Inmobiliaria Colonial SOCIMI Annual Report 2019

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2019 Annual Report. Sustainably feed all Australians to help them lead healthier, happier lives. Coles acknowledges the Traditional Custodians of Country throughout Australia and pays its respects to elders past and present. We recognise their rich cultures and continuing connection to land and waters. Aboriginal and Torres Strait Islander peoples are advised that this document may contain names and images of people who are deceased. All references to Indigenous people in this document are intended to include Aboriginal and/or Torres Strait Islander people. Contents 3 Welcome to Coles 2019 performance 4 2019 highlights 5 6 Message from the Chairman 8 Managing Director and Chief Executive Officer’s report 12 Our vision, purpose and strategy 14 How we create value 17 Sustainability overview 18 Sustainability highlights 20 Our ﬁnancial and operating performance 29 Looking to the future 30 How we manage risk 35 Climate change 38 Corporate governance 45 Directors’ report 63 Financial report 104 Shareholder information Forward-looking statements This report contains forward-looking statements in relation to Coles Group Limited ('Coles' or the 'Company') and its related bodies corporate (together, the 'Group'), including statements regarding the Group's intent, belief, goals, objectives, initiatives, commitments or current expectations with respect to the Group’s business and operations, market conditions, results of operations and ﬁnancial conditions, and risk management practices. Forward-looking statements can generally be identiﬁed by the use of words such as ‘forecast’, ‘estimate’, ‘plan’, ‘will’, ‘anticipate’, ‘may’, ‘believe’, ‘should’, ‘expect’, ‘intend’, ‘outlook’ and ‘guidance’ and other similar expressions. These forward-looking statements are based on the Group's good-faith assumptions as to the ﬁnancial, market, regulatory and other relevant environments that will exist and affect the Group's business and operations in the future. The Group does not give any assurance that the assumptions will prove to be correct. The forward-looking statements involve known and unknown risks, uncertainties and assumptions and other important factors, many of which are beyond the reasonable control of the Group, that could cause the actual results, performances or achievements of the Group to be materially different from future results, performances or achievements expressed or implied by the statements. Readers are cautioned not to place undue reliance on forward-looking statements. Forward-looking statements in this report speak only as at the date of issue. Except as required by applicable laws or regulations, the Group does not undertake any obligation to publicly update or revise any of the forward-looking statements or to advise of any change in assumptions on which any such statement is based. 1914. 1914 The ﬁrst Coles variety store opens in Collingwood, Victoria, founded by George James Coles and his brother Jim. 1924 Coles’ ﬁrst city store opens in Bourke Street, Melbourne. 1956 The ﬁrst self-service store opens in February. 1980s Coles acquires a number of liquor businesses, including the Liquorland and Vintage Cellars brands. 1999 Online shopping is ﬁrst trialled by Coles in 23 Melbourne postcodes, paving the way for the current Coles Online offering. 2006 Coles Myer Limited becomes known as the Coles Group after selling its Myer stores to TPG (formerly Newbridge Capital) and the Myer family. 2012 The ﬂybuys brand and program, originally introduced in 1994, is relaunched. 1939-1945 During World War II, women manage the stores as 90% of male team members enlist to ﬁght. 1960 The ﬁrst Coles supermarket opens in North Balwyn, Victoria. 1985 Coles merges with The Myer Emporium Limited to create Coles Myer Limited. 2003 Coles enters into an Alliance Agreement with Shell whereby Coles operates the Shell convenience and fuel outlets. Coles then establishes a nationwide network of Coles Express convenience stores. 2007 Coles Group (including Coles, Kmart, Target and Officeworks) is acquired by Wesfarmers Limited and undergoes a period of transformation. 2018 Coles Group demerges from Wesfarmers Limited, rejoining the ASX as an independently listed company. Coles Group Ltd / Annual Report & Financial Statements 2019 1 Coles Group Limited 2019 Annual Report 1 2019 Coles enters into partnerships with Witron and Ocado to develop world-class, automated distribution solutions. 2019. Coles Group Limited 2019 Annual Report Coles Group Limited 2019 Annual Report Coles Group Limited 2019 Annual Report 22 2 Coles Group Limited 2019 Annual Report Coles Group Limited 2019 Annual Report Coles Group Limited 2019 Annual Report 33 3 Welcome to Coles. Our Vision Become the most trusted retailer in Australia and grow long-term shareholder value. Our Purpose Sustainably feed all Australians to help them lead healthier, happier lives. From our origins in 1914 as a variety store in Collingwood, Victoria, Coles has grown to become a leading Australian retailer and a household name. Customers trust Coles, as part of the fabric of Australian society for more than 100 years, to provide great value food and drinks. We are known for our value, range and customer service through our extensive store network and for providing online shopping solutions across Australia. Our vision to become the most trusted retailer in Australia and grow long-term shareholder value is underpinned by our purpose and our strategy. We believe this will enable us to ‘Win in our second century’. This is our ﬁrst annual report after rejoining the ASX as a listed company. Welcome. Coles Group Limited 2019 Annual Report 4 Coles Group Limited 2019 Annual Report 5 2019 performance. 