MAKING FOOD BETTER Freedom Foods Group Limited Annual Report 2014 For personal use only Contents Financial Highlights and Five Year Summary ..........................................................................................................................2 Chairman’s Letter ......................................................................................................................................................................................3 Managing Director’s Review of Operations .............................................................................................................................5 Directors’ Report .....................................................................................................................................................................................13 Lead Auditor’s Independence Declaration............................................................................................................................20 Corporate Governance Statement .............................................................................................................................................21 Consolidated Statement of Profit and Loss and Other Comprehensive Income ..........................................29 Consolidated Statement of Financial Position ....................................................................................................................30 Consolidated Statement of Cash Flows ..................................................................................................................................31 Consolidated Statement of Changes in Equity ...................................................................................................................32 Notes to the Financial Statements ..............................................................................................................................................33 Directors’ Declaration ..........................................................................................................................................................................76 Independent Auditor’s Report ......................................................................................................................................................77 Shareholder Statistics ..........................................................................................................................................................................79 Corporate Directory .............................................................................................................................................................................82 Annual General Meeting Date 30 October 2014 Time 12.00 pm Venue DLA Piper Australia Level 22, 1 Martin Place Sydney NSW 2000 FREEDOM FOODS GROUP LIMITED ABN 41 002 814 235 Annual Report for the year ended 30 June 2014 For personal use only Financial Highlights and Five Year Summary n Financial Highlights and Five Year Summary Gross Sales Revenues (i) Net Sales Revenue ($000's) EBDITA (Operating) ($000's)(ii) EBITA (Operating) ($000's) (ii) Equity Associates Share of Profit/Loss Pre Tax Profit (Operating) Pre Tax Profit (Reported) Net Profit (Operating) ($000's) Net Profit (Reported) ($000's) Interim Ordinary Dividend (cents) Final Ordinary Dividend (cents) Interim Convertible Redeemable Preference Share Dividend (cents) Final Convertible Redeemable Preference Share Dividend (cents) Earnings per Share (Fully Diluted for CRPS) on Adjusted Reported Net Profit Earnings per Share (Fully Diluted for CRPS) on Operating Net Profit Net Debt / Equity Net Assets per Share (cents) Total Assets ($000's) Shareholders Equity ($000's) Number of Ordinary Shares Issued (000's) Number of Convertible Redeemable Preference Shares Issued (000's) Dividend Paid ($000's) 2014 122,722 87,856 16,611 13,868 (26) 13,059 12,673 12,518 12,132 1.50 1.50 1.35 1.35 8.21 8.22 4% 81 151,229 122,233 150,645 152 3,186 2013 115,514 88,831 11,600 8,972 819 7,524 18,524 6,351 13,722 1.00 1.00 1.40 1.40 11.96 5.40 10% 63 126,839 82,395 113,754 17,219 2,327 2012 72,556 58,132 5,447 4,075 1,214 3,476 3,250 3,305 3,012 - 1.00 1.40 1.40 3.11 3.32 82% 49 103,881 47,270 77,996 19,415 1,020 2011 57,664 45,256 4,041 2,949 1,136 2,469 4,249 2,607 4,387 0.50 0.50 0.10 2.00 4.99 2.91 36% 52 75,456 49,983 77,497 19,415 405 2010 56,612 44,071 3,816 2,812 1,308 3,666 3,094 3,929 3,357 - - - - 5.00 5.48 53% 52 71,090 40,263 77,435 - - (i) Gross Sales Revenues includes revenues from the group associate entities. It also includes intercompany revenue which is eliminated from the reported Net Sales Revenue figure. (ii) Operating Earnings before depreciation, interest, tax and amortisation and Earnings before interest, tax and amortisation, excludes abnormal or non-operating charges. 2 Annual Report 2014 For personal use only n Chairman’s Letter Dear Shareholder In the 2014 financial year, Freedom Foods Group Limited (“FFG”) achieved Operating EBDITA of $16.6 million, an increase of 43.2% against the prior corresponding period, reflecting increased sales and profitability in the Freedom Foods business, consolidation of Pactum Australia for 12 months and a contribution from Specialty Seafood. Operating Pre-tax Profit was $13.1 million for the 12 months ended 30 June 2014, reflecting a 73.6% increase on the previous corresponding 12 month period. The Reported Net Profit of $12.1 million included non-operating employee share option expense of $252k (after tax). With improving profitability, the Board has recommended payment of a final fully franked dividend of 1.5 cents per ordinary share in November 2014. The total dividend for the year of 3 cents (last year 2 cents) represents a dividend payout ratio of 29% of operating net profit in FY 2014. The result included strong sales growth in the Freedom Foods business unit reflecting growth in Cereals and Non Dairy beverages, with a significant business unit EBDITA increase reflecting sales growth and improved operating efficiencies at Leeton. In the Speciality Seafood business unit, the Brunswick Sardine brand maintained its No 1 brand leadership position in Australia and New Zealand. The Pactum business unit provided a strong sales and business EBDITA contribution, reflecting increasing non-dairy production volumes, in support of Freedom branded and Private Label products in the fast growing almond beverage category. The Board is pleased with these results and the Company has continued the positive trend in the development of its unique business platforms in specialised areas of the food market, with two key growth opportunities in Freedom Foods and Pactum Australia, a stable business base in Specialty Seafood and a strategic opportunity in The a2 Milk Company. The Managing Director’s report provides further commentary on operations and future plans. The Company completed a capital raising of $30 million (gross proceeds) from a placement and entitlements offer in September 2013. The capital raising was significantly oversubscribed with strong demand from a broad range of high quality institutional investors and existing shareholders. The proceeds of the Placement and Entitlement Offer are being used to fund the Company’s growth strategy including acceleration of new capital projects within Freedom Foods, Pactum Australia, new product initiatives, acceleration of international sales activities and additional working capital requirements. Chairman’s Letter 3 Freedom Foods Group LimitedFor personal use only Chairman’s Letter (continued...) The a2 Milk Company (a2MC) (formerly A2 Corporation) (17.9% FNP shareholding) reported continued strong growth in the Australian fresh milk business with sales up 24% over the prior year. a2MC current market capitalisation implies a value for the Company’s 17.9% post sale shareholding of approximately A$70 million, materially above the book value of A$10.6 million. The Company did not recognise any equity accounted profit from a2MC during the year, compared to $819k in the prior year period. On behalf of the Board, I would like to thank my fellow directors and all employees for their dedication and hard work throughout the year. There is much to be done and a great deal of confidence about Freedom Foods Group long-term prospects. Perry Gunner Chairman 4 Annual Report 2014For personal use only Managing Director’s Review of Operations n Managing Director’s Review of Operations Group Summary Result Year ended 30th June Gross Sales Revenues (1) Net Sales Revenues EBDITA (Operating) (2) EBITA (Operating) (2) Equity Associates Share of Profit/Loss Pre Tax Profit (Operating) Pre Tax Profit (Reported) Net Profit (Operating) Net Profit (Reported) Interim Ordinary Dividend (cps) Final Ordinary Dividend (cps) Interim CRPS Dividend (cps) Final CRPS Dividend (cps) (3) Fully Diluted Earnings per Share ( for CRPS) Net Debt / Equity Net Assets per Share Notes: 2014 $000 122,772 87,856 16,611 13,868 -26 13,059 12,673 12,518 12,132 1.50 1.50 1.35 1.35 8.21 4% $0.81 2013 $000 115,514 88,831 11,600 8,972 819 7,524 18,524 6,351 13,722 1.00 1.00 1.40 1.40 11.96 10% $0.63 % Change 6.28% -1.10% 43.20% 54.57% -103.17% 73.56% -31.59% 97.10% -11.59% +50% +50% - - -31.35% -59.50% 28.80% (1) Gross Sales Revenues includes revenues from the group associate entity The a2 Milk Company. It also includes intercompany revenue which is eliminated from the reported Net Sales Revenue figure. (2) Operating EBDITA and EBITA, excludes abnormal or non-operating charges with an add back of non cash employee share option expense of $352k, bad debts written off expense of $293k and employee claim settlement expense of $200k. The company achieved an Operating EBDITA of $16.6 million, an increase of 43.20%, reflecting increased sales and profitability in the Freedom Foods business, consolidation of Pactum Australia for 12 months and a contribution from Specialty Seafood. Operating Pre-tax Profit was $13.1 million for the 12 months ended 30 June 2014, reflecting a 73.6% increase on the previous corresponding 12 month period. The Reported Net Profit of $12.1 million included non-operating employee share option expense of $252k (after tax). Net Operating Profit was $12.5 million, an increase of 97.1%, including a decrease in operating income tax expense to $0.5 million, against a $4.8 million tax expense for the prior year period. The prior year period reported net profit included non-operating pre-tax profit of $11.8 million from the sale of 40 million shares in The a2 Milk Company (formerly A2 Corporation) in December 2012. After a detailed review, the Company has written back an amount of $3.1 million relating to over accrual of tax on the disposal, which has had the effect of reducing the income tax expense for this period. Going forward, the Company expects a low effective tax rate relating to any capital gain on a sale of shares in a2 Milk Company. Net assets per share at $0.81 and net tangible assets of $0.67 per share, with The a2 Milk Company investment recorded at a book value of $10.6 million. 5 Freedom Foods Group LimitedFor personal use only Managing Director’s Review of Operations (continued...) HIGHLIGHTS Highlights for the year included : • • • • • • • • Group Operating EBDITA of $16.6 million, a 43.20% increase on the previous corresponding period. Operating Net Profit was $12.5 million for the 12 months ended 30 June 2014, reflecting a 97.1% increase on the previous corresponding 12 month period. Successful year building on the Company’s capability and capacities for profitable growth, investing in our brands and establishing key customer relationships in Asia and North America. Strong sales growth in the Freedom Foods business unit reflecting growth in Cereals and Non Dairy beverages, with a significant business unit EBDITA increase reflecting sales growth and improved operating efficiencies at Leeton. Pactum Australia provided a strong sales and business EBDITA contribution, reflecting increasing non-dairy production volumes, in support of Freedom branded and Private Label products in the fast growing almond beverage category. Commencement of commercial operations at Pactum Dairy Group (PDG) in Shepparton in April 2014, with initial volumes ahead of its 3 year business plan, reflecting strong demand from customers from China, SE Asia and Australia. Specialty Seafood business made a steady profit contribution, with the Brunswick Sardine brand maintaining its number 1 brand leadership position in Australia and New Zealand. The a2 Milk Company (a2MC) (17.9% FNP shareholding) reported continued strong growth in the Australian fresh milk business with sales up 24% over the prior year period. a2MC’s current market capitalisation implies a value for the Company’s 17.9% shareholding of approximately A$70 million, materially above the book value of A$10.6 million. • The Company completed a capital raising of $30m (gross proceeds) at $2.10 per share from a placement and entitlements offer in September 2013. The capital raising was significantly oversubscribed with strong demand from a broad range of high quality institutional investors and existing shareholders. In addition, the exercise of options by shareholders and employees raised $2.2 million. • Net Cash position including financial assets (loans to PDG associate of $12.8 million) at June of $7.9 million. During the period, the Company invested $19.9 million in capital expenditure, $4.5 million in equity associates and repaid debt of $12.5 million. • Net assets per share at $0.81 and net tangible assets of $0.67 per share. If The a2 Milk Company investment was recorded at market value (as compared to book value of $10.4 million), the Net Assets per share would be $1.27. • The Company is to pay a final dividend for the half year of 1.5 cents fully franked per ordinary share paid on 3 November 2014. A fully franked converting preference share dividend will be paid on 15 October 2014. 6 Annual Report 2014For personal use only Managing Director’s Review of Operations (continued...) BUSINESS UNITS - WHOLLY OWNED Freedom Foods The Freedom Foods business unit continued to build momentum, investing significantly in capability and capacities for future growth including capital expenditure at Leeton and increase in brand marketing. The business delivered overall gross sales growth of 15% compared to the previous corresponding period. With a focus on its core product portfolio of Cereal, Snacks and Non Dairy Beverage for future growth, the business is progressively reducing its presence in non-core categories including biscuits. The reduction in non-core products impacted sales in the period by approximately $2.6 million, with some resulting impact on manufacturing recoveries. Growth in Cereal volumes contributed to increased efficiencies at the Leeton manufacturing facility, with further benefits arising from a focus on improving efficiencies in labour, supply chain and distribution. To our large scale knowledge, the Leeton facility manufacturing capability in Australia and overseas producing cereals and snacks “free from” gluten, nuts and dairy to the lowest detectable standards. is the only integrated Dairy alternative beverage sales continued the strong upward trend from the half year with volume growth of 44% compared to the previous corresponding period, reflecting increased market share of Australia’s Own Organic and Blue Diamond Almond Breeze brands, within a category which is itself growing significantly. As at 30 June 2014, the Almond Milk category accounted for 30% of the retail non dairy category, compared to 16% at 30 June 2013. The business invested in senior sales & marketing expertise during the year in order to drive growth in retail and other channels in the medium term, as well as marketing investment in building awareness of the brand and products across a broader consumer market. In North America, our new 80% owned subsidiary Freedom Foods North America, invested in building sales and distribution capabilities, including establishing key relationships with distributors, brokers and retailers within the Specialty and Natural Product Retailer markets. While an operating loss was incurred in this business, this investment now provides a strong base of retail distribution coming on stream into calendar year 2015, building on Freedom Foods unique allergen free and non GMO capabilities. During the second half of FY 2014, the business invested $6 million in incremental capital expenditure at Leeton, including an upgrade of cereal packaging capabilities to improve efficiencies and provide increased capacity in range and format and additional Cereal extrusion capacity to meet growth requirements in Cereals and other Cereal based products. The investment will significantly increase Freedom Foods production capability, with no material increase in cash overheads and lower cost per case. The commissioning was completed in August 2014. The impact of sales and efficiency improvements, against increased sales and marketing investment during the period resulted in an increased business unit EBDITA to $7.1 million. The North American operations reported an EBDITA loss of $684k from start up operations during the period. 7 Freedom Foods Group LimitedFor personal use only Managing Director’s Review of Operations (continued...) The focus for the business into 2015 remains on increasing sales in Australia through building on its category leadership in the health channel and further growth in distribution channels, while establishing key products, channels and distribution for expansion of product into export markets in North America and Asia. An exciting innovation pipeline has been developed which will be launched into 2015, through new products in Cereals, Non Dairy Beverages, Nutritional Snacks and new formats for convenience and food service channels. The additional $9 million upgrade to Freedom Foods nutritional snack capabilities at Leeton will materially improve efficiencies on current business and provide the ability to meet demand for nutritious allergen free snacks in a range of formats in Australia and internationally. The new capabilities will come on line in 2 stages between November 2014 and March 2015. increase production capability and Our capital investment at Leeton has been made to improve operating improve quality. This efficiencies, investment, aligned with ongoing marketing in building awareness of the brand and products across a broader consumer market open to healthier digestive and nutritional products, provides a strong base for growth. investment In North America, the business is focused on building sales within a core base of retail distribution that has been established in 2014. The business has obtained ranging in excess of 3,000 Stores that is either on shelf or due to be ranged over the next few months in retailers such as Sprouts, Whole Foods, PCCC, Raleys, Wegmans, HEB and Kroger’s, reflecting Freedom Foods unique proposition in Allergen Free and Non GMO. The business remains focused on delivering its medium term sales target of up to 1 million cases of Freedom Foods branded Cereals and Cereal snacks per annum. With the launch of the Australia’s Own brand in China in late 2014, via our licensing agreement with Shenzhen JLL Group (JLL), Freedom Foods will be looking to develop and grow a range of high quality and safe food products relevant to the Asian consumer. The initial launch will comprise Dairy products, manufactured through Pactum. The existing and new capabilities with Freedom Foods and Pactum’s manufacturing facilities will provide superior capabilities to customise food and beverage products for these markets. Specialty Seafood The Specialty Seafood business performed broadly in line with the previous corresponding period, with business unit EBDITA of $2.4 million. Brunswick sardines maintained its No 1 brand leadership position in Australia and New Zealand. In salmon, the Paramount brands full year sales result was impacted by SKU ranging reductions implemented during 2nd half FY 2013, although the effect on profitability of these reductions was reduced in the FY 2014 year through management of promotional spend and improved cost of goods 8 Annual Report 2014For personal use only Managing Director’s Review of Operations (continued...) against plan. The impact of this SKU reduction impacted sales in the full year by approximately $2.5m. The business remains focused on driving growth into 2015 through category leadership of the specialty seafood channel, including new product opportunities aligned to consumer demand for convenience and superior health benefits. As part of this the business is introducing revitalized packaging for the Brunswick brand in 1st half FY 2015 and for Paramount during 2015. The business continued to utilise the procurement power of Bumble Bee Foods of North America, with Bumble Bee securing 2014/15 inventory requirements through priority access to salmon and sardine catch volumes. Pactum Group Business Pactum Food and Beverage The Pactum business unit continued to build momentum investing significantly in capability and capacities for future growth including the new Pactum Dairy Group (PDG) facility at Shepparton and investment in additional value added format capability. Pactum provides innovative solutions in long life (UHT) food beverages for private label and proprietary customers and delivered a business EBDITA contribution of $9.7 million. Pactum’s non-dairy production volumes increased during the period to support the growth of the Australia’s Own and Blue Diamond brands, as well as external private label requirements in the fast growing almond beverage category. The business continued to see the benefit of increasing its mix of value added UHT products to a range of private label and proprietary customers. Dairy milk production has been transferred to the PDG facilities in Shepparton. During the 2nd half 2014, Pactum expanded its capabilities with the installation of 250ml Prisma Format and 330ml Prisma Dreamcap formats. The packaging capability is currently owned by Pactum and operated at PDG’s Shepparton facility. Both capabilities will be for domestic customers, with a significant proportion of capacity being allocated to PDG dairy based export customers into 2015. The total investment of approximately $15 million will provide an initial earnings contribution in FY 2015. With increasing demand from its private label and proprietary customer base for increased capacity and product format capability across dairy and non dairy categories, Pactum invested significantly in capability and capacities for future growth including additional capacity at the Shepparton facility and planned expansion at a new site in South West Sydney. Pactum’s planned new facility in Ingleburn in South West Sydney will provide for significant expansion in capacity and efficiency improvements 9 Freedom Foods Group LimitedFor personal use only Managing Director’s Review of Operations (continued...) compared to current operations, including providing more efficient and lower cost warehousing and logistics compared to current arrangements. Pactum will acquire aproximately 66,000 sq. metres of land in Ingleburn for an acquisition price subject to final adjustments, of approximately $16.6 million. Settlement is expected on or around February 2015, once final sub divisions and other approvals have been obtained. The new facility will provide superior capabilities to customise food and beverage products for local and export markets with efficiency and speed to meet the growing demand for high quality safe foods from Australia marketed under the Company’s brands “Australia’s Own” and “Freedom Foods” and leading brands of key customers in Australia and internationally. Construction of the facility is expected to commence in 2nd half FY 2015, with production commencing from 2nd half FY 2016. The acquisition of land, associated building and capital requirements is expected to be funded from Freedom Foods Group existing finance facilities and other assets. Pactum Dairy Group (PDG) PDG was established in 2013 to operate UHT dairy milk operations for supply into both the domestic and export markets. PDG is a joint venture between Pactum and Australian Consolidated Milk (ACM), a major Australian dairy milk supply group. Pactum manages PDG on behalf of the joint venture partners, with sales to key customers undertaken as an integrated contract packaging offer. The facility was established in the northern Victorian city of Shepparton, for a total investment of approximately $45 million, with initial capacity for 100 million litres of dairy milk production, with capability to be increased up to 300 million litres in the longer term. The facility was completed over a construction period of approximately 9 months, with the project largely on budget. The plant commenced operations in April 2014, with commencing volumes ahead of its 3 year business plan, with strong demand from customers for 1 Litre and Portion pack volume from South East Asia and China. These customers are expected to grow beyond their initial volumes as demand for milk increases, with Australian milk products providing highest quality and safety at a comparative cost advantage compared to locally sourced milk. To date, key relationships include Bright Dairy (Shanghai), New Hope Dairy (Chengdu), Shenzhen JLL (Guangzhou) and online retailer Yihaodian. Each of these relationships is complementary with significant diversification in local market distribution, product range and capability. PDG has also developed other relationships for China and SE Asia including A2 Milk Company (for exclusive UHT supply into Australia, China and SE Asia) and selected retailers and distributors in China, SE Asia and Australia. Total dairy milk volume processed in 2015 is expected to be over 100 million litres, with the site total capacity estimated at 300 million litres, based on current planning configuration. To meet expected expansion in milk volumes over the medium term, PDG is evaluating additional processing and filling capacity expansion, including expansion of warehousing and logistics capability. Opportunities to vertically integrate into other value added dairy products streams are also being reviewed, consistent with our customer’s long term requirements. With the commencement of operations and significant resourcing to meet the expected ramp up in volumes, the business recorded a loss in FY 2014. FNP equity accounted 1% of the loss in line with the current ownership structure. The Company has the capacity to obtain a 50% interest in PDG by converting convertible notes issued to it as part of its original investment. This is expected to occur in FY 2015. 