018, and the consolidated income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements, on pages 30 to 74, present fairly, in all material respects, the consolidated financial position of the Group as at 30 June 2018, and its consolidated financial performance and cash flows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting Standards (‘NZ IFRS’) and International Financial Reporting Standards (‘IFRS’). We conducted our audit in accordance with International Standards on Auditing (‘ISAs’) and International Standards on Auditing (New Zealand) (‘ISAs (NZ)’). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants, and we have fulfilled our other ethical responsibilities in accordance with these requirements. Other than in our capacity as auditor and the provision of advisory services and taxation services, we have no relationship with or interests in the Company or any of its subsidiaries. These services have not impaired our independence as auditor of the Company and Group. We consider materiality primarily in terms of the magnitude of misstatement in the financial statements of the Group that in our judgement would make it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced (the ‘quantitative’ materiality). In addition, we also assess whether other matters that come to our attention during the audit would in our judgement change or influence the decisions of such a person (the ‘qualitative’ materiality). We use materiality both in planning the scope of our audit work and in evaluating the results of our work. We determined materiality for the Group financial statements as a whole to be $10.5m. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Stronger together27 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y Key audit matter How our audit addressed the key audit matter Goodwill and Indefinite Life Intangible Asset Impairment Assessment The Group has $1,021m of goodwill and $133m of indefinite life intangible assets, including brands and a franchise network, on the balance sheet at 30 June 2018 as detailed in note B1 to the financial statements. The carrying values of goodwill and indefinite life intangible assets are dependent on the future cash flows expected to be generated by the underlying businesses, and there is a risk if these cash flows do not meet the Group’s expectations that the assets may be impaired. The Group tests goodwill and indefinite life intangible assets at least annually by determining the recoverable amount (the higher of value-in-use or fair value less costs to sell) of the individual assets where possible, or otherwise the cash- generating units to which the assets belong and comparing the recoverable amounts of the assets to their carrying values. The impairment assessment models prepared by the Group contain a number of significant assumptions. Changes in these assumptions might lead to a change in the carrying value of indefinite life intangible assets and goodwill. The Group has assessed the recoverable amount of brands based on fair value using the relief from royalty method and the recoverable amount of franchise assets based on fair value using the multiple-period excess earnings method. The key assumptions applied in the above models are: • annual revenue and expense growth rates for the 5 year forecast period; • pre-tax discount rates; • royalty rates; We considered whether the Group’s methodology for assessing impairment is compliant with NZ IAS 36: Impairment of Assets. We focused on testing and challenging the suitability of the models and reasonableness of the assumptions used by the Group in conducting their impairment reviews. Our procedures included: • agreeing a sample of future cash flows to Board approved forecasts; • challenging the reliability of the Group’s revenue and expense growth rates by comparing the forecasts underlying the growth rates to historical forecasts and actual results of the underlying businesses (where applicable); and • assessing the reasonableness of key assumptions and changes to them from previous years. We used our internal valuation specialists to assist with evaluating the models and challenging the Group’s key assumptions. The procedures of the specialist included: • evaluating the appropriateness of the valuation methodology; • testing the mathematical integrity of the models; • evaluating the Group’s determination of the pre-tax discount rates and royalty rates used in the models through consideration of the relevant risk factors for each CGU, the cost of capital for the Group, and market data on comparable businesses; and • comparing the terminal growth rates to market data for • contributory asset charge (franchise network assets); and the industry sectors. We evaluated the sensitivity analysis performed by management to consider the extent to which a change in one or more of the key assumptions could give rise to impairment in the goodwill and indefinite life intangible assets. • terminal growth rates. The Group has assessed the recoverable amount of each cash-generating unit (“CGU”) or group of CGU’s to which goodwill has been allocated based on value-in-use models. The key assumptions applied in the value-in-use models are: • annual revenue and expense growth rates for the 5 year forecast period; • pre-tax discount rates; and • terminal growth rates. We have included the impairment assessments of goodwill and indefinite life intangible assets as a key audit matter due to the significance of the balances to the financial statements and the level of judgement applied by the Group in determining the key assumptions used to determine the recoverable amounts. EBOS Group Annual Report 2018 28 How our audit addressed the key audit matter Our procedures included: • utilising industry knowledge to assess the Group’s identification of intangible assets and consider what is represented by residual goodwill; • challenging the rationale for allocation of goodwill to CGU’s or group’s of CGU’s; • comparing the forecast sales to Board approved forecasts; and • challenging the reliability of the revenue and expense growth rates by comparing the forecasts underlying the growth rates to historical forecasts and actual results of the underlying business. We used our internal valuation specialists to assess the appropriateness of the nature and valuation of the intangible assets identified by the Group. This assessment included: • evaluating the appropriateness of the valuation methodology and testing the mathematical integrity of the model; • evaluating the pre-tax discount rate applied in the model through comparison to the cost of capital for the business and to external market data; and • comparing the Group’s assumed royalty rate and contributory asset charge to market data for similar intangible assets. Key audit matter Acquisition Accounting New Zealand accounting standards require the purchaser to identify the assets and liabilities acquired in a business combination, including identifiable intangible assets, and to measure them at fair value at the date of acquisition. Goodwill arising (excess of consideration paid over the fair value of the assets and liabilities acquired) is required to be allocated to the cash-generating unit (“CGU”) or groups of CGU’s benefiting from the acquisition. As detailed in note B2, EBOS Group acquired 100% of Alchemy Holdings Pty Ltd (“Alchemy”) for a total consideration of NZD $163m in June 2017, and due to the timing of the acquisition the acquisition balance sheet was determined on a provisional basis as at 30 June 2017. During the current year the Group finalised the acquisition accounting of Alchemy. The finalisation of the acquisition accounting resulted in the recognition of indefinite life intangible assets, comprising brands of $9.5m, and finite life intangible assets, comprising customer contracts of $8.8m, and $127.0m of goodwill. The Alchemy brand has been valued using the relief from royalty method. The key assumptions applied in the model were: • forecast sales volumes; • pre-tax discount rate; • royalty rate; and • terminal growth rate. The customer relationships have been valued using the multiple-period excess earnings method. The key assumptions applied in the model were: • forecast sales; • pre-tax discount rate; • contract useful lives; and • contributory asset charge. We included the identification and valuation of intangible assets and the allocation of goodwill to CGU’s for the Alchemy acquisition as a key audit matter because the Group’s acquisitions are considered a key area of interest for investors and because of the size of this acquisition and the level of intangible assets. There is also significant judgement involved in identifying the intangible assets acquired and determining the appropriate methodology and key assumptions to calculate their fair value. Stronger together29 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y Other Information The directors are responsible on behalf of the Group for the other information. The other information comprises the information in the Annual Report that accompanies the consolidated financial statements and the audit report. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. Our responsibility is to read the other information and consider whether it is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If so, we are required to report that fact. We have nothing to report in this regard. Board of Directors’ Responsibilities for the Consolidated Financial Statements The directors are responsible on behalf of the Group for the preparation and fair presentation of the consolidated financial statements in accordance with NZ IFRS and IFRS, and for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements In preparing the consolidated financial statements, the directors are responsible on behalf of the Group for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and ISAs (NZ) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. A further description of our responsibilities for the audit of the consolidated financial statements is located on the External Reporting Board’s website at: https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit- report-1 This description forms part of our auditor’s report. Restriction on Use This report is made solely to the Company’s shareholders, as a body. Our audit has been undertaken so that we might state to the Company’s shareholders those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company’s shareholders as a body, for our audit work, for this report, or for the opinions we have formed. PAUL BRYDEN, PARTNER FOR DELOITTE LIMITED Christchurch, New Zealand 22 August 2018 EBOS Group Annual Report 2018 30 financial statements Consolidated Income Statement The Consolidated Income Statement presents income earned and expenditure incurred by EBOS Group during the financial year in determining profit. For the financial year ended 30 June 2018 Revenue Income from associates Acquisition costs Profit before depreciation, amortisation, net finance costs and tax expense (EBITDA) Depreciation Amortisation Profit before net finance costs and tax expense Finance income Finance costs Profit before tax expense Tax expense Profit for the year Profit for the year attributable to: Owners of the Company Non-controlling interests Earnings per share: Basic (cents per share) Diluted (cents per share) Notes A1(a) F2 A1(b) A1(b) A1(b) A3 A4 A4 2018 $’000 2017 $’000 7,609,488 7,625,854 4,501 - 272,383 (17,651) (17,084) 237,648 1,780 (24,501) 214,927 (63,207) 151,720 149,564 2,156 151,720 98.5 98.5 4,062 (7,021) 234,427 (13,616) (12,218) 208,593 2,079 (21,104) 189,568 (56,722) 132,846 133,279 (433) 132,846 87.8 87.8 Notes to the financial statements are included on pages 36 to 74. Stronger together 31 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y Consolidated Statement of Comprehensive Income The Consolidated Statement of Comprehensive Income presents profit for the year, plus gains and losses that are not recognised in the Consolidated Income Statement and instead are required to be taken directly to reserves within equity. For the financial year ended 30 June 2018 Profit for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss: Net fair value movement on available-for-sale assets Cashflow hedge gains Related income tax Translation of foreign operations Total comprehensive income net of tax Total comprehensive income for the year is attributable to: Owners of the Company Non-controlling interests 2018 $’000 2017 $’000 151,720 132,846 (1,552) 2,242 (640) 10,123 161,893 159,737 2,156 161,893 - 5,675 (1,653) 1,947 138,815 139,248 (433) 138,815 Notes to the financial statements are included on pages 36 to 74. EBOS Group Annual Report 2018 32 Consolidated Balance Sheet The Consolidated Balance Sheet presents a summary of the EBOS Group assets, liabilities and equity at the end of the financial year. As at 30 June 2018 Notes Current assets Cash and cash equivalents Trade and other receivables Prepayments Inventories Current tax refundable Other financial assets - derivatives Total current assets Non-current assets Property, plant and equipment Capital work in progress Prepayments Deferred tax assets Goodwill Indefinite life intangibles Finite life intangibles Investment in associates Other financial assets Total non-current assets Total assets Current liabilities Trade and other payables Finance leases Bank loans Current tax payable Employee benefits Other financial liabilities - derivatives Total current liabilities C1 C2 G2 D1 D2 A3(b) B1(a) B1(b) B1(d) F2 C3 E3 G2 Notes to the financial statements are included on pages 36 to 74. 