2019 highlights. 3.1% sales growth1 87.7% customer satisfaction for Supermarkets 1.5% Supermarkets sales density growth celebrated 105 years in retailing entered Witron partnership 113,000+ team members $1.3bn EBIT2 $520m net debt 110% cash realisation3 35.5c dividends per share4 3pp (percentage point) improvement in team member engagement 20.3% reduction in Total Recordable Injury Frequency Rate3 $32.1bn payments to suppliers entered into a New Alliance Agreement with Viva Energy 4,100+ Indigenous team members 6.6m active ﬂybuys households entered Ocado partnership $19m funding to food producers through Coles Nurture Fund since 2015 1. On a non-IFRS basis (excluding fuel sales and Hotels). 2. On a non-IFRS basis (excluding Hotels and Signiﬁcant Items). 3. Refer to Glossary of terms on page 28 for deﬁnition. 4. Comprising a ﬁnal dividend of 24.0 cents per share and a special dividend of 11.5 cents per share. $3.7bn cash taxes paid established Hotels and Retail Liquor JV with Australian Venue Co. provided $115m community support Coles Group Limited 2019 Annual Report 6 Message from the Chairman. James Graham In this milestone year for the Company, it is pleasing to see the energy and commitment of our 113,000+ team members establishing such a strong foundation for our future. Coles has a proud history as an Australian company, having started 105 years ago when G.J. Coles opened our ﬁrst store in Collingwood, Victoria. Since that time we have built upon the principles he established of providing quality goods and customer service and lowering the cost of living for Australian families. During the period 2007 to 2018, Coles formed part of Wesfarmers Limited. During this period, considerable transformation of the business took place, facilitating its demerger in November 2018. This was a signiﬁcant and complex initiative and, on behalf of the Board, I express my thanks to all of the Coles and Wesfarmers team members who contributed to this successful outcome. I would especially like to acknowledge and thank Wesfarmers Chief Executive Rob Scott and Coles’ previous Managing Director John Durkan for their substantial contribution and leadership over many years of personal engagement. Results The Directors declared a fully franked dividend of 35.5 cents per share, comprising a ﬁnal dividend of 24.0 cents per share in relation to the period 31 December 2018 to 23 June 2019 and a special dividend of 11.5 cents per share in relation to the period 28 November 2018 to 30 December 2018 and 24 June 2019 to 30 June 2019. This dividend will be paid to shareholders on 26 September 2019. Our focus In our ﬁrst period since listing on the ASX, a number of important initiatives have been undertaken as we set our course for the period ahead. Team Under the leadership of our new Managing Director and Chief Executive Officer Steven Cain, we have established a leadership team which is customer obsessed and committed to our vision of becoming the most trusted retailer in Australia and growing long- term shareholder value. Our more than 113,000 team members are adapting to our changing customer expectations and the opportunities offered by new technology to improve our service delivery. The market environment is dynamic and requires our identifying opportunities early and adapting our operations, at pace. With more than 2,400 outlets across our portfolio of Australian supermarkets, liquor and convenience stores, we achieved total sales revenue for the full year ended 30 June 2019 of $38,176m and net proﬁt after tax of $1,078m from continuing operations. Portfolio Two important initiatives in reshaping our portfolio have been implemented since the demerger. Firstly, through Coles Express, we have restructured our fuel alliance with Viva Energy to better align our contributions and incentives. From March 2019, Coles Express has offered customers fuel through our Shell-branded service stations under a commission agent model, and Viva Energy has set the price of retail fuel. This has ensured that Coles Express can focus upon its retail shop operations, which is a core competency. Secondly, Coles Liquor has entered into a joint venture with Australian Venue Co. (AVC) relating to the Spirit Hotels business formerly operated by Coles and Coles’ associated Retail Liquor business. This has allowed Coles to focus on management of its retail liquor businesses operated through the Liquorland, First Choice Liquor and Vintage Cellars brands. Again a much better alignment, which allows Coles to focus on its core competencies. Technology In the fast-changing customer and competitive landscape, Coles is investing in new technology and new strategic partnerships. Since the demerger, Coles has entered into new long-term commitments with global leaders in automated distribution centres, online fulﬁlment centres, and digital software and systems provision, to name but a few. These investments in new technology and new partnerships are, of necessity, long term and will progressively transform our capacity to operate more quickly and more efficiently. These commitments are substantial and, in many cases, have been secured on a basis that provides Coles with exclusivity in the Australian market for these new facilities. Sustainability We are committed to driving sustainability in all aspects of our business as we set course