Freedom Foods Group Limited
Annual Report 2015

Plain-text annual report

ANNUAL REPORT 2015 growth fuelled innovation by Making food better + FROM AUSTRALIA TO THE WORLD We desire to be recognised as creators — creating on-trend, great-tasting, responsibly Australian produced food and beverages. Food and beverages that people enjoy and feel good about. We aim to continually innovate and reimagine what is possible, to change the way the world eats for the better. Through our brands and customers, we will leverage new categories and emerging consumer trends while also understanding our consumers’ needs, backed up by strong research and product development, marketing and commercial capabilities uniquely based on Australian source advantage. Strategic investments in our manufacturing footprint and supply chain will allow us to continue scaling and controlling our business into the future in both Australia and key Asia Pacific global markets. FREEDOM FOODS GROUP LIMITED ABN 41 002 814 235 ANNUAL REPORT FOR THE YEAR ENDED 30 JUNE 2015 ANNUAL GENERAL MEETING date 29 October 2015 time 12.00 pm location DLA Piper Australia Level 22, 1 Martin Place Sydney NSW 2000 Contents 05 Chairman’s Letter 06 Managing Director’s Review of Operations 28 Directors’ Report 41 Corporate Governance Statement 42 43 Auditor’s Independence Declaration Statement of Profit and Loss and Other Comprehensive Income 44 Statement of Financial Position 45 Statement of Cash Flows 46 47 Statement of Changes in Equity Notes to the Financial Statements 81 Directors’ Declaration 82 Independent Auditor's Report to the Members of Freedom Foods Group Limited 84 Shareholder Information 86 Corporate Directory PG 4 "We believe that people’s needs have moved towards safer, nutrient rich, longer life convenient foods". freedom foods group limited + annual report 2015 Chairman's Letter PG 5 Dear All I am pleased to report a successful year, investing in the Company’s capability and capacities for profitable growth consistent with our 3 year plan. During the year, a number of significant initiatives were completed across our business activities, with the highlights being: » Commissioning of a state of the art Nutritional Snacks line 3 months ahead of plan, and at the same time launching 5 innovative nutritional snacks into the mainstream aisle, from February 2015 » Launch in February 2015 of the Australia’s Own brand in China, in partnership with Shenzhen JLL, with the brand being used to support Shenzhen JLL's Kids Milk brand » A highly successful launch of Pactum Dairy Group (PDG) joint venture, achieving sales of close to $50 million in its first full year, tracking ahead of its 3 year business plan, with demand from customers in China, South East Asia and Australia Each of the above initiatives is consistent with building product and channel diversification, as well as a strong export sales platforms into the Asian (China and South East Asia) and Pacific regions. The rapid and changing face of the Company in recent years is illustrated by close to 20% of sales in the financial year 2015 originating from markets outside of Australia/New Zealand. Additionally, and of equal importance, only 43% of total group sales are now derived from major Australian retail customers, as compared to 75% five years ago. To further build on our paddock to plate capability across our Beverage and Cereals and Snacks platform, the Company undertook or announced a series of investments including: » the Company becoming a 10% equity participant, and a member of the Board, in Australian Fresh Milk Holdings consortium (AFMH), which acquired Moxey Farms, Australia's largest single-site dairy operation, as part of the development of a long term strategic dairy milk supply chain; and » acquisitions of the Darlington Point Mill and a proposed Oats based cereals and snacks manufacturing business to accelerate the business and provide further value adding scale benefits to the expanding sales, manufacturing and supply chain footprint of the Cereals and Snacks business. Alongside the significant expansion of our Company’s manufacturing capabilities, we also invested in people, quality and systems: in particular an expansion of our R&D and product development capabilities to drive innovation in product and channels for future sales development. The Company achieved an underlying Operating EBDITA of $15.2 million, broadly in line with the previous corresponding period. Our financial results reflected the impact of the ramp-up phase of the capital equipment investment process, particularly in our Cereals and Snacks platform. The results included one off investment costs relating to snack bars commissioning and launch costs, which impacted gross margin and operating expense in the Group by $2.8 million. The Operating EBDITA and statutory result was also impacted by the expensing of $1.2 million of increased Almond input costs (reflecting adverse exchange rate and market price movements). Overall, the Board believes the operating earnings result to be a good achievement considering the significant development within the Company during the financial year. The Reported Net Profit of $56.6 million included non- operating employee share option expense of $252k (after tax) and a reclassification investment gain of $51.96 million (after tax), arising from the gain on reclassification of The a2 Milk Company (a2MC) investment to a 'available for sale investment', reflecting a change in accounting treatment following the retirement of myself from a2MC board. In relation to our strategic investment in a2MC, we continue to review all our options with regard to the a2MC investment, including evaluating the benefits of maintaining a strategic stake in a2MC. The Board has recommended payment of a final fully franked dividend of 1.5 cents per ordinary share in November 2015, taking total dividends for the 2015 financial year to 3.0 cents per share fully franked. On behalf of all shareholders, I want to thank Mr Mel Miles who resigned from the Board in August this year for his significant contribution to the business over many years. Mel joined the Board in 2006 after the Perich family became major shareholders in the company. Along with working with the board and management on building the Company, in particular he has made a strong contribution to its manufacturing and operational disciplines. On behalf of the Board, I would like to thank my fellow directors and all our 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 freedom foods group limited + annual report 2015PG 6 Managing Director's Review of Operations Operating Highlights » A successful year investing in the Company’s capability and capacities for profitable growth consistent with its 3 year plan » Commissioning of a state of the art Nutritional Snacks line 3 months ahead of plan, with launch of 5 innovative nutritional snacks into the mainstream aisle from February 2015 » Sales growth in new value added Cereals and Bars in Australia, with growth in cereals in North America from increased distribution, albeit incurring significant start-up sales and marketing costs in both markets » Sales growth in non-dairy beverage, led by growth in branded and non-branded sales in the fast growing Almond Milk category, with margins impacted by increased cost of almond inputs (exchange rate and market price) » Launch in February 2015 of the Australia’s Own brand in China, in partnership with Shenzhen JLL » Highly successful launch of Pactum Dairy Group (PDG) achieving sales of close to $50 million in its first full year, tracking ahead of its 3 year business plan with demand from customers in China, South East Asia and Australia » Launch of new and differentiated packaging for the Brunswick Specialty Seafood brand to consolidate its leadership position » Significant investment in manufacturing capabilities, people, quality and systems » Significant investment in new employees in research and development (R&D) and product development to drive innovation in product and channel development » Investment process impacted revenue and margins in the short term relating to commissioning process, deletion of our biscuit range and run-out of old lines » As part of our development of a long term strategic dairy milk supply chain, the Company became a 10% equity participant in Australian Fresh Milk Holdings consortium (AFMH), with the acquisition of Moxey Farms, Australia's largest single-site dairy operation » Announced acquisitions of the Darlington Point Mill and a proposed Oats based cereals and snacks manufacturing business to accelerate the business plan and provide further value adding scale benefits to the expanding sales, manufacturing and supply chain footprint of the Cereals and Snacks business safer + nutritious + full life + convenience freedom foods group limited + annual report 2015PG 7 freedom foods group limited + annual report 2015 PG 8 Managing Director's Review of Operations Financial Summary The Company reported a net profit of $56.6 million, a material increase from the prior corresponding period. The net profit included an unrealised post-tax fair value gain of $51.96 million, arising from the gain on reclassification of The a2 Milk Company (a2MC) investment to a 'available for sale investment', reflecting a change in accounting treatment following the retirement of Mr Perry Gunner from the a2MC board. The resignation of Mr Gunner from the board of a2MC resulted in the Company no longer being able to clearly demonstrate that it could exercise significant influence over the operation of the a2MC business. The Company achieved an underlying Operating EBDITA of $15.2 million, broadly in line with the previous corresponding period. The statutory reported EBDITA of $12.1 million reflected one off investment costs relating to snack bar commissioning and launch costs, which impacted gross margin and operating expense in the Group by $2.8 million. The Operating EBDITA and statutory result was also impacted by the expensing of $1.2 million of increased Almond input costs (reflecting adverse exchange rate and market price movements). Each of the business units (with the exception of Seafood) achieved increased sales, notably including incremental growth in revenue in our joint venture Pactum Dairy Group of $49 million in its first full year of operation. The Freedom Foods branded product range increased revenue, although profitability was impacted by commissioning of the new nutritional snack equipment reducing manufacturing recoveries and gross margin during the half. Non-dairy UHT operations performed ahead of the prior year. Although Specialty Seafood’s revenue declined its contribution to Operating EBDITA increased. The Company considers the Operating EBDITA result satisfactory having regard to: » the significant investment and commissioning of the plant being undertaken and adjustments required to the operating structure of the business in this phase; and » the impact of material market development expenditure, adverse exchange rate changes and Almond input costs. Set out below is a reconciliation of statutory EBDITA to underlying Operating EBDITA before significant items. YEAR ENDED 30TH JUNE (A$’000) 2015 2014 Underlying Operating EBDITA before significant items 16,420 15,289 Significant Items expensed to profit: Exchange and Market Demand Impact on Purchases of Almond inputs Underlying Operating EBDITA Other costs not representing underlying performance One off Marketing and Promotional Costs for Mainstream Bar Launch One off Marketing Costs for Cereal Launch Bar Line Commissioning Impact on Gross Margin Total Other Costs Operating EBDITA Employee Share Option Expense (non cash) Statutory EBDITA (1,183) 15,237 (1,351) (550) (890) (2,791) 12,446 360 12,086 - 15,289 - - - - 15,289 360 14,929 Note: Operating EBDITA is a non-IFRS measure as contemplated in ASIC Regulatory Guide 230 Disclosing non-IFRS financial information (RG230). Operating EBDITA is used by management and the directors as the primary measures of assessing the financial performance of the Group and individual segments. freedom foods group limited + annual report 2015Summary Financials 12 MONTHS TO 30 JUNE Gross Sales Revenues (1) Net Sales Revenues (1) Net Sales Revenue (Statutory) EBDITA (Underlying Operating pre significant) EBDITA (Statutory Operating) (2) EBITA (Operating) (2) Equity Associates Share of Profit (3) Pre Tax Profit (Operating) (4) Pre Tax Profit (Reported) Income Tax Net Profit (Operating) (4) Net Profit (Reported) Interim Ordinary Dividend (cps) Interim CRPS Dividend (cps) EPS (cents per share) (Fully Diluted for CRPS) EPS Operating (cents per share) (Fully Diluted) Net Debt/Equity Net Assets per Share PG 9 2015 2014 Change $’000 $’000 129,502 111,125 91,460 16,420 12,086 9,092 (42) 9,240 61,980 5,349 4,970 56,631 1.50 1.35 35.99 3.14 27% 120 122,772 104,616 87,856 15,289 14,929 12,201 (26) 13,059 12,673 541 12,518 12,132 1.50 1.35 8.14 8.15 4% 81 % 5.5% 6.2% 4.1% 7.4% -19.0% -25.5% -61.5% -29.2% 389.1% 888.7% -60.3% 366.8% 0.0% 0.0% 342.1% -62.7% 575.0% 48.1% 59.0% Net Tangible Assets per Share 106.35 66.88 Notes: 1. Gross Sales Revenues do not include revenues from group associate entity, Pactum Dairy Group Pty Limited. Net Sales Revenues in the table above differs from the Appendix 4E, as the Net Sales Revenue above includes intercompany sales eliminated from the statutory reported Net Sales Revenue figure. This treatment reflects the Group’s arm’s length trading policy between Group activities. 2. Operating EBDITA and EBITA excludes pre-tax abnormal or non-operating charges and gains with an add back of non cash employee share option expense of $360k, elimination of the fair value gain of $53.1 million due to the reclassification of the a2MC investment and the share of losses from associate. 3. Share of losses from associate. 4. Operating Pre Tax Profit and Net Profit does not include the fair value gain of $53.1 million due to the reclassification of the a2MC investment and the share of losses from associate. freedom foods group limited + annual report 2015 PG 10 Managing Director's Review of Operations We desire to be recognised as creaters - creating on-trend, great tasting, responsibly Australian produced food and beverages. freedom foods group limited + annual report 2015 UHT Beverage Business Group PG 11 Non Dairy Activities Non-dairy production volumes increased during the period to support the growth of the Australia’s Own and Blue Diamond brands, as well as an expansion of private label requirements for UHT Almond. Non-dairy beverage sales continued the upward trend from the 2014 financial year with volume growth compared to the previous corresponding period, reflecting increased market share of Australia’s Own Organic in the UHT Almond segment. Our Australia’s Own brand and our licensed Blue Diamond Almond Breeze brands remain market leaders with a 43.7% (MAT August 15) share of the Almond UHT segment. As at August 2015, the UHT Almond Milk category accounted for 33% of the retail non-dairy category, compared to 26% at August 2014. UHT Soy declined further with total share at 43.7%, compared to +50% in prior years. It is expected that UHT Almond and related blends will exceed UHT Soy market share within the next 18 months, reflecting a similar trend in North America. Other UHT alternative categories including Almond Coconut and Coconut also increased share. The business had a minimal product exposure to these growing segments during the period. We are introducing products in the categories as well as introducing new UHT product categories such as Cashew, the combined effect of which will be to significantly improve our exposure to these categories in FY 2016. Financial returns in the Almond portfolio were impacted during the period by increased Almond inputs (reflecting exchange rate and market pricing). Australia’s Own UHT liquid stocks increased sales and distribution during the period. The business is also a significant supplier of liquid stocks to retailer and other brands. The business continued to see the benefit of increasing its mix of other value added UHT products, to a range of private label and proprietary customers. Sales of UHT portion pack products were reduced from prior year reflecting the withdrawal of a major brand from the breakfast drink category. We continued to grow our private label business in the UHT portion pack category and have also reallocated surplus capacity to support growth in JLL Australia’s Own Kids Milk UHT portion pack requirements. The business continues to develop plans for the launch of UHT Almond Milk into Asian markets using the Company’s Australian production base. This leverages both the free trade agreements between Australia and Asia as well as the Company’s relationship and distribution base within these markets. The Company sees further opportunity to develop non-dairy UHT products from an Australian manufacturing base into China and SE Asia. During the period, the business invested significantly in its UHT R&D and product development capabilities to ensure it is a leading participant in developing innovative UHT solutions in non-dairy and dairy applications for its customers in Australia, China and South East Asia. The benefits of this investment is expected to lead to increased sales and distribution in and beyond FY 2016. freedom foods group limited + annual report 2015PG 12 Managing Director's Review of Operations The new facility will provide for existing and new UHT packaging capabilities including carton and plastic over different stages. This will allow customisation of beverage and food products and packaging for local and export markets with efficiency and speed, to meet the growing demand for high quality safe foods from Australia. It is intended that production will be marketed under the Company’s brands and leading brands of key customers in Australia and Asia. The facility will also be capable of processing dairy products, to allow a two-way redundancy with the Shepparton facility, while providing opportunity to expand the Company’s base in dairy from multiple processing sites as required. New Facility at Ingleburn, South West Sydney Existing UHT non-dairy capabilities are constrained in both production and distribution at our Taren Point operation, restricting growth and financial returns. With increasing demand from its private label and proprietary customer base for additional capacity and product format capability across non-dairy and value added dairy categories, the Company is investing for future growth through a planned expansion at a new site in Ingleburn in South West Sydney. The planned new facility will provide for significant expansion in capacity and efficiency improvements compared to current operations, including providing a materially more efficient and lower cost warehousing and logistics solution compared to current arrangements. The acquisition of aproximately 66,000 sq. metres of land in Ingleburn for a cost of approximately $16.6 million, which will provide the site for our new facility, was completed in June 2015. All requisite development approvals have been obtained for construction of the new facility. Construction of a warehousing and distribution facility has commenced in the first half of FY 2016, with UHT production commencing during the calendar year 2017. The first stage installed capacity is expected to be approximately 80 million litres, from current capacity at the Taren Point facility of approximately 50 million litres. freedom foods group limited + annual report 