2018 $’000 2017 $’000 163,256 998,760 9,854 582,877 65 1,423 162,181 1,041,849 7,834 572,001 168 19 1,756,235 1,784,052 122,186 63,540 - 53,030 1,021,170 132,589 64,136 40,315 10,097 1,507,063 3,263,298 115,876 22,923 9 49,263 1,000,050 115,940 80,084 36,455 922 1,421,522 3,205,574 1,274,624 1,327,757 25 160,293 12,452 44,362 2,157 72 155,857 14,209 40,971 2,995 1,493,913 1,541,861 Stronger together33 2018 $’000 2017 $’000 473,988 440,847 O v e r v e w i B u s i n e s s 14,607 58,015 82 6,475 553,167 2,047,080 1,216,218 888,513 2,318 (24,691) 326,800 (1,552) 1,571 1,192,959 23,259 1,216,218 13,837 50,783 103 5,745 511,315 2,053,176 1,152,398 888,513 490 (34,814) 277,912 - (31) 1,132,070 20,328 1,152,398 i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y Consolidated Balance Sheet (continued) Notes E3 C3 A3(b) E1 As at 30 June 2018 Non-current liabilities Bank loans Trade and other payables Deferred tax liabilities Finance leases Employee benefits Total non-current liabilities Total liabilities Net assets Equity Share capital Share based payments reserve Foreign currency translation reserve Retained earnings Available-for-sale revaluation reserve Cashflow hedge reserve Equity attributable to owners of the Company Non-controlling interests Total equity Notes to the financial statements are included on pages 36 to 74. EBOS Group Annual Report 2018 34 Consolidated Statement of Changes in Equity The Consolidated Statement of Changes in Equity presents the components of capital and reserves of EBOS Group and explains the movements in each component during the financial year. For the financial year ended June 2018 Notes Share capital $’000 Share based payments $’000 Foreign currency translation reserve $’000 Available -for-sale revaluation reserve $’000 Retained earnings $’000 Cashflow hedge reserve $’000 Non- controlling interests $’000 Total $’000 Balance at 1 July 2016 Profit for the year Other comprehensive income for the year, net of tax Payment of dividends E2 Arising on acquisition of subsidiaries Share based payments Effect of exchange rate fluctuations 888,513 - - - - - - - - - - - 490 - (36,761) 239,578 - 133,279 1,947 - - - - - (94,945) - - - Balance at 30 June 2017 888,513 490 (34,814) 277,912 - - - - - - - - - - (4,053) - 1,087,277 - (433) 132,846 4,022 - - - - - - 5,969 (94,945) 20,936 20,936 - (175) 490 (175) (31) 20,328 1,152,398 (31) 20,328 1,152,398 - 2,156 151,720 888,513 490 (34,814) 277,912 - 149,564 Balance at 1 July 2017 Profit for the year Other comprehensive income for the year, net of tax Payment of dividends E2 Share based payments Effect of exchange rate fluctuations - - - - - - - - 1,828 - 10,123 - (1,552) 1,602 - - - (100,676) - - - - - - - - - - - 775 10,173 (100,676) 1,828 775 Balance at 30 June 2018 888,513 2,318 (24,691) 326,800 (1,552) 1,571 23,259 1,216,218 Notes to the financial statements are included on pages 36 to 74. Stronger together35 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y Consolidated Cash Flow Statement The Consolidated Cash Flow Statement presents the cash generated and used by EBOS Group during the financial year. For the financial year ended 30 June 2018 Notes Cash flows from operating activities Receipts from customers Interest received Dividends received from associates Payments to suppliers and employees Taxes paid Interest paid Net cash inflow from operating activities Cash flows from investing activities Sale of property, plant and equipment Purchase of property, plant and equipment Payments for capital work in progress Payments for intangible assets Acquisition of subsidiaries Investment in other financial assets Net cash (outflow) from investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Dividends paid to equity holders of parent Net cash (outflow)/inflow from financing activities Net (decrease)/increase in cash held Effect of exchange rate fluctuations on cash held Net cash and cash equivalents at the beginning of the year Net cash and cash equivalents at the end of the year F2 E5 B2 E5 E5 E2 2018 $’000 2017 $’000 7,684,830 7,922,392 1,780 932 2,079 913 (7,421,615) (7,694,957) (65,255) (24,501) 176,171 187 (17,119) (43,516) (2,709) (22,816) (10,923) (96,896) 26,483 (10,000) (100,676) (84,193) (4,918) 5,993 162,181 163,256 (65,380) (21,104) 143,943 150 (13,507) (22,923) (1,164) (183,228) (879) (221,551) 224,456 (10,357) (94,945) 119,154 41,546 384 120,251 162,181 Notes to the financial statements are included on pages 36 to 74. EBOS Group Annual Report 2018 36 Notes to the consolidated financial statements For the Financial Year Ended 30 June 2018 Introducing this report The notes to the financial statements include information that is considered relevant and material to assist the reader in the understanding of the financial performance and financial position of EBOS Group. Information is considered relevant and material if: • the amount is significant because of its size and nature; • it is important to assist the readers understanding of the results of EBOS; • it helps to explain to the reader the changes in the business and/or operations of EBOS; or • it relates to an aspect of operations that is important to the future performance of EBOS. EBOS Group Limited (the Company) is a profit-oriented company incorporated in New Zealand, registered under the Companies Act 1993 and dual listed on both the New Zealand Stock Exchange and the Australian Securities Exchange. Basis of preparation The financial statements have been prepared in accordance with Generally Accepted Accounting Practice (GAAP). They comply with New Zealand Equivalents to International Financial Reporting Standards and other applicable reporting standards as appropriate for profit oriented entities. The financial statements comply with International Financial Reporting Standards. EBOS is a Tier 1 for-profit entity in terms of the New Zealand External Reporting Board Standard A1. The Company is a FMC reporting entity for the purposes of the Financial Markets Conduct Act 2013, and its financial statements comply with this Act. The financial statements have been prepared on the basis of historical cost, except for the revaluation of certain financial instruments. Cost is based on the fair value of the consideration given in exchange for assets. The information is presented in thousands of New Zealand dollars, unless otherwise stated. Critical accounting estimates and judgements In the process of applying the Group’s accounting policies and the application of accounting standards, EBOS has made a number of judgements and estimates. The estimates and underlying assumptions are based on historic experience and various other factors that are considered to be appropriate under the circumstances. Therefore, there is an inherent risk that actual results may subsequently differ from the estimates made. These estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgements and estimates that are considered material to understanding the performance of EBOS are found in the relevant notes to the financial statements. Key judgements have been made in regard to assumptions that support the impairment assessment for goodwill and indefinite life intangibles (note B1) and the identification and valuation of intangibles recognised on acquisitions (note B2). Basis of consolidation The EBOS Group financial statements comprise the financial statements of EBOS Group Limited, the parent company, combined with all the entities that comprise the Group, being its subsidiaries (listed in note F1) and its share of associate investments (listed in note F2). The financial statements of the members of the Group, including associates, are prepared for the same reporting period as the parent company, using consistent accounting policies. Subsidiaries are consolidated on the date on which control is obtained to the date on which control is lost. The results of subsidiaries acquired or disposed of during the year are included in the Consolidated Income Statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. All significant inter-company transactions and balances are eliminated on consolidation. Stronger togetherINTRODUCING THIS REPORT continued Foreign currency Other accounting policies Other accounting policies that are relevant to the reader’s understanding of the financial statements are included throughout the following notes to the financial statements. Functional currency The financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which that entity operates (the functional currency). Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rate on the date of the transaction. At each balance sheet date, monetary assets and liabilities that are denominated in foreign currencies are translated at the rates prevailing on the balance sheet date. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences arising on the settlement of monetary items, and on the translation of monetary items, are included in the Consolidated Income Statement for the period. Foreign operations On consolidation, the assets and liabilities of EBOS’ overseas operations are translated at the exchange rate at the reporting date. Income and expense items are translated at the average rates for the period. Exchange differences arising are recognised in the foreign currency translation reserve (in equity), and recognised in profit or loss on disposal of the foreign operation. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the exchange rate at the reporting date. 37 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 38 Section A: EBOS Performance SECTION OVERVIEW This section explains the financial performance of EBOS by: a) displaying additional information about individual items in the Consolidated Income Statement; b) presenting further analysis of EBOS’ operating segments by revenue and expenses; and c) providing an analysis of the components of EBOS’ tax balances for the year and the current imputation credit account balance. A1. REVENUE AND EXPENSES (a) Revenue Revenue consisted of the following items: Revenue from the sale of goods Revenue from the rendering of services 2018 $’000 7,379,765 229,723 7,609,488 2017 $’000 7,471,918 153,936 7,625,854 RECOGNITION AND MEASUREMENT Revenue is measured at the fair value of the consideration received or receivable and represents amounts net of any returns and discounts. Revenue is recognised when it is considered probable that the economic benefits of the transaction will be received by EBOS. The following specific recognition criteria must be met before revenue is recognised: Sale of Goods Rendering of Services Revenue from the sale of goods is recognised when significant risks and rewards of owning the goods are transferred to the buyer. Revenue from services is recognised on the basis of the value of services performed to date as a percentage of the total services to be performed. Stronger togetherA1. REVENUE AND EXPENSES continued (b) Expenses Profit before tax expense has been arrived at after charging the following expenses by nature: Cost of sales Write-down of inventory Impairment loss on trade and other receivables Depreciation of property, plant and equipment Amortisation of finite life intangibles Operating lease rental expenses Donations Employee benefit expense Defined contribution plan expense Acquisition costs Share based payments Other expenses Total expenses 2018 $’000 (6,748,844) (4,036) (1,901) (17,651) (17,084) (43,203) (265) (297,028) (16,299) - (840) (229,190) (7,376,341) 2017 $’000 (6,872,190) (8,387) (2,758) (13,616) (12,218) (35,125) (49) (245,813) (14,653) (7,021) (490) (209,003) (7,421,323) RECOGNITION AND MEASUREMENT Impairment EBOS reviews the recoverable amount of its tangible and intangible assets, including goodwill, at each balance date. If the carrying value of an asset exceeds the recoverable amount, an impairment expense is recognised in the income statement. Tangible assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). The recoverable amount is the higher of an asset’s fair value less costs to sell and the present value of future cash flows expected to be generated by the asset (value in use). Depreciation and amortisation Depreciation is provided for on a straight-line basis on all property, plant and equipment other than freehold land, at depreciation rates calculated to allocate the assets’ cost less estimated residual value, over their estimated useful lives. Refer to note D1 for the useful lives used in the calculation of depreciation. Amortisation is charged on a straight-line basis over the estimated useful life of finite life intangibles. Refer to note B1 for the useful lives used in the calculation of amortisation. Operating lease expenses EBOS leases certain land, buildings, plant and equipment. Operating leases are where the lessor rather than EBOS have effectively retained the substantial risk and benefit of ownership of a leased item. Operating lease payments are included in the determination of profit or loss in equal instalments over the period of the lease. Lease incentives received are recognised on a straight-line basis over the lease period. 