for our second century. Critical to our success is the social impact of our business through investment in team and community. We are committed to being a major employer of Indigenous Australians where, pleasingly, we have seen our Indigenous team members grow from just 65 eight years ago to more than 4,100 today. We have recently committed to growing this number further to 5,500 by 2023. Similarly, we are committed to making a difference in the communities in which we live and work across Australia. We have many wonderful community partnerships, including those with SecondBite, where we donate unsold, edible food to Australians in need, and where our food donated since the inception of our partnership has exceeded 84 million meal equivalents; and with Redkite, where we have supported directly and with our customers the wellbeing of children with cancer and their families in a way that is making a difference. In 2015, Coles established the Nurture Fund to support small and medium-sized Australian businesses to innovate and grow. Through this fund, we have supported more than 50 producers. We have also provided direct support in aid of drought relief, and enabled producers to undertake projects to reduce the impact of water scarcity. Importantly, part of Coles’ DNA is ensuring that we address our long-term environmental sustainability. With signiﬁcant focus across all aspects of our relationships with suppliers, our logistics Coles Group Limited 2019 Annual Report 7 Indigenous team member Tim is a qualiﬁed butcher at Coles Broome and has worked at Coles for 15 years. operations, our distribution centres, our stores, our energy utilisation, packaging and our water usage, it is our aim to be the most sustainable supermarket in Australia. We are determined to contribute to I encourage you to review the details of these initiatives, which are set out in our 2019 Sustainability Report. improving environmental sustainability. Future As a signiﬁcant Australian company, Coles is committed to operating in a way that is transparent and builds trust with its team, its customers and its community. We recognise the increasing expectations of all our stakeholders whose support and engagement is critical to our enduring success. With the support of our Board and management team, I look forward to the challenges ahead as we build upon the contributions of all those who underpinned our ﬁrst century. We are encouraged by our early initiatives and customer responses as an independently listed company and believe that we have a strong team and a strong balance sheet to actively build our business in this competitive environment. James Graham AM Chairman, Coles Group Limited. Coles Group Limited 2019 Annual Report 8 Coles Group Limited 2019 Annual Report 9 Managing Director and Chief Executive Officer’s report. Steven Cain 'Winning in our second century' For more than 100 years, the success of Coles has been built on innovation that inspires our customers, and we are proud of the contribution Coles has made to the Australian community and economy. We are determined to make the second century of our Company every bit as successful. Our aim to at least maintain our market share in the medium term is based on a practical and realistic assessment of the highly competitive and rapidly changing retail landscape. Costs in our business have been growing faster than sales in recent times and this must be addressed as a matter of urgency. With our Smarter Selling initiative we have set ourselves a gross cumulative cost-out target of $1bn over four years and this will be delivered through a simpler, streamlined organisation with signiﬁcant technology investments that will improve efficiency. We are also pursuing new growth opportunities, including our meat export business by building on the brand credentials we have established in key Asian markets. During the past year, our leadership team has reﬂected on our history, our place in the market today, our role in the Australian community and how we best secure success into the future. Our refreshed strategy is outlined on the following pages. I am extremely proud to be leading Coles at the most exciting time in retailing history. It has been a year of far-reaching change at Coles, not least our demerger from Wesfarmers, rejoining the ASX as a listed company in our own right, a new board and a number of new appointments to the leadership team. Importantly, one thing hasn’t changed - the passionate dedication of our 113,000+ team members around Australia to serving our customers and contributing to the communities in which we live and work. Our success is in our hands, and our team is acutely aware that our pace of execution needs to increase as we rise to the challenges ahead of us. Customer expectations and behaviours are changing faster than ever. Whilst time-poor customers demand healthier and more convenient solutions, there are also many in Australia who are struggling to make ends meet every week and we must continue to deliver better value and keep prices low. It’s also clear that new international entrants, rising costs of doing business and an ongoing shift towards online shopping present potential headwinds. However, the Australian food and beverage market is resilient and continues to grow. The adoption of new technology and automation, and analysing increasing amounts of data, present signiﬁcant growth opportunities for a business prepared to meet these challenges head-on. Our strategy at Coles is to do just that. Our vision 1 Become the most trusted retailer in