2015Dairy Activities PG 13 Pactum Dairy Group (PDG) PDG commenced operations in April 2014 to provide innovative UHT dairy milk capability for customers in domestic and export markets. PDG is a joint venture between Pactum and Australian Consolidated Milk (ACM), a major Australian dairy milk supply group. Commencing volumes are tracking ahead of its 3 year business plan, with good demand from customers in Australia, China and South East Asia. In its first full year of operation, the Company delivered sales of close to $50 million (+$44 million or +635%) and a close to break-even EBDITA result. Slower demand in the 2nd half particularly for 1 litre formats reflected subdued market conditions in China and delays in import certifications. These short term market fluctuations delayed the expected move to profitability, which is now expected in the first half of FY 2016. The business secured additional customers and volume from Australia, China and South East Asia, with supply commencing in FY 2016. These include a major Australian retailer, Lion Dairies and IDP (Vietnam). In Australia, PDG is now the largest dairy UHT supplier to one of the three major Australian retailers under a long term supply arrangement, complementing our existing position as the largest non- dairy UHT supplier to that retailer. This position reflects that customer’s recognition of our leading UHT capabilities. Notwithstanding the short term subdued market conditions in China the Company has established key relationships with major dairy manufacturers and brand owners there including New Hope Dairy (Chengdu), Shenzhen JLL (Guangzhou) and Bright Dairy (Shanghai), online retailer Yihaodian and a number of regional dairy manufacturers and distributors. Each of these relationships is complementary, as both Freedom and our customers in China recognise the level of regionalisation and hence diversification in local market distribution, product range and capability within that market. The recent addition of a major Chinese based dairy customer reflects the increasing recognition of PDG as a supplier of choice in UHT dairy ex Australia, based on our unique customer partnership model. The Company has also developed other customer relationships outside of China into South East Asia in markets such as Hong Kong, Philippines and Vietnam. It is anticipated that our customer requirements are expected to grow beyond their initial volumes as demand for milk increases in their respective home markets, with Australian milk products providing the highest quality and safety at a comparative cost advantage compared to locally sourced milk. The $AUD exchange rate depreciation and expected free trade agreement with China provide further competitive advantage to the business in the medium to long term. During the year, PDG installed additional portion pack capacity in 250ml Prisma and 200-330ml formats. Total installed capacity based on these additions is approximately 120 million litres or 290 million packs per annum. freedom foods group limited + annual report 2015PG 14 Managing Director's Review of Operations To meet expected expansion in milk demand in UHT format and customer format requirements over the medium term, the Company is evaluating additional processing and filling capabilities, as well as an expansion of warehousing and logistics capabilities. Opportunities to vertically integrate into other value added dairy product streams are also being reviewed, such streams being aligned to our customer’s long term requirements. Consistent with this opportunity, the Company has acquired approximately 77,400 sq. metres of land adjacent to the PDG site at Shepparton in Victoria. The acquisition price was $4 million and settlement occurred on 24 September 2015. The acquisition of the land provides the capacity and flexibility to develop longer term warehousing and distribution requirements for the Pactum Dairy operation. Additional customised manufacturing and warehouse capacity will provide space for future expansion of processing and packaging operations at the site and potential expansion of other dairy processing capabilities in the future. With the increasing scale of the PDG and Freedom Foods Group operations, the Company augmented the management capability within the PDG business with the appointment of senior commercial and operational resources with long established experience in both UHT dairy processing and UHT commercial sales. With the commencement of operations and significant resourcing to meet the expected ramp up in volumes, the business recorded a net after tax loss in FY 2015. 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. It is expected that this will occur in FY 2016, after which the Company’s share of profits will increase to 50% in line with the increase in shareholding. It is expected that FY 2016 will show PDG making a positive operating result, hence contributing to Freedom’s operating EBDITA, reflecting the business’s increasing revenues and customer base. Australia’s Own Brand Partnership The Company commenced production of our “Australia’s Own” branded “Kids Milk” to support its launch in China in February 2015. Australia’s Own Kids Milk is being marketed and distributed in China through a long term 50 year partnership with Guangzhou based Shenzhen JiaLiLe Food Co. Ltd (JLL), which is owned and led by parties associated with the establishment of the largest selling ready to drink beverage in China. The arrangements reflect the strategic approach of our business model to engage established partners in foreign markets who understand local business requirements. The initial product is a single serve 200ml pack, which is the first Australian milk product marketed specifically to the post- infant-formula toddler market in China. The product has been initially targeted in Tier 2 and Tier 3 cities, with considerable marketing investment by JLL, including point of sale promotion and sampling, external promotion and more recently TV commercials. Volume continues to build monthly. Production commenced in late 2014 sourced from the Company’s Taren Point UHT facility, due to the 200ml format capability in Sydney. Longer term supply decisions will be determined based on spare capability at either the Shepparton or Ingleburn facilities. freedom foods group limited + annual report 2015Dairy Activities PG 15 Australian Fresh Milk Holdings Consortium Investment In July 2015, the Australian Fresh Milk Holdings consortium (AFMH), comprising Leppington Pastoral Company Pty Limited (LPC), New Hope Dairy Holdings Co Ltd and Freedom Foods Group Limited executed binding agreements to acquire Moxey Farms, Australia's largest single-site dairy operation. Collectively the combined Moxey and Leppington Pastoral dairy milk production makes it the largest dairy milking operation in Australia. Moxey Farms operates a fully integrated dairy farming operation located in the Lachlan Valley, New South Wales, 340 km west of Sydney. Moxey Farms land portfolio covers an area of 2,700 hectares has and includes 3,700 milking cows that produce approximately 50 million litres of milk per year, with a large proportion of this milk from a2 cows. The Moxey family will operate Moxey Farms in joint venture with the Perich family under a new Farm Management Agreement with AFMH, ensuring continuity of existing operations for key customers and staff. The Moxey family have retained a strategic stake in AFMH, which will have assets and operations across every aspect of the dairy value chain. FNP has a 10% equity shareholding and Board representation in AFMH, with the balance held by the other consortium members. The acquisition will provide FNP with the opportunity to secure access to a consistent and long-term supply of high quality milk as AFMH explores expansion opportunities to further build on the acquisition of the Moxey operations. The consortium arrangement will also enable AFMH to leverage FNP’s processing capabilities and New Hope Dairy’s Asian footprint to readily access export markets such as China and South East Asia. The Company intends to equity account 10% of the net profit of AFMH. China Representative Office The Group has had a representative in China since 2013. Consistent with the growth in our business in China, the Group has established a China representative office to provide for growth in its sales, marketing and supply chain requirements. While this team in China will initially be substantially engaged in supporting the dairy activities, the increased resource will provide a base for increased distribution of a broad range of the Company’s products. In September 2015, the Company will launch its online trading platforms in China specifically for Freedom Foods branded product. It is anticipated that the office will also provide representation for alliance brands desiring to access China using the Company’s Australian sourced production. freedom foods group limited + annual report 2015PG 16 Managing Director's Review of Operations freedom foods group limited + annual report 2015 Cereal & Cereal Snacks PG 17 The Freedom Foods branded business continued to build momentum in its Cereal and Cereal based Snacks portfolio, with material investments in production capacity and capabilities for future growth. Traditional format products (i.e. Corn Flakes, Rice Puffs) experienced declines against the prior corresponding period. The business maintained category leadership in Health Cereals (retail) of circa 45% (MAT August 15). Significant capital expenditure occurred at Leeton, together with further investment in R&D, product development and an increase in marketing to support new product launches. The business delivered sales growth in its Cereals, Snacks and related Ingredients segments compared to the previous corresponding period. With a focus on its core product portfolio 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, with some resulting impact on margins and manufacturing recoveries. Alongside investment in sales, marketing and specific product launch investment, the business is investing heavily in R&D and product development capability to drive growth in retail and other channels such as food service in the medium term. The business experienced growth in new format combination products such as Active Balance, Oats and Muesli products. Functional and combination format products, as well as portable and convenience options, will be key drivers of growth in Cereals and Snack business. These areas are also a key focus for our innovation investment, while ensuring our products achieve a 3.5 – 5.0 star rating within the Government health star rating system. As part of ensuring best quality and growth in supply of key grains to our Freedom production facilities, the business developed its Freedom Farmer platform, with a number of key farmer groups engaged to build the Company’s specialised grains supply platform over the coming years. This will guarantee our strategy of being an integrated paddock to plate provider. Australian sourcing of all ingredients will be a key source of competitive advantage for the Company. freedom foods group limited + annual report 2015PG 18 Managing Director's Review of Operations Capacity Investment During the year, the business invested approximately $11 million in capital expenditure at Leeton, including completing the upgrade of Cereal extrusion and packaging capabilities to improve efficiencies and provide increased capacity in range and format for both Cereals and Cereal Snacks. The investments had a material impact on earnings during FY 2015, through commissioning impacts on Cereal, Snacks and other operational outputs. The impact of these is not expected to be recurring in FY 2016. A significant part of the capital expenditure was incurred on the installation of a new state of the art automated nutritional snacks line, the most advanced capability installed currently in Australia. The line was installed in record time with new formats delivered within 2 months of installation commencement. Both these investments will significantly increase Freedom Foods production capability, with no material increase in cash overheads and a lower cost per case. Expansion of extrusion capabilities will provide additional internal capacity for Cereal and Bars, as well as capacity for third party ingredient sales. Nut Free Snacks Launch into Mainstream A key objective for the business from the installation of the new nutritional snack line was the introduction of a high star rated nut free nutritional snack bar range into mainstream supermarkets. This was achieved, notwithstanding significant pressure on operational resources of the business, with a successful launch of 5 new products in Coles and Independents from January 2015. The range is the only “nut free” snack bar range on sale in Australia. The launch delivered a material impact on sales growth in the second half (+68% volume, +97% gross sales), although the requirement to bring forward the commissioning timeline of the new line at Leeton had an impact on manufacturing recoveries and gross margin during the year. Additional significant marketing and promotional costs associated with the launch were incurred and expensed during the second half of FY 2015. Since launch, the products have performed well, with certain SKU’s delivering incremental growth above category average. Additional SKU’s, increased facings and retail distribution are expected to be achieved during FY 2016. freedom foods group limited + annual report 2015Cereal & Cereal Snacks PG 19 North America In North America, our 80% owned subsidiary invested in building sales and distribution capabilities, increasing sales and store distribution within the Specialty and Natural Product Retailer markets. Considerable investment has been made in developing relationships with retailers including Sprouts, Whole Foods, Wegmens, Kroger and HEB. A total of 3,500 distribution points were established as at 30 June 2015. Freedom Foods is now ranked in the Top 10 Cereal brands in Specialty and Natural channels in the USA. Sales increased from A$696k in FY 2014 to A$1.56 million in FY 2015, with the net loss increasing from A$684k to A$903k (including exchange rate impact) as the business continues to invest to build a sustainable market share within the retail and wholesale price point parameters available in the North American market. The North American business contributes to + 15% of Leeton Cereal production output. The North America business will continue to build distribution and consumer awareness within existing and new retail stores, reflecting our unique proposition in Allergen Free and Non GMO Cereals and Cereal Snacks. With current portfolio sales skewed to a small number of sweeter tasting products, product development efforts have been focussed on new products that are better aligned to the North American consumer taste requirement. New product launches in Cereal are planned for launch in 2016, along with the introduction of Allergen Free nutritional snack bars to provide increased sales and distribution growth. With the North American business having established a strong consumer profile within the Allergen Free and Non GMO categories, the business will look to significantly expand distribution over the medium term through the application of additional localised sales and marketing resource. The Company is also actively considering options for increased scale in the North American market. The business remains focused on delivering a profitable sales base within the medium term through sales of branded Cereals and Cereal snacks that account for a material proportion of groups cereal and snack production capability. Darlington Point Mill The Company has completed in August 2015, the acquisition of the business and assets of the Darlington Point Mill based in the Riverina district of New South Wales, approximately 32kms from Freedom Foods allergen free cereal and cereal snacks facility at Stanbridge near Leeton. The Mill operates an established grain processing facility for the supply of milled flours and popping corn. It is a significant processor of popping corn, with a +40% share in Australia, while also processing gluten free and non GMO grains. The business has existing customers in food service and processing markets in Australia as well as export markets. Our plans are to expand the milling operations for internal use and external third party customers to grow sales and access cost efficiencies. We will also expand into processing of other key grains. Existing milling operations will be relocated from our Leeton facility to the Darlington Point Mill, providing for increased finished goods warehousing capabilities at our operations at Leeton. The acquisition is well timed to benefit from the changes to labelling requirements which give more prominence to Australian grown products. freedom foods group limited + annual report 2015PG 20 Managing Director's Review of Operations The acquisition comprises assets located at the site including 7.5 hectares of land, several modern large and medium sized grain silos, flour processing plants, other machinery and equipment and buildings including an export container facility. We will also acquire raw materials including popping corn and maize. The acquisition price for the assets (excluding raw materials) is approximately $5.85 million. The business will contribute to earnings in FY 2016. Oats based Cereals & Snacks Business Acquisition The Company has entered into an exclusive term sheet to acquire a major Australian based manufacturer of Oats based Cereals and Snacks. Oats is an expanding consumer preference in Australia and Asia. The acquisition will enable Freedom to expand its brand and category segment offering in oat based products in Australia and into Asia, and for the first time allow Freedom to access manufacturing capability in both Allergen free (Leeton) and nut based capabilities (the new business) on a cost competitive basis. There will also be integration opportunities in milling and ingredients supplies into the new business from our in-house facilities. The acquisition is expected to be accretive to earnings in its first full year of operation and is expected to provide operational efficiencies in the medium term. The acquisition is subject to confirmatory due diligence and other customary documentation and closing requirements. Outlook The focus for the business into 2016 and beyond is 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 Asia and North America. The acquisitions of the Darlington Point Mill and the proposed Oats based business will accelerate the business plan and provide further value adding scale benefits to the expanding sales, manufacturing and supply chain footprint of the Cereal and Snacks business. The Group’s significant investment in R&D and product development capabilities will deliver an exciting innovation pipeline of new products in Cereals, Nutritional Snacks and new formats for convenience and food services channels. The significant capital expenditure in Cereals and Snacks capability is now largely complete. The impact on earnings in the most recent financial year is now behind the business. An expanded and more relevant product suite, a lower cost base and significant capacity, will enable the business to build sales on a cost effective basis. The opportunity to build our state of the art facilities into significant value adding assets through processing high value added niche products will assist in building a leading Cereals