39 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 40 A1. REVENUE AND EXPENSES continued Employee expenses Provision is made for benefits owing to employees in respect of wages and salaries, annual leave, long service leave and employee incentives for services rendered. Provisions are recognised when it is probable they will be settled and can be measured reliably. They are carried at the remuneration rate expected to apply at the time of settlement and discounted to the present value of the expected payment to the employee at balance date. Net finance costs Finance costs include bank interest and amortisation of costs incurred in connection with borrowing facilities. Finance costs are expensed immediately as incurred, using the effective interest method, unless they relate to acquisition and development of qualifying assets, in which case they are capitalised. Interest income is recognised on a time-proportionate basis using the effective interest method. A2. SEGMENT INFORMATION (a) Reportable segments EBOS GROUP LIMITED HEALTHCARE SEGMENT ANIMAL CARE SEGMENT CORPORATE SEGMENT Sale of healthcare products in a range of sectors, own brands, retail healthcare, pharmacy services and wholesale activities. Sale of animal care products in a range of sectors, own brands, retail and wholesale activities. Includes net funding costs and central administration expenses that have not been allocated to the healthcare or animal care segments. EBOS’ major products and services are the same as the reportable segments, i.e. Healthcare and Animal Care, with no major products and services allocated to corporate. (b) Segment revenues and results The following is an analysis of EBOS’ revenue and results by reportable segment: Revenue from external customers ($’000) 2018 Animal Care $411,932 5% 2017 Animal Care $423,166 6% Healthcare Animal Care Healthcare $7,197,556 95% Healthcare $7,202,688 94% Stronger togetherA2. SEGMENT INFORMATION continued (b) Segment revenues and results (continued) EBITDA ($’000) $235,867 $208,782 Healthcare $49,761 $44,712 Animal Care 2018 2017 ($13,245) ($19,067) Corporate Net profit/(loss) after tax for the year attributable to owners of the company ($’000) $142,483 $133,172 Healthcare Associate information: $33,226 $29,953 Animal Care 2018 2017 ($26,145) ($29,846) Corporate Included in the segment results above is income from associates: Animal Care Healthcare Total income from associates 2018 $’000 3,554 947 4,501 2017 $’000 3,141 921 4,062 41 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 42 A2. SEGMENT INFORMATION continued (b) Segment revenues and results (continued) The following is an analysis of other financial information by reportable segment: Healthcare Animal Care Corporate 2018 $’000 2017 $’000 2018 $’000 2017 $’000 2018 $’000 2017 $’000 Depreciation (16,687) (12,562) (964) (1,054) Amortisation of finite life intangibles (14,454) (9,719) (2,630) (2,499) - - - - Net finance costs - - - - (22,721) (19,025) Tax (expense)/benefit (60,087) (53,762) (12,941) (11,206) 9,821 8,246 (c) Geographical information EBOS operates in two principal geographical areas: New Zealand and Australia. EBOS’ revenue from external customers by geographical location and information about its segment assets (non-current assets), excluding financial instruments and deferred tax assets, are detailed below: Australia New Zealand Group 2018 $’000 2017 $’000 2018 $’000 2017 $’000 2018 $’000 2017 $’000 Continuing operations Revenue from external customers 6,022,031 6,116,760 1,587,457 1,509,094 7,609,488 7,625,854 Non-current assets 1,107,893 1,048,967 305,825 286,837 1,413,718 1,335,804 (d) Information about major customers No revenues from transactions that are with a single customer amount to 10% or more of EBOS’ revenues (2017: Nil). RECOGNITION AND MEASUREMENT The reportable segments of EBOS have been identified in accordance with NZ IFRS 8 ‘Operating Segments’. The Group’s operating segments are identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The accounting policies of EBOS have been consistently applied to the operating segments. Profit before depreciation, amortisation, net finance costs and tax expense (EBITDA) is the measure reported to the chief operating decision-maker for the purposes of resource allocation and assessment of segment performance. Assets are not allocated to operating segments as they are not reported to the chief operating decision-maker at a segment level. Stronger togetherA3. TAXATION (a) Tax expense recognised in Consolidated Income Statement Tax expense comprises: Current tax expense/(credit): Current year Adjustments for prior years Deferred tax (credit): Adjustments for prior years Total tax expense 2018 $’000 2017 $’000 64,115 (1,897) 62,218 (646) 1,635 989 63,207 59,303 (119) 59,184 (2,832) 370 (2,462) 56,722 The prima facie income tax expense on pre-tax accounting profit from operations reconciles to the income tax expense in the financial statements as follows: Profit before tax expense 214,927 189,568 Tax expense calculated at 28% (2017: 28%) Non-deductible expenses Effect of different tax rates of subsidiaries operating in overseas jurisdictions (Over)/under provision of tax expense in prior years Other adjustments Total tax expense 60,180 1,445 3,555 (262) (1,711) 63,207 53,079 1,762 2,503 251 (873) 56,722 The tax rates used are principally the corporate tax rates of 28% (2017: 28%) payable by New Zealand and 30% (2017: 30%) payable by Australian corporate entities on taxable profits under tax law in each jurisdiction. 43 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 44 A3. TAXATION continued (b) Deferred tax assets and liabilities Taxable and deductible temporary differences arise from the following: Gross deferred tax liabilities: Property, plant and equipment Provisions Other financial assets – derivatives Intangible assets Gross deferred tax assets: Property, plant and equipment Provisions Other financial liabilities – derivatives Intangible assets Tax losses carried forward (c) Imputation credit account balances 2018 $’000 (3,505) (201) (166) (54,143) (58,015) 9,460 37,778 18 5,408 366 53,030 2017 $’000 (1,437) (221) (28) (49,097) (50,783) 9,541 35,159 802 3,499 262 49,263 Imputation credit account balances Imputation credits available directly and indirectly to shareholders of the parent company: 2018 $’000 2017 $’000 7,610 5,885 Imputation credits allow EBOS to pass on to its shareholders the benefit of the New Zealand income tax it has paid by attaching imputation credits to the dividends it distributes, reducing shareholders’ net tax obligations. RECOGNITION AND MEASUREMENT Income tax expense is the income tax assessed on taxable profit for the year. Taxable profit differs from profit before tax reported in the Consolidated Income Statement as it excludes items of income and expense that are taxable or deductible in other years (temporary differences) and also excludes items that will never be taxable or deductible (permanent differences). Income tax expense components are current income tax and deferred tax. Stronger together A3. TAXATION continued Deferred tax is income tax that is expected to be payable or recoverable in the future as a result of the unwinding of temporary differences. These arise from differences in the recognition of assets and liabilities for financial reporting and for the filing of income tax returns. Deferred tax is recognised on all temporary differences, other than those arising: • from goodwill; • from the initial recognition of assets and liabilities in a transaction (other than in a business combination) that affects neither the accounting nor taxable profit or loss; and • investments in associates and subsidiaries where EBOS is able to control the reversal of the temporary differences and such differences are not expected to reverse in the foreseeable future. Deferred tax is calculated at the tax rates that are expected to apply to the year when a liability is settled or an asset realised, based on tax rates and tax laws that have been enacted or substantively enacted at balance date. A deferred tax asset is recognised to the extent it is probable that future taxable profits will be available to use the asset. This is reviewed at each balance date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available in the future to utilise the deferred tax asset. A4. EARNINGS PER SHARE Basic earnings per share Diluted earnings per share 2018 2017 2018 2017 Earnings used in the calculation of total earnings per share ($’000) 149,564 133,279 149,564 133,279 Weighted average number of ordinary shares for the purposes of calculating earnings per share No. (000’s) 151,914 151,768 151,914 151,768 Earnings per share Cents 98.5 87.8 98.5 87.8 Basic earnings per share is calculated by dividing the profit attributable to the shareholders of the company by the weighted average number of ordinary shares on issue during the year excluding shares held as treasury stock. Diluted earnings per share assumes conversion of all diluted potential ordinary shares in determining the denominator. 45 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 46 Section B: Key judgements made SECTION OVERVIEW This section identifies the balances and transactions to which key judgements have been made by EBOS in the preparation of these financial statements. Key judgements have been made with regard to the estimates for future cash flows for goodwill impairment assessment purposes, and the identification of intangible assets and recognition of goodwill for business acquisitions. B1. GOODWILL AND INTANGIBLES (a) Goodwill Gross carrying amount Balance at beginning of financial year Recognised from business acquisition during the year (note B2) Adjustment due to finalisation of acquisition in the prior year (note B2) Effects of foreign currency exchange differences 2018 $’000 1,000,050 16,062 (3,242) 8,300 2017 $’000 829,163 171,107 - (220) Net book value 1,021,170 1,000,050 RECOGNITION AND MEASUREMENT Goodwill arising on the acquisition of a subsidiary is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously-held equity interest (if any) in the acquiree over the fair value of the identifiable net assets recognised. Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of EBOS’ cash-generating units or groups of cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. The recoverable amount is the higher of fair value less cost to sell and value in use. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is first allocated to reduce the carrying amount of any goodwill and then to the other assets of the cash-generating unit on a pro-rata basis. Any impairment loss on goodwill is recognised immediately in profit or loss and is not subsequently reversed. Stronger togetherB1. GOODWILL AND INTANGIBLES continued (b) Indefinite life intangibles TerryWhite Chemmart Brands $’000 Other Healthcare Brands $’000 Franchise Network $’000 Animal Care Brands $’000 Healthcare Trademarks $’000 Total $’000 Gross carrying amount Balance at 1 July 2016 25,298 22,247 - 26,362 17,240 91,147 Acquisitions through business combinations Effects of foreign currency exchange differences 13,034 109 - 8 11,613 (92) - 121 - - 24,647 146 Balance at 30 June 2017 38,441 22,255 11,521 26,483 17,240 115,940 Acquisitions through business combinations Effects of foreign currency exchange differences - 13,777 1,358 388 - 412 - 714 - - 13,777 2,872 Balance at 30 June 2018 39,799 36,420 11,933 27,197 17,240 132,589 RECOGNITION AND MEASUREMENT Indefinite life intangible assets represent purchased brands, trademarks and a franchise network asset that are initially recognised at fair value. These intangible assets are tested annually for impairment on the same basis as for goodwill. JUDGEMENT: USEFUL LIVES OF INDEFINITE LIFE INTANGIBLE ASSETS The directors have assessed these brands, trademarks and a franchise network asset as having an indefinite useful life. In coming to this conclusion the expected expansion of these assets across other products and markets, the typical product life cycle of these assets, the stability of the industry in which the assets are operating, the level of maintenance expenditure required and the period of legal control over these assets has been considered. 47 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 48 B1. GOODWILL AND INTANGIBLES continued (c) Cash-generating units The carrying amount of goodwill and indefinite life intangibles allocated to cash-generating units or groups of cash-generating units is as follows: Healthcare Australia1 Healthcare New Zealand2 Healthcare: Pharmacy/Logistics NZ3 Healthcare: Terry White Group 4 Animal Care5 Goodwill Indefinite life intangibles 2018 $’000 2017 $’000 2018 $’000 2017 $’000 651,148 643,267 13,781 3,865 73,197 65,683 22,640 18,390 95,043 95,043 38,621 34,367 163,161 161,690 17,240 51,732 27,196 17,240 49,962 26,483 1,021,170 1,000,050 132,589 115,940 1 Australian Consumer, Hospital, Pharmacy, Primary Healthcare sectors. 2 New Zealand Consumer, Hospital, Primary Healthcare, Aged Care and International Product Supplies. 3 New Zealand Pharmacy Wholesaler and Logistic Services. 4 Australia - Terry White Group. 