10 Annual Report 2014For personal use only Managing Director’s Review of Operations (continued...) STRATEGIC EQUITY ASSOCIATES The a2 Milk Company Limited (a2MC), 17.9% Equity Interest The Company is the largest single shareholder in The a2 Milk Company Limited (a2MC). a2MC owns and commercialises unique and comprehensive intellectual property rights relating to a2™ brand milk and related dairy products in international markets. a2™ branded milk is the fastest growing milk brand in the Australian market and the major driver of category growth nationally, accounting for approximately 9% of grocery channel market share by value. a2MC also markets a2™ Platinum™ infant formula to consumers in Australia and China. a2MC’s plan to enter the North American fresh milk market is progressing, with a launch expected to commence during calendar year 2015. The Company is the largest single shareholder in a2MC with a fully diluted shareholding of 17.9%. a2MC is listed on the main board of the New Zealand Stock Exchange (NZX: ATM), with a current market capitalisation of approximately NZ$429million (A$391 million) implying a value for the Company’s 17.9% investment of around A$70 million, materially above the book value of A$10.6 million. The Company did not recognise any equity accounted profit from a2MC during the year, compared to $819k in the prior year period. While the Company intends to maintain a strategic shareholding in the medium term, it will retain the option to realise capital from the investment to support growth opportunities. Capital Management The Company held cash of $4.8m at the full year, with total borrowings of $9.8 million, comprising mainly equipment finance leases. Net debt at 30th June 2014 was $4.9m. Net debt excludes financial assets and loans to Associate entities. At 30th June 2014, the Company had lent $12.8 million to Pactum Dairy Group to support further capital investment and working capital requirements. The loan attracts interest at a rate of 8.0% per annum. Net cash flow from operations was $7.2m, reflecting improved operating performance and increased working capital from change in product mix and inventory build for capital installation. During the period, the Company invested $19.9m in capital expenditure, $4.5m in equity associates and repaid debt of $12.5m. The capital expenditure of $19.9 million comprised normal operating expenditures, commitments to expansion at Freedom’s Leeton facility and expansion of Pactum’s packaging capabilities at Shepparton. The Company completed a capital raising of $30m (gross proceeds) from a placement and entitlements offer in September 2013. The capital raising was significantly oversubscribed with strong demand from a broad range of high quality institutional investors and existing shareholders. The proceeds of the Placement and Entitlement Offer is being used to fund the Company’s growth strategy including acceleration of new capital projects within Freedom Foods, Pactum Australia, new product initiatives, acceleration of international sales activities and additional working capital requirements. The Company has approximately 152,127 convertible redeemable preference shares (CRPS) on issue, which are convertible 1 for 1 into ordinary shares at election of the holder at any time. 11 Freedom Foods Group LimitedFor personal use only Managing Director’s Review of Operations (continued...) Dividends Consistent with the continued improvement in group performance, the Company will pay a final fully franked dividend of 1.5 cents per ordinary share, an increase of 0.5 cents on the final dividend paid in November 2013. The record date for determining entitlements is 3 October 2014 and the payment date is 3 November 2014. The Company’s dividend reinvestment plan (DRP) remains open. The Company will pay a fully franked converting preference share dividend to be paid in accordance with the terms of the converting preference shares. The record date for determining entitlements is 3 October 2014 and the payment date is 15 October 2014. There are 152,127 converting preference shares on issue. Outlook The Company will continue to build on its capability and capacities for growth, investing in our brands and establishing key customer relationships in Asia and North America through its Freedom Foods and Pactum businesses. Freedom Foods is expected to continue to deliver improved results from growth through innovation in new products, expansion of distribution channels in Australia and international markets, aligned with increasing manufacturing efficiencies from volume and cost efficiencies arising from the capital investment program at the Leeton facility. This, aligned with investment in building awareness of the brand across a broader consumer market open to healthier products, provides a strong base for growth into future years. The expansion of capabilities in Pactum will result in an increase in sales and profitability, with further growth opportunities through meeting the increasing demands of its private label and proprietary customer base, including under the Company’s brands “Australia’s Own” and “Freedom Foods” and leading brands of key customers in Australia and internationally. The investment in Pactum Dairy Group provides a material opportunity to increase exposure to the growing demand for high quality and safe dairy products from South East Asia, including China aligned with our key strategic customers. PDG is expected to provide a material profit contribution in FY 2015. The strategic investment in a2 Milk Company provides the Company and its shareholders a potentially significant value creation opportunity through a2 Milk Company’s growth in Australia and international markets. Overall the Company anticipates growth in sales, operating profitability and improving return on funds employed in FY 2015. Rory J F Macleod Managing Director Freedom Foods Group Limited 12 Annual Report 2014For personal use only n Directors’ Report Your Directors submit the financial report of Freedom Foods Group Limited (the Company) for the year ended 30 June 2014. In order to comply with the provisions of the Corporations Act 2001, the Directors report as follows: Directors For the names and particulars of the Directors of the Company during or since the end of the financial year, refer to the Corporate Governance Statement. Company Secretary Mr Rory J F Macleod held the position of Company Secretary during and at the end of the financial year. He has been with the Company for over 10 years and is the Managing Director. Mrs Sharon Maguire is the Assistant Company Secretary. Principal activities The principal activities of the consolidated entity during the financial year were: • manufacture, distribution and marketing of allergen free cereals, nutritional snacks and biscuits; • manufacture and distribution of long life beverages; • • distribution and marketing of canned seafood; investment in branded dairy milk manufacture, marketing and distribution activities. There were no significant changes in the nature of the principal activities during the financial year. Review of operations The consolidated entity’s profit attributable to equity holders of the Company, after providing for income tax, amounted to $12,132,000 (2013 profit: $13,722,000). Refer to the commentary in the Managing Directors Review of Operations. Dividends paid or recommended In respect of the financial year ended 30 June 2014, the Directors are recommending that a final ordinary dividend of 1.5 cent per share be paid at the beginning of November 2014 and a converting preference share (CRPS) dividend of 1.35 per CRPS to be paid mid October 2014. Significant changes in state of affairs There are no significant changes in the state of affairs for the current financial year. Subsequent Events As disclosed in Note 27 the following subsequent events occurred. (i) The Company entered into an agreement on 21 August 2014 to acquire land for a new integrated Aseptic (UHT) production and logistics facility in south west Sydney. It will acquire approximately 66,000 sq. metres of land at Ingleburn in South West Sydney. The acquisition price subject to final adjustments is approximately $16.6 million. Settlement is expected on or around February 2015, once final sub divisions and other approvals have been obtained. (ii) The Company acquired a further 942,500 shares in The a2 Milk Company in September 2014 for NZD 589,000. This increases it’s shareholding in the company to 17.9% of issued capital. Directors’ Report 13 Freedom Foods Group LimitedFor personal use only Directors’ Report (continued...) Future developments In future financial years, the consolidated entity expects to further it’s growth through expansions to other territories, and forming strategic alliances and partnerships. Environmental regulations The consolidated entity’s operations are subject to environmental regulation under the law of the Commonwealth (AQIS) and the State (Workcover, EPA, Sydney Water, Safe Food NSW) and local council regulations. • • • The consolidated entity operates under a Dangerous Goods Licence issued by Workcover. There were no breaches of environmental laws, regulations or permits during the year. The consolidated entity is currently operating in accordance with local council consent in regard to hours of operation. Indemnification of officers and auditors The Company has not, during or since the financial year, in respect of any person who is or has been an officer or auditor of the Company or a related body corporate: • • indemnified or made any relevant agreement for indemnifying against liability incurred as an officer, including costs and expenses in successfully defending legal proceedings; or paid or agreed to pay, a premium in respect of a contract insuring against a liability incurred as an officer for the costs or expenses to defend legal proceedings; with the exception of the following matter. During the financial year the Company paid premiums to insure each of the Directors against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity of an officer of the Company. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Rounding off of amounts The Company is an entity to which ASIC Class Order 98/0100 applies. Accordingly amounts in the financial report have been rounded off to the nearest thousand dollars, unless otherwise stated. Meetings of Directors During the financial year there were 13 meetings of Directors (including committees). The following persons acted as Directors of the company during or since the end of the financial year with attendances to meetings of Directors as follows: Directors Meeting Remuneration & nomination committee meetings Audit, risk & compliance committee meetings Eligible to attend Attended Eligible to attend Attended Eligible to attend Attended 1 - 1 - 1 - - 9 9 9 9 9 10 2 10 10 10 10 10 10 2 - - 1 2 2 2 - 1 - 1 - 1 - - - - 2 2 2 - - P.R. Gunner A.M. Perich R. Perich M. Miles T.J. Allen R.J.F. Macleod (i) M.R. Perich (alternate director) (i) R.J.F. Macleod attended the Audit Committee meetings at the invitation of the Audit Committee. 14 Annual Report 2014For personal use only Remuneration report - audited This report details the nature and amount of remuneration for each Director and the Executives. Directors’ Report (continued...) Key management personnel include: P.R. Gunner Chairman and Non-Executive Director R.J.F. Macleod Managing Director A.M. Perich Non-Executive Director R. Perich Non-Executive Director M. Miles Non-Executive Director T.J. Allen Non-Executive Director A. Haddad CEO Pactum Australia M. Bracka CEO Freedom Foods North America Remuneration policy Remuneration arrangements for key management personnel of the Company and Group (“the Directors and Executives”) are set competitively to attract and retain appropriately qualified and experienced Directors and Executives. As part of its agreed mandate, the Remuneration and Nomination Committee obtains independent advice when required on the appropriateness of remuneration packages given trends in comparable companies and the objectives of the consolidated entity’s remuneration strategy. The remuneration structures explained below are designed to attract suitably qualified candidates. The remuneration structures take into account: • • • The capability and experience of the Directors and Executives; The Directors and Executives’ ability to control the relevant operational performance; and The amount of incentives within each Director and Executive’s remuneration. Managing Director and Executives Fixed remuneration consists of base remuneration (which is calculated on a total cost basis and includes any FBT charges related to employee benefits including motor vehicles), as well as employer contributions to superannuation funds. The Managing Director and Executives remuneration levels are reviewed annually by the Remuneration and Nomination Committee through a process that considers the overall performance of the Group. Performance based remuneration Performance based remuneration is at the discretion of the Remuneration and Nomination Committee. These can take the form of share options or cash bonuses, although the Company’s preference is to link performance and service to a long term incentive arrangement through the Company’s Employee Share Option Plan (ESOP). The ESOP allows the Company to grant options over shares to all directors (excluding Ron and Anthony Perich) and permanent full time or part time employees, or their respective nominees, of a company in the group (Group Companies), which includes related bodies corporate of the Company and a body corporate in which the Company has voting power of 20% or more, whom the Board determines to be eligible to participate. The Board believes that Options granted are appropriate to aligning key executive performance with long term performance and growth of the Company. Options are valued using the binomial method. 15 Freedom Foods Group LimitedFor personal use only Directors’ Report (continued...) Non-Executive Directors The maximum aggregate amount of fees that can be paid to Non-Executive Directors is subject to approval by shareholders at an Annual or Extraordinary General Meeting. Total fees for all Non-Executive Directors, last voted upon by shareholders in June 2013, was not to exceed $500,000 in total. Total fees paid to Non-Executive Directors for 2014 was $334,129 (2013: $223,179). To align director interests with shareholder interests, the Directors are encouraged to hold shares in the Company. The Chairman receives approximately twice the base fee of Non-Executive Directors. Non-Executive Directors do not receive performance related remuneration. Directors’ fees cover all main Board activities including Committee Fees. There are no termination or retirement benefits for Non- Executive Directors. Service agreements Neither the Managing Director or any other Executive has a fixed term contract. All senior executive management are employed under contract. The agreements outline the components of the remuneration paid to executives including annual review. The agreements do not obligate the business to increase fixed remuneration, pay a short term incentive, make termination benefits or offer a long term incentive in any given year. The Company may terminate the contract at any time without notice if serious misconduct has occurred. Where termination with cause occurs, the executive is only entitled to that portion of remuneration that is fixed, and only up to the date of termination. The agreements may be terminated by written notice from either party or by the employing entity within the Group making a payment in lieu of notice. The notice periods are 9 months for the Managing Director, 6 months for the CEO of Pactum Australia and 12 months for the CEO of Freedom Foods North America. Other notice periods for other executives are between 1 and 2 months. Company performance, shareholder wealth and directors and senior management remuneration The remuneration policy of the company and group is at the discretion of the Remuneration and Nomination Committee. The following table shows the revenue, profits, dividends and earnings per share for the past five years for the consolidated entity. Gross Sales Revenue ($000s) (i) Revenue ($000s) Operating EBDITA ($000s) Operating Net Profit ($000s) Net Profit ($000s) Ordinary Dividends Per Share (cents) CRPS Dividends Per Share (cents) Basic Earnings per Share (cents) Diluted earnings per share (cents per share) 2014 122,722 87,856 16,611 12,518 12,132 2.50 2.75 8.65 8.21 2013 115,514 88,831 11,600 6,351 13,722 2.00 2.75 14.73 11.96 2012 72,556 58,132 5,447 3,305 3,012 0.50 3.40 3.88 3.03 2011 57,664 45,256 4,041 3,735 4,387 0.50 1.00 5.67 4.99 2010 56,612 44,071 3,816 2,786 3,357 - - 5.00 5.00 (i) Gross Sales Revenues includes revenues from the group associate entity The a2 Milk Company. It also includes intercompany revenue which is eliminated from the reported Net Sales Revenue figure. The Remuneration and Nomination Committee considers that the Company’s remuneration structure is appropriate to building shareholder value in the medium term. 16 Annual Report 2014For personal use only Directors and executive officers emoluments The benefits of each Director who held office and other key management personnel for the year ended 30 June 2014 are as follows: Directors’ Report (continued...) Short-term employee benefits Post employ- ment benefits Share based payments % of total being Directors Fees $ Committee Fees $ Non-cash Benefits $ Superannuation Contributions $ 979,450 315,000 (1) TJ Allen became a director in July 13 2014 Directors P.R. Gunner R.J.F. Macleod A.M. Perich R. Perich M. Miles T.J. Allen (1) Executive Officers A. Haddad (CEO, Pactum Australia) M. Bracka (2) (CEO, Freedom Foods North America) Salary $ - 332,225 - - - - 312,225 335,000 or payable 2013 Directors P.R. Gunner R.J.F. Macleod (1) G.H. Babidge (2) A.M. Perich R. Perich M. Miles Executive Officers A. Haddad (3) (CEO, Pactum Australia) M. Bracka (CEO, Freedom Foods North America) Salary $ - 350,460 - - - - 276,226 317,493 85,000 - 65,000 55,000 55,000 55,000 - - 68,250 - 34,667 35,425 36,779 34,667 - - 944,179 209,788 Other $ - - - - - - - - - Other $ - - - - - - 62,000 - 62,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Options Total Options $ - $ 92,853 106,067 456,067 - - - - 71,012 60,088 60,088 60,088 - 23% - - - - 7,853 17,775 6,012 5,088 5,088 5,088 17,775 75,567 405,567 19% - 85,733 420,733 20% 64,679 267,367 1,626,496 16% Options Total Options $ - $ 74,393 151,605 517,739 - - - - 37,787 35,425 37,787 37,787 - 29% - - - - 6,143 15,674 3,120 - 1,008 3,120 25,106 108,139 471,471 23% 17,046 122,628 457,167 27% 71,217 382,372 1,669,556 23% 17 (2) M Bracka was resident in North America during the year and therefore Superannuation Contributions were not due Short-term employee benefits Post employ- ment benefits Share based payments % of total being Directors Fees $ Committee Fees $ Non-cash Benefits $ Superannuation Contributions $ Freedom Foods Group LimitedFor personal use only Directors’ Report (continued...) (1) RJF Macleod remuneration included pay out of accrued leave during the financial year (2) GH Babidge resigned as a director on 30 June 2013 (3) Other is a bonus for performance relating to FY 2012 No Director or senior management person appointed during the year received a payment as part of his or her consideration for agreeing to hold the position. Bonus payments as compensation for the current financial year No material bonus payments are payable to Group employees with respect to the financial year ended 30 June 2014. Employee share options Details of unissued shares or interests under option granted to key management pesonnel as at the date of this report are: Issuing entity Freedom Foods Group Limited (i) Freedom Foods Group Limited (ii) Number of shares under option 3,766,667 1,791,668 Class of shares Ordinary Ordinary Exercise price of options $0.40 $0.60 Expiry date of options 2 February 2017 30 August 2017 Grant date (i) Issued 2 February 2012 (ii) Issued 30 August 2012 Recipients (i) Issued 2 February 2012 Issued 2 February 2012 Issued 2 February 2012 Issued 30 August 2012 Issued 30 August 2012 Issued 30 August 2012 Issued 30 August 2012 Fair value at grant $0.122 $0.066 Name R.J.F. Macleod M. Bracka A. Haddad R.J.F. Macleod M. Bracka A. Haddad Senior Employees Number 1,266,667 1,333,333 1,166,667 133,333 133,334 200,000 1,325,001 Fair Value ($) 154,533 162,667 142,333 8,800 8,800 13,200 87,450 Conditions Employment Employment Employment Employment Employment Employment Employment There are no further performance criteria that need to be met in relation to options granted. The options detailed above vest over a period of 3 years and relate to an employee’s service period only. The holders of these options do not have the right by virtue of the option, to participate in any share issue or interest issue of any other body corporate or registered scheme. Directors’ shareholding Refer to Principle 2 “Structure of the Board to add value” in the Corporate Governance Statement. Non-audit services During the year Deloitte Touche Tohmatsu, the auditors have performed certain other services in addition to their statutory duties. With respect to the non-audit services provided during the year by the auditor, the Board has considered written advice provided and a recommendation of the Audit, Risk and Compliance Committee. The Board is satisfied that the provision of those non-audit services 18 Annual Report 2014For personal use only Directors’ Report (continued...) during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporation Act 2001 for the following reasons: • • all non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed by the Audit, Risk and Compliance Committee to ensure they do not impact the integrity and objectivity of the auditor; and the non-audit services provided do not undermine the general principles relating to auditor independence as set out in the Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by The Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the company, acting as advocate for the company or jointly sharing economic risks and rewards. Details of the amounts paid/payable to the auditor of the consolidated entity, Deloitte Touche Tohmatsu for audit and non-audit services provided during the year are set out below: Audit Services Auditors of the Company - Deloitte Touche Tohmatsu - audit and review of financial reports - taxation advice - research and development advice Consolidated 2014 $ 246,500 165,500 60,000 472,000 2013 $ 219,810 125,429 59,872 405,111 Auditor’s independence declaration A copy of the auditor’s independence declaration as required under Section 307C of the Corporations Act is included on page 20. Proceedings on behalf of Company No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all of those proceedings. Signed in accordance with a resolution of the Board of Directors made pursuant to s.298(2) of the Corporations Act 2001. On behalf of the Directors Perry Gunner Chairman Dated at Sydney 26 September 2014 Rory J F Macleod Managing Director 19 Freedom Foods Group LimitedFor personal use only Lead Auditor’s Independence Declaration n Lead Auditor’s Independence Declaration Deloitte Touche Tohmatsu ABN: 74 490 121 060 Eclipse Tower Level 18 60 Station Street Parramatta NSW 2150 PO Box 38 Parramatta NSW 2124 Australia DX 28485 Tel: +61 (0) 2 9840 7000 Fax: +61 (0) 2 9840 7001 www.deloitte.com.au The Board of Directors Freedom Foods Group Limited 80 Box Road TAREN POINT NSW 2229 Dear Board Members Freedom Foods Group Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Freedom Foods Group Limited. As lead audit partner for the audit of the financial statements of Freedom Foods Group Limited for the financial year ended 30 June 2014, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Catherine Hill Partner Chartered Accountants Sydney, 26 September 2014 Liability limited by a scheme approved under Professional Standards Legislation. A member of Deloitte Touche Tohmatsu Limited. 