Australia and grow long-term shareholder value. That’s why we have declared that our purpose is to ‘sustainably feed all Australians to help them lead healthier, happier lives’. We will deliver this by: • Inspiring customers through best-value food and drink solutions to make lives easier; • Smarter selling through efficiency and pace of change; and 2 • Winning together with our team members, suppliers and communities. Inspire customers Coles will become a retailer that is truly customer obsessed. Using our insights from more than one billion transactions each year, we can make more informed decisions on our offer to customers including the use of advanced analytics to support better ranging decisions in our stores. We will continue to focus on building customer trust in value via Own Brand and an increased focus on Everyday Low Prices. Coles will become the destination of choice for convenience and healthy solutions with our Wellness Road health products, Nature’s Kitchen vegan range and I’m Free From products, designed for customers with allergies and intolerances, all launched over the past year. We will lead in online shopping through a compelling digital experience. In March, we entered into an exclusive partnership with Ocado, a global leader in online grocery retailing, to launch an end-to-end online shopping solution. The agreement will provide Coles customers with a market-leading online customer experience through Ocado’s proprietary applications. The deal also includes two automated customer fulﬁlment centres, one in each of Victoria and New South Wales, increasing capacity while reducing cost to serve. Smarter selling Just as technology is transforming the retail industry landscape, the needs and expectations of customers are also evolving rapidly. We will tailor our offer through a new store format strategy, which aligns store layouts to speciﬁc demographics. New partnerships with global technology leaders in cloud computing, artiﬁcial intelligence, digitalisation, warehousing and online fulﬁlment will provide Coles with a suite of capabilities to deliver the service customers want and will expect now and into the future. In January, we signed an agreement with Witron, a world leader in automated warehousing, to develop two automated distribution centres to be located in Queensland and New South Wales. We have also partnered with SAP and Optus to improve our systems and streamline our business, delivering a range of beneﬁts to improve the shopping experience and help make life easier for our customers and team members. 1. Coles Southern Livestock Manager Stephen congratulates Gippsland cattle producers Trevor and Carryn Caithness. The Caithness family is one of 16 Australian food producers who will share $5m from the Coles Nurture Fund to help combat drought. 2. Our strategy includes making a positive difference for Australians and we have a long- standing relationship with SecondBite. A strategy is only a good strategy if it can be delivered and executed well at pace. We are changing our ways of working at Coles to become more agile, and we are investing in the new skills we need to complement our existing ones. Win together We have an exceptional team at Coles, and they are dedicated to executing our strategy to bring a great retail experience to our customers. Their commitment is demonstrated in the ‘mysay’ team member survey, which this year recorded an increased level of engagement during the year. It has been an exciting journey sharing the vision and ambitions of our business with team members at Coles. As further evidence of engagement, our team member share offer was well supported. That’s a vote of conﬁdence in Coles’ future by the people operating the business. We know that innovation is often best formulated through partnerships, and we also know we are better together through diversity. I like to think Coles has the most diverse team in Australia, and we need to continue to celebrate that. We have a modern workforce – we now have more Indigenous team members than any other private sector employer in Australia, and more women in senior management positions. The Coles team also reﬂects Australia’s great multicultural diversity. This diversity ensures the decisions we make are informed by many different perspectives, which translates to better representation of what our customers and other stakeholders want and need. For Coles, trust is primarily about knowing that we’ll do the right thing by team members, our customers, the community, our partners and our shareholders. Safety is a priority for Coles. Coles Group Limited 2019 Annual Report 11 Proud moment Our farmers believe that good- quality beef doesn’t need added hormones, and that’s why all of our Own Brand fresh beef is 100% Australian with no added hormones. Kelsey with grain-fed beef at a cattle property near Capella in Queensland. Coles Group Limited 2019 Annual Report 10 There is nothing more important than everyone going home safely at the end of the working day. I am delighted to report a signiﬁcant improvement in our safety performance. In FY19, our total number of recordable injuries dropped by more than 700 compared to the previous year, an outstanding result. At Coles we are all committed to helping the community and this year contributions increased by 26% to $115m. Our relationships with our major partners SecondBite and Redkite continue to grow, helping provide meals for those in need and support for kids with cancer. associated Retail Liquor business. Under the joint venture, AVC manages the day-to-day