and Snacks business across all segments of the market. freedom foods group limited + annual report 2015PG 21 at freedom foods honesty is our promise and when we claim that a product is free from something, we make sure it really is. freedom foods group limited + annual report 2015PG 22 Managing Director's Review of Operations Brunswick Wild Sardines are small fish with huge nutritional benefits and are packed with flavour. freedom foods group limited + annual report 2015 Specialty Foods PG 23 Exchange rate impacts in FY 2016 may be potentially offset by improved Salmon pricing from a strong 2015 Salmon catch. The business continued to utilise the procurement power of Bumble Bee Foods of North America, with Bumble Bee securing 2015 inventory requirements through priority access to salmon and sardine catch volumes. The Company continues to review opportunities for other food format. Tetra Recart technology has some significant and compelling consumer and retailer benefits. The Company is trailing product development formats with potential customers as part of the feasibility study. Brunswick Sardines maintained its No 1 brand leadership position in Australia and New Zealand. The Paramount Salmon brand performed well during the period. Commencing Salmon inventory reduced exposure to AUD/USD exchange rate decline during the year. Tight management of sales promotions, while leading to lower gross sales during the year, reduced promotional spend and improved gross margin. Operating performance improved reflecting Company’s increased management resourcing and focus on the business. The business remains focused on positioning for growth into FY 2016 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 approach, the business introduced revitalized packaging and website content for the Brunswick brand. The Company sees further category and product expansion opportunities within the Specialty Seafood category in response to the brand and packaging repositioning. freedom foods group limited + annual report 2015PG 24 Managing Director's Review of Operations The a2 Milk Company Limited (a2MC), 17.8% 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 a range of international markets including Australia. a2™ branded milk is the fastest growing milk brand in the Australian market and the major driver of category growth nationally, accounting for approximately 9.3% of grocery channel market share by value. a2MC also markets a2™ Platinum™ infant formula to consumers in Australia and China, with infant formula being ranged nationally in Coles, Woolworths, Independents and Pharmacy. a2MC entered the North American fresh milk market with a launch of a2 branded fresh milk to selected retailers from April 2015. During the period, the Company was required to reclassify how it accounts for the investment in a2MC. This resulted from the resignation of Mr P R Gunner from the a2MC Board in November 2014 and the determination by the Group that it no longer was able to clearly demonstrate that it exercised significant influence over a2MC. Significant influence was deemed to be lost at the conclusion of the a2MC AGM and therefore on this date the group has reclassified the investment to an Available for Sale investment (AFS) under the requirements of AASB 139 Financial Instruments: Recognition and Measurement. At the date of reclassification, a fair value gain of $53.1 million ($51.96 million net of tax) was recorded in the statement of profit or loss. The investment in a2MC continues to be recorded at fair value, with any gains and losses arising from changes in fair value recognised in other comprehensive income and accumulated in the investments revaluation reserve. An additional $5.84 million net of tax has been added to the carrying value of the a2MC investment as at 30 June 2015, reflecting the increase in market price of a2MC shares in the second half of FY 2015. The Company did not recognise any equity accounted profit from a2MC during the period. a2MC listed on the Australian Stock Exchange in April 2015. On 21 June 2015, the Company, along with consortium partner Dean Foods, submitted an Expression of Interest (EOI) to a2MC which set out a preliminary, indicative non-binding proposal to explore an acquisition of a2MC. The Company is disappointed that the Board of a2MC did not engage with the consortium. The Company has had no communication with a2MC since then and the Company and Dean Foods have ceased detailed discussions in relation to a2MC. As previously advised, the Company continues to review all its options with regard to its a2MC investment including evaluating the benefits of maintaining a strategic stake in a2MC. Capital Management The Company held cash of $2.3 million at 30 June 2015, with total borrowings of $52.9 million, comprising term facilities, equipment finance leases and working capital facilities. Net debt at 30 June 2015 was $50.6 million. Net debt excludes financial assets and loans to Associate entities. At 30 June 2015, the Company had lent $14.3 million ($12.8 million at 30 June 2014) 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 $8.3 million, an increase of $1.1 million from FY 2014, reflecting increases in working capital requirements associated with inventory build for changing mix of business in beverages and new product launches. During the period, the Company invested $49.6 million in capital expenditure and drew down financing facilities of $43.1 million. The capital expenditure comprised commitments to expansion at Freedom’s Leeton facility, expansion of packaging capabilities at Shepparton, acquisition of land and payments for building works at Ingleburn and a deposit paid for land at Shepparton. Dividends Consistent with the positive outlook for group performance, the Company will pay a final fully franked dividend of 1.5 cents per ordinary share in November 2015. The record date for determining entitlements is 2 November 2015 and the payment date is 30 November 2015. The Company’s dividend reinvestment plan (DRP) remains open. The Company will pay a fully franked converting preference share dividend in accordance with the terms of the converting preference shares. The record date for determining entitlements is 2 November 2015 and the payment date is 30 November 2015. There are 137,027 converting preference shares remaining on issue at 30 June 2015. 15,100 converting preference shares were converted to ordinary shares during FY 2015. freedom foods group limited + annual report 2015PG 25 Capital Investment & Acquisition Programme The Group is well advanced on a 3 pillar capital investment and acquisition programme which will transform its operations over the next 3 years and provide the opportunity to become a leading Australian based Food Company with a strong export platform. The 3 pillars of the programme involve the following: » Cereal and Snack Production (Allergen Free and oats/nuts). The Group has installed world class equipment to increase production capacity significantly for growth in sales and profitability at our allergen free site at Leeton over the next 3 years. Upgraded Cereals and new Snacks production lines have been commissioned and are ramping up to full efficiency. The design of the upgrade provides for modular expansion at relatively low capital cost thereafter. We are now looking to finalise the acquisition of an integrated Oats and nuts production business which will allow Freedom to operate across the full spectrum cereals and cereal based snacks. These core businesses will be supported by our newly acquired Darlington Point milling capabilities. » Creation of Pactum Dairy Group and the development of a high speed low cost dairy focussed UHT facility at Shepparton. Operations commenced in April 2014 and the business is now moving into profitability on relatively low volumes compared to the rated capacity. Significant expansion of throughput has occurred during the year with the third and fourth lines becoming operational. » The development of a low cost high speed UHT processing and distribution facility at Ingleburn for non- dairy and dairy products with the potential for other food related products over time. As in any major expansion or reshaping of a business, not all matters proceed to plan. Commissioning issues, shutdown of existing production etc. can occur. This was reflected in our lower operating profit from our Cereals and Snacks operations for the year compared to the prior corresponding period. At the same time, the effort from our business to achieve the outcomes detailed in this release has been outstanding. The Company is well placed to capitalise on the capital investment programme from the efforts of the team to bring these plans to fruition. Funding for these major growth programmes will be provided from existing capital, prudent expansion of debt financing and the medium term realisation of other assets. Where equity capital is required, it will be sourced predominantly through entitlements offers to all shareholders. Outlook The Company through its UHT business and Cereals and Snacks platforms continues to build on its capability and capacities for growth, investing in our brands, our manufacturing facilities, R&D and product development as well as establishing key customer relationships in Asia and North America. The expansion of UHT capabilities in Sydney 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 key brands “Australia’s Own” and “Freedom Foods” and leading brands of key customers in Australia and internationally. The UHT dairy platform 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. With strong sales growth and delivery of profitability in FY 2016, the Company plans to convert its PDG convertible note into a 50% shareholding, allowing it to equity account PDG’s sales and profit result, consistent with the business’s increasing profitability and returns. The Cereals and Cereal Snacks business is expected to deliver improved results from revenue growth through innovation in new products, expansion of distribution channels in Australia and international markets, together 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, is expected to provide a strong base for growth into future years. The acquisitions of the Darlington Point Mill and the proposed Oats based business will accelerate the business plan and provide further value adding scale benefits to the expanding sales, manufacturing and supply chain footprint of the Cereals and Snacks business. The strategic investment in a2MC provides the Company and its shareholders a potentially significant value creation opportunity. We will continue to review all our options with regard to the a2MC investment, including evaluating the benefits of maintaining a strategic stake in a2MC. Overall the Company anticipates that the benefits of the multi stage capital investment programme will commence to increase group profits and returns from FY 2016. freedom foods group limited + annual report 2015PG 28 freedom foods group limited + annual report 2015 PG 27 2015 Financial Report 28 Directors’ Report 41 42 43 Corporate Governance Statement Lead Auditor’s Independence Declaration Statement of Profit and Loss and Other Comprehensive Income 44 Statement of Financial Position 45 Statement of Cash Flows 46 47 Statement of Changes in Equity Notes to the Financial Statements 81 Directors’ Declaration 82 Independent Auditor's Report to the Members of Freedom Foods Group Limited 84 Shareholder Information 86 Corporate Directory freedom foods group limited + annual report 2015PG 28 Directors' report The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the 'Group') consisting of Freedom Foods Group Limited (referred to hereafter as the 'Company' or 'parent entity') and the entities it controlled at the end of, or during, the year ended 30 June 2015. Directors The following persons were directors of Freedom Foods Group Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Perry R. Gunner - Chairman (Non-Executive) Rory J.F. Macleod - Managing Director (Executive) Anthony M. Perich - Director (Non-Executive) Ronald Perich - Director (Non-Executive) Melvyn Miles - Director (Non-Executive) (resigned on 14 August 2015) Trevor J. Allen - Director (Non-Executive) Michael R. Perich - Alternate Director (Non-Executive) Company secretaries Managing Director, Rory J F Macleod held the position of Company Secretary during and at the end of the financial year. Mrs Sharon Maguire is the Assistant Company Secretary. Principal activities The principal activities of the consolidated entity during the financial year were: ƒ manufacture, distribution and marketing of allergen free cereals, nutritional snacks and ingredients; ƒ manufacture and distribution of long life beverages; ƒ distribution and marketing of canned seafood; and ƒ 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 profit for the Group after providing for income tax amounted to $56,631,000 (30 June 2014: $12,132,000). Refer to the commentary in the Managing Directors Review of Operations. freedom foods group limited + annual report 2015Directors' report Dividends Final fully franked dividend for the year ended 30 June 2014 (2014: 30 June 2013) of 1.5 cents (2014: 1.0 cents) per ordinary share Dividends reinvested: fully franked at 30% tax rate Interim fully franked dividend for the year ended 30 June 2015 (2014: 30 June 2014) of 1.5 cents (2014: 1.5 cents) per ordinary share Dividends reinvested: fully franked at 30% tax rate Final fully franked dividend for the year ended 30 June 2014 (2014: 30 June 2013) of 1.35 cents (2014: 1.4 cents) per convertible redeemable preference share Interim fully franked dividend for the year ended 30 June 2015 (2014: 30 June 2014) of 1.35 cents (2014: 1.35 cents) per convertible redeemable preference share PG 29 PG 29 consolidated 2015 $'000 2014 $'000 556 1,718 595 1,705 2 2 1,101 49 1,842 413 241 2 4,578 3,648 On 31 August 2015, 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 2015, which is to be paid to shareholders on 30 November 2015. The record date for determining the entitlements to the final dividend is 2 November 2015. The dividend has not been included as a liability in these financial statements. The total estimated dividend to be paid is $2,319,000. On 31 August 2015, the directors declared a fully franked final dividend of 1.35 cents per share to the holders of the converting redeemable preference shares in respect of the financial year ending 30 June 2015, which is to be paid to shareholders on 30 November 2015. The record date for determining the entitlements to the final dividend is 2 November 2015. The dividend has not been included as a liability in these financial statements. The total estimated dividend to be paid is $2,000. Significant changes in the state of affairs There were no significant changes in the state of affairs of the Group during the financial year. Matters subsequent to the end of the financial year Asset Purchase Agreement Ringwood Mill (to be known as Darlington Point Mill) The Group entered into an Asset Purchase Agreement with the Ringwood Group of Companies to acquire the business and assets of the Ringwood Mill (to be known as Darlington Point Mill) based at Darlington Point in the Riverina district of New South Wales on 13 July 2015 (Acquisition). Darlington Point Mill operates an established grain processing facility for the supply of milled flours and popping corn. It is a significant processor of popping corn in Australia and processes gluten free and non GMO grains. Darlington Point Mill currently supplies customers in food service and processing markets in Australia as well as in export markets. The Acquisition will enable Freedom Foods to expand its milling operations for internal use and external third party customers through increased capabilities and capacity, access to cost efficiencies and the ability to consider expansion into processing of other key grains. Freedom Foods existing milling operations will be relocated to the Darlington Point Mill, providing for increased finished goods warehousing capabilities at its current operations. Under the terms of the Acquisition, Freedom Foods will acquire assets located at the site including 7.5 hectares of land, several modern large and medium sized grain silos, flour processing plants, other machinery and equipment and buildings including an export container facility. Freedom Foods will also acquire raw materials including popping corn and maize. The acquisition price for the assets (excluding raw materials) is approximately $5.9 million (exclusive of stamp duty) and working capital for raw material of popping corn. Settlement occurred on 31 August 2015. freedom foods group limited + annual report 2015PG 30 Directors' report The Group acquired 10% of the consortium Australian Fresh Milk Holdings Pty Limited The Group, as part of the consortium Australian Fresh Milk Holdings Pty Limited (AFMH), completed the acquisition of Moxey Farms on 3 August 2015. Moxey Farms is one of Australia’s largest single-site dairy operations. The consortium comprises Leppington Pastoral Company Pty Limited (LPC), New Hope Dairy Holdings Co Ltd (New Hope Dairy) and Freedom Foods Group Limited. The Group acquired 10% of the consortium for $6 million. Moxey Farms operates a fully integrated dairy farming operation located in the Lachlan Valley, New South Wales, 340 km west of Sydney. Moxey Farms’ land portfolio covers an area of 2,700 hectares and includes 3,700 milking cows that produce approximately 50 million litres of milk per year. The Moxey family retained a significant interest in Moxey Farms. Under the terms of the Acquisition, the Moxey family will continue to operate Moxey Farms in a joint venture with the Perich family under a Farm Management Agreement with AFMH, ensuring continuity of existing operations for key customers and staff. The completion of the Acquisition ensures AFMH has in place a scalable operating platform to invest in additional greenfield dairy sites, enabling the consortium to become a significant player in the Australian dairy industry. The Group has entered into an exclusive term sheet to acquire a major Australian based manufacturer of Oat based Cereal and Snacks Oats is an expanding consumer preference in Australia and Asia. The acquisition will enable Freedom Foods to expand its brand and category segment offering in oat based products in Australia and into Asia, and for the first time allow access to manufacturing capability in both Allergen free (Leeton) and nut based capabilities (the new business) on a cost competitive basis. There will also be integration opportunities in milling and ingredient supplies into the new business from our in-house facilities. The acquisition is expected to be accretive to earnings in its first full year of operation and is expected to provide operational efficiencies in the medium term. The acquisition is subject to confirmatory due diligence and other customary documentation and closing requirements. Completion of acquisition of land at Shepparton for Pactum Dairy expansion The Group has completed the acquisition of land (approximately 77,400 sq. metres) adjacent to the Pactum Dairy site in Shepparton Victoria on 24 September 2015. The acquisition price was $4 million (exclusive of stamp duty) and was funded from existing finance facilities. The land will provide capacity and flexibility for longer term warehousing and distribution requirements for the Pactum Dairy operation. Existing warehousing capability on site and adjacent to the site is insufficient for long term requirements, including operating a low cost automated logistics function, with facilities for export containerisation. Additional warehouse capacity will provide space for future expansion of processing and packaging operations at the site and potential expansion of other dairy processing capabilities in the future. Apart from the dividend declared as discussed above, no other matter or circumstance has arisen since 30 June 2015 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years. Likely developments and expected results of operations In future years, the consolidated entity expects to further grow through organic sales development leveraging its expanding capabilities in supply chain and manufacturing, product development, sales, marketing and distribution. Growth beyond Australia and New Zealand will be targeted through key export markets in Asia (China and South East Asia) and North America, either through company owned capabilities or through strategic alliances and partnerships. Environmental regulation 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. ƒ The consolidated entity operates under a Dangerous Goods Licence issued by Workcover. ƒ There were no breaches of environmental laws, regulations or permits during the year. ƒ The consolidated entity is currently operating in accordance with local council consent in regard to hours of operation. freedom foods group limited + annual report 2015Directors' report PG 31 Indemnity and insurance of officers The group has not, during or since the financial year, in respect of any person who is or has been an officer of the Company or a related body corporate: ƒ indemnified or made any relevant agreement for indemnifying against liability incurred as an officer, including costs and expenses in successfully defending legal proceedings; or ƒ 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 Group 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 Group. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The Company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the financial year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. Rounding of amounts The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to 'rounding-off'. Amounts in this report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. Meetings of directors The number of meetings of the Company's Board of Directors ('the Board') and of each Board committee held during the year ended 30 June 2015, and the number of meetings attended by each director were: P.R. Gunner R.J.F. Macleod (i) A.M. Perich R. Perich M. Miles (ii) T.J. Allen M.R. Perich full board audit, risk & compliance remuneration & nomination attended held attended held attended held 11 11 11 11 8 11 10 11 11 11 11 11 11 11 - 2 - 2 2 2 - - - - 2 2 2 - 1 - - 1 - 1 - 1 - - 1 - 1 - Held: represents the number of meetings held during the time the director held office or was a member of the relevant committee. (i) R.J.F. Macleod attended the Audit, Risk and Compliance Committee meetings at the invitation of the Audit Committee. (ii) M. Miles was asked to take a leave of absence from 25 June 2015 until his resignation on 14 August 2015 as a result of his role on the a2MC board which caused him not to be present for 1 meeting of the full board. freedom foods group limited + annual report 2015PG 32 Directors' report Information on directors Name: Title: Mr Perry R. Gunner Chairman and Non-Executive Director (Independent) Qualifications: B.Ag.Sc Experience and expertise: Perry is former Chairman and CEO of Orlando Wyndham Wine Group and was appointed Chairman in July 2006. Other current directorships: Non-Executive Director of Australian Vintage Ltd. Former directorships (last 3 years): None Special responsibilities: Chairman of the Remuneration and Nomination Committee and member of the Audit, Risk and Compliance Committee. Interests in shares: 853,157 Name: Title: Qualifications: Experience and expertise: Mr Rory J.F. Macleod Managing Director B.Econ (Hons) Mr Macleod has been with the group for the past 12 years and is responsible for strategic and corporate development and finance and administration. He is a 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. Other current directorships: Non-Executive Alternate Director, Company Secretary and Public Officer of Australian Fresh Milk Holdings Pty Limited and Fresh Dairy One Pty Limited. Former directorships (last 3 years): Special responsibilities: Interests in shares: Interests in options: Name: Title: Experience and expertise: None None 1,824,482 Employee Share Options 833,334 @ $0.40 and 133,333 @ $0.60 Mr Anthony M. Perich Non-Executive Director Anthony is a Member of the Order of Australia. He 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 Inghams Health Research 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. He was appointed a director in July 2006. Other current directorships: Austral Malaysian Mining Limited Former directorships (last 3 years): None Special responsibilities: Deputy Chairman Interests in shares: 86,938,153 freedom foods group limited + annual report 2015Directors' report PG 33 Name: Title: Mr Ronald Perich Non-Executive Director Other current directorships: Austral Malaysian Mining Limited Former directorships (last 3 years): None Special responsibilities: Deputy Chairman Interests in shares: 86,938,153 Experience and expertise: Ronald is 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. He was appointed as a director in April 2005 Other current directorships: Former directorships (last 3 years): None None Special responsibilities: Member of the Audit, Risk & Compliance Committee and member of the Remuneration & Nomination Committee Interests in shares: 86,938,153 Name: Title: Mr Melvyn Miles (resigned on 14 August 2015) Non-Executive Director (Independent) Qualifications: B.Sc (Hons), F.I.B.D. Experience and expertise: Melyvn has 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. He was appointed as a director in November 2006. Other current directorships: Former directorships (last 3 years): None None Special responsibilities: Member of the Audit, Risk & Compliance Committee Interests in shares: 335,410 freedom foods group limited + annual report 2015PG 34 Directors' report Name: Title: Mr Trevor J. Allen Non-Executive Director (Independent) Qualifications: B Comm (Hons), CA, FF, MAICD Experience and expertise: Mr Allen has thirty seven years’ experience in the corporate and commercial sectors, primarily as a Corporate and Financial Adviser to Australian and international public and privately owned companies. Mr Allen is an independent Non-Executive Director of Peet Limited, where he chairs its Audit and Risk Management Committee and is a member of its Remuneration Committee. He is an independent Non-Executive Director of Eclipx Limited, where he also chairs its audit and risk management committee and is a member of its remuneration committee, Aon Superannuation Pty Ltd, the trustee of the Aon Master Trust, where he also chairs the audit committee, and Yowie Group Limited. Mr Allen is a consultant to PPB Advisory. Mr Allen has recently stepped down after seven years as Non-Executive Director and honorary treasurer of the Juvenile Diabetes Research Foundation. He was also a member of FINSIA’s Corporate Finance Advisory Group Committee for ten years until December 2013. Prior to Mr Allen’s non-executive roles, he had senior executive positions in the investment banking and corporate advisory sector, including Executive Director – Corporate Finance at SBC Warburg (now part of UBS) for over 8 years, Director at Baring Brothers Australia for one year and as a Corporate Finance Partner at KPMG for nearly 12 years. At the time of his retirement from KPMG in December 2011, he was the lead partner in its National Mergers and Acquisitions group. From 1997 – 2000 he was Director - Business Development for Cellarmaster Wines, having responsibility for the integration and performance of a number of acquisitions made outside Australia in that period. He was appointed as a director in July 2013 Other current directorships: Non-Executive Alternate Director, Company Secretary and Public Officer of Australian Fresh Milk Holdings Pty Limited and Fresh Dairy One Pty Limited Former directorships (last 3 years): Australian Childcare Projects Limited Special responsibilities: Chairman of the Audit Risk & Compliance Committee and a member of the Remuneration Committee Interests in shares: 61,178 Name: Title: Mr Michael R. Perich Alternate Non-Executive Director Qualifications: B AppSci (SysAg) Experience and expertise: 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. He was appointed as an alternate director in March 2009. Other current directorships: Non-Executive Director of Australian Fresh Milk Holdings Pty Limited Former directorships (last 3 years): Special responsibilities: Interests in shares: None None 86,938,153 'Other current directorships' quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 'Former directorships (last 3 years)' quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. freedom foods group limited + annual report 2015Directors' report PG 35 Remuneration report (audited) The remuneration report details the key management personnel remuneration arrangements for the Group, in accordance with the requirements of the Corporations Act 2001 and its Regulations. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all directors. The remuneration report is set out under the following main headings: ƒ Principles used to determine the nature and amount of remuneration ƒ Details of remuneration ƒ Service agreements ƒ Share-based compensation ƒ Group performance, shareholder wealth and directors and senior management remuneration ƒ Additional disclosures relating to key management personnel Principles used to determine the nature and amount of remuneration 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: ƒ The capability and experience of the Directors and Executives; ƒ The Directors and Executives' ability to control the relevant operational performance; and ƒ 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. The options on issue at 30 June 2015 vest over a period of 3 years and relate to an employee's service period only. 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 the options issued at 30 June 2015 other than continuing employment within the Group. freedom foods group limited + annual report 2015PG 36 Directors' report At the AGM on 30 October 2014, approval was granted for 2,500,000 options under the Employee Share Option Plan to be issued to Mr Rory J. F Macleod, Managing Director on 1 July 2015. Unlike the options on issue at 30 June 2015, these options will have a 5 year exercise period and will vest based on the achievement of Group Company EBDITA performance per the below: ƒ 750,000 on achievement of Audited Group EBDITA of A$38 million; ƒ 750,000 on achievement of Audited Group EBDITA of A$45 million; and ƒ 1,000,000 on achievement of Audited Group EBDITA of A$57 million Audited Group Earnings before depreciation, interest, tax and amortisation (EBDITA) includes 100% of Equity Associate Pactum Dairy Group’s EBDITA. Audited Group EBDITA will be adjusted for any material divestment and/or acquisition of a material asset or business. The exercise price is equal to the volume weighted average price of the Company's shares traded on the ASX on the trading days in the month of June 2015. Options are valued using the binomial method. 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 2015 was $443,475 (2014: $344,129). To align director interests with shareholder interests, the Directors are encouraged to hold shares in the Company. The Chairman receives approximately 1.3 times 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 nor 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 CEO, Commercial Operations and 12 months for CEO, Freedom Foods North America. Other notice periods for other executives are between 1 and 2 months. Group 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 earnings of the Group for the five years to 30 June 2015 are summarised below: 2015 $'000 2014 $'000 2013 $'000 2012 $'000 2011 $'000 Gross Sales Revenue* Operating EBITDA** Operating Net Profit** Profit after income tax 129,502 122,722 115,514 72,556 57,664 16,420 4,970 56,631 15,289 12,518 12,132 11,600 6,351 13,722 5,447 3,305 3,012 4,041 3,735 4,387 * Gross Sales Revenues do not include revenues from group associate entity, Pactum Dairy Group Pty Limited (PDG). Gross Sales Revenues in the table above differs from the reported revenue, as the Gross Sales Revenue above includes intercompany sales eliminated from the statutory reported Net Sales Revenue figure. This treatment reflects the Group’s arm’s length trading policy between Group activities. ** Operating EBITDA/Operating Net Profit excludes the non-operating charges and gains with an add back of the non cash employee share option expense of $360k, elimination of the fair value gain of $53.1 million on reclassification of the a2MC investments and share of losses of $42k from the associate PDG. freedom foods group limited + annual report 2015Directors' report PG 37 Share price at financial year end ($) Total dividends declared (cents per share) Basic earnings per share (cents per share) Diluted earnings per share (cents per share) EPS (Fully Diluted for CRPS) on Operating Net Profit 2015 2014 2013 2012 2.96 3.00 37.11 35.99 3.14 2.76 2.50 8.65 8.14 8.15 1.65 2.00 14.73 11.96 5.40 0.60 0.50 3.88 3.03 3.32 2011 0.34 0.50 5.67 4.99 2.91 The Remuneration and Nomination Committee considers that the Company's remuneration structure is appropriate to building shareholder value in the medium term. Details of remuneration Amounts of remuneration Details of the remuneration of key management personnel of the Group are set out in the following tables. The key management personnel of the Group consisted of the following directors of Freedom Foods Group Limited: ƒ P.R. Gunner - Chairman and Non-Executive Director ƒ R.J.F. Macleod - Managing Director ƒ A.M. Perich - Non-Executive Director ƒ R. Perich - Non-Executive Director ƒ M. Miles - Non-Executive Director (resigned on 14 August 2015) ƒ T.J. Allen - Non-Executive Director Executive Officers ƒ A. Haddad - CEO, Commercial Operations ƒ M. Bracka - CEO, Freedom Foods North America The benefits of each Director who held office and other key management personnel for the year ended 30 June 2015 are as follows: short-term benefits salary $ directors fees $ post-employment benefits superannuation $ long-term benefits share-based payments long service leave $ options $ total $ 2015 Non-Executive Directors: P.R. Gunner A.M. Perich R. Perich M. Miles T.J. Allen - - - - - 95,000 85,000 75,000 75,000 75,000 Executive Directors: R.J.F. Macleod 389,550 Other Key Management Personnel: A. Haddad M. Bracka (1) 331,203 402,261 - - - 1,123,014 405,000 9,025 8,075 7,125 7,125 7,125 18,783 18,783 - 76,041 - - - - - - - - - - - - - - 104,025 93,075 82,125 82,125 82,125 60,443 468,776 43,062 48,856 393,048 451,117 152,361 1,756,416 (1) M. Bracka was resident in North America and his salary in USD was $335,000, the above is the converted AUD amount. Superannuation Contributions were not due or payable. freedom foods group limited + annual report 2015PG 38 Directors' report short-term benefits salary $ directors fees $ post-employment benefits superannuation $ long-term benefits share-based payments long service leave $ options $ total $ 2014 Non-Executive Directors: P.R. Gunner A.M. Perich R. Perich M. Miles T.J. Allen (1) - - - - - 85,000 65,000 55,000 55,000 55,000 Executive Directors: R.J.F. Macleod 332,225 Other Key Management Personnel: A. Haddad M. Bracka (2) 312,225 365,506 - - - 1,009,956 315,000 7,853 6,012 5,088 5,088 5,088 17,775 17,775 - 64,679 - - - - - - - - - - - - - - 92,853 71,012 60,088 60,088 60,088 106,067 456,067 75,567 85,733 405,567 451,239 267,367 1,657,002 (1) T.J. Allen became a director in July 13. (2) M. Bracka was resident in North America and his salary in USD was $335,000, the above is the converted AUD amount. Superannuation Contributions were not due or payable. No bonus payments are payable to Executive Directors or other Key Management Personnel with respect to the financial year ended 30 June 2015. The remuneration is fixed in the above tables. Additional disclosures relating to key management personnel Key management personnel equity holdings The number of shares in the Company held during the financial year by each director and other members of key management personnel of the Group, including their personally related parties, is set out below: balance at the start of the year received on exercise of options on market trades dividend reinvestment plan balance at the end of the year Ordinary shares P.R. Gunner R.J.F. Macleod A.M. Perich* R. Perich* M. Miles T.J. Allen M. Perich* M. Bracka A. Haddad 853,157 - - - 853,157 1,426,790 433,333 (36,790) 1,149 1,824,482 86,000,000 86,000,000 331,893 41,178 86,000,000 917,271 538,088 - - - - - 1,400,000 650,001 262,108,377 2,483,334 26,962 26,962 - 20,000 26,962 (417,700) (519,000) (872,604) 911,191 86,938,153 911,191 86,938,153 3,517 - 335,410 61,178 911,191 86,938,153 19,595 1,919,166 910 669,999 2,758,744 266,477,851 * 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 direct interest in the Group. freedom foods group limited + annual report 2015Directors' report PG 39 Employee Share Options in the Group The number of options over ordinary shares in the Company held during the financial year by each director and other members of key management personnel of the Group, including their personally related parties, is set out below: balance at the start of the year granted exercised expired/ forfeited/lapsed balance at the end of the year Options over ordinary shares R.J.F. Macleod M. Bracka A. Haddad Options over ordinary shares R.J.F. Macleod A. Haddad 1,400,000 1,466,667 1,366,667 4,233,334 - - - - (433,333) (1,400,000) (650,001) (2,483,334) - - - - 966,667 66,667 716,666 1,750,000 vested and exercisable vested and unexercisable balance at the end of the year 900,000 649,999 1,549,999 - - - 900,000 649,999 1,549,999 All share options issued to key management personnel were made in accordance with the provisions of the Employee Share Option Plan. No director or senior management personnel of the Group appointed during the year received a payment as part of his or her consideration for agreeing to hold the position. Share-based compensation Employee Share Options grant date 2 February 2012 30 August 2012 1 July 2013 recipients R.F.J. Macleod - Issued 2 February 2012 A. Haddad - Issued 2 February 2012 R.F.J. Macleod - Issued 30 August 2012 M. Bracka - Issued 30 August 2012 A. Haddad - Issued 30 August 2012 number of shares under option expiry date exercise price fair value per option at grant date 1,416,667 2 February 2017 1,375,002 30 August 2017 1,525,000 1 July 2018 $0.40 $0.60 $1.65 $0.122 $0.066 $0.181 number during the year 2015 fair value ($) during the year 2015 833,334 583,333 133,333 66,667 133,333 101,667 71,167 8,800 4,400 8,800 There are no performance criteria that need to be met in relation to options granted above. The options detailed above vest over a period of 3 years and relate to an employee's service period only. freedom foods group limited + annual report 2015PG 40 Directors' report 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. At the AGM on 30 October 2014, approval was granted for 2,500,000 options under the Employee Share Option Plan to be issued to Mr Rory J. F Macleod, Managing Director on 1 July 2015. Unlike the options on issue at 30 June 2015, these options will have a 5 year exercise period and will vest based on the achievement of Group Company EBDITA performance per the below: ƒ 750,000 on achievement of Audited Group EBDITA of A$38 million; ƒ 750,000 on achievement of Audited Group EBDITA of A$45 million; and ƒ 1,000,000 on achievement of Audited Group EBDITA of A$57 million Audited Group Earnings before depreciation, interest, tax and amortisation (EBDITA) includes 100% of Equity Associate Pactum Dairy Group’s EBDITA. Audited Group EBDITA will be adjusted for any material divestment and/or acquisition of a material asset or business. The exercise price is equal to the volume weighted average price of the Company's shares traded on the ASX on the trading days in the month of June 2015. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 32 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor's behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in note 32 to the financial statements do not compromise the external auditor's independence requirements of the Corporations Act 2001 for the following reasons: ƒ all non-audit services were subject to the corporate governance procedures adopted by the Company and have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and ƒ 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. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on the following page. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors ______________________________ ______________________________ Perry Gunner Chairman 30 September 2015 Sydney Rory J F Macleod Managing Director freedom foods group limited + annual report 2015 Corporate Governance Statement PG 41 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 Third Edition of the Australian Securities Exchange (ASX) Corporate Governance Council’s Principles and Recommendations (ASX Principles). For full details refer to the Company’s Corporate Governance statement and its Appendix 4G which are available from the corporate governance section of the Company’s website at: www.ffgl.com.au together with other governance related information. Key developments Since that start of the 2015 financial year, the following key developments have been undertaken by the Company in relation to its corporate governance practices. A board skills matrix was introduced The Board developed a matrix setting out the relevant skills and experience which the Board currently has and is looking to achieve in its membership. The matrix covers the criteria of: ƒ Leadership: Strategy and development; Financial acumen; Governance, risk and compliance; ex-CEO experience; listed Company board experience ƒ People, behaviours and culture: People Management; Retention and Succession Planning ƒ Customer: Food Quality and Safety ƒ Operations: Workplace Health and Safety ƒ Digital technology and Analytics: Information Technology and System Scalability ƒ Industry specific skills: Agricultural science, including food safety; retailing which also includes sales, branding and marketing; small medium enterprise (SME) business experience; regional, customer and community focus The Board believes it currently has an appropriate mix of these skills and experience amongst its membership to enable the Board to operate effectively. Further details are set out in the Corporate Governance Statement. Biographical details for the Directors can be found on pages 32 to 34 of the Directors’ report. The Risk Management Framework was enhanced The Board engaged a leading firm of chartered accountants, Ernst & Young to assist with the development of a ‘risk- aware culture’, where identifying, responding to and managing risk underpins day to day decision making, in support of organisational growth and strategic objectives. A series of Board and senior management workshops were held with the purpose of: ƒ Identifying the risks/challenges with the potential to impact on achievement of Freedom’s strategic objectives ƒ Identifying those controls currently in place and initiatives currently underway to manage the identified risks/challenges ƒ Identifying and prioritising additional initiatives required to effectively manage the identified risks/challenges. From this exercise, the Company’s risk management framework is focused on the following aspects as approved by the Board’s assessment of the risks and opportunities facing the Company in light of its strategic objectives. ƒ People, behaviours and culture: People Management, Retention and Succession Planning ƒ Customer: Food Quality and Safety ƒ Operations: Workplace Health and Safety ƒ Digital technology and Analytics: Information Technology and System Scalability The Company will continue to refine this framework during FY16 on an ongoing basis and make any changes in focus and in risk management activity as required. This work will be overseen by the Audit, Risk and Compliance Committee on behalf of the Board. freedom foods group limited + annual report 2015PG 42 Auditor's independence declaration Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au The Board of Directors Freedom Foods Group Ltd 80 Box Road Taren Point NSW 2229 Australia 30 September 2015 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 2015, 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 Andrew J Coleman Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited freedom foods group limited + annual report 2015Statement of profit or loss and other comprehensive income For the year ended 30 June 2015 PG 43 Revenue Revenue from sale of goods Cost of sales Gross profit Other income Gain from reclassification of a2MC investment Expenses Marketing expenses Selling and distribution expenses Administrative expenses Depreciation Net finance (costs)/income Share of losses of associates accounted for using the equity method Profit before income tax expense Income tax expense Profit after income tax expense for the year attributable to the owners of Freedom Foods Group Limited Other comprehensive income Items that will not be reclassified subsequently to profit or loss Gain on the revaluation of land and buildings, net of tax Items that may be reclassified subsequently to profit or loss Revaluation of investment in a2MC, net of tax Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to the owners of Freedom Foods Group Limited Basic earnings per share Diluted earnings per share consolidated note 2015 $'000 2014 $'000 5 26 25 11 17 26 17 6 6 91,460 (58,385) 33,075 896 53,148 (4,264) (12,221) (5,040) (3,354) (218) (42) 61,980 (5,349) 56,631 1,026 5,841 (193) 6,674 87,856 (53,960) 33,896 665 - (3,070) (12,075) (4,472) (2,743) 498 (26) 12,673 (541) 12,132 - - 4 4 63,305 12,136 cents 37.11 35.99 cents 8.65 8.14 The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes freedom foods group limited + annual report 2015PG 44 Statement of financial position For the year ended 30 June 2015 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Other financial assets Prepayments Total current assets Non-current assets Investments accounted for using the equity method Investment in a2MC Property, plant and equipment Intangibles Deferred tax Loans due from associated entities Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Income tax Provisions Other financial liabilities Total current liabilities Non-current liabilities Payables Borrowings Deferred tax Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity consolidated note 2015 $'000 2014 $'000 18 7 8 25 25 26 9 10 12 25 14 20 13 21 12 15 17 2,329 25,303 24,475 1,700 2,094 55,901 4,432 72,618 103,430 21,488 - 13,136 215,104 271,005 18,779 22,025 8,316 1,776 193 4,873 20,655 18,967 689 1,211 46,395 15,061 - 55,077 21,488 385 12,823 104,834 151,229 13,068 3,899 4,155 1,438 287 51,089 22,847 52 30,890 2,785 260 33,987 85,076 53 5,927 - 169 6,149 28,996 185,929 122,233 99,028 3,398 83,503 94,419 (3,636) 31,450 185,929 122,233 The above statement of financial position should be read in conjunction with the accompanying notes freedom foods group limited + annual report 2015Statement of cash flows For the year ended 30 June 2015 PG 45 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest received Interest and other finance costs paid Other income received Receipts of government grants Income taxes paid Net cash from operating activities Cash flows from investing activities Payments for property, plant and equipment Purchase of shares in associated entity Advances to associates Repayment of loan by associate Proceeds from disposal of associate shares Investment in equity interest Net cash 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/(repayments) of borrowings Payment of related party transactions Net cash from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year consolidated note 2015 $'000 2014 $'000 87,104 (78,797) 8,307 10 (1,691) - 371 (960) 6,037 (49,625) (529) (2,758) 1,200 107 - (51,605) 1,264 (77) (1,155) 43,088 (96) 43,024 (2,544) 4,873 2,329 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 (9,233) 14,106 4,873 19 9 25 15 16 18 The above statement of financial position should be read in conjunction with the accompanying notes freedom foods group limited + annual report 2015 PG 46 Statement of changes in equity For the year ended 30 June 2015 consolidated issued capital $'000 reserves $'000 retained profits $'000 total equity $'000 Balance at 1 July 2013 62,978 (3,549) Profit after income tax expense for the year Other comprehensive income for the year, net of tax (note 17) Total comprehensive income for the year Transactions with owners in their capacity as owners: Issue of ordinary shares under employee share option plan (note 15) Issue of ordinary shares from unlisted options exercised (note 15) Issue of ordinary shares in accordance with the dividend replacement plan (note 15) Issue of ordinary shares from a capital raising allotment (including an entitlement offer) (note 15) Share issue costs (note 15) Related income tax (note 15) Share-based payments (note 17) Acquisition of subsidiary under common control (note 17) Dividends paid (note 16) Balance at 30 June 2014 consolidated - - - 1,239 992 462 29,998 (1,868) 618 - - - - 4 4 - - - - - - 360 (451) - 94,419 (3,636) 22,966 12,132 - 82,395 12,132 4 12,132 12,136 - - - - - - - - (3,648) 31,450 1,239 992 462 29,998 (1,868) 618 360 (451) (3,648) 122,233 issued capital $'000 reserves $'000 retained profits $'000 total equity $'000 Balance at 1 July 2014 94,419 (3,636) Profit after income tax expense for the year Other comprehensive income for the year, net of tax (note 17) Total comprehensive income for the year Transactions with owners in their capacity as owners: Issue of ordinary shares under employee share option plan (note 15) Issue of ordinary shares in accordance with the dividend replacement plan (note 15) Share issue costs (note 15) Related income tax (note 15) Share-based payments (note 17) Dividends paid (note 16) Balance at 30 June 2015 - - - 1,264 3,422 (110) 33 - - - 6,674 6,674 - - - - 360 - 99,028 3,398 31,450 56,631 - 56,631 122,233 56,631 6,674 63,305 - - - - - 1,264 3,422 (110) 33 360 (4,578) 83,503 (4,578) 185,929 The above statement of changes in equity should be read in conjunction with the accompanying notes freedom foods group limited + annual report 2015PG 47 Note 1. General information The financial report of Freedom Foods Group Limited ("Group" or "Company") for the year ended 30 June 2015 was authorised for issue in accordance with resolution of Directors on 30 September 2015. Freedom Foods Group Limited is a company incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange (ASX). The company is trading under the symbol 'FNP'. The nature of the operations and principal activities of the Group are described in note 3. The financial statements were authorised for issue, in accordance with a resolution of directors, on 30 September 2015. The directors have the power to amend and reissue the financial statements. Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out either in the respective notes or below. These policies have been consistently applied to all the years presented, unless otherwise stated. New and amended standards adopted by the Group The Group has adopted all relevant new and amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (“AASB”) which are effective for annual reporting periods beginning on or after 1 July 2014. None of the new standards or amendments to standards that are mandatory for the first time materially affected any of the amounts recognised in the current period or any prior period and they are not likely to significantly affect future periods. During the current year, the Group also elected to early adopt the following standard: AASB 2015-2 ‘Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101.' The Group has early adopted AASB 2015-2 ‘Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101’ ahead of the mandatory, effective date of 1 January 2016. AASB 2015-2 amends AASB 101 ‘Presentation of Financial Statements’ to provide clarification regarding the disclosure requirements in AASB 101. The Group has applied these amendments in determining relevant disclosures in the preparation of these financial statements. Significant accounting policies The following 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 accordance with the Corporations Act 2001, Accounting Standards and Interpretations, 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’). (b) Basis of preparation 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) Basis of consolidation 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: ƒ has power over the investee; ƒ is exposed, or has rights, to variable returns from its involvement with the investee; and ƒ 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. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 48 Note 2. Significant accounting policies (continued) (c) Basis of consolidation (continued) 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. The Non-controlling interests in the investment Freedom Foods North America Inc. are entitled to their proportionate share of that entity's net assets, profits and losses and other comprehensive income during the period. The amounts attributable to the non-controlling interests are not separately disclosed as this financial report is rounded to the nearest thousand dollars ($'000) under ASIC Class Order 98/0100. (d) 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 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 identifiable assets, liabilities and 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. (e) 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. 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 less impairment. Interest income is recognised by applying the effective interest rate. 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. Issued standards and interpretations not early adopted AASB 2015-3 ‘Amendments to Australian Accounting Standards arising from the Withdrawal of AASB 1031 Materiality’ Effective date - Annual reporting period beginning on or after 1 July 2015. AASB 2015-1 ‘Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012-2014 Cycle’; AASB 2014-10 ‘Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture’; AASB 2014-9 ‘Amendments to Australian Accounting Standards – Equity Method in Separate Financial Statements’; AASB 2014-4 ‘Amendments to Australian Accounting Standards – Clarification of Acceptable Methods of Depreciation and Amortisation’ Effective date - Annual reporting period beginning on or after 1 January 2016. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 49 AASB 15 ‘Revenue from Contracts with Customers’ and AASB 2014-5 ‘Amendments to Australian Accounting Standards arising from AASB 15’ Effective date - Annual reporting period beginning on or after 1 January 2017. The International Accounting Standards Board (IASB) is currently undertaking a consultation process to discuss stakeholder challenges arising from the implementation of the new revenue standard. In finalising its assessment of the impact of the new standards, the Group will continue to monitor developments in this area. The Group does not intend to adopt this new standard or amendments before their mandatory effective dates. AASB 9 (2014) ‘Financial Instruments’, and the relevant amending standards. Effective date - Annual reporting period beginning on or after 1 January 2018. Note 3. Operating segments The Group is organised into four segments which is the basis on which the Group reports and the principal products and services of each of these operating segments are as follows: Freedom Foods - Cereals and Snacks Freedom Foods North America - Cereal and Snacks Seafood Pactum Australia - Beverages 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, snack bars, soy, almond and rice beverages and other complimentary products. These products are manufactured and sold in Australia and overseas. 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. A range of canned seafood covering sardines, salmon and specialty seafood. These products are manufactured overseas and sold in Australia and overseas. 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. The 'unallocated group' consists of the Group's other operating segments that are not separately reportable, including the investment in a2MC and Pactum Dairy Group Pty Limited, as well as various shared service functions. 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. Information regarding these segments is presented below. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 50 Note 3. Operating segments (continued) The following is an analysis of the Group's revenue and results by reportable operating segment for the periods under review: consolidated 2015 freedom foods $'000 freedom foods north america $'000 seafood $'000 pactum $'000 unallocated $'000 total $'000 Revenue Sales to external customers Intercompany sales elimination Total sales revenue Total revenue EBITDA Depreciation and amortisation Shared services Net finance costs Gain on a2MC investment Convertible loan note interest Other income Share of equity accounted associates 46,934 1,229 48,163 48,163 3,350 (1,920) - - - - - - 1,560 12,802 30,164 - 91,460 - 1,560 1,560 - 18,436 12,802 48,600 12,802 48,600 (19,665) (19,665) (19,665) - 91,460 91,460 (903) 2,535 10,457 - 15,439 - - - - - - - - - - - - - - (1,316) - - - - - - (118) (3,889) (218) (3,354) (3,889) (218) 53,148 53,148 525 371 (42) 525 371 (42) Profit/(loss) before income tax expense 1,430 (903) 2,535 9,141 49,777 61,980 Income tax expense Profit after income tax expense Assets Segment assets Unallocated assets: Shared services Investment in associate Investment in a2MC Total assets Total assets includes: Investment in a2MC Acquisition of non-current assets Liabilities Segment liabilities* Unallocated liabilities: Shared services Total liabilities (5,349) 56,631 86,622 1,707 19,141 67,272 - 174,742 19,213 4,432 72,618 271,005 - 15,160 - - - - - 72,618 72,618 29,933 4,530 49,623 24,398 2,491 5,494 38,232 - 70,615 14,461 85,076 * The segment liabilities include finance leases, debtor finance facilities and multi advance facilities relevant to the appropriate operating segment. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 51 consolidated 2014 freedom foods $'000 freedom foods north america $'000 seafood $'000 pactum $'000 unallocated $'000 total $'000 Revenue Sales to external customers Intercompany sales elimination Total sales revenue Total revenue EBITDA Depreciation and amortisation Shared services Net finance costs Share of equity accounted associates 43,415 828 44,243 44,243 7,131 (1,639) - - - 696 13,239 30,506 - 87,856 - 696 696 - 15,932 13,239 46,438 13,239 46,438 (684) 2,431 9,748 - - - - - - - - (1,045) - - - (16,760) (16,760) (16,760) - (59) (3,682) 498 (26) - 87,856 87,856 18,626 (2,743) (3,682) 498 (26) Profit/(loss) before income tax expense 5,492 (684) 2,431 8,703 (3,269) 12,673 Income tax expense Profit after income tax expense Assets Segment assets Unallocated assets: Shared services Investment in associate Investment in a2MC Total assets Total assets includes: (541) 12,132 61,679 1,219 20,184 33,908 19 117,009 19,159 4,474 10,587 151,229 Investments in associates Acquisition of non-current assets - 9,135 - 3,394 - - - - 15,061 129 15,061 12,658 Liabilities Segment liabilities* Unallocated liabilities: Shared services Total liabilities 7,637 1,095 1,956 13,258 7 23,953 5,043 28,996 * The segment liabilities include finance leases, debtor finance facilities and multi advance facilities relevant to the appropriate operating segment. 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. 94% of total external sales of the consolidated group (2014: 96%) and 56% of total external sales (2014: 61%) are through major Australian retailers. Total (loss) from equity accounted associates for the period totalled $(4,200,000) (2014: $2,600,000). The consolidated entities share of these (losses) was $(42,000) (2014: $(26,000)). Information about major customers Included in revenues arising from external sales of $91.5 million (2014: $87.9 million) (see segment revenue above) are revenues of approximately $51.5 million (2014: $53.2 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 2015 and 2014. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 52 Note 4. Expenses Profit before income tax includes the following specific expenses: Research and development costs expensed Defined contribution superannuation expense Share-based payments expense Employee benefits expense excluding superannuation and share-based payment expense Note 5. Revenue Revenue Revenue from sale of goods Significant accounting policies consolidated 2015 $'000 2014 $'000 500 1,254 360 6,860 500 974 360 7,226 consolidated 2015 $'000 2014 $'000 91,460 87,856 Revenue is measured at the fair value of the consideration received or receivable. Revenue is reduced for terms, rebates and other similar allowances. Sale of goods Revenue from the sale of goods is recognised when all the following conditions are satisfied: ƒ the significant risks and rewards of ownership of the goods have been transferred; ƒ the amount of revenue can be measured reliably; ƒ it is probable the revenue will be received; and ƒ the costs incurred or to be incurred in respect of the transaction can be measured reliably. Note 6. Earnings per share Profit after income tax attributable to the owners of Freedom Foods Group Limited Share-based payments expense Profit after income tax attributable to the owners of Freedom Foods Group Limited used in calculating diluted earnings per share consolidated 2015 $'000 2014 $'000 56,631 360 56,991 12,132 360 12,492 number number Weighted average number of ordinary shares used in calculating basic earnings per share 152,587,346 140,246,504 Adjustments for calculation of diluted earnings per share: CRPS ESOP 141,205 4,720,898 5,637,970 8,554,589 Weighted average number of ordinary shares used in calculating diluted earnings per share 158,366,521 153,521,991 Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015Basic earnings per share Diluted earnings per share PG 53 cents 37.11 35.99 cents 8.65 8.14 At 30 June 2015 there were 154,624,900 Ordinary shares (2014: 150,645,371) on issue and 137,027 Convertible Redeemable Preference shares (2014: 152,127). At 30 June 2015 there were no unlisted ordinary share options (2014: Nil). There were 4,316,669 (2014: 7,075,001) employee share options were outstanding (1,416,667 (2014: 3,766,667) exercisable at $0.40 per share, 1,375,002 (2014: 1,708,334) exercisable at $0.60 per share and 1,525,000 (2014: 1,600,000) exercisable at $1.65 per share. Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Freedom Foods Group Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Note 7. Current assets - trade and other receivables Trade receivables Less: Provision for impairment of receivables Other receivables consolidated 2015 $'000 2014 $'000 21,935 - 21,935 3,368 25,303 17,497 (59) 17,438 3,217 20,655 The average credit period on sales of goods is 45 days (2014: 36 days). No interest is charged on trade receivables. No 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 decreased by $59,000 (2014: increased by $30,000) in the Group. The allowance for doubtful debts/impaired trade receivables as at 30 June 2015 is nil (2014: $59,000). The Group does not hold any collateral over these balances. Customers with balances past due but without provision for impairment of receivables amount to $2,228,000 as at 30 June 2015 ($892,000 as at 30 June 2014). The current receivables for the Group have a weighted average of 33 days (2014: 31 days). Management considers that there are no indications as of the reporting date that the debtors will not meet their payment obligations. The past due but not impaired receivables for the Group have a weighted average of 33 days (2014: 56 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 56% (2014: 61%) of sales and 68% (2014: 64%) of year end receivables are concentrated in major supermarkets throughout Australia. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 54 Note 8. Current assets - inventories Raw materials - at cost Finished goods - at cost Less: Provision for impairment consolidated 2015 $'000 2014 $'000 10,436 14,039 - 24,475 6,095 12,988 (116) 18,967 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 $58,384,951 (2014: $53,959,849) Significant accounting policies 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 proportion of manufacturing variable and fixed overheads based 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. Note 9. Non-current assets - property, plant and equipment Freehold Land - at independent valuation Buildings - at independent valuation Less: Accumulated depreciation Plant and Equipment - at cost Less: Accumulated depreciation Add: Capital Work in Progress - at cost Motor Vehicles - under lease Less: Accumulated depreciation consolidated 2015 $'000 2014 $'000 254 5,446 - 5,446 64,150 (16,643) 50,154 97,661 109 (40) 69 254 4,850 (748) 4,102 51,492 (13,438) 12,658 50,712 21 (12) 9 103,430 55,077 Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015Movements in the carrying amounts of each class of property, plant and equipment between the beginning and the end of the current financial year: PG 55 consolidated freehold land $'000 buildings $'000 plant & equipment $'000 motor vehicles $'000 Balance at 1 July 2013 Depreciation at 1 July 2013 Additions* Depreciation expense Balance at 30 June 2014 Additions* Revaluation adjustment Depreciation write back on revaluation Depreciation expense Balance at 30 June 2015 254 - - - 254 - - - - 254 4,850 (626) - (122) 4,102 - 596 869 (121) 5,446 * Included in additions is $617,192 (2014: $243,884) of capitalised interest Significant accounting policies 51,492 (10,817) 12,658 (2,621) 50,712 50,154 - - (3,205) 97,661 total $'000 56,617 (11,455) 12,658 (2,743) 55,077 50,242 596 869 21 (12) - - 9 88 - - (28) 69 (3,354) 103,430 The Leeton site is carried at fair value, as at 30 June 2015, less any subsequent accumulated depreciation. Fair value is determined on the basis of an independent valuation which is carried out regularly by an external valuation expert, based on discounted cash flows or capitalisation of net income, as appropriate. Plant and equipment, motor vehicles and equipment under finance lease are stated at cost less accumulated depreciation and impairment. Construction in progress is stated at cost. 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 an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. Accounting estimates The following depreciation rates are used in the calculation of depreciation: Buildings Plant and equipment 2-6% 4-20% Leased plant and equipment 4-20% Motor vehicles Leased motor vehichles 15-33% 15-33% Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015 PG 56 Note 10. Non-current assets - intangibles Goodwill Brand names Significant accounting policies consolidated 2015 $'000 2014 $'000 5,214 16,274 21,488 5,214 16,274 21,488 Goodwill has been allocated for impairment testing purposes to the following cash-generating units: ƒ Seafood ƒ 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 established major brands purchased as part of business combinations 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 was no goodwill associated to the Group's acquisition of Pactum Australia Pty Limited. The carrying amount of goodwill has been allocated to the identified cash-generating units as follows: Seafood Freedom Foods Accounting estimates consolidated 2015 $'000 2014 $'000 1,982 3,232 5,214 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 terminal value, and a discount rate range between 8.55% and 9.02% pa post tax and between 12.21% and 12.85% pa pre-tax (2014: 9.1% pa post tax and 13.0% 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 used in the value in use calculations for Cash-generating units; ƒ 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. ƒ Budgeted gross margin - average gross margins achieved in the period immediately before the budget period is consistent with that used by management. 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 impairment loss charged against goodwill. 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. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 57 Note 11. Income tax expense Income tax expense Current tax Adjustments recognised in the current year in relation to the current tax of prior years Deferred tax expense/(income) relating to the origination and reversal of temporary differences Aggregate income tax expense Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Effect of revenue/expenses that are not deductible in determining taxable profit Effect of tax concessions (research and development) Tax impact on investment in a2MC Prior year loss Franking deficit tax Prior year research and development claim Income tax expense consolidated 2015 $'000 2014 $'000 4,357 1,066 (74) 5,349 61,980 18,594 209 (50) 3,996 (3,455) - 541 12,673 3,802 245 (50) (14,470) (3,100) 4,283 - 1,255 (189) 5,349 897 (9) - (347) 541 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 in other comprehensive income A deferred tax amount recognised in other comprehensive income of $2,942,903 is attributable to the gain on the revaluation of the investment in a2MC ($2,503,262) and the gain on the revaluation of land and buildings ($439,641). Deferred tax balances Deferred tax assets/(liabilities) comprises temporary differences attributable to: Impairment of receivables Plant and equipment Provisions Other Tax losses Withholding tax paid Investments Total deferred tax assets/(liabilities) consolidated 2015 $'000 2014 $'000 - (633) 605 (78) - 38 (2,717) (2,785) 18 (1,017) 523 (173) 996 38 - 385 Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 58 Note 11. Income tax expense (continued) Significant accounting policies 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. Income tax expense/ benefit, 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. Current tax Current tax is calculated as the expected 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. Deferred tax Deferred tax is accounted for on the basis of temporary differences between the tax base of an asset or liability and it's 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 in relation to taxable temporary differences arising from the initial recognition of goodwill. 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 it's probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible 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. 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 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 for a business combination, in which case it is taken into account in the determination of goodwill or excess. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015Note 12. Non-current liabilities - deferred tax Deferred tax liability Movements: Opening balance Temporary difference - Provisions Temporary difference - Doubtful debts Temporary difference - Property, plant & equipment Temporary difference - Other Investments Tax losses Closing balance Note 13. Current liabilities - income tax PG 59 consolidated 2015 $'000 2014 $'000 2,785 (385) (385) (82) 18 (384) (95) 2,717 996 2,785 (1,146) (80) (9) 619 231 - - (385) consolidated 2015 $'000 2014 $'000 Income tax payable attributable to: Entities in the tax consolidated group 8,316 4,155 Note 14. Current liabilities - trade and other payables Trade payables Other payables and accruals Refer to note 22 for further information on financial instruments. Amounts not expected to be settled within the next 12 months consolidated 2015 $'000 2014 $'000 14,724 4,055 18,779 10,442 2,626 13,068 consolidated 2015 $'000 2014 $'000 Payables to related parties - refer note 25 Related party transactions 193 287 Trade payables are paid on average within 60 days of invoice date. No interest is charged on trade payables. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 60 Note 15. Equity - issued capital consolidated 2015 shares 2014 shares 2015 $'000 2014 $'000 Ordinary shares - fully paid 154,624,900 150,645,371 98,995 94,378 Convertible redeemable preference shares - fully paid 137,027 152,127 33 41 154,761,927 150,797,498 99,028 94,419 Movements in ordinary share capital details Balance Employee share options exercised Employee share options exercised Unlisted options exercised Convertible redeemable preference shares ('CRPS') conversions Dividend Replacement Plan ('DRP') shares Dividend Replacement Plan ('DRP') shares Buy back of unmarketable parcels Transaction costs Balance Employee share options exercised Employee share options exercised Employee share options exercised Convertible redeemable preference shares ('CRPS') conversions Dividend Replacement Plan ('DRP') shares Dividend Replacement Plan ('DRP') shares Transaction costs Balance Movements in convertible redeemable preference shares details Balance Conversion to ordinary shares Costs incurred and reallocated to fully paid ordinary shares Balance Conversion to ordinary shares Transaction costs Balance date shares issue price $'000 1 July 2013 113,754,106 408,332 2,483,333 2,478,533 17,066,888 20,126 149,234 14,284,819 - 30 June 2014 150,645,371 2,350,000 333,332 75,000 15,100 604,193 601,904 - 30 June 2015 154,624,900 $0.60 $0.40 $0.40 $0.30 $2.46 $2.76 $0.95 $0.00 $0.40 $0.60 $1.65 $0.30 $2.85 $2.83 $0.00 58,008 245 994 992 5,120 50 412 29,998 (1,441) 94,378 940 200 124 5 1,717 1,705 (74) 98,995 date shares issue price $'000 1 July 2013 17,219,015 (17,066,888) 30 June 2014 - 152,127 (15,100) - 30 June 2015 137,027 $0.30 $0.00 $0.30 $0.00 4,970 (5,120) 191 41 (5) (3) 33 Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015 PG 61 Ordinary shares Fully paid ordinary shares carry one vote per share and carry the right to dividends. Changes to the then Corporation Law abolished the authorised capital and par value concept in relation to share capital form 1 July 1988. 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 (CRPS) 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 November 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: ƒ the issue price of $0.30; and ƒ 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. 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. Share options granted under the employee share option plan (ESOP) For information relating to the Freedom Foods Group Limited ESOP, including details of options issued, exercised and lapsed during the financial year and the options outstanding at year end, refer to note 31. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 62 Note 16. Equity - dividends Dividends Dividends paid during the financial year were as follows: Final fully franked dividend for the year ended 30 June 2014 (2014: 30 June 2013) of 1.5 cents (2014: 1.0 cents) per ordinary share Dividends reinvested: fully franked at 30% tax rate Interim fully franked dividend for the year ended 30 June 2015 (2014: 30 June 2014) of 1.5 cents (2014: 1.5 cents) per ordinary share Dividends reinvested: fully franked at 30% tax rate Final fully franked dividend for the year ended 30 June 2014 (2014: 30 June 2013) of 1.35 cents (2014: 1.4 cents) per convertible redeemable preference share Interim fully franked dividend for the year ended 30 June 2015 (2014: 30 June 2014) of 1.35 cents (2014: 1.35 cents) per convertible redeemable preference share consolidated 2015 $'000 2014 $'000 556 1,718 595 1,705 2 2 1,101 49 1,842 413 241 2 4,578 3,648 On 31 August 2015, 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 2015, which is to be paid to shareholders on 30 November 2015. The record date for determining the entitlements to the final dividend is 2 November 2015. The dividend has not been included as a liability in these financial statements. The total estimated dividend to be paid is $2,319,000. On 31 August 2015, the directors declared a fully franked final dividend of 1.35 cents per share to the holders of the converting redeemable preference shares in respect of the financial year ending 30 June 2015, which is to be paid to shareholders on 30 November 2015. The record date for determining the entitlements to the final dividend is 2 November 2015. The dividend has not been included as a liability in these financial statements. The total estimated dividend to be paid is $2,000. Franking credit Franking credits available for subsequent financial years based on a tax rate of 30% Franking debits that will arise from the payment of dividends declared subsequent to the reporting date based on a tax rate of 30% Net franking credits available based on a tax rate of 30% Note 17. Equity - reserves Land and buildings revaluation reserve Investment revaluation reserve Foreign currency translation reserve Equity-settled employee benefits reserve Common control reserve consolidated 2015 $'000 2014 $'000 - (696) (696) - (969) (969) consolidated 2015 $'000 2014 $'000 1,499 5,841 (189) 1,711 (5,464) 3,398 473 - 4 1,351 (5,464) (3,636) Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 63 Land and buildings revaluation reserve 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. Investment revaluation reserve The reserve is used to recognise increments and decrements in the fair value of the Group's investments in a2 Milk Company Limited ('a2MC'). Foreign currency translation reserve The reserve is used to recognise exchange differences arising from the translation of the financial statements of foreign operations to Australian dollars. It is also used to recognise gains and losses on hedges of the net investments in foreign operations. Equity-settled employee benefits reserve 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. Common control reserve The acquisition of Pactum by the Group was 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. Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: consolidated land & buildings revaluation reserve $'000 investment revaluation reserve $'000 foreign currency translation reserve $'000 equity-settled employee benefits reserve $'000 common control reserve $'000 total $'000 Balance at 1 July 2013 473 Share-based payments Acquisition of subsidiary under common control Foreign exchange translation Balance at 30 June 2014 Land and building revaluation Revaluation of a2MC investment Foreign currency translation Share-based payments - - - 473 1,026 - - - - - - - - - 5,841 - - Balance at 30 June 2015 1,499 5,841 - - - 4 4 - - (193) - (189) 991 360 - - (5,013) (3,549) - 360 (451) (451) - 4 1,351 (5,464) (3,636) - - - 360 1,711 - - - - (5,464) 1,026 5,841 (193) 360 3,398 Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 64 Note 18. Current assets - cash and cash equivalents Cash consolidated 2015 $'000 2014 $'000 2,329 4,873 Note 19. Reconciliation of profit after income tax to net cash from operating activities Profit after income tax expense for the year Adjustments for: Depreciation and amortisation Share based payments Interest received Interest on associates loan Interest capitalised Share of loss/(profit) of associates Fair value gain on a2MC Movement for provision in employee entitlements Movements in working capital: Increase in trade and other receivables Increase in inventories Decrease in deferred tax assets Decrease/(increase) in other operating assets Increase/(decrease) in trade and other payables Increase/(decrease) in provision for income tax Net cash from operating activities consolidated 2015 $'000 2014 $'000 56,631 12,132 3,354 360 (10) (1,086) (617) 42 (53,148) (429) (5,727) (5,508) 3,170 95 4,749 4,161 6,037 2,743 360 (42) (1,265) (244) 26 - (305) (2,120) (4,081) 761 (290) (556) (220) 6,899 Details of credit standby arrangements available and unused loan facilities are shown in note 24 to the financial statements. Non-cash financing and investing activities In accordance with the Company's Dividend Reinvestment Plan, $3,422,483 was reinvested in the year to 30 June 2015 (2014: $462,154) Note 20. Current liabilities - borrowings Loan payable Finance facility Bank bill facility Lease liability consolidated 2015 $'000 2014 $'000 5,698 12,143 1,650 2,534 22,025 228 670 - 3,001 3,899 Refer to note 21 for further information on assets pledged as security and financing arrangements. Refer to note 22 for further information on financial instruments. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015Note 21. Non-current liabilities - borrowings Bank bill facility Lease liability Refer to note 22 for further information on financial instruments. Total secured liabilities The total secured liabilities (current and non-current) are as follows: Loan payable Finance facility Lease liability Bank bill facility Assets pledged as security PG 65 consolidated 2015 $'000 2014 $'000 16,500 14,390 30,890 - 5,927 5,927 consolidated 2015 $'000 2014 $'000 5,698 12,143 16,924 18,150 52,915 228 670 8,928 - 9,826 In accordance with the security arrangements of liabilities, all 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 $13 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 its 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. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 66 Note 21. Non-current liabilities - borrowings (continued) Financing arrangements Total facilities Loan facilities Finance facilities Bank bill facility Used at the reporting date Loan facilities Finance facilities Bank bill facility Unused at the reporting date Loan facilities Finance facilities Bank bill facility Unused financing facilities consolidated 2015 $'000 2014 $'000 9,700 35,050 18,150 62,900 5,698 29,067 18,150 52,915 4,002 5,983 - 9,985 9,700 33,155 - 42,855 228 9,598 - 9,826 9,472 23,557 - 33,029 The bank facilities are arranged with HSBC Bank Australia Limited with general terms and conditions and debtor finance facility components 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 2020. Interest rates are variable and subject to adjustment. Note 22. Financial instruments 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 2014. The capital structure of the Group consists of debt, which includes the borrowings, cash and cash equivalents and equity attributable to equity holders of the parent comprising issued capital, reserves and retained earnings as disclosed in their respective notes. 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. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 67 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 and export supply. There has been no change to the Group's exposure to market risks or the manner in which it manages and measures the risk. Significant accounting polices 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 2 to the financial statements. 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 and for sales receipts denominated in United States dollars from export customers. 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 and on sales orders from export customers. 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 973,805 (Buy), USD 2,242,620 (Sell), CAD 318,470 (Buy) and EUR 323,181 (Buy) outstanding foreign exchange contracts as at 30 June 2015. The Group does not adopt hedge accounting. The following table details the forward foreign currency contracts outstanding as at reporting date in Australian dollars: Buy US dollars Maturity: 0 - 3 months Buy Canadian Dollars Maturity: 0 - 3 months Buy Euros Maturity: 0 - 3 months Buy Australian dollars Maturity: 0 - 3 months 3 - 6 months sell australian dollars average exchange rates 2015 $'000 2014 $'000 2015 2014 1,252 3,524 0.7777 0.9320 337 617 0.9457 1.0120 520 4,273 0.6212 0.6430 sell US dollars average exchange rates 2015 $'000 2014 $'000 2015 2014 1,715 906 - - 0.8640 0.8401 - - Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 68 Note 22. Financial instruments (continued) Australian dollars Buy US dollars - Less than 3 months Buy CAD dollars - Less than 3 months Buy Euros - Less than 3 months Sell US dollars - Less than 3 months Sell US dollars - 3 to 6 months Foreign currency risk management fair value $'000 2015 2014 17 (1) (49) (152) (162) (24) 5 (261) - - The carrying amount of the Group's foreign currency denominated financial assets and financial liabilities at the reporting date were as follows (in the respective foreign currency): consolidated US dollar Canadian dollar Euro New Zealand dollar Chinese yuan assets liabilities 2015 $'000 2014 $'000 2015 $'000 2014 $'000 3,358 450 - - 122 3,930 1,649 526 - - 2,498 4,673 3,063 2,540 260 120 10 - 708 105 101 - 3,453 3,454 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. 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), 3% (CAD), 11% (NZD), 5% (EUR) and 6% (CNY) 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. consolidated 2015 % change aud strengthened effect on profit before tax effect on equity % change aud weakened effect on profit before tax effect on equity US dollar Canadian dollar New Zealand dollar Euro Chinese yuan 10% 3% 11% 5% 6% (57) 2 1 5 (1) (50) 57 (2) (1) (5) 1 50 10% 3% 11% 5% 6% 69 (2) (1) (5) 2 63 (69) 2 1 5 (2) (63) Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 69 consolidated 2014 % change aud strengthened effect on profit before tax effect on equity % change aud weakened effect on profit before tax effect on equity US dollar Canadian dollar New Zealand dollar Euro Chinese yuan 10% 5% 7% 6% 4% 87 9 6 29 (18) 113 (87) (9) (6) (29) 18 (113) 10% (105) 5% 7% 6% 4% (10) (7) (33) 20 (135) 105 10 7 33 (20) 135 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 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: consolidated Cash and cash equivalents Loans due from related parties Finance leases Finance facilities Loan payable 2015 2014 weighted average effective interest rate % balance $'000 weighted average effective interest rate % -% 8.00% 5.76% 4.80% 4.77% 2,329 14,836 (16,924) (12,143) (23,848) (35,750) -% 8.00% 6.51% 5.30% 5.70% balance $'000 4,873 12,823 (8,928) (670) (228) 7,870 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 risks. Interest rate sensitivity analysis The sensitivity analysis below has been determined based on the impact of 150 basis point increase in interest rates on 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 would be: ƒ a decrease on the consolidated entity's net profit of $116,340 (2014: increase of $29,813) This is attributable to the consolidated entity's exposure to interest rates on its variable borrowings. A 150 basis point movement represents management's assessment of the possible change in interest rates. 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 values of transactions concluded are spread amongst approved counterparties. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 70 Note 22. Financial instruments (continued) Credit risk from balances with banks and financial institutions is managed 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. 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 cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Included in Note 17 is a listing of additional undrawn facilities that the company and the consolidated entity has at their disposal to further reduce liquidity risk. Unused borrowing facilities at the reporting date: Loan facilities Finance facilities consolidated 2015 $'000 2014 $'000 4,002 5,983 9,985 9,472 23,557 33,029 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. consolidated 2015 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Finance facilities Loan payable Interest-bearing - fixed rate Bank bill loan Finance lease liabilities Total non-derivatives weighted average effective interest rate % less than 1 year $'000 between 1 and 5 years $'000 remaining contractual maturities $'000 -% -% 4.80% 5.29% 4.61% 5.76% 14,724 4,055 12,143 5,698 1,650 3,557 41,827 - 52 - - 16,500 15,680 32,232 14,724 4,107 12,143 5,698 18,150 19,237 74,059 Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015consolidated 2014 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Finance facilities Loan payable Interest-bearing - fixed rate Finance lease liabilities Total non-derivatives PG 71 weighted average effective interest rate % less than 1 year $'000 between 1 and 5 years $'000 remaining contractual maturities $'000 -% -% 10,442 2,626 5.30% 5.70% 6.51% 670 228 3,445 17,411 - 53 - - 10,442 2,679 670 228 6,482 6,535 9,927 23,946 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: ƒ 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 ƒ the fair value of other financial assets and financial liabilities (excluding derivatives instruments) are determined in accordance with generally accepted pricing models based on discounted cash flow analysis; and ƒ 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 applicable yield curve for the duration of the instruments for non-optional derivatives and option pricing models for optional 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. Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently 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. 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. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 72 Note 22. Financial instruments (continued) Gearing ratio consolidated 2015 Debt (i) Cash and cash equivalents Net debt Equity (ii) Net debt to equity ratio 2015 $'000 2014 $'000 52,915 (2,329) 50,586 9,826 (4,873) 4,953 185,929 122,233 27% 4% (i) Debt is defined as long and short-term borrowings, as detailed in the notes to the financial statements. (ii) Equity includes all capital and reserves. Note 23. Capital and leasing commitments Lease commitments - operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years More than five years Lease commitments - finance Minimum future lease payments: Within one year One to five years Total commitment Less: Future finance charges Net commitment recognised as liabilities Representing: Lease liability - current (note 20) Lease liability - non-current (note 21) consolidated 2015 $'000 2014 $'000 746 1,841 834 3,421 3,557 15,680 19,237 (2,313) 16,924 2,534 14,390 16,924 511 1,872 1,286 3,669 3,445 6,482 9,927 (999) 8,928 3,001 5,927 8,928 Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 73 Note 24. Interests in subsidiaries 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 2015 financial report. name principal place of business/ country of incorporation Paramount Seafoods Pty Limited* Nutrition Ventures Pty Limited* Nutrition Ventures Financing Pty Limited* Freedom Foods Pty Limited* Pactum Australia Pty Limited* Pactum Dairy Group Pty Limited** Australian Natural Foods Holdings Pty Limited* Thorpedo Foods Group Pty Limited Thorpedo Foods Pty Limited Thorpedo Seafoods Pty Limited Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Freedom Foods North America Inc*** North America ownership interest 2015 % 2014 % 100.00% 100.00% 100.00% 100.00% 100.00% 1.00% 100.00% 100.00% 75.00% 75.00% 80.00% 100.00% 100.00% 100.00% 100.00% 100.00% 1.00% 100.00% 100.00% 75.00% 75.00% 80.00% * These companies are members of the tax consolidated group. ** 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 1% equity interest. Refer to shares in associates. *** Freedom Foods North America Inc was incorporated on 17 July 2013. Note 25. Interests in associates Interests in associates are accounted for using the equity method of accounting. Information relating to associates that are material to the Group are set out below: name principal place of business/ country of incorporation The a2 Milk Company Limited (a2MC)* Pactum Dairy Group Pty Limited (PDG) New Zealand Australia ownership interest 2015 % 2014 % -% 1.00% 17.70% 1.00% * From 19 November 2014 The a2 Milk Company Limited was reclassified as an available for sale financial asset. Refer to the details below. The a2 Milk Company Limited (a2MC) The group holds 117,699,229 (17.8%) of the ordinary shares of a2MC, a company listed on the main board of the New Zealand Exchange (NZX:ATM). Mr P R Gunner resigned from the board of a2MC at the conclusion of the a2MC Annual General Meeting on 18 November 2014, leaving Mr M Miles as the only common director on the a2MC board, until his resignation from the Board of Freedom Foods Group Limited on 14 August 2015. As a result of the resignation of Mr P R Gunner, the directors of the Group re-assessed whether the group continues to exercise significant influence over this investment as contemplated in AASB 128 Investments in Associates and Joint Ventures (AASB 128). The directors considered the following factors in assessing their significant influence; the total number of directors on a2MC, the Group’s intent and ability to appoint directors to a2MC, the Group’s extent of ownership relative to other a2MC shareholders, the lack of any material transactions with a2MC and the ability of the Group to participate in the policy-making processes, including participation in decisions about dividends or other distributions of a2MC. In the directors’ judgment, these considerations in conjunction with the view that the directors retain the option to realise capital from the investment to support further growth opportunities, result in the Group no longer being able to clearly demonstrate that they exercise significant influence over a2MC. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 74 Note 25. Interests in associates (continued) Significant influence was deemed to be lost at the conclusion of the a2MC AGM and therefore on this date the group has reclassified the investment to an available for sales financial asset ('AFS') under the requirements of AASB 139 Financial Instruments: Recognition and Measurement on this date. Pactum Group Pty Limited (PDG) PDG was established in 2013 for the purpose of supplying high speed low cost liquid products to the Domestic and International market. PDG is a joint venture between Pactum Australia Pty Limited, a wholly owned subsidiary of the Group and Australian Consolidated Milk Pty Limited ('ACM'), a major Australian dairy milk supply group. 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. With the commencement of operations and significant resourcing to meet the expected ramp up in volumes, the business recorded a loss in FY 2015. FNP equity accounted 1% of the loss in line with the current ownership structure. The Group has the capacity to obtain a 50% interest in PDG by converting convertible notes issued to it as part of its original investment. Summarised financial information a2MC 2015 $'000 a2MC 2014 $'000 PDG 2015 $'000 PDG 2014 $'000 Summarised statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets/(liabilities) Summarised statement of profit or loss and other comprehensive income Revenue Expenses Profit/(loss) before income tax Other comprehensive income Total comprehensive income Reconciliation of the Group's carrying amount Opening carrying amount Share of loss after income tax Equity investment Transfer to available-for-sale financial asset - - - - - - - - - - - - 8,504 4,321 12,825 2,973 100 3,073 9,752 4,184 34,373 38,557 4,742 41,045 45,787 (7,230) 18,396 48,779 (18,394) 2 - 2 (52,983) (4,204) - 5,933 35,261 41,194 4,482 39,283 43,765 (2,571) 4,073 (6,654) (2,581) - (4,204) (2,581) 10,587 9,909 - 538 (11,125) - 678 - 4,474 (42) - - - (26) 4,500 - Closing carrying amount - 10,587 4,432 4,474 The investment of $4,500,000 in PDG 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 2015 was $42,000 (2014: $(26,000)). Related party transactions Current receivables and loans due from associates - refer to note 29 to the financial statements Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PDG receivable a2MC receivable PDG loan PG 75 consolidated 2015 $'000 2014 $'000 1,700 - 13,136 14,836 660 29 12,823 13,512 The loan to PDG attracts interest at 8%. 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. Note 26. Non-current assets - investment in a2MC Investment in The a2 Milk Company Limited Reconciliation Reconciliation of the fair values at the beginning and end of the current and previous financial year are set out below: Opening fair value Reclassification of investment Gain on reclassification Revaluation increments Closing fair value consolidated 2015 $'000 2014 $'000 72,618 - 11,125 53,148 8,345 72,618 - - - - - - The Group holds 117,699,229 (17.8%) of the ordinary shares of The a2 Milk Company (a2MC), a company listed on the main board of the New Zealand Stock Exchange (NZX:ATM). Mr P R Gunner resigned from the board of a2MC at the conclusion of the a2MC Annual General Meeting on 18 November 2014, leaving Mr M Miles as the only common director on the a2MC board, until his resignation from the Board of Freedom Foods Group Limited on 14 August 2015. As a result of the resignation of Mr P R Gunner, the directors of the Group have re-assessed whether the group continues to exercise significant influence over this investment as contemplated in AASB 128 Investments in Associates and Joint Ventures (AASB 128). The directors have considered the following factors in assessing their significant influence; the total number of directors on a2MC, the group’s intent and ability to appoint directors to a2MC, the Group’s extent of ownership relative to other a2MC shareholders, the lack of any material transactions with a2MC and the ability of the Group to participate in the policy-making processes, including participation in decisions about dividends or other distributions of a2MC. In the directors’ judgment, these considerations in conjunction with the view that the directors retain the option to realise capital from the investment to support further growth opportunities, result in the Group no longer being able to clearly demonstrate that they exercise significant influence over a2MC. Significant influence was deemed to be lost at the conclusion of the a2MC AGM and therefore on this date the Group has reclassified the investment to an Available for Sale investment (AFS) under the requirements of AASB 139 Financial Instruments: Recognition and Measurement on this date. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 76 Note 27. 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. Freedom Foods Group Limited Freedom Foods Pty Limited Paramount Seafoods Pty Limited Nutrition Ventures Pty Limited Nutrition Ventures Financing 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 3 above. Note 28. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Profit/(loss) after income tax Other comprehensive income for the year, net of tax Total comprehensive income Statement of financial position Total current assets Total non-current assets Total assets Total current liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity parent 2015 $'000 2014 $'000 48,406 - 48,406 (992) - (992) parent 2015 $'000 2014 $'000 626 174,310 174,936 6,900 3,240 10,140 164,796 98,855 8,578 57,363 239 113,204 113,443 4,003 635 4,638 108,805 94,419 1,325 13,061 164,796 108,805 parent 2015 $'000 2014 $'000 Committed at the reporting date but not recognised as liabilities, payable: Property, plant and equipment - 3 Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015 PG 77 Note 29. Related party transactions Subsidiaries Interests in subsidiaries are set out in note 24. Associates Interests in associates are set out in note 25. Key management personnel Disclosures relating to key management personnel are set out in note 30 and the remuneration report in the directors' report. Transactions with related parties Other related parties include: ƒ entities with joint control or significant influence over the Group ƒ joint ventures in which the entity was a venturer ƒ subsidiaries ƒ other related parties The following transactions occurred with related parties: Sale of goods and services: Sale of goods to The a2 Milk Company (Australia) Limited Sale of goods to subsidiaries Sale of services to Pactum Dairy Group Pty Limited Payment for goods and services: Purchase of goods from Australian Consolidated Milk Pty Limited Purchase of goods and services from Leppington Pastoral Company Payment for services from The a2 Milk Company (Australia) Pty Limited Payment for other expenses: Payment for rent and outgoings under a lease commitment with Perich Property Holdings These services are provided under normal terms and conditions. Note 30. Key management personnel disclosures Compensation consolidated 2015 $'000 2014 $'000 - 1,423,000 19,665,000 16,760,000 500,000 660,000 2,045,000 2,102,000 410,000 3,448,000 - 19,000 1,011,000 2,463,000 The aggregate compensation made to directors and other members of key management personnel of the Group is set out below: Short-term employee benefits Post-employment benefits Share-based payments consolidated 2015 $'000 2014 $'000 1,528,014 1,324,956 76,041 152,361 64,679 267,367 1,756,416 1,657,002 Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 78 Note 31. Share-based payments 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 below expire within five years of their issue, or one year after 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 reconciles the outstanding share options granted under the employee share option plan at the beginning and end of the financial year: 2015 grant date expiry date exercise price 01/02/2012 01/02/2017 30/08/2012 30/08/2017 01/07/2013 01/07/2018 $0.40 $0.60 $1.65 balance at the start of the year 3,766,667 1,708,334 1,600,000 7,075,001 granted exercised expired/ forfeited/ lapsed balance at the end of the year - - - - (2,350,000) (333,332) (75,000) (2,758,332) - - - - 1,416,667 1,375,002 1,525,000 4,316,669 Weighted average exercise price $0.73 $0.00 $0.46 $0.00 $0.91 2015 grant date expiry date exercise price 01/02/2012 01/02/2017 30/08/2012 30/08/2017 01/07/2013 01/07/2018 $0.40 $0.60 $1.65 balance at the start of the year 6,250,000 2,200,000 granted exercised expired/ forfeited/ lapsed balance at the end of the year - - (2,483,333) - 3,766,667 (408,332) (83,334) 1,708,334 - 1,600,000 - - 1,600,000 8,450,000 1,600,000 (2,891,665) (83,334) 7,075,001 Weighted average exercise price $0.45 $1.65 $0.43 $0.60 $0.73 Set out below are the options exercisable at the end of the financial year: grant date expiry date 01/02/2012 01/02/2017 30/08/2012 30/08/2017 01/07/2013 01/07/2018 2015 number 2014 number 1,416,667 1,683,334 641,669 458,333 241,667 - 2,516,669 1,925,001 The weighted average exercise price during the financial year was $0.46 (2014: $0.43). The weighted average remaining contractual life of options outstanding at the end of the financial year was 2.3 years (2014: 3.2 years). Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 79 Expected volatility is based on historical share price volatility over the past two years. It is expected that options will be exercised only in the event of the market price exceeding the exercise price. grant date expiry date share price at grant date exercise price expected volatility dividend yield risk-free interest rate fair value at grant date 02/02/2012 02/02/2017 30/08/2012 30/08/2017 01/07/2013 01/07/2018 $0.46 $0.65 $1.80 $0.40 $0.60 $1.65 20.00% 5.00% 5.00% 2.50% 2.50% 2.50% 5.00% 5.00% 5.00% $0.122 $0.066 $0.181 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. 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. Note 32. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by Deloitte Touche Tohmatsu, the auditor of the Company: Audit services - Deloitte Touche Tohmatsu Audit or review of the financial statements Other services - Deloitte Touche Tohmatsu Tax compliance services Research and development advice and preparation of the return Assurance services consolidated 2015 $'000 2014 $'000 260,000 246,500 63,579 44,009 24,790 132,378 392,378 165,500 60,000 - 225,500 472,000 Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015PG 80 Note 33. Events after the reporting period Asset Purchase Agreement Ringwood Mill (to be known as Darlington Point Mill) The Group entered into an Asset Purchase Agreement with the Ringwood Group of Companies to acquire the business and assets of the Ringwood Mill (to be known as Darlington Point Mill) based at Darlington Point in the Riverina district of New South Wales on 13 July 2015 (Acquisition). Darlington Point Mill operates an established grain processing facility for the supply of milled flours and popping corn. It is a significant processor of popping corn in Australia and processes gluten free and non GMO grains. Darlington Point Mill currently supplies customers in food service and processing markets in Australia as well as in export markets. The Acquisition will enable Freedom Foods to expand its milling operations for internal use and external third party customers through increased capabilities and capacity, access to cost efficiencies and the ability to consider expansion into processing of other key grains. Freedom Foods existing milling operations will be relocated to the Darlington Point Mill, providing for increased finished goods warehousing capabilities at its current operations. Under the terms of the Acquisition, Freedom Foods will acquire assets located at the site including 7.5 hectares of land, several modern large and medium sized grain silos, flour processing plants, other machinery and equipment and buildings including an export container facility. Freedom Foods will also acquire raw materials including popping corn and maize. The acquisition price for the assets (excluding raw materials) is approximately $5.9 million (exclusive of stamp duty) and working capital for raw material of popping corn. Settlement occurred on 31 August 2015. The Group acquired 10% of the consortium Australian Fresh Milk Holdings Pty Limited The Group, as part of the consortium Australian Fresh Milk Holdings Pty Limited (AFMH), completed the acquisition of Moxey Farms on 3 August 2015. Moxey Farms is one of Australia’s largest single-site dairy operations. The consortium comprises Leppington Pastoral Company Pty Limited (LPC), New Hope Dairy Holdings Co Ltd (New Hope Dairy) and Freedom Foods Group Limited. The Group acquired 10% of the consortium for $6 million. Moxey Farms operates a fully integrated dairy farming operation located in the Lachlan Valley, New South Wales, 340 km west of Sydney. Moxey Farms’ land portfolio covers an area of 2,700 hectares and includes 3,700 milking cows that produce approximately 50 million litres of milk per year. The Moxey family retained a significant interest in Moxey Farms. Under the terms of the Acquisition, the Moxey family will continue to operate Moxey Farms in a joint venture with the Perich family under a Farm Management Agreement with AFMH, ensuring continuity of existing operations for key customers and staff. The completion of the Acquisition ensures AFMH has in place a scalable operating platform to invest in additional greenfield dairy sites, enabling the consortium to become a significant player in the Australian dairy industry. The Group has entered into an exclusive term sheet to acquire a major Australian based manufacturer of Oat based Cereals and Snacks Oats is an expanding consumer preference in Australia and Asia. The acquisition will enable Freedom Foods to expand its brand and category segment offering in oat based products in Australia and into Asia, and for the first time allow access to manufacturing capability in both Allergen free (Leeton) and nut based capabilities (the new business) on a cost competitive basis. There will also be integration opportunities in milling and ingredient supplies into the new business from our in-house facilities. The acquisition is expected to be accretive to earnings in its first full year of operation and is expected to provide operational efficiencies in the medium term. The acquisition is subject to confirmatory due diligence and other customary documentation and closing requirements. Completion of acquisition of land at Shepparton for Pactum Dairy expansion The Group has completed the acquisition of land (approximately 77,400 sq. metres) adjacent to the Pactum Dairy site in Shepparton Victoria on 24 September 2015. The acquisition price was $4 million (exclusive of stamp duty) and was funded from existing finance facilities. The land will provide capacity and flexibility for longer term warehousing and distribution requirements for the Pactum Dairy operation. Existing warehousing capability on site and adjacent to the site is insufficient for long term requirements, including operating a low cost automated logistics function, with facilities for export containerisation. Additional warehouse capacity will provide space for future expansion of processing and packaging operations at the site and potential expansion of other dairy processing capabilities in the future. Apart from the dividend declared as disclosed in note 16, no other matter or circumstance has arisen since 30 June 2015 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years. Notes to the financial statementsFor the year ended 30 June 2015freedom foods group limited + annual report 2015Directors' declaration 30 June 2015 PG 81 In the directors' opinion: ƒ the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; ƒ the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 2 to the financial statements; ƒ the attached financial statements and notes give a true and fair view of the Group's financial position as at 30 June 2015 and of its performance for the financial year ended on that date; ƒ there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and ƒ at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in note 27 to the financial statements. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors ______________________________ ______________________________ Perry Gunner Chairman 30 September 2015 Sydney Rory J F Macleod Managing Director freedom foods group limited + annual report 2015PG 82 Independent auditor's report to the members of Freedom Foods Group Limited Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX: 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au Independent Auditor’s Report to the Members of Freedom Foods Group Limited Report on the Financial Report We have audited the accompanying financial report of Freedom Foods Group Limited (the “Company”), which comprises the consolidated statement of financial position as at 30 June 2015, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of cash flows and the consolidated statement of changes in equity for the financial 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 43 to 81. 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 the basis of preparation, 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. Member of Deloitte Touche Tohmatsu Limited freedom foods group limited + annual report 2015Independent auditor's report to the members of Freedom Foods Group Limited PG 83 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. Opinion 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 2015 and of its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the consolidated financial statements also comply with International Financial Reporting Standards as disclosed in the basis of preparation. Report on the Remuneration Report We have audited the Remuneration Report included in pages 35 to 40 of the Directors’ report for the financial year ended 30 June 2015. 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 financial year ended 30 June 2015, complies with section 300A of the Corporations Act 2001. DELOITTE TOUCHE TOHMATSU Andrew J Coleman Partner Chartered Accountants Sydney, 30 September 2015 freedom foods group limited + annual report 2015PG 84 Shareholder information The shareholder information set out below was applicable as at 31 August 2015. Distribution of ordinary shareholders number of holders of ordinary shares number of holders of options over ordinary shares 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel 20 largest shareholders as at 31 August 2015 Stock exchanges that have granted quotation to the securities of the Parent quoted in Australia: All Member Exchanges. Ordinary shareholders 683 836 240 252 45 2,056 103 - - - - - - - 1. Arrovest Pty Limited 2. RBC Investor Services Australia Nominees Pty Limited 3. Citicorp Nominees Pty Limited 4. National Nominees Pty Limited 5. HSBC Custody Nominees (Australia) Limited 6. J P Morgan Nominees Australia Limited 7. UBS Wealth Management Australia Nominees Pty Limited 8. Mirrabooka Investments Limited 9. Mr Michael Andris Bracka 10. HSBC Custody Nominees (Australia) Limited 11. Australian Foundation Investment Company Limited 12. CS Fourth Nominees Pty Limited 13. Mr Perry Richard Gunner & Mrs Felicity Jane Gunner 14. BNP Paribas Noms Pty Limited 15. Citicorp Nominees Pty Limited 16. Goldacre Investments Pty Limited 17. AMBK Trust Pty Limited 18. East Coast Rural Holdings Pty Limited 19. Mr Melvyn Miles & Mrs Joanna Miles 20. Mr Lawrence Lip & Mrs Sabina Lip number held % of total ordinary shares issued 86,938,153 18,896,544 7,934,224 4,588,034 4,124,049 3,235,487 2,586,803 1,828,906 1,687,766 1,025,149 989,281 869,716 853,157 679,607 564,887 502,220 416,667 363,815 335,410 333,695 56.23 12.22 5.13 2.97 2.67 2.09 1.67 1.18 1.09 0.66 0.64 0.56 0.55 0.44 0.37 0.32 0.27 0.24 0.22 0.22 138,753,570 89.74 freedom foods group limited + annual report 2015 Shareholder information PG 85 CRPS shareholders 1. Mr Mathew John 2. R & M Gugliotta Pty Limited 3. Lewis Little River Pty Limited 4. Mr Hugh Middendorp & Mr Peter Charles 5. Alan Ong Enterprises Pty Limited 6. Est John William Hartigan & Mrs Enid May Hartigan 7. Mr Craig Sargent 8. GWG Investments Pty Limited 9. Lokit Investments Pty Limited 10. Mr Robert William Russell 11. Mr Robert David Napier Nicholls 12. Palatine Holdings Pty Limited 13. Mr Gerald Millman 14. Mr Tjeerd Veenstra & Mrs Susan Lesley Veenstra 15. Mr Brendan Andrew Hislop 16. Mrs Michelle Louise Farrell 17. Mr Andrew Jonathon Achilles 18. Mr Stuart William McDonald 19. Mr Neville Thiele 20. Mrs Dianne Joan Thiele Distribution of CRPS shareholders 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 number held 34,720 30,000 23,438 16,664 8,000 5,000 3,394 3,125 2,214 1,924 1,736 1,697 1,000 963 680 640 500 497 273 219 % of total CRPS issued 25.34 21.89 17.10 12.16 5.84 3.65 2.48 2.28 1.62 1.40 1.27 1.24 0.73 0.70 0.50 0.47 0.36 0.36 0.20 0.16 136,684 99.75 number of holders of CRPS shares 11 7 1 4 23 Substantial shareholders The number of shares held by substantial shareholders as listed in the Parent's register as at 31 August 2015 are: Arrovest Pty Limited RBC Investor Services Australia Nominees Pty Limited Citicorp Nominees Pty Limited ordinary shares number held % of total shares issued 86,938,153 18,896,544 7,934,224 56.23 12.22 5.13 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). freedom foods group limited + annual report 2015PG 86 Corporate directory Directors Perry R. Gunner Rory J.F. Macleod Anthony M. Perich Ronald Perich Trevor J. Allen Melvyn Miles (Resigned 14th August 2015) Alternate Director Michael R. Perich Company secretaries Rory J.F. Macleod Assistant Company Secretary Sharon Maguire Notice of annual general meeting The details of the annual general meeting of Freedom Foods Group Limited are: 29 October 2015 at 12:00 pm DLA Piper Australia Level 22, 1 Martin Place Sydney NSW 2000 Registered office 80 Box Road Taren Point NSW 2229 Tel: (02) 9526 2555 Fax: (02) 9525 5406 Principal place of business 80 Box Road Taren Point NSW 2229 Tel: +61 2 9526 2555 Fax: +61 2 9525 5406 Share register Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Tel: +61 2 8280 7111 Fax: +61 2 9287 0303 Auditor Deloitte Touche Tohmatsu Grosvenor Place, 225 George Street Sydney NSW 2000 Tel: +61 2 9237 1171 Fax: +61 2 9237 1400 ABN 41 002 814 235 Solicitors DLA Piper Level 22, 1 Martin Place Sydney NSW 2000 Tel: +61 2 9286 8000 Fax: +61 2 9286 8007 Gilbert + Tobin 2 Park Street Sydney NSW 2000 Tel: +61 2 9263 4000 Fax: +61 2 9263 4111 Addisons Level 12, 60 Carrington Street Sydney NSW 2000 Tel: +61 2 8915 1000 Fax: +61 2 8916 2000 Bankers HSBC Australia Limited Level 32, 580 George Street Sydney NSW 2000 Tel: +61 1300 308 188 (toll free) Fax: +61 2 9255 2647 National Australia Bank Limited Level 3, 255 George Street Sydney NSW 2000 Tel: +61 2 9237 1171 Fax: +61 2 9237 1400 Stock exchange listing Freedom Foods Group Limited shares are listed on the Australian Securities Exchange (ASX code: FNP) Website www.ffgl.com.au Insurance Brokers GSA Insurance Brokers Pty Ltd ‘The Old Presbytery’ 137 Harrington St Sydney NSW 2000 Tel: +61 2 8274 8100 Fax: + 61 2 9252 5882 Management Rory J. F. Macleod - Managing Director Amine Haddad - CEO Commercial Operations Michael Bracka - CEO Freedom Foods North America Noel Ayre - GM Commercial Pactum Dairy Group Tim Moses - GM Group Operations Abdul Badreddine - GM Group Quality Luke Collis - GM Group Commercial Finance freedom foods group limited + annual report 2015PG 87 ANNUAL REPORT 2015 growth fuelled innovation by designed & produced by 121 Creative Circular Quay 100% PCW Recycled printed on eco star uncoated 100% recycled cover 300gsm, text 140 gsm ANNUAL REPORT 2015 www.ffgl.com.au 

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