5 New Zealand and Australia Animal Care. For the year ended 30 June 2018, the directors have determined that there is no impairment of any of the cash-generating units containing goodwill, brands, trademarks and franchise network asset (2017: Nil). KEY JUDGEMENT: IMPAIRMENT ASSESSMENT ASSUMPTION The recoverable amounts of cash-generating units is determined on the basis of value in use calculations. The recoverable amount calculations are most sensitive to changes in the following assumptions: Revenue Estimated by management based on revenue achieved in the period immediately before the start of the assessment period and adjusted each year for any anticipated growth. Operating costs Estimated by management based on current trends at the start of the assessment period and adjusted for expected changes in the business or sector in which the business operates. Discount rates Estimated by management based on a current market assessment of the time value of money, cost of capital and risks specific to the asset to which the cash flows generated by that asset are being assessed. Stronger togetherB1. GOODWILL AND INTANGIBLES continued KEY ESTIMATE: VALUE IN USE CALCULATION The value in use calculation uses cash flow projections based on financial forecasts approved by the Board and management covering a five year period, including terminal value, and management’s past experience. The following estimates were used in the value in use calculation: Goodwill Annual revenue growth rates Allowance for increases in expenses Pre-tax discount rates Terminal growth rate 2018 $’000 2017 $’000 3.5% - 7.1% 3.0% - 6.7% 1.6% - 5.0% 2.7% - 5.0% 12.3% - 14.1% 12.3% - 14.3% 2.5% 2.5% KEY ESTIMATE: VALUE IN USE CALCULATION The in use value of indefinite life intangibles has been calculated using the relief from royalty method. The following estimates were used: Indefinite life intangibles Annual revenue growth rates Allowance for increases in expenses Royalty rate Pre-tax discount rates Terminal growth rate 3.8% - 7.0% 3.0% - 7.0% 2.7% - 7.0% 2.4% - 4.7% 3.0% - 8.3% 3.0% - 8.3% 13.2% - 17.9% 12.7% - 17.9% 2.5% 2.5% Management has carried out a sensitivity analysis and believe that any reasonably possible change in the key assumptions would not cause the book value of any of the cash-generating units, or groups of cash-generating units to exceed their recoverable amount. 49 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 50 B1. GOODWILL AND INTANGIBLES continued (d) Finite life intangibles Gross carrying amount Accumulated amortisation and impairment Balance at 30 June 2017 Gross carrying amount Accumulated amortisation and impairment Balance at 30 June 2018 Aggregate amortisation recognised as an expense during the year: Customer relationships and contracts Other Customer relationships/ contracts $’000 Other $’000 Total $’000 14,215 (6,971) 7,244 16,942 (11,316) 5,626 114,403 128,618 (41,563) (48,534) 72,840 80,084 116,666 133,608 (58,156) (69,472) 58,510 64,136 2018 $’000 2017 $’000 14,737 2,347 17,084 10,641 1,577 12,218 RECOGNITION AND MEASUREMENT Finite life intangible assets are recorded at cost less accumulated amortisation. Amortisation is charged on a straight-line basis over their estimated useful life. JUDGEMENT: USEFUL LIVES OF FINITE LIFE INTANGIBLE ASSETS In determining the estimated useful life of finite life intangible assets (of a period of between 1 to 12 years) the following characteristics have been assessed: (i) expected expansion of the usage of the assets, (ii) the typical product life cycle of these assets, (iii) the stability of the industry in which the assets are operating, and (iv) the level of maintenance expenditure required. The estimated useful life and amortisation period is reviewed at the end of each annual reporting period. Stronger togetherB1. GOODWILL AND INTANGIBLES continued (e) Goodwill and intangibles accounting policies ACCOUNTING POLICIES At each balance sheet date, EBOS reviews the carrying amounts of its non-current assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, EBOS estimates the recoverable amount of the cash-generating unit to which the asset belongs. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised as an expense immediately. Where an impairment loss subsequently reverses, other than for goodwill, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised as income immediately. Impairment losses cannot be reversed for goodwill. B2. ACQUISITION INFORMATION The following material acquisitions of subsidiaries took place during the year. Name of business acquired Principal activities Date of acquisition 2018: 100% of the business assets of Gran’s Remedies Limited Healthcare March 2018 100% of the business assets of Ventura Health Pty Limited Healthcare April 2018 100% of the business assets of Beagle Pharmacy Group Pty Limited Healthcare June 2018 100% of the business assets of BFCMC Pty Limited Healthcare June 2018 51 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 52 B2. ACQUISITION INFORMATION continued Combined details of acquisitions undertaken during the current year are as follows: Current assets Cash and cash equivalents Trade and other receivables Prepayments Inventories Non-current assets Property, plant and equipment Deferred tax assets Indefinite life intangibles Finite life intangibles Current liabilities Trade and other payables Current tax payable Employee benefits Non-current liabilities Deferred tax liabilities Employee benefits Net assets acquired Carrying value $’000 Fair value adjustment $’000 Fair value on acquisition $’000 896 1,888 91 1,468 675 183 2,898 274 (903) (23) (346) - (42) 7,059 - (484) 2 - (250) 3 (144) 4 228 5 1,352 1 (274) 6 (334) 7 - - (1,190) 5 - (1,096) 896 1,404 91 1,218 531 411 4,250 - (1,237) (23) (346) (1,190) (42) 5,963 Stronger togetherB2. ACQUISITION INFORMATION continued Goodwill on acquisition Total consideration Less cash and cash equivalents acquired Deferred purchase consideration Net cash outflow from acquisition JUDGEMENTS MADE: Carrying value $’000 Fair value adjustment $’000 Fair value on acquisition $’000 16,062 22,025 (896) (813) 20,316 1. To recognise the fair value of a brand as a result of a valuation performed at acquisition. The brand was valued using the relief from royalty method. Key assumptions used in the valuation of the brand were: royalty rate of (11.8%), annual revenue growth rate (5.0%), pre-tax discount rate (21.4%) and terminal growth rate of (2.5%). 2. To recognise the fair value of trade and other receivables on acquisition. 3. To recognise the fair value of inventory on acquisition. 4. To recognise the fair value of property, plant and equipment on acquisition. 5. To recognise additional deferred tax asset and liability balances on acquisition. 6. To recognise the fair value of finite life intangibles on acquisition. 7. To recognise the fair value of trade and other payables on acquisition. RECOGNITION AND MEASUREMENT Acquisition of subsidiaries and businesses are accounted for using the acquisition method. The cost of acquisition is measured at the aggregate of the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and equity instruments issued by EBOS in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. Where applicable, the cost of acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments. All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with relevant NZ IFRSs. Changes in the fair value of contingent consideration classified as equity are not recognised. Goodwill arising on acquisition Goodwill arose on the acquisition of business operations because the costs of acquisition included control premiums paid. In addition, goodwill resulted from the consideration paid for the benefit of future expected cash flows above the current fair value of the assets acquired and due to the expected synergies and future market benefits expected to be obtained. These benefits are not recognised separately from goodwill as the expected future economic benefits arising cannot be reliably measured and they do not meet the definition of identifiable intangible assets. The businesses were acquired because they are profitable healthcare businesses which the Group believes fit strategically with its existing Australasian healthcare business assets. 53 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 54 B2. ACQUISITION INFORMATION continued Impact of the acquisitions on the results of the Group The acquired businesses contributed profit of $1.5m to the Group profit for the year. Group revenue for the year includes $6.0m in respect of the businesses acquired. Had the acquisitions been effective at 1 July 2017, the revenue of the Group from continuing operations would have been $7.630b and the profit for the period from continuing operations would have been $152.960m. KEY JUDGEMENT: FAIR VALUE ADJUSTMENT 2017: The Group acquired a 100% equity interest in Alchemy Holdings Pty Ltd in June 2017 for $162.8m. Due to the timing of the acquisition, the acquisition accounting fair value adjustments were identified as being on a provisional basis in the Group’s 30 June 2017 financial statements. During the current period, the acquisition accounting adjustments have been updated to reflect independent valuations performed on the net assets recognised as part of the acquisition. As a result, the following adjustments have been recognised in the current period: the recognition of a brand indefinite life intangible asset ($9.5m), a decrease in finite life intangible assets ($4.8m to $8.8m) and an increase in deferred tax liabilities ($1.5m to $5.8m). Consequently the goodwill recognised on the acquisition has decreased by $3.2m to $127.0m. Prior year balances also include the acquisition of Terry White Group. Impact on the Consolidated Cash Flow Statement of all acquisitions and fair value adjustments during the year: Subsidiaries acquired Consideration Cash and cash equivalents Disposal of associate Non-controlling interest Deferred purchase consideration Total consideration Represented by Net assets acquired Goodwill on acquisition Total consideration Net cash outflow on acquisition Cash and cash equivalents consideration Less cash and cash equivalents acquired Net cash consideration paid 2018 $’000 2017 $’000 23,712 - - (1,687) 22,025 9,205 12,820 22,025 23,712 (896) 22,816 188,767 3,710 20,936 (9,769) 203,644 32,537 171,107 203,644 188,767 (5,539) 183,228 Stronger togetherSection C: Operating assets and liabilities used by EBOS SECTION OVERVIEW This section provides further analysis on the significant operating assets and liabilities of EBOS. These balances comprise the material net working capital balances used by EBOS to run its day to day operating activities. C1. TRADE AND OTHER RECEIVABLES Trade receivables (i) Other receivables Allowance for impairment 2018 $’000 991,182 26,915 (19,337) 998,760 2017 $’000 1,035,971 26,746 (20,868) 1,041,849 RECOGNITION AND MEASUREMENT Trade and other receivables are measured on initial recognition at fair value, and are subsequently carried at amortised cost. Allowances are made for estimated unrecoverable amounts (provision for doubtful debts), and these are recognised in the Consolidated Income Statement. The provision for doubtful debts is measured as the difference between the trade receivables carrying amount and expected present value of future cash flows, which has considered customer credit history and historical recovery performance and trends. (i) Trade receivables are non-interest bearing with credit accounts provided to customers on monthly terms. Interest may be charged on outstanding overdue balances in accordance with the terms and conditions under which goods are supplied. (ii) Ageing of impaired trade and other receivables Current 30 - 60 days 60 - 90 days 90 days+ 2018 $’000 5,038 1,205 734 13,572 20,549 2017 $’000 2,894 1,075 835 15,169 19,973 55 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 56 C1. TRADE AND OTHER RECEIVABLES continued (iii) Ageing of past due but not impaired trade and other receivables Included in the trade and other receivables balance are debtors with a carrying amount of $68.437m (2017: $71.610m) which are past due at the reporting date for which EBOS has not provided any impairment as the amounts are still considered recoverable. 30 - 60 days 60 - 90 days 90 days+ C2. INVENTORIES Raw materials – at cost Finished goods – at cost 2018 $’000 56,000 8,356 4,081 68,437 2018 $’000 782 582,095 582,877 2017 $’000 55,396 9,608 6,606 71,610 2017 $’000 1,860 570,141 572,001 RECOGNITION AND MEASUREMENT Inventories consist of raw materials (for the manufacturing operations of EBOS) and finished goods. Inventories are recognised at the lower of cost, determined on a weighted average basis, and net realisable value. Cost comprises direct materials and, where applicable, direct labour costs and those overheads that have been incurred in bringing the inventories to their present location and condition. Net realisable value represents the estimated selling price in the ordinary course of business, less all estimated costs of completion and costs to be incurred in marketing, selling and distribution. Stronger together57 O v e r v e w i B u s i n e s s i F n a n c a l s i C3. TRADE AND OTHER PAYABLES Current Trade payables Other payables Deferred purchase consideration Non-current Other payables 2018 $’000 2017 $’000 1,174,453 97,661 2,510 1,274,624 14,607 14,607 1,229,981 94,397 3,379 1,327,757 13,837 13,837 RECOGNITION AND MEASUREMENT Trade and other payables are initially measured at fair value and subsequently measured at amortised cost using the effective interest method. Section D: Capital assets used by EBOS to operate our business SECTION OVERVIEW This section explains what capital assets, such as property, plant and equipment that EBOS uses to operate its business activities. This section also describes the material movements in capital assets during the year. D1. PROPERTY, PLANT AND EQUIPMENT Freehold land $’000 Buildings $’000 Leasehold improvements $’000 Plant and equipment $’000 Office equipment, furniture and fittings $’000 Total $’000 Cost 34,834 17,481 20,620 61,942 24,804 159,681 Accumulated depreciation - (5,468) (5,953) (19,454) (12,930) (43,805) Balance at 30 June 2017 34,834 12,013 14,667 42,488 11,874 115,876 Cost 36,010 18,514 23,055 68,063 23,928 169,570 Accumulated depreciation - (6,025) (7,992) (25,334) (8,033) (47,384) Balance at 30 June 2018 36,010 12,489 15,063 42,729 15,895 122,186 C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 58 D1. PROPERTY, PLANT AND EQUIPMENT continued Reconciliation of the carrying amount from the beginning to the end of the year ($’000) $160,000 $140,000 $120,000 $115,876 $19,814 $531 ($205) ($17,651) $3,821 $122,186 $100,000 $80,000 $60,000 $40,000 $20,000 - Opening NBV Additions/ transfers Acquisitions Disposals Depreciation Forex Closing NBV RECOGNITION AND MEASUREMENT Property, plant and equipment is initially recorded at cost. Cost includes the original purchase consideration and those costs directly attributable to bringing the item of property, plant and equipment to the location and condition for its intended use. After recognition as an asset, property, plant and equipment is carried at cost less accumulated depreciation and impairment losses. Depreciation of property, plant and equipment assets, other than freehold land, is calculated on a straight-line basis. This allocates the cost or fair value amount of an asset, less any residual value, over its estimated useful life. JUDGEMENTS AND ESTIMATES – USEFUL LIVES EBOS estimates the remaining useful life of assets as follows: • Buildings: 20 to 50 years • Leasehold improvements: 2 to 15 years • Plant and equipment: 2 to 20 years • Office equipment, furniture and fittings: 2 to 10 years The residual value and useful lives are reviewed and if appropriate adjusted at each reporting date. D2. CAPITAL WORK IN PROGRESS Capital work in progress 2018 $’000 63,540 63,540 2017 $’000 22,923 22,923 Capital work in progress relates to buildings under construction. The additional cost to complete the projects is estimated at $13.055m (2017: $42.891m). Stronger together59 O v e r v e w i B u s i n e s s i F n a n c a l s i Section E: How we fund the business SECTION OVERVIEW This section explains how EBOS funds its operations and shows the sources of other available facilities that it may call upon if required to fund its operational or future investing activities. Capital management EBOS manages its capital, meaning total shareholders’ funds and debt facilities, to provide appropriate returns to shareholders whilst maintaining a capital structure that safeguards its ability to remain a going concern and optimises the cost of capital. E1. SHARE CAPITAL Fully paid ordinary shares Notes 2018 No. 000’s 2018 Total $’000 2017 No. 000’s 2017 Total $’000 Balance at beginning of financial year 151,914 888,513 151,314 888,513 Shares issued under the long-term executive incentive scheme H4 - September 2017 - September 2016 625 - - - - 600 - - 152,539 888,513 151,914 888,513 C o r p o r a t e G o v e r n a n c e Treasury stock Opening stock Shares scheme - shares issued 2018 No. 000’s 600 625 1,225 2017 No. 000’s - 600 600 l & D i s c o s u r e s RECOGNITION AND MEASUREMENT Equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 60 E2. DIVIDENDS Recognised amounts Fully paid ordinary shares: Final - prior year Interim - current year Dividends per share Unrecognised amounts Final dividend SUBSEQUENT EVENT 2018 2017 Cents per share Total $’000 Cents per share Total $’000 33.0 33.0 66.0 50,338 50,338 100,676 32.5 30.0 62.5 49,371 45,574 94,945 35.5 54,151 33.0 50,132 A dividend of 35.5 cents per share was declared on 22 August 2018 with the dividend being payable on 12 October 2018. The anticipated cash impact of the dividend is approximately $54.2m (2017: $50.1m). E3. BORROWINGS Current Bank loans - securitisation facility (i) Bank loans (ii) Non-current Bank loans (ii) 2018 $’000 2017 $’000 160,293 - 160,293 154,962 895 155,857 473,988 440,847 (i) EBOS, through a subsidiary company, has a trade debtor securitisation facility of $435.7m (2017: $447.0m) of which $275.4m was unutilised at 30 June 2018 (2017: $292.0m). The securitisation facility involves providing security over the future cash flows of specific trade receivables, which meet certain criteria, in return for cash finance on a contracted percentage of the security provided. As recourse, in the event of default by a trade debtor, remains with EBOS, the trade receivables provided as security and the funding provided are recognised on the EBOS Consolidated Balance Sheet. At 30 June 2018, the value of trade receivables provided as security under this securitisation facility was $207.4m (2017: $198.9m). The net cash flows associated with the securitisation programme are disclosed in the Consolidated Cash Flow Statement as cash flows from financing activities. Stronger togetherE3. BORROWINGS continued (ii) EBOS has bank term loans and working capital facilities of $606.5m (2017: $450.4m), of which $132.5m was unutilised at 30 June 2018 (2017: $8.7m). EBOS is in full compliance with its debt facility financial covenants. Bank loans are secured over the assets of EBOS. RECOGNITION AND MEASUREMENT All loans and borrowings are initially recognised at cost, being the fair value of the consideration received plus issue costs associated with the borrowing. After initial recognition, these loans and borrowings are subsequently measured at amortised cost using the effective interest method which allocates the cost through the expected life of the loan or borrowing. The fair value of non-current borrowings is approximately equal to their carrying amount. Bank loans are classified as current liabilities unless EBOS has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. E4. BORROWINGS FACILITY MATURITY PROFILE As at 30 June 2018 EBOS had unrestricted access to the following lines of available credit: Facility Term debt facilities Term debt facilities Term debt facilities Working capital facilities Securitisation facility Amount (NZD) $ millions $132.9m $54.5m $319.1m $100.0m $435.7m Maturity 2-3 years 3-4 years 4-5 years 1-2 years 2-3 years The following table shows the remaining contractual maturity for EBOS’ borrowings at balance date. The table includes both interest and principal (undiscounted) cash flows, with total bank loans of $707.5m (2017: $604.0m): Bank loans 2018 2017 Less than 1 year $’000 1-2 years $’000 2-3 years $’000 3-4 years $’000 4-5 years $’000 Total $’000 22,775 22,492 277,864 64,434 320,657 708,222 18,182 402,310 98,611 34,358 50,515 603,976 61 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 62 E4. BORROWINGS FACILITY MATURITY PROFILE continued Financing activities Bank overdraft facility, reviewed annually and payable at call: Amount unused Bank loan facilities with various maturity dates through to May 2023 (2017: July 2021) Amount used Amount unused E5. OPERATING CASH FLOWS Reconciliation of profit for the year with cash from operating activities: For the financial year ended 30 June 2018 Profit for the year Add/(less) non-cash items: Depreciation Loss on sale of property, plant and equipment Amortisation of finite life intangible assets Share of profit from associates Expense recognised in respect of share based payments Deferred tax 2018 $’000 2017 $’000 1,468 1,468 4,290 4,290 634,281 407,964 1,042,245 596,704 300,704 897,408 2018 $’000 2017 $’000 151,720 132,846 17,651 16 17,084 (4,501) 840 989 32,079 13,616 497 12,218 (4,062) 490 (2,462) 20,297 Stronger togetherE5. OPERATING CASH FLOWS continued For the financial year ended 30 June 2018 Movement in working capital: Trade and other receivables Prepayments Inventories Current tax refundable/payable Trade and other payables Employee benefits Foreign currency translation of working capital balances Balances classified as investing activities Working capital items acquired Net cash inflow from operating activities Reconciliation of movement in debt facilities: 2018 $’000 2017 $’000 43,089 (2,011) (10,876) (1,654) (52,363) 4,121 9,200 (10,494) 1,801 1,065 176,171 278,538 626 6,512 (4,079) (282,943) 6,436 608 5,698 (2,466) (12,432) 143,943 1 July 2017 $’000 Net drawings $’000 596,704 175 16,483 (75) Foreign currency movement $’000 21,094 7 30 June 2018 $’000 634,281 107 Bank loans Finance leases ACCOUNTING POLICIES Cash and cash equivalents comprise cash on hand and deposits readily convertible to cash and which are not subject to a significant risk of change in value. The Consolidated Cash Flow Statement is prepared exclusive of Goods and Services Tax (GST), which is consistent with the method used in the Consolidated Income Statement. • Operating activities include all transactions and other events that are not investing or financing activities. • Investing activities are those activities relating to the acquisition and disposal of current and non-current investments and any other non-current assets. • Financing activities are those activities relating to changes in the equity and debt capital structure of the Group and those activities relating to the cost of servicing EBOS’ equity capital. 63 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 64 Section F: EBOS Group structure SECTION OVERVIEW This section provides information to assist in understanding the EBOS Group legal structure and how it affects the financial position and performance of the Group. Details of businesses acquired are presented in Section B. F1. SUBSIDIARIES The following entities comprise the significant trading and holding companies of the Group: Parent and head entity: EBOS Group Limited Subsidiaries (all balance dates 30 June unless otherwise noted) Pet Care Holdings Australia Pty Limited (formerly EBOS Healthcare [Australia] Pty Limited) EBOS Group Australia Pty Limited EBOS Health & Science Pty Limited PRNZ Limited Pharmacy Retailing NZ Limited Pet Care Distributors Pty Limited Masterpet Corporation Limited Masterpet Australia Pty Limited Botany Bay Imports and Exports Pty Limited Aristopet Pty Ltd EAHPL Pty Limited ZHHA Pty Ltd ZAP Services Pty Ltd Symbion Pty Ltd Intellipharm Pty Ltd Clinect Pty Ltd Lyppard Australia Pty Ltd DoseAid Pty Limited Symbion Trade Receivables Trust (formerly Symbion Pharmacy Services Trade Receivables Trust)1 Blackhawk Premium Pet Care Pty Limited Country of Incorporation Australia Australia Australia New Zealand New Zealand Australia New Zealand Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Endeavour Consumer Health Limited New Zealand Ownership Interests and Voting Rights 2018 2017 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Stronger together65 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y F1. SUBSIDIARIES continued Nexus Australasia Pty Limited EBOS PH Pty Limited Terry White Group Limited Chemmart Holdings Pty Ltd TW&CM Pty Ltd TWC IP Pty Ltd PBA Wholesale Pty Ltd VIM Health Pty Ltd Old LL Pty Ltd PBA Finance Pty Ltd Chem Plus Pty Ltd Pharmacy Brands Australia Pty Ltd VIM Health IP Pty Ltd Tony Ferguson Weight Management Pty Ltd Lite Living Pty Ltd Alchemy Holdings Pty Limited Alchemy Sub-Holdings Pty Ltd HPS Holdings Group (Aust) Pty Ltd HPS Hospitals Pty Ltd HPS Corrections Pty Ltd HPS Services Pty Ltd Hospharm Pty Ltd HPS IVF Pty Ltd HPS Finance Pty Ltd HPS Brands Pty Ltd Natures Synergy Pty Ltd Ventura Health Pty Limited You Save Management Pty Limited Mega Save Management Pty Limited Cincotta Holding Company Pty Limited CC Pharmacy Investments Pty Limited CC Pharmacy Promotions Pty Limited CC Pharmacy Management Pty Limited 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 100% 100% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - - - - - - - 1 The balance date of all subsidiaries is 30 June aside from the Symbion Trade Receivables Trust which has a balance date of 31 December. The results of the Symbion Trade Receivables Trust (‘the Trust’) have been included in the Group results for the year to 30 June 2018. The Trust is consolidated as EBOS has the exposure, or rights, to variable returns from its involvement with the Trust and the Group considers that it has existing rights that give it the current ability to direct the relevant activities of the Trust. EBOS Group Annual Report 2018 66 F2. INVESTMENT IN ASSOCIATES Name of associate company Principal activities Proportion of shares and voting rights acquired Cost of acquisition $’000 Date of acquisition Animates NZ Holdings Limited Animal Care supplies December 2011 50% 18,150 Good Price Pharmacy Franchising Pty Limited Healthcare supplies October 2014 25.77% Good Price Pharmacy Management Pty Limited Healthcare supplies October 2014 25.77% 3,918 3,918 The reporting date for Animates NZ Holdings Limited is 30 June. Animates NZ Holdings Limited is incorporated in New Zealand. The reporting date for Good Price Pharmacy Franchising Pty Limited and Good Price Pharmacy Management Pty Limited is 30 June. They are incorporated in Australia. Although the company holds 50% of the shares and voting power in Animates NZ Holdings Limited this entity is not deemed to be a subsidiary as the other 50% is held by a single shareholder, therefore EBOS is unable to exercise control over this entity. Stronger togetherF2. INVESTMENT IN ASSOCIATES continued The summary financial information in respect of EBOS Group’s associates is set out below: Statement of Financial Position Total assets Total liabilities Net assets Group’s share of net assets Income Statement Total revenue Total profit for the year Group’s share of profits of associates Movement in the carrying amount of the Group’s investment in associates: Balance at the beginning of the financial year Disposals Share of profits of associates Share of dividends Net foreign currency exchange differences Balance at the end of the financial year 2018 $’000 74,140 (37,976) 36,164 17,162 130,879 10,784 4,501 36,455 - 4,501 (932) 291 40,315 2017 $’000 72,344 (43,051) 29,293 13,741 119,032 9,880 4,062 36,778 (3,710) 4,062 (913) 238 36,455 Goodwill included in the carrying amount of the Group’s investment in associates The Group’s share of the contingent liabilities of associates The Group’s share of capital commitments of associates 21,593 21,398 - - - - 67 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 68 