operations of Spirit Hotels and will receive the economic beneﬁt of this business. Coles manages the day-to-day operations of the 243 retail liquor stores in Queensland and the 10 retail liquor stores attached to Spirit Hotels venues in Western Australia and South Australia and will receive the economic beneﬁt of this business. Our focus is once again on our core business of retail, with our Retail Liquor business now operating under the Liquorland, First Choice, First Choice Liquor Market and Vintage Cellars brands. Our ﬁnancial position Coles’ ﬁnancial framework is aligned with our objective of providing shareholders with sustainable earnings growth and attractive dividends over the long term. Coles is committed to maintaining a strong balance sheet and credit metrics, sustainable cash ﬂow generation and a disciplined approach to capital allocation focused on growth and efficiency initiatives while returning surplus capital to shareholders. Statutory EBIT for the Group was $1,467m ($1,343m excluding Signiﬁcant Items) for the year. Increased EBIT from Supermarkets and Liquor was more than offset by declines in Express from lower fuel volumes, as well as Signiﬁcant Items and additional corporate costs associated with becoming a standalone ASX- listed company. We also achieved a reduction in net debt during the year despite a 38% increase in gross operating capital investment to $893m. Our ﬁnancial performance for FY19 includes a number of Signiﬁcant Items, with the demerger and our transition to a Retail calendar creating further complexity in the statutory results. For FY19, the Retail (non-IFRS) calendar also covers a 53 week period. In terms of segment performance on a retail basis, Supermarkets continues to show resilience in an increasingly competitive market, with 3.2% sales growth and total revenue of $30,890m for the year. Pleasingly, Supermarkets EBIT returned to full year growth for the ﬁrst time in three years driven by higher sales and improved gross margin. Within this result, Coles Online also delivered strong sales growth of 30%. Our Liquor business (excluding Hotels) achieved sales growth of 1.9% to $3,063m and improvements in gross margin during the year. Our target to realise $1bn in cumulative cost savings over four years will be delivered through increased use of technology in stores and across our supply chain, strategic sourcing, optimising our store network and formats, and more efficient store support centres. As a highly cash generative business, Coles aims to achieve cash realisation greater than 100% each year. Our new partnership arrangements In February, a new 10-year Alliance Agreement was signed with Viva Energy. Under this agreement Coles Express became a commission agent – a strategic step that allows Coles Express to focus on what we do best as we work to become the leading Australian convenience retailer. In March, we entered into an incorporated joint venture with AVC for the ongoing operation of the Spirit Hotels business and the Looking ahead Very few organisations in this country can lay claim to a history of more than 100 years, let alone in retail! As we embrace the opportunities of the future, it is vital that we maintain the customer focus and appetite for innovation that our customers and stakeholders love about Coles. This energy and dynamism will help us to deliver a second century of success for Coles. I would like to thank the Board for their support through a year of signiﬁcant change and for applying their valuable skills and insights to the important tasks of governance and setting our future course. I pay tribute to our team of more than 113,000 dedicated people in stores, our distribution centres and our store support centres who come to work every day to provide the best retail experience possible for our customers. To our more than 7,000 suppliers, we are grateful for your ongoing support in delivering great quality food, drinks and other products that inspire our customers and enable our businesses to grow together. To the millions of customers we serve every week, we are working harder than ever to understand and meet your needs so that we can earn your ongoing loyalty and help you live healthier, happier lives with your friends and family. To the Australian communities we operate in, we are committed to making Coles the most sustainable supermarket - for the next generation of Australians. Finally to our approximately 460,000 shareholders, I thank you on behalf of the Board and team for your ongoing support as we strive to increase long-term shareholder value in our great Australian company. We have made a solid start to our four year transformation program but we recognise there is still much to do! Steven Cain Managing Director and Chief Executive Officer, Coles Group Limited. Coles Group Limited 2019 Annual Report 12 Our strategy Three pillars underpin our strategy: Inspire customers, Smarter selling and Win together. Coles Group Limited 2019 Annual Report 13 Our vision, purpose and strategy. Our vision. Become the most trusted retailer in Australia and grow long-term shareholder value. Our purpose Sustainably feed all Australians to help them lead healthier, happier lives. Smarter selling through efficiency and pace of change. Win together with our team members, suppliers and communities. Inspire customers through best value food and drink solutions to make lives easier. Our LEaD behaviours Look ahead Energise everyone Deliver with pride We will Inspire customers through best value food and drink solutions to make lives easier. This means being customer than obsessed, where we know our customers better anyone else. We will take the stress out of for dinner tonight?’ by tailoring our offer with trusted and targeted value, inspiring Coles Own Brand products, being a destination for convenience and health, leading anytime, anywhere shopping and accelerating growth through new markets. ‘what’s Coles Own Brand is the portfolio of product brands owned by Coles. All Own Brand products are exclusive to Coles and only available to Coles customers. We go to great lengths to ensure they are compelling, great value and loved by our customers. Our partnership with Ocado, a global leader in online shopping solutions, will provide our customers with a market-leading online customer experience. We need to Win together with our team members, suppliers and communities to help make a positive difference for all Australians. We will continue to build a great place to work, where we are better together through diversity, and have wellbeing and safety in our DNA. To drive generational sustainability, we will focus on building sustainable communities, delivering sustainable products and using sustainable environmental practices. Coles strives to be recognised as an employer of choice by building and retaining a diverse team, acting sustainably on behalf of our customers and rapidly driving innovation through a culture of collaboration. Wellness Road is a Coles Own Brand product. Own Brand products are sourced ethically and responsibly with a focus on protecting human rights and animal welfare. Smarter selling through efficiency and pace of change will enable us to invest in the areas that matter for our customers. We will take a more disciplined approach to operating costs, with a gross cumulative cost reduction target across the business of $1bn by FY23. The retail world is rapidly changing. To keep pace we will be creating agile ways of working to deliver changes faster. We will be technology-led across our stores and supply chain to provide safe, high quality products at the best price to our customers. We will optimise our existing store network and work more efficiently at our store support centres. We strive to make Coles a great place to work by attracting, engaging and retaining talented team members like Joe and Todd, pictured at Coles Mernda, Victoria. Coles Group Limited 2019 Annual Report 14 Coles Group Limited 2019 Annual Report 15 How we create value. We are driven by our purpose to… sustainably feed all Australians to help them lead healthier, happier lives …which means we need to consider our social and environmental impacts in all that we do. Our vision is centred on earning the trust of Australians and creating long-term shareholder value. For Coles, trust is primarily about being reliable and responsible. It is also recognising that we have a signiﬁcant responsibility as a food provider. Customers tell us that they want to shop with a company that does the right thing by farmers and suppliers. Customers are seeking to purchase products that have been sourced responsibly and ethically, without compromising on food safety, quality or nutrition. Sustainability at Coles is broader than environmental management. It is about the way we treat people, the way we govern ourselves and manage the impact of our business on society. We understand that focusing on all these areas is not only the right thing to do, it creates value for all our stakeholders. Coles economic value creation Suppliers Team members Shareholders Governments Community $32.1bn in supplier and services spend $4.5bn payments and beneﬁts to team members $473.5m $3.7bn $115m total dividend payment cash taxes paid in community support Farming and production Through our commitment to Australian First sourcing and long-term partnerships, we are supporting Australian farmers, growers and suppliers who provide us with healthy, quality products, sourced in a responsible and ethical way with a focus on protecting human rights and animal welfare. Our support includes the $50m Coles Nurture Fund. Nurture Fund Packaging and processing Five Freedoms for animal welfare Freedom: from hunger and thirst; from discomfort; from pain, injury or disease; to express normal behaviour; from fear and distress. Innovation R&D Our targets and commitment to work with our suppliers on sustainable Own Brand packaging will make it easier for our customers to recycle, including through our soft plastics recycling program with REDcycle, which is available in all supermarkets. We help customers make sustainable choices by promoting country of origin labelling and health star ratings. Retail and store network We support local economic growth through our investment in new stores and infrastructure, while continuing to reduce greenhouse gas emissions. We are driving innovation to provide online grocery and convenience shopping experiences to make life easier for our customers. We are committed to providing safe, responsibly sourced, nutritious products at competitive prices. Coles Online Convenience Transport and distribution Working with our logistics partners, we are reducing our environmental footprint through more efficient ﬂeet movements. Our quality inspection program completes more than 200,000 fresh food checks annually to make sure we are providing customers with quality, safe products. Team members Customers and community With more than 113,000 team members, including the largest number of Indigenous team members in Australia’s private sector, our workforce reﬂects the diversity of our customers and