20 Annual Report 2014For personal use only Corporate Governance Statement n Corporate Governance Statement Freedom Foods Group Limited (the Company) is committed to implementing the highest possible standards of corporate governance and ensures, wherever possible, that its practices are consistent with the Second Edition of the Australian Securities Exchange (ASX) Corporate Governance Council’s Principles and Recommendations (ASX Principles). Each of the eight principles is listed in turn. In certain circumstances, due to the size and stage of development of the Company and its operations, it may not be practicable or necessary to implement the ASX Principles in their entirety. In such instances, the Company will identify the areas of divergence and the reasons for such divergence. The Corporate Governance Statement, policies and Charters are published on the Company’s website: http://www.ffgl.com.au in the ‘Corporate Governance’ section. Principle 1 Lay solid oversight by the Board foundations for management and (9) approving and monitoring financial and other reporting. The Board’s responsibilities are encompassed in a charter which is published on the Company’s website: http://www.ffgl.com.au in the ‘Corporate Governance’ section. The Board is responsible for, and has the authority to determine, all matters relating to the strategic direction, policies, practices, establishing goals for management and the operation of the Company. Without intending to limit this general role of the Board, the specific functions and responsibilities of the Board include: (1) oversight of the Company, including its control and accountability systems; (2) appointing and removing the Managing Director (or equivalent) for the ongoing management task of developing and implementing suitable strategies consistent with the Company’s policies and strategic direction, including approving remuneration of the Managing Director and remuneration policy and succession plans for the Managing Director; (3) ratifying the appointment and, where appropriate, the removal of the CFO (or equivalent) and the Company Secretary; (4) reviewing and determining the strategic direction and policies of the Company, the allocation of resources, planning for the future and succession planning; (5) reviewing and ratifying systems of risk management and internal compliance and control, codes of conduct and legal compliance; (6) monitoring executive management performance and implementation of strategy and ensuring appropriate resources are available; (7) approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestitures; (8) continuously monitoring and overseeing the Company’s financial position; and Key responsibilities of the Board include the overseeing of the strategic direction of the Company, determining its policies and objectives and monitoring executive management performance. The Board adopts a three-year strategic plan and a 12 month operating plan for the Company. Financial results and general performance are closely monitored against the operating plan objectives. To assist in carrying out its responsibilities, the Board has established the following committees of its members. They are: (1) Audit, Risk and Compliance Committee; and (2) Remuneration and Nomination Committee. The responsibilities delegated by the Board to the Company’s management, as set out in the Company’s Statement of Delegated Authority, include managing the day-to-day operations of the Company and consolidated entities. The Statement of Delegated Authority is available on the Company’s website: http://www.ffgl.com.au in the ‘Corporate Governance’ section. The Managing Director and Senior Executive management have service contracts and position descriptions respectively setting out their duties, responsibilities, and conditions of service and termination entitlements. Any new Directors appointed will receive formal letters of appointment setting out the key terms, conditions and expectations of their appointment. The Managing Director and Senior Executive management are subject to a formal performance review process on an annual basis. The Remuneration and Nomination Committee reviews the performance of the Managing Director and Senior Executive management against clear performance objectives. Principal and secondary objectives for the financial year have been established includes monthly which are evaluated against and monitoring of performance. A performance evaluation was undertaken in August 2014 in accordance with the process disclosed. 21 Freedom Foods Group LimitedFor personal use only Corporate Governance Statement (continued...) Principle 2 Structure of the Board to add value The Board determines the Board’s size and composition, subject to limits imposed by the Company’s Constitution. The Constitution provides for a minimum of three Directors and a maximum of ten. At this time the Board comprises of six Directors (excluding alternate Director), three of whom are non-executive independent Directors including the Chairman. A Director is deemed to be independent if he or she is a Non-Executive Director and: (1) is not a substantial shareholder or an associate of a substantial shareholder; (2) has not been employed in an executive capacity in the Company in the last three years; (3) has not acted as a material consultant or provided material professional services to the Company in the last three years; (4) is not a material supplier or customer of the Company; (5) has no material contractual relationship with the Company; (6) has not served on the Board for a period which could materially interfere with his or her ability to act in the best interests of the Company; and (7) is free from any interest which could materially interfere with his or her ability to act in the best interests of the Company. The test of independence for Directors is set out in detail under section 4 of the Board Charter, which is available on the Company’s website: http://www.ffgl.com.au in the ‘Corporate Governance’ section. Materiality thresholds referred to above are assessed on a case-by-case basis. Whilst the Board is not structured with a majority of independent directors in terms of the ASX Corporate Governance Council’s discussion of independent status, the Board believes that the Directors are able, and do make, quality and independent decisions in the best interests of the Company on all relevant issues before the Board. The Board considers that the Company is not currently of a size, nor are its affairs of such complexity to justify the expense of the appointment of a majority of independent Directors. The Board aims to attract and maintain a Board which has an appropriate mix of skills, experience, expertise and diversity. The names and particulars of the Directors of the Company during or since the end of the financial year are: 22 Mr Perry R. Gunner Chairman (Non-Executive), Age 67. Appointed in April 2003, Director 11 years. B.Ag.Sc - is former Chairman and CEO of Orlando Wyndham Wine Group, a current Director of A2 Corporation and Director of Australian Vintage Ltd. Appointed Chairman in July 2006. Chairman of the Remuneration & Nomination Committee. Interest in shares in the Company is 853,157 ordinary independence criteria shares. Measured against the adopted by the Company, Mr Gunner is considered an independent Director. Mr Rory J.F. Macleod Managing Director Age 46. Appointed Director in May 2008, Director 6 years. B.Econ (Hons) - currently Managing Director and director of all Group entities. Mr Macleod has been with the group for the past 11 years responsible for strategic and corporate development and finance and administration. Former Senior Director, corporate finance for UBS in Australasia and Europe where he gained extensive experience in strategy and commercial development, mergers and acquisitions and corporate analysis. Interest in shares and options over shares in the Company are 1,426,108 ordinary shares and 1,400,000 options (1,266,667 exercisable at $0.40 and 133,333 exercisable at $0.60) under the group employee share option scheme. Mr Macleod, being Managing Director of the Company, is not considered independent. Mr Anthony M. Perich Director (Non-Executive), Age 73. Appointed Director in July 2006, Director 8 years. Member of the Order of Australia - Joint Managing Director of Arrovest Pty Limited, Leppington Pastoral Company, one of Australia’s largest dairy producers, and various other entities associated with Perich Enterprises Pty Limited. He is also a property developer, farmer and business entrepreneur. Outside of the Perich Group Mr. A.M. Perich holds a number of other directorships which include, Greenfields Narellan Holdings, East Coast Woodshavings Pty Limited, Breeders Choice Woodshavings Pty Limited, Austral Malaysian Mining Limited, Pulai Mining Sdn Bhd (Malaysia) and Institute. Memberships include Narellan Chamber of Commerce, Narellan Rotary Club, Urban Development Institute of Australia, Urban Taskforce, Property Council of Australia, past President of Narellan Rotary Club and Past President of Dairy Research at Sydney University. Inghams Health Research Annual Report 2014For personal use only Interest in shares in the Company is 86,000,000 ordinary shares. Being a substantial shareholder of the Company, Mr A.M. Perich is not considered an independent Director. Mr Ronald Perich Director (Non-Executive), Age 71. Appointed Director in April 2005, Director 9 years. Joint Managing Director of Arrovest Pty Limited, Leppington Pastoral Company, one of Australia’s largest dairy producers, and various other entities associated with Perich Enterprises Pty Limited. He is also a property developer, farmer and business entrepreneur. Former Director of United Dairies Limited. Member of the Audit, Risk & Compliance Committee and member of the Remuneration & Nomination Committee. Interest in shares in the Company is 86,000,000 ordinary shares. Being a substantial shareholder of the Company, Mr R. Perich is not considered an independent Director. Mr Melvyn Miles Director (Non-Executive), Age 65. Appointed Director in November 2006, Director 7 years. B.Sc (Hons), F.I.B.D. – Extensive Fast Moving Consumer Goods (FMCG) experience throughout Australasia, North America and the UK over a period of 26 years. Former Vice President of Carlton and United Breweries and Foster’s Group, former Director of Carlton & United Breweries & its subsidiaries. Current Director of The a2 Milk Company and Brewtique Pty Limited and former Chairman of South Pacific Distilleries, Fiji. Member of the Audit, Risk & Compliance Committee. Interest in shares in the Company is 331,893 ordinary independence criteria shares. Measured against the adopted by the Company, Mr Miles is considered an independent director. Mr Trevor J. Allen Director (Non-Executive), Age 58. Appointed in July 2013, Director 1 year. B Comm (Hons), CA, FF, MAICD – former partner of KPMG and, at the time of his retirement, the National Head of its Mergers and Acquisitions business. With over thirty years experience in the corporate advisory sector including senior positions at SBC Warburg (now part of UBS), Baring Brothers and KPMG. He is a non-executive director of Peet Limited, where he chairs its Audit & Risk Management Committee and its Remuneration is a member of Committee. He is also a non-executive director and honorary treasurer of the Juvenile Diabetes Research Foundation, and a consultant to ShawICS Advisory Limited, and PPB Advisory. He is Chairman of the Audit Risk & Corporate Governance Statement (continued...) Compliance Committee and a member of Remuneration Committee. the Interest in shares in the Company is 51,178 ordinary shares. Measured against the independence criteria adopted by the Company, Mr Allen is considered an independent director. Mr Michael R. Perich Alternate Director (Non-Executive), Age 39. Appointed Alternate Director for A.M Perich and R. Perich in March 2009, Alternate Director 5 years. B AppSci (SysAg), Director of Arrovest Pty Limited, Leppington Pastoral Company, one of Australia’s largest dairy producers, and various other entities associated with Perich Enterprises Pty Limited. Former Director of Contract Beverages Packers of Australia Pty Limited, a joint venture controlled equally by the Company and Arrovest, Director of Australian Dairy Conference and Dairy NSW, Vice President of Dairy Research Foundation and Graduate Member of the Australian Institute of Company Directors post nominals. Interest in shares in the Company is 86,000,000 ordinary shares. Being a substantial shareholder of the Company, Mr M. Perich is not considered an independent Director. In order to facilitate independent judgement in decision making, each Director may seek independent professional advice at the Company’s expense. If advice is sought by the Chairman, he must obtain board approval if the fees for such advice exceeds $50,000 (exclusive of GST), such approval is not to be unreasonably withheld. Where advice is sought by the other Directors, prior written approval by the Chairman is required but approval will not be unreasonably withheld. If the Chairman refuses to give approval, the matter must be referred to the Board. All Directors are made aware of the professional advice sought and obtained. There is a clear division of responsibility between the Chairman and Managing Director. The Remuneration and Nomination Committee of the Board comprises of three Non-Executive Directors-Messrs. P.R. Gunner, R. Perich and T.J. Allen. Two out of three committee members are independent. Mr Gunner, who is an independent Director, is the Committee Chairman. The Committee Charter which is available on the Company’s website: http://www.ffgl.com.au ‘Corporate Governance’ section, details the process and timing for re-election of directors. The Board’s policy for nomination and appointment of Directors also forms part of the Charter. the in 23 Freedom Foods Group LimitedFor personal use only Corporate Governance Statement (continued...) The Company Constitution states that at each Annual General Meeting (AGM) one-third of the Directors for the time being, or if their number is not three or a multiple of three, then the nearest number greater than one-third, shall retire from office. A retiring Director shall be eligible for re-election. No Director (other than a Managing Director) may hold office without re-election past the third annual general meeting following their appointment or three years, whichever is longer or, in the case of a Director appointed by the Directors as an additional Director or to fill a casual vacancy, past the next annual general meeting of the company. Any Director appointed by the Board since the last AGM must stand for election at the next AGM after his or her appointment. The Remuneration and Nomination Committee is responsible for ensuring that the Board is of a size and composition that allows for: (1) decisions to be made expediently; (2) a range of different perspectives to be put forward regarding issues before the Board; (3) a range of different skills to be brought to Board deliberations; and (4) Board decisions to be made in the best interests of the Company as a whole rather than of individual shareholders or interest groups. The Committee’s functions are to review and report to the Board on: • • • • • • remuneration policy for the entire consolidated entity (including Managing Director, Senior Executives and Non-Executive Directors); identifying nominees for Directorships and other key Executive appointments; appointment and re-election of Directors; assessing Director competencies; evaluating the performance of the Board, its committees and the directors, annually; and remuneration policies and practices. The Remuneration and Nomination Committee responsible for the: is (1) evaluation and review of the performance of the Board (excluding the Chairman); (2) evaluation and review of the performance of individual Directors; evaluation of itself and its committees in August 2014 in accordance with the process disclosed, with all Directors providing input as to the effectiveness of the board processes, meetings, board composition and reporting with Directors having an opportunity to discuss and comment on such matters with the Chairman. The Board reviews its performance and composition on an annual basis to ensure that it has the appropriate mix of expertise and experience. The Board also reviews the performance and composition of its committees on an annual basis. The Remuneration and Nomination Committee meets as frequently as required and at least twice a year. The quorum for such meetings is two members, at least one of whom shall be independent. Details of the Committee members’ attendance at Committee meetings are set out in the Directors’ Report which is included in this Annual Report. Subject to normal privacy requirements, each Director has the right of access to all of the Company’s records, information and senior Executives. They receive regular detailed reports on financial and operational aspects of the Company’s business and may request elaboration or explanation of these reports at any time. New Directors undergo an induction process in which they are given a full briefing of the operations of the Company. Where possible, this includes meetings with key Executives, tours of the operating sites (if practicable), provision of an induction package containing key corporate information and presentations. Directors and Executives are encouraged to broaden their knowledge of the Company’s business and to keep abreast of developments in business more generally by attendance at relevant courses, seminars, conferences, etc. The Company meets expenses involved in such activities. Names of Members of Committees Remuneration and Nomination Committee 3 - 3 - 3 - Audit Risk and Compliance Committee - - 3 3 3 - P.R. Gunner A.M. Perich R. Perich M. Miles T.J. Allen R.J.F. Macleod review of and making of recommendations on the size and structure of the Board; and Principle 3 (3) (4) review of the effectiveness and programme of Board meetings. A review of the performance of the individual Directors occurs each year. The Board undertook a performance 24 Promote ethical and responsible decision-making The Directors acknowledge the need for, and continued maintenance of, a high standard of corporate governance practices and ethical conduct by all Directors and Annual Report 2014For personal use only Corporate Governance Statement (continued...) employees. Company will: In maintaining its ethical standards, the (1) behave with integrity in all its dealings with customers, shareholders, employees, suppliers, business partners and the community; (2) ensure its actions comply with applicable laws and regulations; c. where there is price sensitive information that has not been disclosed because of an ASX Listing Rule exemption; and d. any additional period arising from time to time that the Board imposes a prohibition on trading by Key Management Personnel as an ‘ad-hoc’ prohibition on trading of securities. (3) not engage in any activity that could be construed to involve an improper inducement; (4) achieve a working environment where: Further details of the Company’s Securities Trading Policies are available on the Company’s website: http://www.ffgl.com.au in the ‘Corporate Governance’ section. (i) equal opportunity is rigorously practised; (ii) harassment and other offensive forms of behaviour are not tolerated; (iii) confidentiality of commercially sensitive information is protected; and (iv) employees are encouraged to discuss concerns and ethical behaviour with Directors and senior Executives. individual The Board, senior Executives and all employees of the Company are committed to implementing this Code of is accountable for such Ethics and each compliance. A copy of the Code of Ethics is made available to Directors, employees, contractors and relevant personnel and is available on the Company’s website: http://www.ffgl.com.au in the ‘Corporate Governance’ section. implementing for Senior Executive management establishing, the effectiveness of the Code of Ethics as well as for overseeing that all of the Company’s employees and contractors understand, and act in accordance with the Code of Ethics. responsible reviewing is and The Board has implemented a range of procedures designed to oversee that the Company complies with the law and achieves high ethical standards in identifying and resolving or managing conflicts of interest. All Directors must advise the Chairman of all business dealings with the Company. As a part of active promotion of ethical behaviour, any behaviour that does not comply with the Code must be duly reported. Protection will be provided for those who report violations in good faith. The Company’s Securities Trading Policies for Directors and senior executives generally allow Directors and senior executives to deal in the Company’s securities other than the following: a. from the end of the half year or full year financial period to the release of the half year or full year accounts; b. within the period of 1 month prior to the issue of a prospectus; Diversity Policy In accordance with the ASX Corporate Governance Recommendations on diversity, the Board adopted a diversity policy in the financial year ended 30 June 2012 which includes: a. b. a requirement that the Board establish measurable objectives for achieving gender diversity; and a requirement for the Board to assess annually both the gender objectives and the progress in achieving them. This policy is available on the Company’s website: http:// www.ffgl.com.au in the ‘Corporate Governance’ section. The Company acknowledges the positive outcome that can be achieved through a diverse workforce and is committed to actively managing diversity as a means of enhancing the Company’s performance. The Board will establish measurable objectives for achieving gender diversity in the upcoming financial year and will report on those measurable objectives and the progress in achieving them in the following year’s annual report. As at 30 June 2014, the proportion of women employed by the Company was as follows: • • • • Board of Directors: 0% Senior Executive positions (Managing Director and two Chief Executive Officers): 0% Senior Management positions: 24% Total Company workforce: 30% Workplace Gender Equality The Workplace Gender Equality Act 2012 (WGE Act) puts a focus on promoting and improving gender equality and outcomes for both women and men in the workplace. All non-public sector employers with 100 or more employees are required to report annually under the WGE Act. The Company has submitted its 2014 report to the Workplace Gender Equality Agency. A copy of this report is available on the Company’s website: http://www.ffgl. com.au in the ‘Corporate Governance’ section. 