F2. INVESTMENT IN ASSOCIATES continued RECOGNITION AND MEASUREMENT An associate is an entity over which EBOS has significant influence and that is neither a subsidiary nor an interest in a joint venture or joint operation. EBOS has significant influence when it has the power to participate in the financial and operating policy decisions of the investee, but is not in control or joint control over those policies. Investments in associates are incorporated in the EBOS Group financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the Consolidated Balance Sheet at cost and adjusted for post-acquisition changes in EBOS’ share of the net assets of the associate, less any impairment in the value of individual investments and less any dividends. Losses of an associate in excess of EBOS’ interest in that associate are recognised only to the extent that EBOS has incurred legal or constructive obligations or made payments on behalf of the associate. Any excess of the cost of acquisition over EBOS’ share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Section G: How we manage risk SECTION OVERVIEW This section describes the financial risks that EBOS has identified and how it manages these risks, to protect its financial position and financial performance. Management of these risks includes the use of financial instruments to hedge against unfavourable interest rate and foreign currency movements. G1. FINANCIAL RISK MANAGEMENT The EBOS corporate treasury function provides services to the Group’s entities, co-ordinates access to financial markets, and manages the financial risks relating to the operation of the Group. EBOS does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. The use of financial derivatives is governed by Group policies approved by the Board of Directors, which provide written principles on the use of financial derivatives. Compliance with policies and exposure limits is reviewed by the Board of Directors on a regular basis. FOREIGN CURRENCY RISK EBOS is exposed to foreign currency risk arising primarily from the procurement of goods denominated in foreign currencies (US dollar, Australian dollar, Thai baht, Euro and British pound). Foreign exchange rate exposures are managed utilising forward foreign exchange contracts. EBOS enters into forward foreign exchange contracts to manage the risk associated with anticipated future purchase transactions denominated in foreign currencies in accordance with the Board approved treasury policy. INTEREST RATE RISK EBOS is exposed to interest rate risk as it borrows funds in both New Zealand dollars and Australian dollars at floating interest rates. Stronger together69 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y G1. FINANCIAL RISK MANAGEMENT continued The risk is assessed and managed by the use of interest rate swap contracts. Under interest rate swap contracts, EBOS agrees to exchange the difference between fixed and floating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable EBOS to mitigate the risk of changing interest rates on debt held. Interest rate swap contracts are only entered into in accordance with the Group’s Board approved treasury policy. LIQUIDITY RISK EBOS is exposed to liquidity risk as it must invest in significant levels of working capital such as inventory and accounts receivable which can impact liquidity unless they are converted to cash. EBOS manages liquidity risk by maintaining adequate reserves, banking facilities and reserve banking facilities by continuously monitoring forecast and actual cash flows and matching maturity profiles of financial assets and liabilities. Refer to note E4 for information on EBOS’ borrowings facility maturity profile. CREDIT RISK EBOS is exposed to the risk of default in relation to receivables owing from its Healthcare and Animal Care customers, hedging instruments and guarantees and deposits held with banks and other financial institutions. EBOS has adopted a policy of only dealing with credit worthy counter parties as a means of mitigating the risk of financial loss from defaults. Trade receivables consist of a large number of customers, spread across diverse sectors and geographical areas. Ongoing credit evaluation is performed on the financial condition of the trade receivables. The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represents the maximum exposure to EBOS of any credit risk. EBOS does not have any significant credit risk exposure to any single counter party. The credit risk on liquid funds and derivative financial instruments is limited because the counter parties are banks with high credit ratings assigned by international credit rating agencies. EBOS has not changed its overall strategy regarding the management of risk from 2017. G2. FINANCIAL INSTRUMENTS Derivatives Other financial assets – derivatives (at fair value) Forward foreign exchange contracts (i) Interest rate swaps (i) Other financial liabilities – derivatives (at fair value) Forward foreign exchange contracts (i) Interest rate swaps (i) (i) Designated and effective as a cash flow hedging instrument carried at fair value. 2018 $’000 2017 $’000 1,404 19 1,423 - 2,157 2,157 19 - 19 428 2,567 2,995 EBOS Group Annual Report 2018 70 G2. FINANCIAL INSTRUMENTS continued EBOS has categorised these derivatives, both financial assets and financial liabilities, as Level 2 under the fair value hierarchy contained within NZ IFRS 13. There were no transfers between fair value hierarchy levels during the current or prior periods. The fair value of forward foreign exchange contracts is determined using a discounted cash flow valuation. Key inputs are based upon observable forward exchange rates, at the measurement date, with the resulting value discounted back to present values. Interest rate swaps are valued using a discounted cash flow valuation. Key inputs for the valuation of interest rate swaps are the estimated future cash flows based on observable yield curves at the end of the reporting period, discounted at a rate that reflects the credit risk of the various counterparties. Outstanding forward foreign currency contracts: nominal value Buy Australian dollars Buy Euro Buy British pounds Buy Thai bhat Buy USD Outstanding interest rate swap contracts: nominal value Less than 1 year 1 to 3 years 3 to 5 years Greater than 5 years 2018 $’000 8,625 8,902 3,300 5,236 28,640 54,703 2018 $’000 81,806 83,020 173,845 - 338,671 2017 $’000 5,566 3,694 3,584 5,283 24,766 42,893 2017 $’000 53,122 107,140 127,433 57,846 345,541 Stronger togetherG2. FINANCIAL INSTRUMENTS continued RECOGNITION AND MEASUREMENT Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. EBOS designates these derivatives as cash flow hedges of highly probable forecast transactions. The carrying amount of financial assets and financial liabilities recorded in the financial statements approximates their fair values. The fair values of financial assets and financial liabilities are determined as follows: • the fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices; • the fair value of other financial assets and financial liabilities are determined in accordance with generally accepted pricing models based on discounted cash flow analysis; and • the fair value of derivative instruments are calculated using quoted prices. Where such prices are not available use is made of discounted cash flow analysis using the applicable yield curve for the duration of the instruments. CASH FLOW HEDGES Changes in fair value of hedges that are designated and qualify as cash flow hedges and are considered effective for accounting purposes are recognised in the cash flow hedge reserve (in equity) and in other comprehensive income. The gain or loss relating to any ineffective element is recognised immediately in the income statement. Amounts accumulated in other comprehensive income are recycled in the income statement in the periods when the forecast transactions (hedged item) take place. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset or liability. Hedge accounting is discontinued when EBOS either revokes the hedging relationship or the hedging instrument expires or is terminated, exercised or no longer qualifies for hedge accounting. Amounts deferred in equity are recycled in profit or loss in the periods when the hedged item is recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was deferred in equity is recognised immediately in profit or loss. 71 O v e r v e w i B u s i n e s s i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 72 Section H: Other disclosures SECTION OVERVIEW This section includes the remaining information relating to EBOS that is required to be presented so as to comply with its financial reporting requirements. H1. CONTINGENT LIABILITIES Contingent liabilities Guarantees given to third parties Guarantees principally comprise property lease guarantees on behalf of landlords of EBOS. H2. COMMITMENTS FOR EXPENDITURE Capital expenditure commitments: Plant Software development Operating expenditure commitments: Non-cancellable operating lease payments: Less than one year More than one year and less than five years More than five years Lease arrangements 2018 $’000 16,222 16,222 2018 $’000 10,078 1,466 11,544 35,831 106,264 63,958 206,053 2017 $’000 9,640 9,640 2017 $’000 27,697 628 28,325 32,024 81,043 42,295 155,362 Operating leases relate to certain land, buildings, plant and equipment, with lease terms of between one to twelve years with options to extend for a further one to nineteen years. Operating lease contracts contain market review clauses in the event that EBOS exercises its option to renew. EBOS does not have an option to purchase the leased asset at the expiry of the lease period. H3. SUBSEQUENT EVENTS SUBSEQUENT EVENT Subsequent to year end the Board has approved a final dividend to shareholders. For further details please refer to note E2. Stronger together73 H4. RELATED PARTY DISCLOSURES Key management personnel compensation Short-term employee benefits O v e r v e w i B u s i n e s s 2017 $’000 10,564 10,564 2018 $’000 12,292 12,292 EBOS operates a long term incentive share plan whereby EBOS provides an interest free, non-recourse loan to participating senior executives in order for those executives to purchase shares in the company. While the shares are issued and held in the executive’s name the shares will not vest unless and until performance conditions are met. The executive cannot deal in the shares unless and until those shares vest. All net dividends received in respect of the shares must be applied to the repayment of the interest free loan. A total of 625,000 (2017: 600,000) shares were issued during the year with an issue price of $17.35 (2017: $18.15). The performance conditions in relation to these shares will be tested after the end of the performance period, being 1 July 2017 to 30 June 2020 (FY17 tranche: 1 July 2016 to 30 June 2019). H5. REMUNERATION OF AUDITORS All non-audit services provided by EBOS Group’s auditor require pre-approval by the Audit and Risk Committee. Before any non-audit services are approved, the Audit and Risk Committee must be satisfied that the provision of such services will not have any influence on the independence of the auditors. Auditor of the Group (Deloitte) Audit of the financial statements Audit related services for review of interim financial statements Due diligence Information technology services Advisory services Other Auditors (Ernst & Young) Audit of subsidary financial statements Audit related services for review of interim financial statements Advisory services 2018 $’000 606 177 - - 78 861 203 54 - 257 2017 $’000 683 164 25 162 9 1,043 147 37 47 231 i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 74 H6. CHANGES IN FINANCIAL REPORTING STANDARDS No new accounting standards or interpretations have been adopted during the year which have had a material impact on these financial statements. The following new standards have been approved but are not yet effective which may have a future impact on the Group financial statements: NZ IFRS 16 Leases NZ IFRS 16 will supersede the current lease guidance including NZ IAS 17 Leases and the related interpretations when it becomes effective for EBOS in the 2020 financial year. NZ IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and are replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees (i.e., all on balance sheet) except for short-term leases and leases of low value assets. The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications. Furthermore, the classification of cash flows will also be affected as operating lease payments under NZ IAS 17 are presented as operating cash flows; whereas under the NZ IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively. As a result reported EBITDA will be higher upon the adoption of IFRS 16. The new requirement to recognise a right-of use asset and a related lease liability is expected to have a significant impact on the amounts recognised in the Group’s consolidated financial statements and the directors are currently assessing its potential impact. The Group has begun to assess the impact of the new standard and prepare for its implementation from 1 July 2019, however it is not considered practicable to provide a reasonable estimate of the financial effect at this time until the directors complete their review. NZ IFRS 9 Financial instruments NZ IFRS 9 establishes the principles for hedge accounting, measurement, classifications and impairment of financial assets. Under NZ IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an ‘economic relationship’. Retrospective testing assessment of hedge effectiveness is also