the community. We strive for a safe and inclusive workforce for all. Through our community partnerships, we are supporting Australians and reducing our environmental impact. Our work with SecondBite provides Australians in need with healthy, nutritious food that might otherwise have gone to waste. Disaster relief and business continuity plans support customers and communities in times of extreme weather events. Coles Group Limited 2019 Annual Report 16 Proud moment In FY19, Coles was awarded the Marine Stewardship Council’s Oceania Sustainable Supermarket of the Year for the third year in a row. The award recognises that we have the widest eco-labelled fresh seafood range of any Australian supermarket, with all Own Brand seafood products labelled according to the methodology to which they are certiﬁed. BUDI from Australia Bay Seafoods, supplier of Coles’ responsibly sourced snapper off the coast of Darwin, Northern Territory. Coles Group Limited 2019 Annual Report 17 Sustainability overview. Our Sustainability Strategy has a key role in realising our purpose to sustainably feed all Australians to help them lead healthier, happier lives. Our credentials provide assurance that shopping with Coles means making sustainable choices. Understanding our key sustainability issues During FY19, we assessed our environmental, social and economic issues and impacts to identify the material aspects of sustainability. This shaped our Sustainability Strategy and forms the basis of our 2019 Sustainability Report. The sustainability issues that matter most to our stakeholders are grouped under key focus areas: Sustainable communities Coles is supporting Australian farmers and suppliers and contributing to the communities in which we live and work. Sustainable products Coles is committed to sourcing quality, healthy products in an ethical and responsible way. Sustainable environmental practices Coles is reducing environmental impacts across our business. Details of our performance across our key sustainability areas are set out in our 2019 Sustainability Report. Our material economic, environmental and social sustainability risks, including risks associated with climate change, are also explained in How we manage risk (refer to page 30). Coles Group Limited 2019 Annual Report 18 Coles Group Limited 2019 Annual Report 19 Sustainability highlights. Sustainable communities Sustainable products $16m to provide drought relief in FY19 Health stars on 1,900+ Own Brand products at the end of FY19 114m meals1 donated to Australians in need 550+ third-party ethical audits conducted at supplier sites Australian First sourcing policy 100% Own Brand fresh lamb, pork, chicken, beef, milk and eggs sourced from Australian suppliers 200,000+ quality checks for allergens, imports, and authenticity in FY19 110 tonnes of salt 150 tonnes of sugar removed from Own Brand products in FY19 1. Total meal equivalents donated to SecondBite since 2011 and Foodbank since 2003. Sustainable environmental practices Removed 1.7bn lightweight, single-use plastic shopping bags in FY19 Greenhouse gas emissions 6% from FY18 (Scope 1 and 2) 74% waste diverted from landﬁll in FY19 REDcycle soft plastics recycling in all supermarkets in FY19 We are proud of our responsible sourcing and animal welfare commitments. Our approach and FY19 performance In FY19, we set our Sustainability Strategy to focus on sustainable communities, products and environmental practices. In doing this, our Board, Executive Leadership Team and all team members will work to achieve our ambition to be Australia’s most sustainable supermarket. During the year, with the assistance of our customers and team members, we provided more than $115m in community support. We worked with food rescue organisations to help sustainably feed Australians and marked a special milestone with the equivalent of 114 million meals donated to food charity organisations. We continued to build our credentials around sustainable Own Brand products, particularly human rights in the supply chain, with 97% of Own Brand direct suppliers registered on the global ethical supply chain management platform Sedex and monitored under the Coles Ethical Sourcing Program. For Own Brand, we reduced sugar and salt, removed artiﬁcial colours and ﬂavours, and enhanced our animal welfare and responsibly sourced seafood programs. Plastic packaging was an important challenge during the year. While packaging plays a key role in maintaining food safety, supporting product longevity and reducing food waste, we are continually looking for opportunities to further reduce packaging and help drive more recyclable packaging in our supply chain. In FY19, we removed 1.7bn lightweight single-use plastic bags. We are committed to climate change mitigation and managing its impacts on our business and operations. We have reduced our carbon emissions by 36% four years earlier than targeted. Solar is now installed on 30 supermarkets and in August 2019 we announced a 10-year agreement to purchase renewable energy from three solar plants. As part of our commitment to sustainable environmental practices, all Coles supermarkets and distribution centres are now connected to programs diverting food waste from landﬁll. During the year, Coles joined the United Nations Global Compact, committing to its 10 principles. This is an important platform for driving corporate leadership and collective action. We are making progress on our journey to drive generational sustainability, supported by our dedicated team members, loyal customers and committed