25 Freedom Foods Group LimitedFor personal use only Corporate Governance Statement (continued...) Principle 4 Safeguard integrity in financial reporting The Board has established an Audit, Risk and Compliance Committee comprising three Non-Executive Directors, with appropriate experience. Every member of the Committee must be able to read and understand financial statements with experience in financial and accounting matters. Currently, the Committee comprises of Mr T Allen (Chairman), Mr R Perich and Mr M Miles. Two out of the independent. The three Committee members are Chairman of the Committee is an independent Director and is not Chairman of the Board. The Managing Director, other senior management and external audit partner attend Committee meetings at the discretion of the Committee. The external auditors have a direct line of communication at any time to either the Chairman of the Audit, Risk and Compliance Committee or the Chairman of the Board. The Audit, Risk and Compliance Committee is responsible for: (1) reviewing and reporting to the Board on the half yearly and annual reports and financial statements of the Company and consolidated entities; (2) nominating, appointing and removing the external auditor and reviewing the adequacy, scope and quality of the annual statutory audit and half yearly statutory review; (3) reviewing the effectiveness of the Company’s internal control systems; (4) monitoring and reviewing the reliability of financial reporting; (5) monitoring and reviewing the compliance of the Company with applicable laws and regulations; (6) monitoring the Australian Accounting Standards and Interpretations; quorum for such meetings is two members, at least one of whom shall be independent. Details of the Committee members’ attendance at Committee meetings and the number of times the Committee met throughout the financial year are set out in the Directors’ Report which is included in this Annual Report. The minutes of each Committee meeting are reviewed at the subsequent Board meeting and signed as an accurate record of proceedings. At the subsequent Board meeting the Chairman of the Committee reports to the Board on the Committee’s conclusions and recommendations. The candidates for the position of external auditor must be able to demonstrate complete independence from the Company and an ability to maintain independence throughout the engagement period. The external auditors have advised, after consultation with the Company, that the audit engagement partner shall be rotated every five years. The Board may select an external auditor based on the criteria relevant to the business of the Company such as experience in the industry in which the Company operates, references, costs, and any other matters deemed relevant by the Board. Principle 5 Make timely and balanced disclosure The purpose of the Continuous Disclosure Policy is to ensure that there are mechanisms in place to provide all investors with equal and timely access to material information concerning the Company. Such information must be presented in a clear and balanced way so as not to omit any material information This Policy is designed to ensure that the Company meets its continuous disclosure obligations under the ASX Listing Rules and is available on the Company’s website: http://www.ffgl.com.au in the ‘Corporate Governance’ section. (7) monitoring financial risks and exposure of the Type of information that needs to be disclosed Company’s assets; (8) monitoring the risk management policy and plans; (9) reviewing the Company’s Occupational Health and Safety obligations and the Company’s compliance; (10) reviewing the Company’s insurance policies and coverage; and (11) overseeing the independence of external auditors and annually reviewing the Company’s policy on maintaining the independence of external auditor. The Committee has a formal Charter which is available on the Company’s website: http://www.ffgl.com.au in the ‘Corporate Governance’ section. The Committee meets as frequently as required and at least twice a year. The 26 ASX Listing Rule 3.1 states that any information that a reasonable person would expect to have a material effect on the price or value of the Company’s securities must be immediately disclosed to the ASX. Examples of such information include a change in revenue, asset values or significant transactions. Directors receive copies of all announcements immediately after notification to the ASX. Since the Company’s website went live on 25 September 2014, all announcements made since that date are posted to the Company’s “Investor website: http://www.ffgl.com.au Information” section. A report is submitted at each Board meeting of disclosures to the ASX since last meeting with the Disclosure File available for review. the in Annual Report 2014For personal use only Disclosure Officer Principle 7 Corporate Governance Statement (continued...) The Board has appointed the Company Secretary to act as the Disclosure Officer, responsible for communications with the ASX. The Company Secretary in discussion with the Chairman (as required) decides what information must be disclosed. The Disclosure Officer holds the primary responsibility for ensuring that the Company complies with its disclosure obligations. In addition, Directors, employees or consultants are all responsible for reporting price sensitive information that is not generally available to the Disclosure Officer. To enhance clarity and balance of reporting and to enable investors to make an informed assessment of the Company’s performance, financial results are accompanied by commentary. Principle 6 Respect the rights of shareholders The Company aims to keep shareholders informed of the Company’s performance in an ongoing manner. Apart from information provided pursuant to the Company’s legal and ASX Listing Rules obligations regarding continuous disclosure of information, the Company also communicates its performance with shareholders through the: information about itself and (1) Annual Report which is available to all shareholders. The Annual Report includes relevant information about the Company’s operations and performance; (2) Invitation to the annual general meeting and all accompanying papers; (3) The Company’s website at http://www.ffgl.com; (4) Reports to the ASX and the press; (5) Half year and full year profit announcements; and (6) Information and presentations to analysts (which are released to the ASX). The Annual General Meeting provides an important opportunity for shareholders to express their views and respond to initiatives being proposed by the Board. The Company also requests that the external auditor attend the Annual General Meeting and be available to answer shareholder questions about the audit and the preparation and content of the audit reports. In accordance with Principle 6 of the ASX Principles, the Company will establish a Communications with Shareholder Policy, incorporating matters disclosed above. The policy once adopted will be available on the Company’s website: http://www.ffgl.com.au the ‘Corporate Governance’ section. in Recognise and manage risk. Risk oversight and management policies risk management, The Company’s Risk Management Policy is available on the Company’s website: http://www.ffgl.com.au in the ‘Corporate Governance’ section. The Policy covers the areas of oversight, risk profile, compliance and control and assessment of effectiveness. The Audit, Risk and Compliance Committee (details and composition of which have been set out earlier) is responsible for providing the Board with advice and recommendations regarding the ongoing development of the Policy. Risk management and risk profile The Committee is responsible for: (1) providing the Board with advice and recommendations regarding the Company’s: (i) (ii) risk management system; and risk profile that describes the material risks (including financial and non-financial risks) (2) reviewing the effectiveness of the Company’s implementation of the risk management system at least once a year; (3) regularly reviewing and updating the Company’s risk profile; and (4) ensuring that the appropriate Executives have established and implemented a system for identifying, assessing, monitoring and managing risk throughout the organisation. The system is to include the Company’s internal compliance and control systems. Executive management provide the Committee and Board with regular reports on operational, financial, regulatory and commercial matters within their business divisions. This ensures Management accountability. Executive management is responsible for designing and implementing a risk management and internal control system to manage the Company’s material business risks. Executive management identifies and reviews the major risks impacting each area of the business and develops strategies to effectively mitigate these risks. As required by the ASX Principles, Executive management has reported to the Board on the effectiveness of the management of its material business risks. The ultimate responsibility for risk oversight and management rests with the Board. Due to the size and scale of operations of the Company, there is no separate internal audit function. 27 Freedom Foods Group LimitedFor personal use only Corporate Governance Statement (continued...) Executive Management Assurances As part of the structure of financial review and authorisation, the Managing Director and Senior Executive management are required to provide written assurances that the financial reports present a true and fair view of the Company’s and consolidated entity’s financial position in all material aspects and that the integrity of the financial is founded on a sound system of risk statements management and internal compliance and control which implements the policies adopted by the Board and is operating efficiently and effectively in all material aspects in relation to financial reporting risks. As part of internal management reporting policy relevant senior personnel provide written assurances regarding the integrity of the financial reports to support the Managing Director and Senior Executive management assurances to the Board. The Board received the written assurances with respect to the financial year ended on 30 June 2014. Principle 8 Remunerate fairly and responsibly. The Board has established a Remuneration and Nomination Committee to consider and report on, among other matters, remuneration policies and packages applicable to Board members and to senior executives of the Company. The Committee is responsible for ensuring that any equity-based Executive or Non-Executive Director remuneration is made in accordance with any thresholds approved by shareholders. The composition and details of the Committee have been detailed earlier in this Statement. In respect of remuneration issues, the responsibilities of the Committee include determining, evaluating and reporting to the Board with respect to: (1) executive remuneration and incentive policies, including ensuring that the remuneration policies and practices of the Company are consistent with its strategic goals and human resource objectives; the Company’s recruitment, retention and termination policies and procedures for executives; incentive schemes; superannuation arrangements; and the remuneration framework for Directors. (2) (3) (4) (5) The Committee operates independently of the senior management of the Company in its recommendations to the Board in relation to: (1) reviewing on an annual basis the performance and salary of the Executive management group including Executive and Employee Share Option Plan participation; 28 (2) (3) the remuneration packages and other terms and conditions of appointment and continuing employment of senior Executives; and reviewing Non-Executive Directors’ remuneration within the maximum amount approved by shareholders. The Board believes that Directors are properly rewarded through payment of a fee which is reviewed annually in the light of market conditions and has regard to the responsibilities placed on the Directors by the legal and financial framework within which they act. The Committee’s main functions include: (1) Conditions of service and remuneration of Executive management and their direct reports: (2) Performance of the Executive management; (3) Ensure that the remuneration policy achieves both a level and composition of remuneration that is both competitive and reasonable. Remuneration policies are designed to attract and maintain talented and motivated Directors and employees as well as raising the level of performance of the Company. (4) Recommendation to the Board, which has the discretion to reward eligible employees with the payment of bonuses, share options and other incentive payments. These incentive payments are designed to link reward to performance and are determined by both financial and non-financial imperatives. the Executive management attend meetings of Remuneration and Nomination Committee by invitation when report on, and discuss, senior management performance, remuneration matters, etc. required to Non-Executive Directors receive fees determined by the Board, but within the aggregate limit approved by Shareholders at a General Meeting. The structure of remuneration for Non-Executive Directors and Managing Director is different. As explained in the Remuneration Report, the Managing Director and key management personnel receive fixed remuneration, employer contributions to superannuation funds and options. The current options on issue are valued using the binomial method and are linked to both the performance of the Company and to the personnel’s employment. The Securities Trading Policy for Directors and senior executives prohibits them entering into transactions in associated products which operate to limit the economic risk of any unvested entitlements under any equity based remuneration the Company. scheme offered by Remuneration packages of Non-Executive Directors are fee based. Non-Executive Directors do not participate in bonus payments or any retirement benefits other than statutory superannuation. Annual Report 2014For personal use only Consolidated Statement of Profit and Loss and Other Comprehensive Income n Consolidated Statement of Profit and Loss and Other Comprehensive Income For the financial year ended 30 June 2014 Notes Consolidated $000 Revenue from sale of goods Cost of sales Gross profit Other income Marketing expenses Selling and distribution expenses Administrative expenses Depreciation Finance costs Profit on sale of a2MC shares Share of profit of associates accounted for using the equity method Profit before tax Income tax expense Profit for the year Other comprehensive income Total comprehensive income for the year Profit attributable to: Owners of the company Non-controlling interests Total comprehensive income attributable to: Owners of the company Non-controlling interests Earnings per share From continuing operations: Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Ordinary Dividends per share paid - Final 2013 (cents per share) CRPS Dividends per share paid - Final 2013 (cents per share) Ordinary Dividends per share paid - Interim 2014 (cents per share) CRPS Dividends per share paid - Interim 2014 (cents per share) Notes to the financial statements are included on pages 33 to 75. 5 5 6 36 7 9 9 2014 89,163 (53,960) 35,203 665 (3,070) (12,075) (4,472) (2,743) (809) - (26) 12,673 (541) 12,132 - 12,132 12,132 - 12,132 12,132 - 12,132 8.65 8.21 1.00 1.40 1.50 1.35 2013 88,922 (60,522) 28,400 108 (2,433) (10,157) (5,072) (2,628) (2,356) 11,843 819 18,524 (4,802) 13,722 - 13,722 13,722 - 13,722 13,722 - 13,722 14.73 11.96 1.00 1.40 1.00 1.35 29 Freedom Foods Group LimitedFor personal use only Consolidated Statement of Financial Position n Consolidated Statement of Financial Position For the financial year ended 30 June 2014 ASSETS Current assets Cash and cash equivalents Trade and other receivables Other financial assets Inventories Prepayments Total Current Assets Non-current assets Investments in associates Deferred tax assets Property, plant and equipment Loans due from associated entities Goodwill Other intangible assets Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Borrowings Current tax liabilities Other financial liabilities Provisions Total current liabilities Non-current liabilities Trade and other payables Borrowings Provisions Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Capital and Reserves Equity attributable to owners of the company Issued capital Reserves Retained earnings TOTAL EQUITY Notes to the financial statements are included on pages 33 to 75. 30 Notes 23(a) 10 11 12 11 7 13 14 15 15 16 17 7 16 18 16 17 18 19 20 21 Consolidated $000 2014 2013 4,873 20,655 689 18,967 1,211 46,395 15,061 385 54,597 13,303 5,214 16,274 104,834 151,229 13,068 3,899 4,155 287 1,438 22,847 53 5,927 169 6,149 28,996 122,233 94,419 (3,636) 31,450 122,233 14,106 19,076 148 14,886 918 49,134 9,909 1,146 45,162 - 5,214 16,274 77,705 126,839 15,847 14,282 4,375 472 1,217 36,193 63 8,066 122 8,251 44,444 82,395 62,978 (3,549) 22,966 82,395 Annual Report 2014For personal use only n Consolidated Statement of Cash Flows For the financial year ended 30 June 2014 Consolidated Statement of Cash Flows Notes Consolidated $000 2014 2013 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Cash generated from operations Interest paid Income tax paid Other income received Receipt of government grants Net cash generated by operating activities 23(b) Cash flows from investing activities Payment for property, plant and equipment Purchase of shares in associated entity Proceeds from sale of associate shares Advance to associates Proceeds from associate Investment in equity interest Net cash provided by/(used in) investing activities Cash flows from financing activities Proceeds from issue of equity instruments of the company Payment of share issue costs Dividends paid Proceeds from borrowings Repayment of borrowings Payment of related party transactions Net cash provided by financing activities Cash and cash equivalents at beginning of financial year Net increase in cash and cash equivalents Cash and cash equivalents at end of financial year Notes to the financial statements are included on pages 33 to 75. 23(a) 87,783 (80,595) 7,188 (1,010) - 578 143 6,899 (19,937) (678) - (14,146) 17,500 (4,500) (21,761) 32,198 (1,227) (3,186) (12,539) (9,617) 5,629 14,106 (9,233) 4,873 87,480 (81,605) 5,875 (1,979) (353) - 115 3,658 (10,193) (20) 15,277 - - - 5,064 24,109 (722) (2,327) 4,201 (12,257) (8,387) 4,617 767 13,339 14,106 31 Freedom Foods Group LimitedFor personal use only Consolidated Statement of Changes in Equity n Consolidated Statement of Changes in Equity For the financial year ended 30 June 2014 ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT Notes Fully paid ordinary shares $000 CRPS Shares Retained earnings $000 $000 Equity - settled employee benefits reserve $000 Other Reserve $000 Asset revaluation reserve $000 Total $000 Non controlling interest $000 Total Equity $000 CONSOLIDATED Balance as at 30 June 2012 Equity issues Share issue costs Related income tax Profit for the year Total comprehensive income for the year Recognition of share-based payments Dividends paid Balance as at 30 June 2013 Issue of ordinary shares under employee share option plan Issue of ordinary shares from unlisted options exercised Issue of ordinary shares from the conversion of convertible redeemable preference shares Issue of ordinary shares in accordance with the dividend replacement plan Issue of ordinary shares from a capital raising allotment (including an entitlement offer) Share issue costs Related income tax Acquisition of subsidiary under common control Profit for the year Foreign exchange translation Total comprehensive income for the year Recognition of share-based payments Dividend paid 19 19 19 21 20 22 19 19 19 19 19 19 19 20 21 20 20 22 - - - 13,722 13,722 - (2,419) 22,966 - - - - - - - - 12,132 - 33,875 24,851 (1,026) 308 - - - - 5,633 (659) (4) - - - - - 58,008 4,970 1,239 992 - - 5,120 (5,120) 462 29,998 - - (2,059) 191 - - - - 618 - - - - - - Balance as at 30 June 2014 94,378 Notes to the financial statements are included on pages 33 to 75. 32 11,663 639 (5,013) 473 47,270 24,192 (1,030) 308 13,722 - - - - 47,270 24,192 (1,030) 308 13,722 - - - - 13,722 - 13,722 - - - - - 352 - - - - - - - - - - 352 (2,419) 991 (5,013) 473 82,395 - - - - - - - - - - - - - - - - - (451) - 4 - - - - - - - - - - 1,239 992 - 462 29,998 (1,868) 618 (451) 12,132 4 - - 352 (2,419) - 82,395 - - - - - - - - - - 1,239 992 - 462 29,998 (1,868) 618 (451) 12,132 4 - 12,132 - (447) - 11,685 - 12,136 - - 41 - (3,648) 31,450 360 - - - - - 360 (3,648) 1,351 (5,460) 473 122,233 - - 360 (3,648) - 122,233 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) n Notes to the Financial Statements For the financial year ended 30 June 2014 1. General Information The financial report of Freedom Foods Group Limited (“Group” or “Company”) for the year ended 30 June 2014 was authorised for issue in accordance with resolution of Directors on 26 September 2014. Freedom Foods Group Limited is a company incorporated in Australia whose shares are publicly traded on the Australian securities exchange. The company is trading under the symbol ‘FNP’. The nature of the operations and principal activities of the Group are described in note 4. 2. Adoption of New and Revised Accounting Standards 2.1 Standards and Interpretations affecting amounts reported in the current period (and/or prior periods) In the current year, the Group has adopted all of the new and revised Standards and Intepretations issued by the Australian Accounting Standards Board (the ‘AABS’) that are relevant to its operations and effective for annual reporting periods beginning on or after 1 July 2013. The following amendments to Australian Accounting Standards have been adopted during the period but do not have a material impact on the Group. Where there has been a significant change in accounting policy, an explanation of the change bas been provided below: • AASB 10 ‘Consolidated Financial Statements’; AASB 10 changes the definition of control such that an investor controls an investee when a) it has power over an investee, b) it is exposed, or has rights to variable returns from its involvement with the investee, and c) had the ability to use its power to affect its returns. All three criteria must be met for an investor to have control over an investee. Previously, control was defined as the power to govern the financial and operating policies of an entity so as to obtain benefit from its activities. • AASB 11 ‘Joint Arrangements’; AASB 11 has revised the definition types of joint arrangements, focusing on the rights and obligations of the arrangement, rather than its legal form. The definition types have been consolidated into joint ventures (previously referred to as jointly controlled entities) and joint operations (previously referred to as jointly controlled assets and jointly controlled operations). Joint operations give the parties a right to the underlying assets and obligations of the arrangement and are accounted for by recognising the Group’s share of those assets and obligations. Joint ventures give the parties a right to the net assets of the arrangement and are accounted for using the equity method. • AASB 12 ‘Disclosure of Interests in Other Entities’; AASB 12 is a new standard on disclosure requirements for all forms of interests in investments, including subsidiaries, associates, joint arrangements and consolidated and unconsolidated structured entities. There are no measurement impacts from the adoption of this standard. • AASB 13 ‘Fair Value Measurement’; AASB 13 is a new standard providing a single source of guidance for all fair value measurements and a precise definition of fair value. AASB 13 replaces all fair value measurement guidance in Australian Accounting Standards and Inteprepations (excluding share based payments under AASB 2 ‘Share-based Payment’ and leasing transactions within the scope of AASB 117 ‘Lease’) but does not replace existing standard requirements on when fair values should be used. The adoption of this standard did not result in a change to how the Group measures fair value. • AASB 119 ‘Employee Benefits’; The revised standard has changed the accounting for the Group’s annual leave obligations. As the Group do not expect all annual leave to be taken within 12 months of the respective service being provided, a portion of 33 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 2. Adoption of New and Revised Accounting Standards (continued...) annual leave obligations is now classified as long term employee benefits and needs to be measured on a discounted basis. The Group have assessed the financial effect of discounting the long term annual leave balances to be immaterial to the financial results. • AASB 2012-2 ‘Disclosures - Offsetting Financial Assets and Financial Liabilities’; The Group has applied the amendments to AASB 7 ‘Disclosures - Offsetting Financial Assets and Financial Liabilities’ for the first time in the current year. The amendments to AASB 7 require entities to disclose information about rights of offset and related arrangements for financial instruments under an enforceable master netting agreement or similar arrangement. • • • AASB 127 ‘Separate Financial Statements (2011)’ AASB 128 ‘Investments in Associates and Joint Ventures (2011)’ AASB 2011-4 ‘Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements’ 2.2 Standards and Interpretations in issue not yet adopted At the date of authorisation of the financial statements, the Standards and Interpretations listed below were in issue but not yet effective. Their adoption is not expected to have any significant impact on the amounts reported in these financial statements but may affect the accounting for future transactions or arrangements. Standard/Interpretation AASB 1031 'Materiality' (2013) AASB 2012-3 'Amendments to Australian Accounting Standards - Offsetting Financial Assets and Financial Liabilities AASB 2013-3 'Amendments to AASB 135 'Recoverable Amount Disclosure for Non-Financial Assets' AASB 2013-4 'Amendments to Australian Accounting Standards - Novation of Derivatives and Continuation of Hedge Accounting' AASB 2013-9 ‘Amendments to Australian Accounting Standards – Conceptual Framework, Material- ity and Financial Instruments’ INT 21 'Levies' Annual Improvements to IFRSs 2010-2012 Cycle Annual Improvements to IFRSs 2011-2013 Cycle AASB 9 ‘Financial Instruments’(December 2010), AASB 2010-7 ‘Amendments to Australian Account- ing Standards arising from AASB 9 (December 2010)’, AASB 2012-6 ‘Amendments to Australian Accounting Standards – Mandatory Effective Date of AASB 8 and Transition Disclosure’ AASB 2013-9 ‘Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments’ Effective for annual reporting periods beginning on or after 1 January 2014 Expected to be initially applied in the financial year ending 30 June 2015 1 January 2014 1 January 2014 1 January 2014 1 January 2014 1 January 2014 1 July 2014 1 July 2014 30 June 2015 30 June 2015 30 June 2015 30 June 2015 30 June 2015 30 June 2015 30 June 2015 1 January 2018 30 June 2019 At the date of authorisation of the financial statements, the following IASB Standards and IFRIC Interpretations were also in issue but not yet effective, althought Australian equivalent Standards and Intepretations have not yet been issued. Standard/Interpretation IFRS 15 'Revenue from Contracts with Customers' IFRS 9 'Financial Instruments' 34 Effective for annual reporting periods beginning on or after 1 January 2017 1 January 2018 Expected to be initially applied in the financial year ending 30 June 2018 20 June 2019 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 3. Significant Accounting Policies The following significant accounting policies have been adopted in the preparation and presentation of the financial report: (a) Statement of compliance These financial statements are general purpose financial statements which have been prepared in the Corporations Act 2001, accordance with Interpretations, and Accounting Standards and comply with other requirements of the law. The financial statements comprise the consolidated financial statements of the Group. For the purposes of preparing the consolidated financial statements, the Company is a for-profit entity. Accounting Standards include Australian Accounting Standards. Compliance with Australian Accounting Standards ensures that the financial statements and notes of the company and the Group comply with International Financial Reporting Standards (‘IFRS’). Key sources of estimation uncertainty: Impairment of goodwill and other intangible assets Determining whether goodwill or other intangible assets are impaired requires an estimation of the value in use of the cash generating units to which the goodwill or other intangible assets have been allocated. The value in use calculation requires the directors to estimate the future cash flows expected to arise from the cash generating unit and a suitable discount rate in order to calculate the present value. The value of the goodwill as at the end of the financial year was $5,214,000, with no loss charged against goodwill. impairment The value of other intangible assets as at the end of the financial year was $16,274,000, with no impairment loss charged against the other intangible assets. Further details in relation to the goodwill and other intangible assets of the consolidated entity are set out in note 15. (b) Basis of preparation (d) Basis of consolidation The financial report has been prepared on the historical cost basis, except for the revaluation of certain non-current assets and financial instruments. Cost is based on the fair values of the consideration given in exchange for assets. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($000) unless otherwise stated under the option available to the Parent under ASIC Class Order 98/0100, dated 26 June 2014. The Parent is an entity to which the class order applies. (c) Critical accounting judgments and key sources of estimation uncertainty is required to make In the application of the Group’s accounting policies, management judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The 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. The consolidated financial statements incorporate the financial statements of Freedom Foods Group Limited and its subsidiaries as at 30 June each year (‘the Group’). Control is achieved where the Company: • • • has power over the investee; is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power to affect its returns. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. (e) Business combinations Acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The cost of the business combination is measured as the aggregate of 35 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 3. Significant Accounting Policies (continued...) the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the group in exchange for control of the acquiree. Acquisition related costs are recognised in profit and loss as incurred. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under AASB 3 ‘Business Combinations’ are recognised at their fair values at the acquisition date, except for non-current assets (or disposal groups) that are classified as held for sale in accordance with AASB 5 ‘Non-current Assets Held for Sale and Discontinued Operations’, which are recognised and measured at fair value less costs to sell. Goodwill arising on acquisition is recognised as an asset and initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. If, after reassessment, the Group’s interest in the net fair value of the acquiree’s liabilities and identifiable assets, contingent liabilities exceeds the cost of the business combination, the excess is recognised immediately in profit or loss. The interest of minority shareholders in the acquiree is initially measured at the minority’s proportion of the net fair value of the assets, liabilities and contingent liabilities recognised. (f) Interests in joint ventures The Group’s interest in joint ventures represent jointly controlled entities which have been measured by applying the equity method of accounting. Under the equity method of accounting the carrying amounts of interests in joint venture entities are increased or decreased to recognise the Group’s share of the post acquisition profits or losses and other changes in net assets of the joint ventures. Pactum Dairy Group (PDG) Joint Venture PDG was established in 2013 to operate UHT dairy milk operations for supply into both domestic and export markets. PDG is a joint venture between Pactum Australia Pty Limited, a wholly owned the Company and Australian subsidiary of 36 in Consolidated Milk Pty Limited (ACM), a major Australian dairy milk supply group. The facility was established the northern Victorian city of Shepparton, for a total investment of approximately $45 million, with initial capacity for 100 million litres of dairy milk production, with capability to be increased up to 300 million litres in the longer term. The facility was completed over a construction period of approximately 9 months, with the project largely on budget. With the commencement of operations and significant resourcing to meet the expected ramp up in volumes, the business recorded a loss in FY 2014. FNP equity accounted 1% of the loss in line with the current ownership structure. The Company has the capacity to obtain a 50% interest in PDG by converting convertible notes issued to it as part of its original investment. (g) Foreign currency translation Both the functional and presentation currency of Freedom Foods Group Limited and its Australian subsidiaries is Australian dollars (AUD). Transactions in foreign currencies are recorded initially in the functional currency at the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are restated at the rate of exchange ruling at the end of each reporting period. Exchange differences are recognised in the profit or loss in the period in which they arise. (h) Property, plant and equipment Plant and equipment, motor vehicles and equipment less under finance accumulated depreciation and impairment. lease are stated at cost less any fair value, Land and Buildings held for use in the production of goods, are carried in the statement of financial position at subsequent accumulated depreciation. Fair value is determined on the basis of an independent valuation prepared by external valuation experts, based on discounted cash flows or capitalisation of net income, as appropriate. Revaluations are performed with sufficient regularity such that the carrying amounts do not differ materially from those that would be determined using fair values at the end of each reporting period. Any revaluation increase arising on the revaluation of land and buildings is credited to a Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 3. Significant Accounting Policies (i) Non-current assets classified as held for (continued...) sale revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense in the profit or loss, in which case the increase is credited to the profit or loss to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of land and buildings is charged as an expense in profit or loss to the extent that it exceeds the balance, if any, held in the revaluation reserve relating to a previous revaluation of that asset. Construction in progress is stated at cost. Cost includes expenditure that is directly attributable to the acquisition or construction of the item. In the event that settlement of all or part of the purchase consideration is deferred, cost is determined by discounting the amounts payable in the future to their present value as at the date of acquisition. including Depreciation is provided on property, plant and equipment, freehold buildings but excluding land. Depreciation is calculated on a straight line basis so as to write off the net cost of each asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period, with the effect of any changes recognised on a prospective basis. Assets held under finance leases are depreciated over their expected useful lives on the same basis as owned assets or, where shorter, the term of the relevant lease. The gain or loss arising on disposal or retirement of is item of property, plant and equipment an determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. The following depreciation rates are used in the calculation of depreciation: Class of Fixed Assets Buildings Plant and equipment Leased plant and equipment Motor vehicles Depreciation Rate 2-6% 4-20% 4-20% 15-33% Non-current assets and disposal groups classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for such a sale and the sale is highly probable. The sale of the asset (or disposal group) must be expected to be completed within one year from the date of classification, except in the circumstances where sale is delayed by events or circumstances outside the Group’s control and the Group remains committed to a sale. (j) Borrowing costs to Borrowing costs directly attributable the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in profit or loss in the period in which they are incurred. (k) Goodwill Goodwill acquired in a business combination is initially measured at its cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised at the is subsequently date of acquisition. Goodwill measured at its cost less any impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (CGUs) or groups of CGUs, expected to benefit from the synergies of the business combination. 37 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 3. Significant Accounting Policies (continued...) frequently if events or changes CGUs (or groups of CGUs) to which goodwill has been allocated are tested for impairment annually, or more in circumstances indicate that goodwill might be impaired. If the recoverable amount of the CGU (or group of CGUs) is less than the carrying amount of the CGU (or groups of CGUs), the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or groups of CGUs) and then to the other assets of the cash-generating units pro-rata on the basis of the carrying amount of each asset in the CGU (or groups of CGUs). An impairment is recognised recognised immediately in profit or loss and is not reversed in a subsequent period. On disposal of an operation within a CGU, the attributable amount of goodwill is included in the determination of the profit or loss on disposal of the operation. for goodwill loss (l) Intangible assets Brand names Brand names recognised by the group have an indefinite useful life and are not amortised. Each period, the useful life of this asset is reviewed to determine whether events and circumstances life continue assessment for the asset. Such assets are tested for impairment in accordance with the policy in note 3(m). indefinite useful to support an Intangible assets acquired in a business combination Intangible assets acquired in a business combination from identified and recognised separately are goodwill where they satisfy the definition of an intangible asset. Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets acquired separately. (m) Impairment of long-lived assets excluding goodwill At each reporting date the Group reviews the carrying amounts of its assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the 38 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, the Group estimates the recoverable amount of the CGU to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash- generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. that the asset may be Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment annually and whenever there is an indication impaired. 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 post-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 (or CGU) is estimated to be less than its carrying amount, the carrying amount of the asset (CGU) is reduced to its recoverable amount. An is recognised in profit or loss immediately. impairment loss Where an impairment loss subsequently reverses, the carrying amount of the asset (CGU) 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 (CGU) in prior years. A recognised reversal of an immediately in profit or loss. impairment loss is (n) Inventories Inventories are measured at the lower of cost and net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for as follows: Raw materials: purchase cost on a first-in, first-out basis; Manufactured finished goods: cost of direct materials, direct labour and an appropriate portion of manufacturing variable and fixed overheads based Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 3. Significant Accounting Policies (continued...) on normal operating capacity but excluding borrowing costs; Purchased finished goods: purchase cost on a weighted average cost basis. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. (o) Cash and cash equivalents Cash and short-term deposits in the statement of financial position comprise cash at bank and in hand and cash equivalents, which are short-term deposits with an original maturity of three months or less. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities in the statement of financial position. (p) Other financial liabilities Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. interest method The effective is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period. (q) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flow estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, the recoverable amount is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. (r) Employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognised in respect of short term employee benefits are the measured at remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of long term employee benefits are measured at the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. their nominal values using Defined contribution plans Contributions to defined contribution superannuation plans are expensed when incurred. (s) Share-based payments Equity-settled payments with employees and others providing similar services are measured at the fair value of the equity instrument at the grant date. Fair value is measured by use of a binomial model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. Further details on how the fair value of equity-settled share-based transactions has been determined can be found in note 31. 39 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 3. Significant Accounting Policies (continued...) The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. At each reporting date, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss over the remaining vesting period, with corresponding adjustment to the equity-settled employee benefits reserve. (t) Leased Assets Group as lessee leases are Assets held under finance initially recognised at their fair value or, if lower, at amounts equal to the present value of the minimum lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation. Lease payments are apportioned between finance charges and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income, unless they are directly attributable to the qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs. Refer to note 3(j). Contingent rentals are recognised as expenses in the periods in which they are incurred. Finance leased assets are amortised on a straight line basis over the estimated useful life of the asset. Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. from the Lease incentives In the event that lease incentives are received to enter into operating leases, such incentives are 40 recognised as a liability. The aggregate benefits of incentives are recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. (u) Revenue Revenue is measured at the fair value of the consideration received or receivable. Revenue is rebates and other similar reduced allowances. for terms, Sale of goods Revenue from the sale of goods is recognised when all the following conditions are satisfied: • • • • • the Group has transferred to the buyer the significant risks and rewards of ownership of the goods; the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; the amount of revenue can be measured reliably; it is probable that the economic benefits associated with the transaction will flow to the entity; and the costs incurred or to be incurred in respect of the transaction can be measured reliably. Interest revenue Interest is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount. (v) Government grants Government grants are assistance by the government in the form of transfers of resources to the Group in return for past or future compliance with certain conditions relating to the operating activities of the entity. Government grants include government assistance where there are no conditions specifically relating to the operating activities of the group other than the requirement to operate in certain regions or industry sectors. Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 3. Significant Accounting Policies (continued...) Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and the grants will be received. Government grants whose primary is that the Group should purchase, condition construct or otherwise acquire long-term assets are recognised as deferred income in the statement of financial position and recognised as income on a systematic and rational basis over the useful lives of the related assets. Other government grants are recognised as income over the periods necessary to match them with the related costs which they are intended to compensate, on a systematic basis. are receivable Government grants as that compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised as income of the period in which it becomes receivable. (w) Income tax Current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). Deferred tax Deferred tax is accounted for on the basis of temporary differences between the tax base of an asset or liability and its carrying amount in the statement of financial position. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised temporary differences arising from the initial recognition of goodwill. relation taxable to in Deferred tax liabilities are recognised for taxable temporary differences associated with investments in branches and associates and interests in joint ventures except where the Group is able to control the reversal of the temporary differences and its probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. from deductible Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the company/Group intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in profit or loss, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting 41 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 3. Significant Accounting Policies (continued...) of comprehensive income in the period in which they arise. for a business combination, in which case it is taken into account in the determination of goodwill or excess. (x) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (‘GST’) except: • where the amount of GST incurred is not recoverable from the taxation authority, in which case the GST is recognised as part of acquisition of the asset or as part of the expense item as applicable; or • for receivables and payables which are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified within operating cash flows. (y) Financial instruments Recognition of investments Investments are initially measured at fair value, net of transaction costs, except for those financial assets carried at fair value through profit and loss, which are initially measured at fair value when the related contractual rights or obligations exist. Subsequent to initial recognition these investments are measured as set out below. Financial assets at fair value through profit and loss A financial asset is classified in this category if acquired principally for the purpose of selling in the short term if so designated by management and within the requirements of AASB 139 Financial Instruments: and Measurement. Derivatives are also categorised as held for trading unless they are designated as hedges. Realised and unrealised gains and losses arising from changes in fair value of these assets are included in the statement Recognition 42 Effective interest method interest method The effective is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial asset, or, where appropriate, a shorter period. Income is recognised on an effective interest rate basis for debt instruments other than those financial assets ‘at fair value through profit or loss’. Loans and receivables Loans and receivables have fixed or determinable payments that are not quoted in an active market and are stated at amortised cost using the effective interest rate method Interest less income is recognised by applying the effective interest rate. impairment. Held-to maturity investments These investments have fixed maturities, and it is the group’s intention to hold these investments to maturity. Any held-to-maturity investments held by the group are stated at amortised cost using the effective interest rate method less impairment. Available-for-sale financial assets Available-for-sale financial assets include any financial assets not included in the above categories. Available- for-sale financial assets are reflected at fair value. Unrealised gains and losses arising from changes in fair value are taken directly to equity. Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 3. Significant Accounting Policies (continued...) rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. Impairment of financial assets Financial assets, other than those at fair value through profit or loss, are assessed for indicators of impairment at the end of each reporting period. Financial assets are impaired where there is objective evidence that as a result of one or more events that occurred after the initial recognition of the financial asset the estimated future cash flows of the investment have been impacted. Financial liabilities Non-derivative financial liabilities are recognised at amortised cost, comprising original debt less principal payments and amortisation. (z) Derivative financial instruments are is entered statements. Derivatives The Group enters into a variety of derivative financial instruments to manage its exposure to foreign exchange rate risk, including foreign exchange forward contracts. Further details of derivative financial instruments are disclosed in note 27 to the financial initially recognised at fair value at the date a derivative into and are subsequently contract remeasured to their fair value at each reporting date. 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. The Group has not adopted hedge accounting during the financial year or previous corresponding period. Embedded derivatives Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of host contracts and the host contracts are not measured at their fair value with changes in fair value recognised in profit or loss. 4. Operating Segments The Group is organised into four segments which is the basis on which the Group reports. The principal products and services of these segments are as follows: Freedom Foods: A range of products for consumers requiring a solution to specific dietary or medical conditions including allergen free, (ie gluten free, wheat free, nut free) low sugar or salt or highly fortified. The product range covers breakfast cereals, biscuits, snack bars, soy, almond and rice beverages and other complimentary products. These products are manufactured and sold in Australia and overseas. Freedom Foods North America: A range of products for consumers requiring a solution to specific dietary or medical conditions including allergen free, (ie gluten free, wheat free, nut free) low sugar or salt or highly fortified. The product range covers breakfast cereals and other complimentary products. These products are manufactured in Australia and sold in North America. Seafood: A range of canned seafood covering sardines, salmon and specialty seafood. These products are manufactured overseas and sold in Australia and overseas. Pactum Australia: A range of UHT (long life) food and beverage products including liquid stocks, soy, rice, almond and dairy milk beverages. These products are manufactured and sold in Australia and overseas. Operating segments are identified on the basis of internal reports about components of the Group that are regularly reviewed by the Board of Directors in their capacity as the chief operating decision maker of the group in order to allocate resources to the segments and assess their performance. 