no longer required. Enhanced disclosure requirements about an entity’s risk management activities have also been introduced. In relation to the impairment of financial assets NZ IFRS 9 requires an expected credit loss model to be applied, as opposed to an incurred credit loss model under NZ IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in counter party risk. This standard will be effective for EBOS in the 2019 financial year. The Group has reviewed NZ IFRS 9 and has concluded that applying the standard is not expected to have a material impact on the Group’s financial statements. NZ IFRS 15 Revenue from Contracts NZ IFRS 15 provides a single, comprehensive principles-based five-step model to be applied to all contracts with customers. This standard will be effective for EBOS in the 2019 financial year. The five steps in the model are: identify the contract with the customer; identify the performance obligations in the contract; determine the transaction price; allocate the transaction price to the performance obligations in the contract; and, recognise revenue when (or as) the entity satisfies a performance obligation. The Group has reviewed NZ IFRS 15 and has concluded that applying the standard will have an immaterial impact on profit and will not materially impact revenue recognised in the Group’s financial statements. Stronger togetherAdditional stock exchange information As at 16 July 2018 Twenty largest shareholders Sybos Holdings Pte Limited HSBC Nominees (New Zealand) Limited – NZCSD HKBN90 JP Morgan Chase Bank NA NZ Branch-Segregated Clients Acct – NZCSD CHAM24 Citibank Nominees (New Zealand) Limited – NZCSD CNOM90 Forsyth Barr Custodians Limited 1-CUSTODY Whyte Adder No 3 Limited FNZ Custodians Limited HSBC Nominees (New Zealand) Limited A/C State Street – NZCSD HKBN45 Accident Compensation Corporation – NZCSD ACCI40 Custodial Services Limited A/C 3 JP Morgan Nominees Australia Limited Custodial Services Limited A/C 4 Citicorp Nominees Pty Limited BNP Paribas Nominees (NZ) Limited – NZCSD COGN40 National Nominees New Zealand Limited – NZCSD NNLZ90 HSBC Nominees A/C New Zealand Superannuation Fund Nominees-NZCSD SUPR40 Custodial Services Limited A/C 2 HSBC Custody Nominees (Australia) Limited BNP Paribas Nominees Pty Ltd Agency Lending DRP A/C Custodial Services Limited A/C 18 Fully paid shares 60,525,721 9,396,808 8,088,531 5,120,961 4,239,568 3,596,425 3,173,934 3,087,292 2,509,909 2,119,985 1,800,779 1,482,048 1,473,979 1,413,241 1,238,267 1,125,314 998,685 919,798 903,905 838,481 114,053,631 74.77% Substantial Product Holders The following information is provided in compliance with section 293 of the Financial Markets Conduct Act 2013 and is stated as at 30 June 2018. The total number of ordinary shares in EBOS as at that date was 152,539,304. Sybos Holdings Pte Limited FMR LLC Fully paid shares Percentage of paid capital 60,525,721 15,457,115 75,982,836 39.68% 10.13% 49.81% 75 O v e r v e w i B u s i n e s s Percentage of paid capital 39.68% 6.16% 5.30% 3.36% 2.78% 2.36% 2.08% 2.02% 1.65% 1.39% 1.18% 0.97% 0.97% 0.93% 0.81% 0.74% 0.65% 0.60% 0.59% 0.55% i F n a n c a l s i C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 76 Additional stock exchange information continued Distribution of Shareholders and Shareholdings Holders Fully paid shares Size of Holding 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total Percentage of paid capital 0.84% 4.64% 3.55% 8.36% 82.61% 2,674 2,895 762 572 56 1,281,358 7,082,392 5,420,912 12,747,403 126,007,239 6,959 152,539,304 100.00% Unmarketable Parcels as at 16 July 2018 As at 16 July 2018, there were 111 shareholders (with a total of 1,366 shares) holding less than a marketable parcel of shares, based on the closing price of the Company’s shares on the ASX of A$18.90. The ASX Listing Rules define a marketable parcel of shares as a parcel of shares of not less than A$500. Waivers from the NZX and ASX Listing Rules Waivers granted from the application of NZX and ASX Listing Rules are published on the Company’s website. The terms of the Company’s admission to the ASX and on-going listing requires the following disclosures: 1. The Company is not subject to Chapters 6, 6A, 6B and 6C of the Australian Corporations Act dealing with the acquisition of shares (including substantial holdings and takeovers). 2. Limitations on the acquisition of securities imposed under New Zealand law are as follows: (a) In general, securities in the Company are freely transferable and the only significant restrictions or limitations in relation to the acquisition of securities are those imposed by New Zealand laws relating to takeovers, overseas investment and competition. (b) The New Zealand Takeovers Code creates a general rule under which the acquisition of 20% or more of the voting rights in the Company or the increase of an existing holding of 20% or more of the voting rights of the Company can only occur in certain permitted ways. These include a full takeover offer in accordance with the Takeovers Code, a partial takeover in accordance with the Takeovers Code, an acquisition approved by an ordinary resolution, an allotment approved by an ordinary resolution, a creeping acquisition (in certain circumstances), or compulsory acquisition of a shareholder holding 90% or more of the shares. (c) The New Zealand Overseas Investment Act 2005 and Overseas Investment Regulations 2005 (New Zealand) regulate certain investments in New Zealand by overseas interests. In general terms, the consent of the New Zealand Overseas Investment Office is likely to be required where an ‘overseas person’ acquires shares in the Company that amount to 25% or more of the shares issued by the Company, or if the overseas person already holds 25% or more, the acquisition increases that holding. (d) The New Zealand Commerce Act 1986 is likely to prevent a person from acquiring shares in the Company if the acquisition would have, or would be likely to have, the effect of substantially lessening competition in the market. Voting Rights Shareholders may vote at a meeting of shareholders either in person or by proxy, attorney, or representative. Where voting is by show of hands or by voice every shareholder present in person or representative has one vote. In a poll every shareholder present in person or by proxy, attorney or representative has one vote for each share. Stronger togethercorporate governance The Board and management of EBOS Group Limited are committed to ensuring that the Company adheres to best practice and governance principles and maintains high ethical standards. For the purposes of compliance with the New Zealand Companies Act, NZX Listing Rules and NZX Corporate Governance Code 2017, the following disclosures are included in the Annual Report. The Group’s Corporate Governance Statement can be found at: https://ebosgroup.gcs-web.com/corporate- governance. The Corporate Governance Statement refers to a number of codes, policies and charters of the Group. These documents (or a summary of them) can also be found at https://ebosgroup.gcs-web.com/corporate-governance. DIVERSITY The Board adopted a Diversity Policy in July 2017, which is set out as Appendix F of the Corporate Governance Code. Under the policy, the Board is responsible for setting measurable objectives for achieving diversity. Set out below is the Board’s assessment of the objectives for the 2017/18 year: Objective Progress during 2017/18 Aim to increase the proportion of women on the Board as vacancies arise, having regard to the circumstances (including skill requirements) relating to the vacancies No Board vacancies arose during the year ended 30 June 2018 Aim to increase the proportion of women in executive and senior management roles as vacancies arise, having regard to the circumstances (including skill requirements) relating to the vacancies During the year ended 30 June 2018, the number of females that were Officers (being the CEO and his direct reports) increased. As at 30 June 2018, 25% of Officers were female (up from 9% in the previous financial year) Continue to ensure that the remuneration of females in salaried roles is objectively reviewed against the remuneration of males in comparable roles in order to eliminate inequity based on gender (with such review taking into account relevant experience, qualifications and performance) A detailed gender pay equity analysis was undertaken, comparing like-for-like roles held by males and females. The conclusion from that analysis was that any variances were based on tenure in the role or experience at the time of appointment. Continue to promote family friendly and flexible work place practices including but not limited to parental leave, flexible return to work arrangements, flexible work arrangements and employee assistance programs EBOS continued to promote these policies throughout the year. It is recognised that such policies contribute to retaining talent and reducing staff turnover GENDER REPRESENTATION The Company’s gender representation as at 30 June 2018 was as follows: Board 2016/17 2017/18 Officer 2016/17 2017/18 Female % Female (no.) Male % Male (no.) 40 40 2 2 60 60 3 3 Female % Female (no.) Male % Male (no.) 9 25 1 2 91 75 9 6 Officer means the CEO and his direct reports Group 2016/17 2017/18 Female % Male % 57 55 43 45 77 O v e r v e w i B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 78 DIRECTOR INDEPENDENCE The Board’s assessment of the independence of each current director is set out below. valuation of share based payments and accrual of short term incentives. Fixed remuneration Name Status* Appointment Date Mark Waller Independent 1987 Elizabeth Coutts Independent July 2003 Stuart McGregor Non-independent July 2013 In the financial year ended 30 June 2018 and during the periods in which they respectively held the office of Chief Executive Officer: • Mr Davies received fixed remuneration of $1,981,110; and • Mr Cullity received fixed remuneration of $313,194. Sarah Ottrey Independent September 2006 Short Term Incentive (STI) payment Peter Williams Non-independent July 2013 *Independent means that the director is considered to be an Independent Director as defined under the NZX Listing Rules. CEO REMUNERATION During the year ended 30 June 2018, the following persons held the office of Chief Executive Officer: • Mr Patrick Davies – until 31 March 2018; and • Mr John Cullity – from 1 April 2018. The following disclosures set out the remuneration received by Mr Davies and Mr Cullity during the periods in which they held the office of Chief Executive Officer. In the year ended 30 June 2018 and during the period in which he held the office of Chief Executive Officer: An STI payment is a performance based payment and the targets in relation to the STI payment are set by the Board. The maximum amount that the Chief Executive Officer may be entitled to as an STI payment is a fixed dollar amount (in Australian dollars). Mr Davies In the financial year ended 30 June 2018, Mr Davies received an STI payment of $893,246. This payment was based on the financial performance of the Group for the prior year (that is, the year ended 30 June 2017) (2017 STI). With regard to the 2017 STI, a target was set by reference to the Group’s 2017 Profit Before Tax results (Target). The calculation of Mr Davies’ 2017 STI was based on the following criteria: • if the Group’s Profit Before Tax (PBT) results were less • Mr Patrick Davies, received fixed remuneration, a short than 80% of the Target, no STI was payable; term incentive payment and was provided a loan as part of a long-term incentive; • Mr John Cullity received fixed remuneration, as described below.1 The Group’s policy in relation to the remuneration of the CEO (and other executives) is set out in its Remuneration Policy. A copy of this policy can be found in the Group’s Corporate Governance Code which is published on its website: www.ebosgroup.com. The remuneration described in this section relates to fixed remuneration and short term incentives paid during the year and long term incentive grants made during the year. These amounts may differ from the amounts included in Note H4 to the Financial Report and the table of employee remuneration included on pages 85 and 86 which are reported according to accounting standards. The accounting values of remuneration reported in accordance with the accounting standards may not always reflect what the person was actually paid whilst he was CEO during the financial year, particularly due to the • if the Group’s PBT results were between 80% of the Target and the Target, an STI between 35% and 75% of Mr Davies’ maximum STI entitlement was payable; • if the Group’s PBT results met certain stretch targets above the Target, an STI between 75% to 100% of Mr Davies’ maximum STI entitlement was payable. Mr Davies received his maximum STI entitlement under the 2017 STI. Mr Cullity Mr Cullity did not receive an STI payment during the period in which he held the office of Chief Executive Officer. 