43 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 4. Operating Segments (continued...) Information regarding these segments is presented below. The following is an analysis of the Group’s revenue and results by reportable operating segment for the periods under review: Segment revenue Continuing operations Freedom Foods Freedom Foods North America Seafood Pactum Thorpedo Foods Net Sales Revenue Intercompany Sales Elimination Other Total revenue of the consolidated group External sales 2014 $000 44,243 696 13,239 46,438 - 104,616 (16,760) - 87,856 2013 $000 40,070 - 15,787 42,829 31 98,717 (9,886) - 88,831 Total 2014 $000 44,243 696 13,239 46,438 - 104,616 (16,760) 1,972 89,828 2013 $000 40,070 - 15,787 42,829 31 98,717 (9,886) 199 89,030 Revenue generated by equity accounted associates from external sales is not consolidated, instead under the equity method of accounting, the carrying amounts of interest in joint venture entities are increased or decreased to recognise the Group’s share of post acquisition profits or losses and other changes in net assets of the joint venture/minority interest. 96% of total external sales of the consolidated group and equity accounted associates are generated in Australia (2013: 96%) and 63% of total external sales (2013: 72%) are through major Australian retailers. Segment result Continuing operations Freedom Foods Freedom Foods North America Seafood Pactum Thorpedo Foods FFGL share of equity accounted associates Shared services Finance costs Depreciation Profit on sale of The a2 Milk Company shares Write off of non recurring legal expense and unrecoverable amounts Income tax expense Profit for the year from continuing operations 2014 $000 2013 $000 7,131 (684) 2,431 9,748 - 18,626 (26) (2,375) (809) (2,743) - - (541) 12,132 6,124 - 2,717 6,427 (12) 15,256 819 (3,917) (2,356) (2,628) 11,843 (493) (4,802) 13,722 Total profit/(loss) from equity accounted associates for the period totalled $(2,600,000) (2013: $3,482,000). The consolidated entities share of these profits/(losses) was $(26,000) (2013: $819,000). 44 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 4. Operating Segments (continued...) Segment assets Freedom Foods (includes capital works in progress) Freedom Foods North America Seafood Pactum (includes capital works in progress) Thorpedo Foods Unallocated (Shared Services) Total assets of the Group Segment liabilities Freedom Foods Freedom Foods North America Seafood Pactum Thorpedo Foods Unallocated (Shared Services) Total liabilities of the Group Other segment information Freedom Foods Pactum Unallocated (Shared Services) 2014 $000 2013 $000 61,679 1,219 20,184 33,908 19 117,009 34,220 151,229 7,637 1,095 1,956 13,258 7 23,953 5,043 28,996 48,858 - 19,905 33,236 885 102,884 23,955 126,839 13,462 - 4,463 24,780 4 42,709 1,735 44,444 Depreciation and Amortisation Additions to non-current assets 2014 $000 1,639 1,045 2,684 59 2,743 2013 $000 1,793 829 2,622 6 2,628 2014 $000 8,655 3,394 12,049 129 12,178 2013 $000 1,522 10,538 12,060 105 12,165 Information about major customers Included in revenues arising from external sales of $87.9 million (2013: $88.8 million) (see segment revenue above) are revenues of approximately $69.8 million (2013: $69.1 million) which arose from sales to the Group’s two largest customers. No other single customers contributed 10% or more to the Group’s revenue for both 2014 and 2013. 45 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 5. Revenue Segment revenue Continuing operations Sale of goods Interest received • Cash and Cash equivalents • Loans and receivables Other income • Government/State grants - refer below • Payroll Tax Rebate • Commitment Fee Income Total Revenue Consolidated $000 2014 2013 87,856 88,831 42 1,265 89,163 143 72 450 665 89,828 91 - 88,922 33 75 - 108 89,030 The above grants are the Export Market Development Grant received or receivable for 2014 and 2013 (2014: $131,645, 2013: $23,000), State Training Grant (2014: $3,150, 2013: $5,000) and Department of Education, Employment and Workplace Relations Grant (2014: $8,000, 2013: $5,000). 6. Profit for the year before tax Profit for the year was arrived at after charging the following expenses: Finance costs • Interest on bank overdrafts and loans • Interest on related party loan • Interest capitalised as addition to the cost of qualifying assets • Interest on obligations under finance leases Total borrowing costs Depreciation on property, motor vehicles, plant and equipment Rental expense on operating leases (equipment) Rental expense on operating leases (property) Research and development costs expensed Impairment of trade receivables Employee benefit expense Post employment benefits - defined contribution plans Share-based payments - equity settled share based payments Other employee benefits Total employee benefit costs 46 Consolidated $000 2014 340 - (244) 713 809 2,743 392 816 500 30 974 360 7,226 8,560 2013 1,485 360 - 511 2,356 2,628 329 623 375 29 1,029 352 8,162 9,543 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 6. Profit for the year before tax (continued...) The Group uses derivative financial instruments to hedge its exposure to foreign exchange risks arising from operational, financing and investment activities. Refer to Note 27. In accordance with its treasury policy, the Group does not hold or issue derivative financial instruments for trading purposes. During the financial year the Group utilised foreign exchange contracts for the purchase of inventory and capital equipment. The foreign exchange contracts were denominated in USD, CAD and EUR. As at 30 June 2014 the Group held foreign exchange contracts totalling USD 3,282,620, CAD 624,201 and EUR 2,745,500. The contracts related to highly probable forecasted transactions for the purchase of inventory for the Specialty Seafood business (Salmon and Sardines) and the Freedom Foods business (Spreads and Almond paste) and authorised capital project expenditure for the Leeton site with the purchase consideration being settled in the above currencies. The Group’s objective in entering into foreign exchange contracts is to provide certainty to the income and cash flow implications for the designated foreign currency purchase, relating to purchase of inventory. As the Group does not adopt hedge accounting, derivative financial instruments held by the Group are required under the Australian Accounting Standards to be valued at fair value as at balance date. A valuation at fair value assumes that the Group would settle the contracts at a specific date and recognise a gain or loss depending on the prevailing spot rate at value date, even though the intention of the Group is to settle the contract at contract expiry in relation to the purchase of inventory or an asset required for manufacturing. 7. Income Taxes Income tax recognised in profit or loss Tax expense comprises: Current tax expense in respect of the current year Adjustments recognised in the current year in relation to the current tax of prior years Tax on sale of shares in investment Deferred tax expense/(income) relating to the origination and reversal of temporary differences Total income tax expense recognised in the current year relating to continuing operations Consolidated $000 2014 3,996 (3,455) - - 541 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 from continuing operations Income tax expense calculated at 30% Effect of revenue/expenses that are not deductible in determining taxable profit Effect of tax concessions (research and development) Adjustments recognised in the current year in relation to the current tax of prior years: Prior year loss a2MC adjustment Prior year R&D claim 12,673 3,802 245 (50) (9) (3,100) (347) 541 2013 4,384 (858) 387 889 4,802 18,524 5,557 253 (150) - - (858) 4,802 47 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 7. Income Taxes (continued...) The tax rate used in the above reconciliation is the corporate tax rate of 30% payable by Australian corporate entities on taxable profits under Australian tax law. There has been no change in the corporate tax rate when compared with the previous reporting period. Income tax recognised directly in equity An amount of $618,000 was credited to equity in relation to share issue costs during the year (2013: $308,000). Income tax recognised in other comprehensive income No current or deferred tax amounts were charged/(credited) directly to other comprehensive income during the year. Current tax assets/(liabilities) Income tax receivable/payable attributable to: Entities in the tax-consolidated group Deferred tax balances Deferred tax assets/(liabilities) arise from the following: Consolidated 2014 Temporary differences: Provisions Doubtful debts Property plant & equipment Other Unused tax losses and credits: Tax losses (i) Withholding tax paid Net defered tax asset Consolidated $000 2014 (4,155) (4,155) 2013 (4,375) (4,375) Opening Balance $000 Charged to income $000 Closing balance $000 443 9 (398) 58 112 996 38 1,034 1,146 80 9 (619) (231) (761) - - - (761) 523 18 (1,017) (173) (649) 996 38 1,034 385 (i) Current year earnings together with forecast future earnings support the recognition of carried forward losses as deferred tax assets. 48 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 7. Income Taxes (continued...) Consolidated 2013 Temporary differences: Provisions Doubtful debts Property plant & equipment Other Unused tax losses and credits: Tax losses Withholding tax paid Net defered tax asset Opening Balance $000 Charged to income $000 Closing balance $000 348 - (347) (10) (9) 2,006 38 2,044 2,035 95 9 (51) 68 121 (1,010) - (1,010) (889) 443 9 (398) 58 112 996 38 1,034 1,146 The company and its wholly-owned Australian subsidiaries have formed a tax-consolidated group and are therefore taxed as a single entity. The head entity within the tax consolidated group is Freedom Foods Group Limited. Tax expense/ income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax- consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using the ‘separate taxpayer within group’ approach by reference to the carrying amounts in the separate financial statements of each entity and the tax values applying under tax consolidation. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and relevant tax credits of the members of the tax-consolidated group are recognised by the company (as head entity in the tax-consolidated group). Entities within the tax-consolidated group have entered into a tax funding arrangement and a tax sharing agreement with the head entity. Under the terms of the tax funding arrangement, Freedom Foods Group Limited and each of the entities in the tax-consolidated group has agreed to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. The tax sharing agreement entered into between members of the tax-consolidated group provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations or if an entity should leave the tax-consolidated group. The effect of the tax sharing agreement is that each member’s liability for tax payable by the tax consolidated group is limited to the amount payable to the head entity under the tax funding arrangement. 8. Auditors remuneration Current year Remuneration of the auditors of the Group for: • audit or review of the financial report • taxation advice and preparation of tax returns • research and development advice and preparation of the return The auditor of the consolidated entity is Deloitte Touche Tohmatsu. Consolidated $000 2014 246,500 165,500 60,000 472,000 2013 219,810 125,429 59,872 405,111 49 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 9. Earnings per share Basic earnings per share from continuing operations Diluted earnings per share from continuing operations The earnings and weighed average number of ordinary shares used in the calculation of basic and diluted earnings per share are as follows: (a) Earnings used in the calculation of basic EPS (b) Earnings used in the calculation of diluted EPS Consolidated Cents per share 2014 8.65 8.21 $000 12,132 12,492 Number 000 (c) Weighted average number of ordinary shares outstanding during the year used in the calculation of basic EPS 140,246 Shares deemed to be issued for no consideration in respect of: - CRPS - ESOP - unlisted options 4,721 7,281 - 2013 14.73 11.96 13,722 14,074 93,155 18,741 4,345 1,433 (d) Weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted EPS including CRPS 152,248 117,674 At 30 June 2014 there were 150,645,371 Ordinary shares (2013: 113,754,106) in issue and 152,127 Convertible Redeemable Preference shares (2013: 17,219,015 ). At 30 June 2014 there were no unlisted ordinary share options (2013: 2,492,384) and 5,558,335 (2013: 8,450,000) employee share options were outstanding (3,766,667 exercisable at 40 cents per share and 1,791,668 exercisable at 60 cents per share). 10. Trade and other receivables Current Trade receivables Allowance for doubtful debts Other receivables Consolidated $000 2014 17,497 (59) 17,438 3,217 20,655 2013 18,750 (29) 18,721 355 19,076 The average credit period on sales of goods is 36 days (2013: 32 days). No interest is charged on trade receivables. An allowance has been made for estimated irrecoverable trade receivable amounts arising from past sale of goods, determined by reference to past default experience. During the current financial year, the allowance for doubtful debts increased by $30,000 (2013: $29,000) in the Group. The allowance for doubtful debts/impaired trade receivables as at 30 June 2014 is $59,000 (2013: $29,000). The Group does not hold any collateral over these balances. Current (i) Past due but not impaired (ii) 50 Consolidated $000 2014 17,829 892 2013 17,853 868 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 10. Trade and other receivables (continued...) (i) The current receivables for the Group are with a weighted average of 31 days (2013: 26 days). Management considers that there are no indications as of the reporting date that the debtors will not meet their payment obligations. (ii) The past due but not impaired receivables for the Group are with a weighted average of 56 days (2013: 69 days). These relate to a number of customers for whom there is no recent history of default and other indicators of impairment. Management considers that no provision is required on these balances. The Group does not have significant risk exposure to any one debtor, however 63% (2013: 72%) of sales and 64% (2013: 63%) of year end receivables are concentrated in major supermarkets throughout Australia. Movement in the allowance for doubtful debts Balance at the beginning of the year Impairment losses recognised on receivables Amounts written off as uncollectable Balance at the end of the year Consolidated $000 2014 29 30 - 59 2013 - 322 (293) 29 Other receivables These amounts generally arise from transactions outside the usual operating activities of the Group. Management has assessed that these are all recoverable and no impairment has been taken. 11. Other financial assets Current Receivables from related parties - refer Note 30 Related party transactions Non-current Investment in associates - refer Note 36 Related party transactions 12. Inventories Current Raw materials Finished goods Provision for stock obsolescence Consolidated $000 2014 689 15,061 Consolidated $000 2014 6,095 12,988 (116) 18,967 2013 148 9,909 2013 5,662 9,361 (137) 14,886 All inventories of the Group are expected to be recovered within a 12 month period. The cost of inventories recognised as an expense during the year in respect of continuing operations was $53,960,000 (2013: $60,522,000). 51 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 13. Property, plant and equipment Non current Freehold land (at fair value) Total Land Buildings (at fair value) Accumulated depreciation Total Buildings Total Land and Buildings Plant and Equipment (at cost) Accumulated depreciation Capital work in progress at cost Total Owned Plant and Equipment Motor Vehicles (under finance leases) Accumulated depreciation Total Motor Vehicles Total property, plant and equipment Consolidated $000 2014 254 254 4,850 (748) 4,102 4,356 Consolidated $000 2014 47,086 (13,438) 33,648 16,584 50,232 21 (12) 9 54,597 2013 254 254 4,850 (626) 4,224 4,478 2013 45,644 (13,204) 32,440 8,235 40,675 21 (12) 9 45,162 Movements in the carrying amounts of each class of property, plant and equipment between the beginning and the end of the current financial year: Freehold Land $000 Buildings $000 Plant & Equipment $000 Motor Vehicles $000 254 - - - 254 254 - - - 254 4,224 - - (122) 4,102 4,345 - - (121) 4,224 40,675 12,178 - (2,621) 50,232 31,011 12,165 - (2,501) 40,675 9 - - - 9 9 - 6 (6) 9 Total $000 45,162 12,178 - (2,743) 54,597 35,619 12,165 6 (2,628) 45,162 Group 2014 Balance at 1 July 2013 Additions Disposals Depreciation expense Balance at 30 June 2014 Group 2013 Balance at 1 July 2012 Additions Disposals Depreciation expense Balance at 30 June 2013 52 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 13. Property, plant and equipment (continued...) Aggregate depreciation allocated, whether recognised as an expense or capitalised as part of the carrying amount of other assets during the year: Freehold land and buildings Plant and equipment Motor vehicles 14. Loans due from associated entities Loan to Pactum Dairy Group Loan to Freedom Foods North America The loan to Pactum Dairy Group attracts interest at 8%. No interest is charged on the loan to Freedom Foods North America. 15. Intangibles 2014 Balance at 1 July 2013 Balance at 30 June 2014 2013 Balance at 1 July 2012 Balance at 30 June 2013 Consolidated $000 2014 122 2,621 - 2,743 Consolidated $000 2014 12,823 480 13,303 Goodwill $000 Brand Names $000 5,214 5,214 5,214 5,214 16,274 16,274 16,274 16,274 2013 121 2,501 6 2,628 2013 - - - Total $000 21,488 21,488 21,488 21,488 Allocation of goodwill to cash-generating units Goodwill has been allocated for impairment testing purposes to the following cash-generating units: Seafood Freedom Foods The consolidated entity carries an amount of $16,274,000 of brand names with indefinite useful lives allocated between the Seafood and Freedom Foods cash generating units. The brand names relate to major brands purchased as part of business combinations that have long establishment and are considered to be market leaders within their market segment. The brand names operate in a stable industry with a strong positioning in the consumer functional foods market. There wasn’t any goodwill associated to the Group’s acquisition of Pactum Australia Pty Limited. 53 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 15. Intangibles (continued...) The carrying amount of goodwill has been allocated to the identified cash-generating units as follows: Seafood Freedom Foods Consolidated $000 2014 1,982 3,232 5,214 2013 1,982 3,232 5,214 The recoverable amounts of the cash generating units are determined based on a value in use calculation which uses cash flow projections based on financial budgets approved by management covering a five-year period, and a discount rate range between 7.0% and 10.0% pa post tax and between 9.1% and 13.0% pa pre tax (2013: 10.1% pa post tax and 13.1% pa pre tax). Cash flow projections during the budget period for the cash-generating units are also based on the same expected gross margins during the budget period. Key assumptions Cash-generating units Budgeted market share Average market share in the period immediately before the budget period plus a growth of up to 1% of market share per year. Management believes that the planned market share growth per year for the next four years is reasonable. Budgeted gross margin Average gross margins achieved in the period immediately before the budget period is consistent with that used by management. 16. Trade and other payables Current Trade payables (i) Other payables and accruals Payables to related parties - refer Note 30 Related party transactions Non-current Other payables and accruals Consolidated $000 2014 10,442 2,626 13,068 287 53 53 2013 9,238 6,609 15,847 472 63 63 (i) Trade payables are paid on average within 60 days of invoice date. No interest is charged on trade payables. 54 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 17. Borrowings Borrowings Secured - at amortised cost Current Loan payable (i) Finance leases (ii) (iii) Finance Facility (i) Non-current Finance leases (ii) (iii) Disclosed in the financial statements as: Current borrowings Non-current borrowings Consolidated $000 2014 228 3,001 670 5,927 9,826 3,899 5,927 9,826 2013 1,741 4,079 8,462 8,066 22,348 14,282 8,066 22,348 (i) Secured by assets as detailed in note 37. (ii) Secured by leased assets as detailed in note 25. (iii) Included as part of the finance leases is the Equipment Financing utilised to purchase equipment for Leeton and Taren Point. 18. Provisions Current Employee benefits (i) Non-current Employee benefits Employee benefits movement Balance at 1 July 2013 Additional provision recognised Amounts used Balance at 30 June 2014 Consolidated $000 2014 1,438 169 1,607 1,339 929 (661) 1,607 2013 1,217 122 1,339 1,066 821 (548) 1,339 (i) The current Group provision for employee benefits includes $169,000 of annual leave and vested long service leave entitlements accrued but not expected to be taken within 12 months (2013: $122,000). 55 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 19. Issued capital Fully paid ordinary shares Balance at 1 July 2013 Employee Share Options Exercised (i) Unlisted Options Exercised at $0.40 CRPS conversions at $0.30 DRP (Dividend Replacement Plan) shares (ii) Capital Raising Allotment (including Entitlement Offer) at $2.10 (2013: $1.04) Buy Back of Unmarketable Parcels at $0.95 Costs incurred Balance at 30 June 2014 Consolidated 2014 2013 No. of Shares Value $000 No. of Shares Value $000 113,754,106 2,891,665 2,478,533 17,066,888 169,360 14,284,819 - 150,645,371 58,008 1,239 992 5,120 462 29,998 - (1,441) 94,378 77,995,731 - 16,730,407 2,195,785 86,923 16,788,190 (42,930) 113,754,106 33,875 - 6,692 659 82 17,460 (41) (719) 58,008 (i) During the year a total of 408,322 employee share options were exercised at $0.60 and 2,483,333 at $0.40. In the prior year there were no employee share options exercised. (ii) During the year there were a total of 20,126 ordinary shares issued in accordance with the Dividend Reinvesment Plan at $2.4564 and 149,234 at $2.7635. In the prior year a total of 59,749 ordinary shares were issued at $0.72 and 27,174 at $1.42. Fully paid ordinary shares carry one vote per share and carry the right to dividends. Changes to the then Corporations Law abolished the authorised capital and par value concept in relation to share capital from 1 July 1998. Therefore, the company does not have a limited amount of authorised capital and issued shares do not have a par value. The Dividend Reinvestment Plan provides shareholders with the opportunity to receive ordinary shares, in lieu of cash dividends, at a discount (set by the directors) from the market price at the time of issue. Convertible Redeemable Preference Shares The CRPS are perpetual with no maturity, but redeemable after 3 years at the option of the Company. The CRPS are transferable and are convertible at the option of the CRPS holder. The dividend rate is 9.0% p.a. on the issue price of $0.30. It is a preferred, discretionary and non cumulative dividend and CRPS holders have no claim or entitlement in respect of a non payment. Dividends are to be payable half-yearly in arrears. CRPS holders who convert their CRPS prior to a dividend payment date will not be entitled to any dividend for that part period in respect of that CRPS. However upon conversion to ordinary shares a holder who is on the register on the record date for a dividend payable in respect of ordinary shares will be entitled to the full ordinary dividend for that period. Dividends on the CRPS will be payable in April and October each year until converted or redeemed. CRPS holders are entitled to receive dividends in priority to holders of ordinary shares and equally with the holders of other CRPS that may be issued by Company on these terms. CRPS are convertible into fully paid ordinary shares in the Company on the basis that each CRPS is convertible at the election of the CRPS holder into one ordinary share, subject to any restrictions imposed by the Corporations Act and ASX Listing Rules. There is no time limit within which CRPS must be converted. No additional consideration is payable on conversion. Notwithstanding the right of holders of CRPS to convert at any time, all CRPS will convert into ordinary shares automatically on the occurrence of certain trigger events including certain transactions involving a change in control of Company, such as a takeover of Company or a scheme or merger between Company and another body. The Company may redeem the CRPS, 3 years from the date of issue of the CRPS, being 16 December 2013, at its option for the payment per CRPS of the higher of: the issue price of $0.30; and an amount determined by the Board of the Company with reference to the value of a CRPS as determined by an independent expert appointed by the Board. • • 56 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 19. Issued capital (continued...) The Company at this time has no plans to redeem the remaining CRPS still on issue due to the expense of the process of redemption being significantly more than the current value of the CRPS on issue. Convertible Redeemable Preference Shares Balance at 1 July 2013 Conversion to ordinary shares at $0.30 Costs reallocated to fully paid ordinary shares Balance at 30 June 2014 2014 No. of Shares 17,219,015 (17,066,888) 152,127 Consolidated 2013 Value $000 No. of Shares Value $000 4,970 (5,120) 191 41 19,414,800 (2,195,785) 17,219,015 5,633 (659) (4) 4,970 Share options granted under the employee share option plan For information relating to the Freedom Foods Group Limited Employee Share Option Plan, including details of options issued, exercised and lapsed during the financial year and the options outstanding at year-end, refer to note 31. 20. Reserves Equity-settled employee benefits Asset revaluation Other reserves Equity-settled employee benefits Balance at 1 July 2013 Share based payment Balance at 30 June 2014 Consolidated $000 2014 1,351 473 (5,460) (3,636) 991 360 1,351 2013 991 473 (5,013) (3,549) 639 352 991 The equity-settled employee benefits reserve arises on the grant of share options to executives and senior employees under the Employee Share Option Plan. Amounts are transferred out of the reserve and into issued capital when the options are exercised. Further information about share-based payments to employees is made in note 31 to the financial statements. Asset revaluation Balance at 1 July 2013 Revaluation increment Balance at 30 June 2014 Consolidated $000 2014 473 - 473 2013 473 - 473 The asset revaluation reserve arises on the revaluation of land and buildings. Where a revalued land or building is sold, that portion of the asset revaluation reserve which relates to the asset, and is effectively realised, is transferred directly to retained earnings. 57 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 20. Reserves (continued...) Other reserve Balance at 1 July 2013 Acquisition of subsidiary under common control Foreign exchange translation Balance at 30 June 2014 Consolidated $000 2014 (5,013) (451) 4 (5,460) 2013 - (5,013) - (5,013) As described in Note 3(e), the acquisition of Pactum by the Company is accounted for as a common control transaction. As a consequence, the difference between the fair value of the consideration paid and the existing book values of assets & liabilities of Pactum has been debited to a common control reserve ($5,464,000). Upon disposal of all interests in Pactum by the Group this reserve would be transferred to retained earnings. 21. Retained Profits Balance at 1 July 2013 Profit attributable to owners of the company Dividends paid Balance at 30 June 2014 22. Dividends Recognised amounts Fully paid ordinary shares Final dividend: fully franked at 30% tax rate Dividends reinvested: fully franked at 30% tax rate Interim dividend: fully franked at 30% tax rate Dividends reinvested: fully franked at 30% tax rate Convertible Redeemable Preference Shares Final dividend: fully franked at 30% tax rate Interim dividend: fully franked at 30% tax rate Consolidated $000 2014 22,966 12,132 (3,648) 31,450 2013 11,663 13,722 (2,419) 22,966 2014 Cents per share 1.00 245.64 1.50 277.48 1.40 1.35 2013 Cents per share 1.00 72.00 1.00 142.00 1.40 1.35 Total $000 1,101 49 1,842 413 241 2 3,648 Total $000 898 43 931 39 272 236 2,419 On 28 August 2014, the directors declared a fully franked final dividend of 1.50 cents per share to the holders of fully paid ordinary shares in respect of the financial year ending 30 June 2014 to be paid to shareholders (registered as at 3rd October 2014) on 3rd November 2014 and dividends for the converting preference shareholders (registered on 3rd October 2014) on 15th October 2014. The total estimated dividend to be paid is $2,260k for ordinary dividend and $2k for the CRPS dividend. Adjusted franking account balance Impact on franking account balance of dividends not recognised 58 Parent $000 2014 - (969) 2013 373 (592) Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 23. Notes to the statement of cash flows (a) Reconciliation of cash and cash equivalents For the purposes of the statement of Cash Flows, cash and cash equivalents includes cash on hand and funds held in cash management and cheque accounts net of bank overdrafts. Cash at the end of the financial year as shown in the statement of cash flows is reconciled to the related items in the statement of financial position as follows: Cash Consolidated $000 2014 4,873 4,873 (b) Reconciliation of profit for the period to net cash flows from operating activities Profit for the year Depreciation of non current assets Movement in provision for employee entitlements Profit on Sale of a2MC shares Interest recognised regarding Leeton facility using amortised cost method Share based payments Interest received Interest on associates loan Interest capitalised Share of loss/(profit) of associates Movements in Working Capital Increase in trade and other receivables Increase in inventory (Increase)/Decrease in other assets Decrease in deferred tax assets Decrease in trade and other payables (Decrease)/Increase in provision for income tax Net cash from operating activities 12,132 2,743 (305) - - 360 (42) (1,265) (244) 26 (2,120) (4,081) (290) 761 (556) (220) 6,899 2013 14,106 14,106 13,722 2,628 (273) (11,843) 288 352 (91) - - (819) (1,474) (3,429) 1,412 5,525 (1,352) (988) 3,658 Details of credit stand-by arrangements available and unused loan facilities are shown in note 24 to the financial statements. (c) Non-cash financing and investing activities Dividends Reinvested Consolidated $000 2014 462 2013 82 In accordance with the Company’s Dividend Reinvestment Plan $462,000 was reinvested in the year to 30 June 2014 (2013: $82,000) 59 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 24. Standby arrangements and unused credit facilities Financing Facility Secured loan facilities - amount used - amount unused Secured finance facilities - amount used - amount unused Unused financing facilities Consolidated $000 2014 228 9,472 9,700 9,598 23,557 33,155 33,029 2013 1,741 7,959 9,700 20,607 5,238 25,845 13,197 The bank facilities are arranged with HSBC Bank Australia Limited with general terms and conditions and certain facility components that are subject to annual review. The bank facilities of the Group are secured by a first equitable mortgage over the whole of the Group’s assets and undertakings (including uncalled capital), (except items specifically discharged under the Freedom Foods and Pactum Australia equipment finance arrangements), and a first registered mortgage over the Group’s Leeton property. The equipment finance facilities relate to specific equipment operating at the Freedom Foods Leeton facility and Pactum Taren Point facility, arranged with National Australia Bank and Westpac. These facilities are secured over the assets financed under the facility, which have been specifically discharged from the first registered mortgage held over all the Group’s property. The leases are over a period of 3 to 7 years and the final residual on the current leases will be due in 2018. Interest rates are variable and subject to adjustment. 25. Capital and leasing commitments Finance leases Leasing arrangements Finance leases relate to motor vehicles and equipment with lease terms of up to 5 years. The Group has options to purchase the equipment for an agreed amount at the conclusion of the lease agreements. The Group’s obligation under finance leases are secured by the lessor’s title to the leased assets. Finance lease liabilities Payable: - No later than 1 year - Later than 1 year but not later than 5 years Minimum future lease payments (i) Less future finance charges Present value of minimum lease payments Included in the financial statements as: (note 17) Current borrowings Non-current borrowings Minimum future lease payments Consolidated $000 2014 3,445 6,482 9,927 (999) 8,928 Total $000 2013 4,700 9,142 13,842 (1,697) 12,145 Present value of minimum future lease payments Total $000 2013 Consolidated $000 2014 3,001 5,927 8,928 - 8,928 3,001 5,927 8,928 4,079 8,066 12,145 - 12,145 4,079 8,066 12,145 (i) Minimum future lease payments includes the aggregate of all lease payments and any guaranteed residual. 60 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 25. Capital and leasing commitments (continued...) Operating leases Disclosure for lessees Leasing arrangements Operating leases relate to office equipment with lease terms of between one and two and a half years. The Group does not have an option to purchase the leased asset at the expiry of the lease period. Non-cancellable operating lease commitments - Not longer than 1 year (i) - Longer than 1 year but not longer than 5 years Consolidated $000 2014 576 - 576 2013 526 16 542 (i) Operating leases not longer than 1 year include rental payments to Leppington Pastoral Company (a related party) as a result of the acquisition of Pactum Australia Pty Limited. 26. Personnel note The entity employs casual and full time staff numbering 27. Financial instruments Consolidated $000 2014 208 2013 178 (a) Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of debt and equity balances. The Group’s overall strategy remains unchanged from 2013. The capital structure of the Group consists of debt, which includes the borrowings disclosed in note 17, cash and cash equivalents and equity attributable to equity holders of the parent comprising issued capital, reserves and retained earnings as disclosed in notes 19, 20 and 21 respectively. Operating cash flows are used to maintain and expand the group’s manufacturing and distribution assets, as well as to make the routine outflows of tax, dividends and repayment of maturing debt. The Group’s policy is to borrow centrally, using a variety of capital market issues and borrowing facilities, to meet anticipated funding requirements. Gearing ratio The Group’s financial management team reviews the capital structure on a regular basis. As a part of this review management considers the cost of capital and the risks associated with each class of capital. Financial liabilities Debt (i) Cash and cash equivalents Net debt Equity (ii) Net debt to equity ratio Consolidated $000 2014 9,826 (4,873) 4,953 122,233 4% 2013 22,348 (14,106) 8,242 82,395 10% 61 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 27. Financial instruments (continued...) (i) Debt is defined as long and short-term borrowings, as detailed in note 17. (ii) Equity includes all capital and reserves. (b) Financial risk management objectives The Group’s financial management team provides services to each of the group businesses, co-ordinates access to domestic and international financial markets, monitors and manages the financial risks relating to the operations of the Group through internal risk reports which analyse exposures by degree and magnitude of risks. These risks include market risk (including currency risk and price risk), credit risk and liquidity risk. The Group seeks to minimise the effects of these risks, by using derivative financial instruments to hedge these risk exposures. The use of financial derivatives is governed by the Group’s policies approved by the board of directors, which provide written principles on foreign exchange risk, credit risk and the investment of excess liquidity. The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes. (c) Market Risk The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates and interest rates. The Group enters into foreign exchange forward contracts to manage exposure to foreign currency risk for its imports. There has been no change to the Group’s exposure to market risks or the manner in which it manages and measures the risk. The Corporate Treasury function reports monthly to the board which monitors risks and policies implemented to mitigate risk exposure. (d) Significant accounting policies Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 3 to the financial statements. (e) Foreign currency risk management The Group undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts. The carrying amount of the Group’s foreign currency denominated financial assets and financial liabilities at the reporting date is as follows: Consolidated US dollars (USD) Canadian dollars (CAD) New Zealand dollars (NZD) Euro (EUR) Chinese Yuan (CNH/RMB) Financial assets $000 Financial liabilities $000 2014 1,649 526 - - 2,497 2013 481 389 - - - 2014 2,540 708 101 105 - 2013 228 272 388 - - There have been no changes to the group’s exposure to foreign currency risks or the manner in which it manages and measures the risks from the previous period. 62 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 27. Financial instruments (continued...) Forward Exchange Contracts The Group enters into forward exchange contracts to buy specified amounts of foreign currencies in the future at stipulated exchange rates. The objective of entering into the forward exchange contracts is to protect the Group against unfavourable exchange rate movements for the contracted purchases undertaken in foreign currencies. The Group had entered into contracts (for terms not exceeding 12 months) to purchase finished goods from suppliers in the United States and Canada and equipment from Europe. The contracts related to highly probable forecasted transactions for the purchase of inventory for the Specialty Seafood business (Salmon and Sardines) and the Freedom Foods business (Spreads and Almond paste) with the purchase consideration being settled in the above currencies. The Group’s objective in entering into foreign exchange contracts is to provide certainty to the income and cash flow implications for the designated foreign currency purchase, relating to purchase of inventory or other capital assets. The Group had USD 3,282,620, CAD 624,201 and EUR 2,745,500 outstanding foreign exchange contracts as at 30 June 2014. The Group does not adopt hedge accounting. The following table details the forward foreign currency contracts outstanding as at reporting date: Average exchange rate Foreign currency 2014 2013 2014 2013 Contract value 2014 2013 Fair value 2014 2013 FC000 $000 $000 Outstanding contracts Consolidated Buy US Dollars Less than 3 months Consolidated Buy CA Dollars Less than 3 months Consolidated Buy NZ Dollars Less than 3 months Consolidated Buy EUR Euros Less than 3 months 0.932 1.024 3,283 168 3,524 165 (24) 1.012 0.982 624 678 617 690 - 1.190 - 967 - 813 5 - 0.643 - 2,746 - 4,273 - (261) 17 10 2 - Foreign currency sensitivity analysis The following table details the sensitivity to an increase / decrease in the Australian dollar against the relevant currencies in relation to foreign exchange exposures. Sensitivity rates of 10% (USD), 5% (CAD), 7% (NZD), 6% (EUR) and 4% (CNH/RMB) have been used as these represent management’s assessment of a likely maximum change in foreign exchange rates. A positive number indicates an increase in profit where the Australia Dollar strengthens against the respective currency. For a weakening of the Australia Dollar against the respective currency there would be an equal and opposite impact on the profit and the balances below would be negative. 63 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 27. Financial instruments (continued...) Consolidated US dollars (USD) impact AUD appreciates by 10% AUD depreciates by 10% Canadian dollars (CAD) impact AUD appreciates by 5% AUD depreciates by 5% New Zealand dollars (NZD) impact AUD appreciates by 7% AUD depreciates by 7% Euro (EUR) impact AUD appreciates by 6% AUD depreciates by 6% Chinese Yuan (CNH/RMB) impact AUD appreciates by 4% AUD depreciates by 4% Profit or loss $000 2014 87 (105) 9 (10) 6 (7) 29 (33) (18) 20 2013 (33) 44 (20) 28 44 (60) - - - - This is mainly attributable to the exposure outstanding on foreign currency receivables and payables at year end in the consolidated entity and the parent. Interest rate risk management (f) The Group is exposed to interest rate risk as it borrows funds at both fixed and floating interest rates. The Group manages this risk by maintaining an appropriate mix between fixed and floating rate borrowings. Exposures to interest rate risk, which is the risk that a financial instrument’s value, its borrowing costs and interest income will fluctuate as a result of changes in market interest rates and the effective weighted average interest rates on those financial instruments are set out below: Group Financial Instrument Financial Assets Cash and cash equivalents Loans due from related parties Total Financial Assets Financial Liabilities Finance leases Finance facilities Loan payable Total Financial Liabilities Note Weighted average effective interest rate % 23 14 17 17 17 0% 8% 7% 5% 6% Amount 2014 $000 4,873 13,303 18,176 8,928 670 228 9,826 2013 $000 14,106 - 14,106 12,145 8,462 1,741 22,348 During the financial year there has been no change to the group’s interest rate risk exposure or the manner in which it manages and measures these risks. 64 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 27. Financial instruments (continued...) Interest rate sensitivity analysis The sensitivity analysis below has been determined based on the impact of 150 basis point increase in interest rates on the exposure to interest rates as detailed in the above table. The impact of a 150 basis point interest rate movement during the year with all other variables being held constant will be: • an increase on the consolidated entity’s net profit of $30,000 (2013: increase of $29,000). This is attributable to the consolidated entity’s exposure to interest rates on its variable rate borrowings. A 150 basis point movement represents management’s assessment of the possible change in interest rates. (g) Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted the policy of only dealing with credit worthy counterparties as a means of mitigating the risk of financial loss from defaults. The Group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded are spread amongst approved counterparties. Quality of Trade and Other Receivables and Other Financial Assets have been disclosed in notes 10 and 11 respectively. Credit risk from balances with banks and financial institutions is managed by Group Treasury in accordance with a Board approved policy. Investments of surplus funds are made only with approved counterparties and within credit limits assigned to each counterparty. Counterparty credit limits are reviewed by the Board on an annual basis and may be updated throughout the year subject to approval of the Board. The limits are set to minimise the concentration of risks and therefore mitigate financial loss through potential counterparty failure. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. The maximum exposure to credit risk, excluding the value of any collateral or other security, at statement of financial position date, to recognised financial assets of the Group which have been recognised on the statement of financial position is the carrying amount, net of any allowance for doubtful debts. (h) Liquidity risk management Liquidity risk arises from the possibility that the Group may be unable to settle a transaction on the due date. The ultimate responsibility for liquidity risk management rests with the Board of Directors, who has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecasts and actual cash flows and matching the maturity profiles of financial assets and liabilities. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching profiles of financial assets and liabilities. Included in Note 24 is a listing of additional undrawn facilities that the company and the consolidated entity has at their disposal to further reduce liquidity risk. Liquidity risk tables The following table details the consolidated entity’s remaining contractual maturity for its financial liabilities. The table has been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the consolidated entity can be required to pay. The table includes both interest and principal cash flows. 65 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 27. Financial instruments (continued...) Consolidated Financial Liabilities Trade payables Other payables and accruals Other payables Finance leases Finance facilities Loan payable Total Financial Liabilities Weighted average effective interest rate % Less than 1 year 2014 $000 2013 $000 1 to 5 years 2014 $000 2013 $000 More than 5 years 2014 $000 2013 $000 - - 0% 8% 5% 6% 10,442 2,626 - 3,445 670 228 17,411 9,238 6,609 288 4,700 8,462 1,741 31,038 - 53 - 6,482 - - 6,535 - 63 - 9,142 - - 9,205 - - - - - - - - - - - - - - (i) Fair value of financial instruments 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; and the fair value of other financial assets and financial liabilities (excluding derivative instruments) 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 for non-optional derivatives, and option pricing models for optional derivatives. 28. Subsequent Events The following subsequent events occurred post 30 June 2014. (i) A further 2,200,000 employee share options granted in September 2014. (ii) The Company also entered into an agreement on 21 August 2014 to acquire land for a new integrated Aseptic (UHT) production and logistics facility in south west Sydney. It will acquire approximately 66,000 sq. metres of land at Ingleburn in South West Sydney. The acquisition price subject to final adjustments is approximately $16.6 million. Settlement is expected on or around February 2015, once final sub divisions and other approvals have been obtained. (iii) The Company increased their shareholding in The a2 Milk Company to 17.9% on 3 September 2014. A total of 942,500 shares were acquired for a total consideration of NZ$ 589,000. This transaction took our shareholding to 117,878,629 ordinary shares. 29. Key management personnel compensation The aggregate compensation made to Directors and other members of key management personnel of the Parent and the Group is set out below: Short-term employee benefits Post-employment benefits Share-based payment Bonus payment (related to FY 2012 performance) 66 Consolidated $000 2014 1,294,450 64,679 267,367 - 1,626,496 2013 1,153,967 71,217 382,372 62,000 1,669,556 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 30. Related party transactions (a) Equity interests in related parties (i) Equity interests in subsidiaries Details of the percentage of ordinary shares held in subsidiaries are disclosed in note 33 to the financial statements. (ii) Equity interest in associates Details of interests in associates is disclosed in note 36 to the financial statements. (b) Transactions with key management personnel (i) Key management personnel compensation Details of key management personnel compensation are disclosed in note 29 to the financial statements. (ii) Key management personnel equity holdings Fully paid ordinary shares of the Group 2014 P. R. Gunner R.J.F Macleod A. M. Perich (1) R. Perich (1) M. Miles T.J. Allen M.Perich (1) M. Bracka A. Haddad 2013 P. R. Gunner R.J.F Macleod A. M. Perich (1) R. Perich (1) M. Miles G.H. Babidge M.Perich (1) M. Bracka A. Haddad Balance at 1 July 2013 No. Granted as compensation No. Received on exercise of options No. Net other change (2) No. Balance at 30 June 2014 No. 526,009 195,076 69,225,122 69,225,122 222,413 - 69,225,122 458,081 84,011 - - - - - - - - - 159,604 1,306,666 - - 64,584 - - 733,333 583,333 167,544 (74,952) 16,774,878 16,774,878 44,896 41,178 16,774,878 (274,143) (129,256) 853,157 1,426,790 86,000,000 86,000,000 331,893 41,178 86,000,000 917,271 538,088 Balance at 1 July 2012 No. Granted as compensation No. Received on exercise of options No. Net other change (2) No. Balance at 30 June 2013 No. 510,732 182,775 51,620,094 51,620,094 212,812 98,057 51,620,094 327,602 80,384 - - - - - - - - - - - 15,995,142 15,995,142 - - 15,995,142 50,391 - 15,277 12,301 1,609,886 1,609,886 9,601 2,334 1,609,886 80,088 3,627 526,009 195,076 69,225,122 69,225,122 222,413 100,391 69,225,122 458,081 84,011 (1) Mr A.M. Perich, Mr R. Perich and Mr M. Perich (as their alternate) are Joint Managing Directors of Arrovest Pty Limited, the entity holding a direct interest in the Group. (2) Subscribed to during the year, by conversion of Convertible Redeemable Preference Shares, Dividend Reinvestment Plan allotments, Entitlement Offer acquisitions and Market Trades. 