2018 STI In relation to the STI for the year ended 30 June 2018, a similar structure for the STI was adopted and it is anticipated that the payment of an STI amount to both Mr Davies and Mr Cullity will be made during the 2019 financial year. 1 Mr Davies received his fixed remuneration and short term incentive payment in Australian dollars. Mr Cullity received his fixed remuneration in Australian dollars. For the purposes of this disclosure the following exchange rate has been used to convert these amounts to NZ dollars: 0.9180:1 (AUD/NZD). Stronger togetherLong Term Incentive (LTI) plan EBOS operates a long term incentive share plan whereby EBOS provides an interest free, non-recourse loan to participating senior executives, including Messrs Davies and Cullity, in order for those executives to purchase shares in the company. While the shares are issued and held in the executive’s name, the shares will not vest unless and until performance conditions are met. The executive cannot deal in the shares unless and until those shares vest. All dividends received in respect of the shares must be applied to the repayment of the loan. In the financial year ended 30 June 2018, the Group provided to Mr Davies a loan of $3,644,865 as part of an LTI plan with a performance period from 1 July 2017 to 30 June 2020 (LTI 2017/20). A total of 210,000 shares were issued to Mr Davies on 22 September 2017 with an issue price of $17.3565 as part of LTI 2017/20. Mr Cullity did not receive a long term incentive during the period in which he held the office of Chief Executive Officer. The performance conditions for the LTI 2017/20 are: • continuous employment with the Group during the performance period (although noting that the Board has retained discretion relating to this condition); and • compound annual growth in the Company’s earnings per share over the performance period must equal or exceed a specific percentage target. The performance conditions in relation to these shares will be tested after the end of the performance period being 1 July 2017 to 30 June 2020. 79 O v e r v e w i B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y EBOS Group Annual Report 2018 80 directors’ interests and disclosures DISCLOSURE OF INTERESTS INDEMNITY AND INSURANCE In accordance with section 140(2) of the Companies Act 1993, the directors named below have made general disclosure of interest, by a general notice disclosed to the Board and entered in the Company’s interests register, as follows: E.M. Coutts: Chair of Urwin & Co Ltd, Oceania Healthcare Ltd, Ports of Auckland Ltd and Skellerup Holdings Ltd, Director of the Yellow Pages group of companies, and Tennis Auckland Region Incorporated, Member, Marsh New Zealand Advisory Board and President, Institute of Directors Inc. S.J. McGregor: Chairman of Donaco International Ltd and director of Symbion Pty Ltd and other EBOS Group subsidiaries. S.C. Ottrey: Director of Whitestone Cheese Ltd, Sarah Ottrey Marketing Ltd, Skyline Enterprises Limited and Mount Cook Alpine Salmon Limited. M.B. Waller: Director of EBOS Group Ltd and subsidiaries. P.J. Williams: Executive of The Zuellig Group and director of associated companies, a director of Pharma Industries Ltd, CB Norwood Pty Ltd, Cambert and Green Cross Health Limited. In accordance with section 162 of the Companies Act 1993 and the constitution of the Company, the Company has given indemnities to, and has effected insurance for, the directors and executives of the Company and its related companies which, except for some specific matters that are expressly excluded, indemnify and insure directors and executives against monetary losses as a result of actions undertaken by them in the course of their duties. Specifically excluded are certain matters, such as the incurring of penalties and fines, which may be imposed for breaches of law. USE OF INFORMATION There were no notices from directors of the Company requesting to use Company information received in their capacity as directors, which would not otherwise have been available to them. Stronger togetherSHARE DEALINGS BY DIRECTORS The directors have disclosed to the Board under section 148(2) of the Companies Act 1993 particulars of acquisitions or disposals of a relevant interest in the Company’s shares. Director E M Coutts DIRECTORS’ SHAREHOLDINGS Ordinary Shares Purchased/(Sold) Consideration Paid/(Received) Date of Transaction 1,704 $29,734.80 18 and 19 October 2017 Number of fully paid shares held as at 30 June 2018 30 June 2017 E M Coutts - Indirect beneficial interest S C Ottrey - Directly held together with another - Indirect beneficial interest M B Waller - Directly held together with others - Direct non-beneficial interest/trustee of EBOS Staff Share Plan ATTENDANCE AT BOARD AND COMMITTEE MEETINGS 30,000 8,079 3,050 535,265 71,592 28,296 8,079 3,050 535,265 71,592 E M Coutts S C Ottrey S J McGregor M B Waller P J Williams Board Audit & Risk Remuneration Eligible to Attend Attended Eligible to Attend Attended Eligible to Attend Attended 6 6 6 6 6 6 6 6 6 6 3 3 3 3 3 3 3 3 3 3 3 3 DIRECTORS’ REMUNERATION AND OTHER BENEFITS Directors’ remuneration and other benefits required to be disclosed pursuant to section 211(1) of the Companies Act 1993 for the year ended 30 June 2018 were as follows: E M Coutts S J McGregor S C Ottrey M B Waller P J Williams 30 June 2018 30 June 2017 $161,750 $151,875 $143,000 $296,875 $140,000 $125,500 $110,833 $110,250 $235,000 $110,000 81 O v e r v e w i B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e D i r e c t o r y EBOS Group Annual Report 2018Directors’ Interests & Disclosures 82 DISCLOSURES RELATING TO SUBSIDIARIES Subsidiary Current Directors Subsidiary Current Directors ACN 618 208 969 Pty Ltd # Alchemy Holdings Pty Ltd# J Cullity J Cullity Alchemy Sub-Holdings Pty Ltd# J Cullity Aristopet Pty Ltd# Beaphar Pty Ltd# BFCMC Pty Ltd Premium Pet Care Pty Ltd# J Cullity S Duggan M Waller J Cullity S Duggan M Waller A White J Cullity Collaboration Medical Clinics Pty Ltd# Developing People Pty Ltd# DoseAid Pty Ltd# Botany Bay Imports Exports Pty Ltd# J Cullity S Duggan M Waller EAHPL Pty Ltd# CC Pharmacy Investments Pty Ltd J Cullity EBOS Group Australia Pty Ltd# CC Pharmacy Management Pty Ltd J Cullity CC Pharmacy Promotions Pty Ltd J Cullity Chem Plus Pty Ltd# Chemmart Holdings Pty Ltd# R Higham J McKellar K Sclavos T White J Cullity D Lewis^ R Higham J McKellar K Sclavos T White J Cullity D Lewis^ EBOS Health & Science Pty Ltd# EBOS PH Pty Ltd# Endeavour Consumer Health Limited# Hospharm Pty Ltd# HPS Brands Pty Ltd# HPS Corrections Pty Ltd# HPS Finance Pty Ltd# R Higham J McKellar K Sclavos T White J Cullity D Lewis^ R Higham J McKellar K Sclavos T White J Cullity D Lewis^ J Cullity S McGregor M Waller J Cullity M Waller J Cullity M Waller J Cullity M Waller J Cullity J Cullity M Waller J Cullity J Cullity J Cullity J Cullity HPS Holdings Group (Aust) Pty Ltd# J Cullity Cincotta Holding Company Pty Ltd# J Cullity Clinect Pty Ltd# Clinect NZ Pty Limited# J Cullity S McGregor M Waller J Cullity M Waller HPS Hospitals Pty Ltd# HPS IVF Pty Ltd# HPS Services Pty Ltd# Intellipharm Pty Ltd# J Cullity J Cullity J Cullity J Cullity S McGregor M Waller Stronger togetherSubsidiary Current Directors Subsidiary Current Directors Lite Living Pty Ltd# Lyppard Australia Pty Ltd# Masterpet Australia Pty Limited# Masterpet Corporation Limited#* Masterpet Logistics Pty Ltd# R Higham J McKellar K Sclavos T White J Cullity D Lewis^ J Cullity S McGregor M Waller J Cullity S Duggan M Waller J Cullity S Duggan M Waller J Cullity S Duggan M Waller Mega Save Management Pty Ltd J Cullity Nature’s Synergy Pty Ltd# J Cullity Nexus Australasia Pty Limited# J Cullity PBA Finance No. 1 Pty Ltd# PBA Finance No. 2 Pty Ltd# PBA Wholesale Pty Ltd# Pet Care Distributors Pty Ltd# R Higham J McKellar K Sclavos T White J Cullity D Lewis^ R Higham J McKellar K Sclavos T White J Cullity D Lewis^ R Higham J McKellar K Sclavos T White J Cullity D Lewis^ J Cullity M Waller Pet Care Holdings Australia Pty Ltd# Pets International Pty Ltd# J Cullity M Waller J Cullity S Duggan M Waller Pharmacy Brands Australia Pty Ltd# A White Pharmacy Retailing (NZ) Limited# PRNZ Limited# Richard Thomson Pty Limited# Symbion Pty Ltd# Terry White Group Limited# Tony Ferguson Weight Management Pty Ltd# TW&CM Pty Ltd# TWC IP Pty Ltd# J Cullity M Waller J Cullity M Waller J Cullity M Waller J Cullity S McGregor M Waller R Higham J McKellar K Sclavos T White J Cullity D Lewis^ R Higham J McKellar K Sclavos T White J Cullity D Lewis^ R Higham J McKellar K Sclavos T White J Cullity D Lewis^ R Higham J McKellar K Sclavos T White J Cullity D Lewis^ Ventura Health Pty Ltd J Cullity 83 O v e r v e w i B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e D i r e c t o r y EBOS Group Annual Report 2018Directors’ Interests & Disclosures 84 Subsidiary Current Directors VIM Health Pty Ltd# VIM Health IP Pty Ltd# Vitapet Corporation Pty Limited# R Higham J McKellar K Sclavos T White J Cullity D Lewis^ R Higham J McKellar K Sclavos T White J Cullity D Lewis^ J Cullity S Duggan M Waller You Save Management Pty Ltd J Cullity ZAP Services Pty Ltd# ZHHA Pty Ltd# J Cullity S McGregor M Waller J Cullity S McGregor M Waller # P Davies retired as a director of these entities during the year ended 30 June 2018. *Nature’s Recipe Pet Foods (NZ) Limited amalgamated with Masterpet Corporation Limited on 31 May 2018. The directors of Nature’s Recipe were M Waller and J Cullity. ^D Lewis is an alternate director for J Cullity. No employee of the Group appointed as a director of the Company or its subsidiaries receives remuneration or other benefits in their role as a director. The remuneration and other benefits of such employees, received as employees, are included in the relevant bandings for remuneration disclosed under the employee remuneration range below. Stronger together85 O v e r v e w i B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e D i r e c t o r y EMPLOYEE REMUNERATION Grouped below, in accordance with Section 211 of the Companies Act 1993, are the number of employees or former employees of the Company and its subsidiaries, including those based in Australia, who received remuneration and other benefits in their capacity as employees totalling NZ$100,000 or more during the year. Employee Remuneration (NZ$) 100,000 – 110,000 110,000 – 120,000 120,000 – 130,000 130,000 – 140,000 140,000 – 150,000 150,000 – 160,000 160,000 – 170,000 170,000 – 180,000 180,000 – 190,000 190,000 – 200,000 200,000 – 210,000 210,000 – 220,000 220,000 – 230,000 230,000 – 240,000 240,000 – 250,000 250,000 – 260,000 260,000 – 270,000 270,000 – 280,000 280,000 – 290,000 290,000 – 300,000 310,000 – 320,000 320,000 – 330,000 330,000 – 340,000 340,000 – 350,000 350,000 – 360,000 360,000 – 370,000 370,000 – 380,000 380,000 – 390,000 400,000 – 410,000 410,000 – 420,000 430,000 – 440,000 440,000 – 450,000 460,000 – 470,000 30 June 2018 Number of Employees 123 81 67 66 32 29 38 23 17 16 12 11 13 5 9 3 7 3 3 2 4 4 2 2 2 1 2 3 3 1 1 1 1 EBOS Group Annual Report 2018Directors’ Interests & Disclosures 86 Stronger together Employee Remuneration (NZ$) 30 June 2018 Number of Employees 490,000 – 500,000 530,000 – 540,000 560,000 – 570,000 570,000 – 580,000 660,000 – 670,000 680,000 – 690,000 730,000 – 740,000 810,000 – 820,000 840,000 – 850,000 870,000 – 880,000 990,000 – 1,000,000 1,130,000 – 1,140,000 1,150,000 – 1,160,000 1,570,000 – 1,580,000 3,160,000 – 3,170,000 AUDITOR 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 The Company’s Auditor, Deloitte, will continue in office in accordance with the Companies Act 1993. The directors are satisfied that the provision of non-audit services during the year by the auditor is compatible with the general standard of independence for auditors imposed by the Companies Act 1993. Details of amounts paid or payable to the auditor for non-audit services provided during the year by the auditor are outlined in note [H5] of the financial statements. M B Waller Chairman of Directors E M Coutts Director directory REGISTERED OFFICES 108 Wrights Road PO Box 411 Christchurch 8024 New Zealand Telephone +64 3 338 0999 Email: ebos@ebos.co.nz Level 7, 737 Bourke Street Docklands 3008 PO Box 7300 Melbourne 8004 Australia Telephone +61 3 9918 5555 Email: ebos@ebosgroup.com WEBSITE ADDRESS www.ebosgroup.com DIRECTORS Mark Waller Chairman Elizabeth Coutts Independent Director Stuart McGregor Sarah Ottrey Independent Director Peter Williams SENIOR EXECUTIVES John Cullity Chief Executive Officer Brett Barons CEO Symbion Andrea Bell Chief Information Officer Janelle Cain General Counsel Sean Duggan CEO Animal Care and Consumer Brands Tim Goldenberg Chief Human Resources Officer Shaun Hughes Chief Financial Officer David Lewis EGM Strategy AUDITOR Deloitte Limited Christchurch SECURITIES EXCHANGE EBOS Group Limited shares are quoted on the New Zealand Securities Exchange and the Australian Securities Exchange (NZX/ASX code: EBO). SHARE REGISTER Computershare Investor Services Ltd Private Bag 92119 Auckland 1142 New Zealand Telephone: +64 9 488 8777 Computershare Investor Services Pty Ltd GPO Box 3329 Melbourne, Victoria 3001 Australia Telephone: 1800 501 366 MANAGING YOUR SHAREHOLDING ONLINE: To change your address, update your payment instructions and to view your Investment portfolio, including transactions, please visit: www.computershare.com/ investorcentre General enquiries can be directed to: • enquiry@computershare.co.nz • Private Bag 92119, Auckland 1142, New Zealand or GPO Box 3329, Melbourne, Victoria 3001, Australia • Telephone (NZ) +64 9 488 8777 or (Aust) 1800 501 366 • Facsimile (NZ) +64 9 488 8787 or (Aust) +61 3 9473 2500 Please assist our registrar by quoting your CSN or shareholder number. NOTICE OF ANNUAL MEETING The Annual Meeting of EBOS Group Limited will be held on Tuesday, 16 October 2018 at 2.00pm, at Addington Raceway & Events Centre, 75 Jack Hinton Drive, Addington, Christchurch, New Zealand. 87 E B O S G r o u p A n n u a l R e p o r t 2 0 1 8 O v e r v e w i B u s i n e s s i F n a n c a s i l C o r p o r a t e G o v e r n a n c e l & D i s c o s u r e s D i r e c t o r s ’ I n t e r e s t s D i r e c t o r y 88 www.ebosgroup.com Stronger together

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