67 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 30. Related party transactions (continued...) Convertible Redeemable Preference shares of the Group (Issued in FY 2011) 2014 P. R. Gunner R.J.F Macleod A. M. Perich (1) R. Perich (1) M. Miles T.J. Allen M.Perich (1) M. Bracka A. Haddad Balance at 1 July 2013 No. Granted as compensation No. Received on exercise of options No. Net other change (2) No. Balance at 30 June 2014 No. 159,604 - 15,995,142 15,995,142 64,584 - 15,995,142 50,391 - - - - - - - - - - - - - - - - - - - (159,604) - (15,995,142) (15,995,142) (64,584) - (15,995,142) (50,391) - - - - - - - - - - (1) Mr A.M. Perich, Mr R. Perich and Mr M. Perich (as their alternate) are Joint Managing Directors of Arrovest Pty Limited, the entity holding a direct interest in the Group. (2) Converted to Ordinary shares during the year. Option over ordinary shares of the Group (exercisable at $0.40 cents ) (Issued in February 2011, expired in February 2014) 2014 P. R. Gunner R.J.F Macleod A. M. Perich (1) R. Perich (1) M. Miles T.J. Allen M.Perich (1) M. Bracka A. Haddad Balance at 1 July 2013 No. Granted as compensation No. Received on exercise of options No. 159,604 6,666 - - 64,584 - - - - - - - - - - - - - - - - - - - - - - Net other change No. (159,604) (6,666) - - (64,584) - - - - Balance at 30 June 2014 No. - - - - - - - - - (1) Mr A.M Perich, Mr R. Perich and Mr M. Perich (as their alternate) are Joint Managing Directors of Arrovest Pty Limited, the entity holding a direct interest in the Group. (2) Options exercised during the year 68 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 30. Related party transactions (continued...) Employee Share Options in the Group Balance at 1 July No. Lapsed No. Granted as compen- sation No. Exercised No. Net other change No. Balance at 30 June No. Balance vested at 30 June No. Vested but not exercisable No. Vested and exercisable No. 2014 R.J.F. Macleod M. Bracka A. Haddad Senior Employees 2013 R.J.F. Macleod M. Bracka A. Haddad Senior Employees 2,700,000 2,200,000 1,950,000 1,600,000 8,450,000 2,500,000 2,000,000 1,750,000 - 6,250,000 - - - - - - - - - - - - - - - (1,300,000) (733,333) (583,333) (274,999) (2,891,665) 200,000 200,000 200,000 1,600,000 2,200,000 - - - - - - - - - - - - - - - 1,400,000 1,466,667 1,366,667 1,325,001 5,558,335 2,700,000 2,200,000 1,950,000 1,600,000 8,450,000 1,733,333 1,400,000 1,233,334 533,333 4,900,000 833,333 666,666 583,333 - 2,083,332 - - - - - - - - - - 1,733,333 1,400,000 1,233,334 533,333 4,900,000 833,333 666,666 583,333 - 2,083,332 Options vested during year No. 1,300,000 733,333 583,333 274,999 2,891,665 - - - - - All share options issued to key management personnel were made in accordance with the provisions of the Employee Share Option Plan. Further details of the Employee Share Option Plan are contained in note 31 to the financial statements. For further transactions with key personnel of the Group, refer to transactions between Group Company and its related parties below. (c) Transactions with other related parties Other related parties include: • • • • entities with joint control or significant influence over the Group joint ventures in which the entity was a venturer subsidiaries other related parties (i) Transactions between the Group and its related parties During the financial year, the following transactions occurred between the Group and its other related parties: • • • • Pactum Australia Pty Limited is a 100% owned subsidiary and as such has related party transactions with the Group. In the 12 months to 30 June 2014 goods totalling $15,932,000 (2013: $9,886,000) were sold to a Group company at cost and have been excluded from revenues. Freedom Foods Pty Limited is a 100% owned subsidiary and as such has related party transactions with the Group. In the 12 months to 30 June 2014 goods totalling $828,000 (2013: Nil) were sold to a Group company at cost and have been excluded from revenues. The Group entered into a lease commitment with Leppington Pastoral Company on 1 April 2012. The Group made payments of $358,000 in the current financial year (2013: $340,000). In the prior year the Group was reimbursed by The a2 Milk Company (Australia) Pty Limited (formerly A2 Dairy Products Australia Pty Limited) $19,000 for labour and other administrative services provided. 69 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 30. Related party transactions (continued...) • The Group provided management services to the new associated entity, Pactum Dairy Group Pty Limited for $660,000. These services are provided under normal terms and conditions. (ii) Transactions between other related parties of the Group During the financial year, the following transactions occurred between the Group and other related parties of the Group: • • • Leppington Pastoral Company sold goods and services totalling $3,425,000 in the current financial year (2013: $6,071,000) to Pactum at cost. Australian Consolidated Milk Pty Limited sold goods totalling $2,102,000 in the current financial year (2013: $3,639,000) to Pactum at cost. The a2 Milk Company (Australia) Pty Limited (formerly A2 Dairy Products Australia Pty Limited) bought goods totalling $1,423,000 in the current financial year (2013: $409,000) from Pactum. These services are provided under normal terms and conditions. (d) Parent entities The Parent entity of the Group is Freedom Foods Group Limited and the ultimate parent entity is Arrovest Pty Ltd which is incorporated in Australia. 31. Share based payments - Employee Share Option Plan Senior employees are eligible to participate in the share scheme under which executives are issued options to acquire shares in the Parent. Each employee share option converts into one ordinary share of the Parent on exercise. No amounts are paid or payable by the recipient on receipt of the option. The options carry neither rights to dividends nor voting rights. Options may be exercised at any time from the date of vesting to the date of their expiry. There are no vesting conditions attached to these options other than continuing employment within the Group. The options granted expire within five years of their issue, or one year of the resignation of the senior employee, whichever is the earlier. In relation to options issued during the financial year ended 30 June 2014, the options vest in three equal tranches over a period of 3 years. The following share-based payment arrangements were in existence during the current and comparative reporting periods: Option series Senior Executive Grant Senior Executive and Management Grant 6,250,000 2,200,000 1/02/12 30/08/12 1/02/17 30/08/17 Number Grant date Expiry date Exercise price $ 0.40 0.60 Fair value at grant $ 0.122 0.066 The weighted average fair value of the share options granted during the prior financial year is $0.066. Options were priced using a binomial option pricing model. Where relevant, the expected life used in the model has been adjusted on management’s best estimate for the effects of non-transferability, exercise restrictions and behavioural considerations. Expected volatility is based on historical share price volatility over the past 2 years. It is expected that options will be exercised only in the event of market price exceeding exercise price. 70 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 31. Share based payments - Employee Share Option Plan (continued...) Inputs into the model Grant date share price Exercise price Expected volatility Option life Dividend yield Risk-free interest rate Executive Options 2 February 2012 0.46 0.40 20% 5 years 2.5% 5% Executive and Management Options 30 August 2012 0.65 0.60 5% 5 years 2.5% 5% The following reconciles the outstanding share options granted under the employee share option plan at the beginning and end of the financial year: Balance at beginning of the financial year Granted during financial year Exercised during financial year Lapsed during financial year Cancelled during financial year Exercisable at end of financial year 2014 Number of options 8,450,000 - (2,891,665) - - 5,558,335 4,900,000 Weighted average exercise price $ 0.45 - 0.43 - - 0.46 2013 Number of options 6,250,000 2,200,000 - - - 8,450,000 Weighted average exercise price $ 0.40 0.60 - - - 0.45 0.43 2,083,332 0.40 Balance at end of the financial year The share options outstanding at the end of the financial year had an average exercise price of $0.46 (2013: $0.45), and a weighted average remaining contractual life of 1,157 days (2013: 1,522 days). During the year 2,483,333 options were exercised at $0.40 and 408,332 at $0.60. 32. Contingent liabilities Bank guarantee arising from rental of office premises. No liability is expected to accrue. 33. Controlled entities Controlled Entity Paramount Seafoods Pty Limited (i) Nutrition Ventures Pty Limited (i) Nutrition Ventures Financing Pty Limited (i) Freedom Foods Pty Limited (i) Pactum Australia Pty Limited (i) Pactum Dairy Group Pty Limited (ii) Australian Natural Foods Holdings Pty Limited (i) Thorpedo Foods Group Pty Limited (i) Thorpedo Foods Pty Limited Thorpedo Seafoods Pty Limited Freedom Foods North America Inc (iii) Consolidated $000 2014 - Country of Incorporation Ownership interest Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia North America 2014 100% 100% 100% 100% 100% 1% 100% 100% 75% 75% 80% 2013 14 2013 100% 100% 100% 100% 100% 100% 100% 100% 75% 75% - 71 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 33. Controlled entities (continued...) The consolidated statement of comprehensive income and statement of financial position of the entities party to the deed of cross guarantee is the consolidated statement of comprehensive income and statement of financial position included in the 2014 financial report. (i) These companies are members of the tax consolidated group. (ii) Pactum Dairy Group Pty Limited was registered on 4 May 2012 as a 100% subsidiary of Pactum Australia Pty Limited. In October 2013 the share structure changed to a 1% equity interest. Refer to note 3(f ) and note 36. (iii) Freedom Foods North America Inc was incorporated on 17 July 2013. 34. Companies party to deed of cross guarantee The following have entered into a deed of cross guarantee as a condition to obtaining relief under ASIC Class Order 98/1418 from the Corporations Act 2001 requirements to prepare and lodge an audited financial report and a directors’ report. Members of the closed group are: • • • • Freedom Foods Group Limited Paramount Seafoods Pty Limited Nutrition Ventures Pty Limited Nutrition Ventures Financing Pty Limited • • • • Freedom Foods Pty Limited Australian Natural Foods Holdings Pty Limited Thorpedo Foods Group Pty Limited Pactum Australia Pty Limited Each party to the deed of cross guarantee, guarantees to each creditor in the group payment in full of any debt upon winding up under the provisions of the Corporations Act 2001 or, in any other case, if six months after a resolution or order for winding up, any debt of a creditor that has not been paid in full. The consolidated financial report of the closed group would not be materially different from the report of the group as a whole. The main difference is the Freedom Foods North America result which is disclosed in Note 4. 35. Parent entity disclosures (a) Financial position Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net Assets Equity Issued capital Reserves Retained earnings Total equity 72 Parent $000 2014 239 113,204 113,443 4,003 635 4,638 108,805 94,419 1,325 13,061 108,805 2013 15 85,360 85,375 3,027 669 3,696 81,679 63,022 965 17,692 81,679 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 35. Parent entity disclosures (continued...) (b) Financial performance Profit/(loss) for the year Other comprehensive income Total comprehensive income (c) Contingent liabilities of the parent entity Bank guarantee Parent $000 2014 (992) - (992) $000 2014 - (d) Commitments for the acquisition of property, plant and equipment by the parent entity Plant and equipment, PV of minimum future lease payments Not longer than 1 year Longer than 1 year and not longer than 5 years Longer than 5 years 36. Equity accounted investments $000 2014 3 - - 2013 8,387 - 8,387 2013 14 2013 26 - - Output interest (fully diluted) % Name of associate/joint venture The a2 Milk Company (a2MC) Pactum Dairy Group Pty Limited (PDG) (i) Country of incorporation New Zealand Australia Principal activity Sale of a2 milk in Australia Sale of UHT beverages in Australia and Asia 2014 17.7 1.0 2013 18.0 - (i) Refer to Note 3(f ) The a2 Milk Company The group holds 116,936,129 ordinary shares in a2MC at 30 June 2014. There are two common directors on the a2MC board, Mr Melvyn Miles and Mr Perry Gunner. Reconciliation of movement in investment accounted for using the equity method: Balance at 1 July Share of profits for the year (i) Costs of shares sold Equity investment Costs associated with investment Balance at 30 June a2MC $000 2014 9,909 - 9,909 - 678 - 10,587 (i) Included in the share of profits for the prior year is $245,000 that related to a post year end adjustment for 2012. 2013 12,357 819 13,176 (3,303) 20 16 9,909 73 Freedom Foods Group LimitedFor personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 36. Equity accounted investments (continued...) Summarised financial information in respect of Freedom Foods Group Limited’s share in the associate is set out below: Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total Liabilities Net assets Equity Shareholder funds Revenue Profit / (loss) after income tax a2MC $000 2014 8,504 4,321 12,825 2,973 100 3,072 9,753 9,753 18,396 2 2013 7,273 3,766 11,039 1,890 12 1,901 9,138 9,138 14,378 628 Pactum Dairy Group Pty Limited The Group entered into a Joint Venture agreement between Pactum Australia Pty Limited (Pactum) and Australian Consolidated Milk Pty Limited (ACM) to form the company Pactum Dairy Group Pty Limited for the purpose of supplying high speed low cost liquid products to the Domestic and International market, at a new site in Shepparton, Victoria. Pactum holds 1% of the equity. Balance at 1 July Share of profits / (losses) for the year Dividends Costs of shares sold Equity investment Costs associated with investment Balance at 30 June PDG $000 2014 - (26) (26) - - 4,500 - 4,474 2013 - - - - - - - - The investment of $4,500,000 includes 100 Ordinary Shares at $1; 999,900 Convertible Notes at $1; and 3,500,000 Loan Notes at $1. Equity accounted loss for the year to 30 June 2014 was $26,000. 74 Annual Report 2014For personal use only Notes to the Financial Statements (For the financial year ended 30 June 2014) (continued...) 37. Assets pledged as security In accordance with the security arrangements of liabilities, as disclosed in note 17 to the financial statements, all non- current assets of the Group, have been pledged as security. The holder of the security does not have the right to sell or repledge the assets. The Group does not hold title to the equipment under finance lease pledged as security. Freedom Foods Pty Limited has equipment leases in place with National Australia Bank to assist in financing equipment requirements for the Freedom manufacturing site at Leeton. The maximum facility limit is for financing amounts of up to $12 million with lease terms of up to 5 years and residuals in the range of 20% to 55%. The facility is secured by the financed equipment and Freedom Foods obligations under the leases are guaranteed by Freedom Foods Group Limited. In June 2013, Pactum Australia Pty Limited entered into an equipment lease with National Australia Bank to assist in financing equipment requirements for it’s 3rd line at the Taren Point site. The lease term is 5 years with a 35% residual. The facility is secured by the financed equipment and Pactum Australia’s obligations under the lease are guaranteed by Freedom Foods Group Limited. The Group also holds equipment leases with Westpac relating to its acquisition of Pactum Australia Pty Limited. These leases have a maximum lease term of 5 years with residual payments of between 20% and 50%. The facility is secured by the financed equipment at our Taren Point site. 75 Freedom Foods Group LimitedFor personal use only Directors’ Declaration (For the financial year ended 30 June 2014) n Directors’ Declaration FREEDOM FOODS GROUP LIMITED DIRECTORS’ DECLARATION FOR THE YEAR ENDED 30 JUNE 2014 The director’s declare that: (a) in the Directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; (b) the attached financial statements are in compliance with International Financial Reporting Standards, as stated in note 3 to the financial statements; (c) in the Directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity; and (d) the Directors have been given the declarations required by s.295A of the Corporations Act 2001. At the date of this declaration, the company is within the class of companies affected by ASIC Class Order 98/1418. The nature of the deed of cross guarantee is such that each company which is party to the deed guarantees to each creditor payment in full of any debt in accordance with the deed of cross guarantee. In the directors’ opinion, there are reasonable grounds to believe that the company and the companies to which the ASIC Class Order applies, as detailed in note 34 to the financial statements will, as a group, be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee. Signed in accordance with a resolution of the directors made pursuant to s.295 (5) of the Corporations Act 2001. On behalf of the directors P R Gunner Chairman Rory J F Macleod Managing Director Sydney, 26 September 2014 76 Annual Report 2014For personal use only n Independent Audit Report Independent Auditor’s Report to the Members of Freedom Foods Group Limited Independent Audit Report Deloitte Touche Tohmatsu ABN 74 490 121 060 Eclipse Tower Level 18 60 Station Street Parramatta NSW 2150 PO Box 38 Parramatta NSW 2124 Australia DX 28485 Tel: +61 (0) 2 9840 7000 Fax: +61 (0) 2 9840 7001 www.deloitte.com.au Report on the Financial Report We have audited the accompanying financial report of Freedom Foods Group Limited, which comprises the consolidated statement of financial position as at 30 June 2014, the consolidated statement of profit and loss and other comprehensive income, the consolidated statement of cash flows and the consolidated statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity, comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 29 to 76. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 3 (a), the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the consolidated financial statements comply with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control, relevant to the company’s preparation of the financial report that gives a true and fair view, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Liability limited by a scheme approved under Professional Standards Legislation. A member of Deloitte Touche Tohmatsu Limited. 77 Freedom Foods Group LimitedFor personal use only Independent Audit Report (continued...) We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Freedom Foods Group Limited, would be in the same terms if given to the directors as at the time of this auditor’s report. In our opinion: (a) the financial report of Freedom Foods Group Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2014 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the consolidated financial statements also comply with International Financial Reporting Standards as disclosed in Note 3 (a). Report on the Remuneration Report We have audited the Remuneration Report included in pages 15 to 19 of the directors’ report for the year ended 30 June 2014. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Opinion In our opinion the Remuneration Report of Freedom Foods Group Limited for the year ended 30 June 2014, complies with section 300A of the Corporations Act 2001. DELOITTE TOUCHE TOHMATSU Catherine Hill Partner Chartered Accountants Sydney, 26 September 2014 78 Annual Report 2014For personal use only Shareholder Statistics n Shareholding Class of shares and voting rights At 31 August 2014, there were: Substantial shareholders 150,720,371 ordinary shares of the Parent on issue. 152,127 convertible redeemable preference shares of the Parent on issue. The number of shares held by substantial shareholders as listed in the Parent’s register as at 31 August 2014 are: Ordinary Shares Arrovest Pty Ltd RBC Investor Services Australia Nominees Pty Limited National Nominees Limited Citicorp Nominees Pty Limited Number 86,000,000 11,922,268 11,022,366 9,477,204 The Parent’s listed ordinary shares are of one class with equal voting rights and all are quoted on a Member Exchange of the Australian Stock Exchange Limited (the home exchange being the Australian Stock Exchange (Sydney) Limited). Distribution of ordinary shareholders as at 31 August 2014 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over Ordinary 513 769 209 251 45 1,787 Non marketable securities which are holdings of less than 500 ordinary shares are held by 253 shareholders. This statistic is based on the share register as at 31 August 2014. 79 Freedom Foods Group LimitedFor personal use only Shareholder Statistics (continued...) 20 largest ordinary shareholders as at 31 August 2014 Name 1 Arrovest Pty Ltd 2 RBC Investor Services Australia Nominees Pty Limited 3 National Nominees Limited 4 Citicorp Nominees Pty Limited 5 HSBC Custody Nominees (Australia) Limited 6 J P Morgan Nominees Australia Limited 7 UBS Wealth Management Australia Nominees Pty Ltd 8 Mirrabooka Investments Limited 9 BNP Paribas Noms Pty Ltd 10 HSBC Custody Nominees (Australia) Limited 11 Mr Perry Richard Gunner & Mrs Felicity Jane Gunner 12 Mr Michael Andris Bracka 13 East Coast Rural Holdings Pty Limited 14 AMBK Trust Pty Ltd 15 Citicorp Nominees Pty Limited 16 Mr Lawrence Lip & Mrs Sabina Lip 17 Mr Melvyn Miles & Mrs Joanna Miles 18 Mr Lawrence Lip 19 Connaught Consultants (Finance) Pty Ltd 20 Moorebank Property Management Pty Ltd Number of Ordinary Shares Held 86,000,000 11,922,268 11,022,366 9,477,204 4,519,661 2,786,447 2,155,894 1,809,731 1,410,235 958,208 853,157 688,298 360,000 352,333 351,651 331,938 331,893 309,081 306,224 290,000 136,236,589 % Held of Ordinary Capital 57.06% 7.91% 7.31% 6.29% 3.00% 1.85% 1.43% 1.20% 0.94% 0.64% 0.57% 0.46% 0.24% 0.23% 0.23% 0.22% 0.22% 0.21% 0.20% 0.19% 90.39% The proportion of ordinary shares held by the 20 largest shareholders is 90.39% Stock exchanges that have granted quotation to the securities of the Parent quoted in Australia: All Member Exchanges. Distribution of convertible redeemable preference shareholders as at 31 August 2014 Ordinary 11 7 1 5 - 24 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over 80 Annual Report 2014For personal use only 20 largest convertible redeemable preference shareholders as at 31 August 2014 Shareholder Statistics (continued...) Name 1 Mr Mathew John 2 R & M Gugliotta Pty Ltd 3 Lewis Little River Pty Ltd 4 Mr Hugh Middendorp & Mr Peter Charles Nicholas Middendorp 5 Firefield Pty Ltd 6 Alan Ong Enterprises Pty Limited 7 Mr John William Hartigan & Mrs Enid May Hartigan 8 Mr Craig Sargent 9 GWG Investments Pty Ltd 10 Lokit Investments Pty Ltd 11 Mr Robert William Russell 12 Mr Robert David Napier Nicholls 13 Palatine Holdings Pty Ltd 14 Mr Gerald Millman 15 Mr Tjeerd Veenstra & Mrs Susan Lesley Veenstra 16 Mr Brendan Andrew Hislop 17 Mrs Michelle Louise Farrell 18 Mr Andrew Jonathon Achilles 19 Mr Stuart William Mcdonald 20 Mr Neville Thiele Number of Ordinary Shares Held 34,720 30,000 23,438 16,664 15,100 8,000 5,000 3,394 3,125 2,214 1,924 1,736 1,697 1,000 963 680 640 500 497 273 151,565 % Held of Ordinary Capital 22.82% 19.72% 15.41% 10.95% 9.93% 5.26% 3.29% 2.23% 2.05% 1.46% 1.26% 1.14% 1.12% 0.66% 0.63% 0.45% 0.42% 0.33% 0.33% 0.18% 99.63% The proportion of convertible redeemable preference shares held by the 20 largest shareholders is 99.63% 81 Freedom Foods Group LimitedFor personal use only Corporate Directory n Corporate Directory Company Secretary Rory J F Macleod Assistant Company Secretary Sharon Maguire Principal Registered Office Freedom Foods Group Limited 80 Box Road Taren Point NSW 2229 Tel: (02) 9526 2555 Fax: (02) 9525 5406 Bankers HSBC Australia Limited Level 32, 580 George Street Sydney NSW 2000 Tel: 1300 308 188 (toll free) Fax: (02) 9255 2647 Insurance Brokers InterRisk Australia Pty Limited Level 1, 7 Macquarie Place Sydney NSW 2000 Tel: (02) 9346 8050 Fax: (02) 9346 8051 Solicitors Gilbert + Tobin 2 Park Street Sydney NSW 2000 Tel: (02) 9263 4000 Fax: (02) 9263 4111 Share Registry Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Tel: (02) 8280 7111 Fax: (02) 9287 0303 National Australia Bank Limited Level 3, 255 George Street Sydney NSW 2000 Tel: (02) 9237 1171 Fax: (02) 9237 1400 Auditor Deloitte Touche Tohmatsu Chartered Accountants Eclipse Tower, 60 Station Street Parramatta NSW 2150 Tel: (02) 9840 7000 Fax: (02) 9840 7001 Addisons Level 12, 60 Carrington Street Sydney NSW 2000 Tel: (02) 8915 1000 Fax: (02) 8916 2000 DLA Piper Level 22, 1 Martin Place Sydney NSW 2000 Tel: (02) 9286 8000 Fax: (02) 9286 8007 Management Rory J F Macleod Managing Director Amine Haddad CEO Pactum Australia Michael Bracka CEO Freedom Foods North America 82 Annual Report 2014For personal use only Freedom Foods Group Limited ABN 41 002 814 235 | Ph: 02 9526 2555 | Fax: 02 9525 5406 80 Box Road Taren Point NSW 2229 | PO Box 2531 Taren Point NSW 2229 For personal use only