suppliers. Looking ahead, our focus will be on: • increasing the number of Indigenous team members to 5,500 including 500 in trade and leadership positions by 2023; • achieving a year-on-year reduction in TRIFR; • achieving 40% women in leadership positions by 2023; • continuing to enhance our Ethical Sourcing Program to protect human rights; • maintaining our leading animal welfare and responsibly sourced seafood programs; • ensuring all Own Brand packaging can be recycled kerbside or in store by the end of 2020; • diverting 90% of waste from landﬁll by 2022 and further reducing food waste; and • developing and implementing new greenhouse emissions reduction targets. By doing this, we will continue to create long-term shareholder value while delivering on our purpose to sustainably feed all Australians to help them lead healthier, happier lives. Coles Group Limited 2019 Annual Report 20 Coles Group Limited 2019 Annual Report 21 Our ﬁnancial and operating performance. Group performance highlights for continuing operations Highlights $ MILLION Sales revenue Supermarkets Liquor Express Group sales revenue EBIT Supermarkets Liquor Express Other Signiﬁcant Items Group EBIT Financing costs Income tax expense Proﬁt after tax Retail (non-IFRS) Group sales revenue2 Group EBIT3 FY19 FY18 CHANGE • Statutory sales revenue growth of 3.2% in Supermarkets and 30,992.6 3,204.8 3,978.4 38,175.8 1,191.4 133.1 45.8 (27.8) 124.2 1,466.7 (41.5) (347.0) 1,078.2 30,018.2 3,180.8 5,735.4 38,934.4 1,171.9 130.2 164.0 13.3 - 1,479.4 (0.1) (456.1) 1,023.2 3.2% 0.8% (30.6%) (1.9%) 1.7% 2.2% (72.1%) n/m1 n/m (0.9%) n/m (23.9%) 5.4% 0.8% in Liquor • Supermarkets EBIT returned to full year growth for the ﬁrst time in three years driven by higher sales and improved gross margin • 30% sales growth in Coles Online, generating $1.1bn in sales, and achieving proﬁtability for the ﬁrst time in FY19 • Robust balance sheet with investment-grade credit metrics • Net cash ﬂows from operating activities increased by 19.1% • The Board has declared a fully franked total dividend of 35.5 cents per share (details on page 21). 35,000.7 1,325.2 33,960.6 1,442.3 3.1% (8.1%) 1 n/m denotes not meaningful. 2 On a non-IFRS basis (excluding fuel sales and Hotels). 3 On a non-IFRS basis (excluding Hotels and Signiﬁcant Items). Performance overview Non-IFRS information Sales revenue from continuing operations reduced by 1.9% to $38,175.8m. Growth in Supermarkets and Liquor was offset by lower sales revenue in Express driven by a decline in fuel volumes and the move to a commission agent model under the New Alliance Agreement, effective 1 March 2019. In accordance with the terms of the New Alliance Agreement, Express no longer recognises fuel sales revenue; however, it is entitled to commission income (recognised in ‘other operating revenue’) from fuel sold at Alliance sites. Sales revenue growth in Supermarkets was achieved through Coles Online, new stores and successful collectable campaigns, including Little Shop. Group EBIT from continuing operations reduced 0.9% to $1,466.7m during the period ended 30 June 2019. This result was driven by lower fuel volumes in Express, largely offset by EBIT growth in Supermarkets from higher sales and improved gross margin. This Annual Report contains non-IFRS ﬁnancial information. IFRS ﬁnancial information is ﬁnancial information that is presented in accordance with all relevant accounting standard. Non-IFRS ﬁnancial information is ﬁnancial information that is not deﬁned or speciﬁed under any relevant accounting standards and may not be directly comparable with other companies' information. Coles changed its statutory reporting calendar during FY19, on a prospective basis, from a Gregorian calendar to a Retail calendar. This will align Coles’ statutory reporting calendar with internal management reporting. The ﬁnancial and operating performance in this section is presented on a statutory (IFRS) basis. Results prepared on a retail (non-IFRS) calendar basis have also been included to support an understanding of comparable business performance. Retail results have been prepared on a 52 week basis, beginning 25 June 2018 and ending 23 June 2019. impacting EBIT for the year Signiﬁcant Items include: a restructuring provision of $145.8m relating to the Supply Chain Modernisation program; a one-off payment of $137.0m from Viva Energy in consideration for forgoing the retail fuel margin under the New Alliance Agreement; and a net gain of $133.0m associated with the establishment of the Queensland Venue Co. Pty Ltd (QVC) joint venture with AVC. Any non-IFRS ﬁnancial information included in this section is clearly labelled to differentiate it from statutory ﬁnancial information and is deﬁned in the glossary on page 28. Non- IFRS measures are used by management to assess and monitor business performance at the Group and segment level and should be considered in addition to, and not as a substitute for, IFRS information. Non-IFRS information is not subject to audit or review. Proﬁt after tax for the Group increased 5.4% to $1,078.2m, largely driven by lower income tax expense, partially offset by higher ﬁnancing costs as a result of the drawdown of external borrowings post demerger. The lower income tax expense was driven by the non-assessable accounting gain arising from the establishment of QVC and the net credit to income tax expense from reset of the tax cost base of the Group’s assets following Coles’ decision to form an income tax consolidated group. The presentation of non-IFRS measures is in line with Regulatory Guide 230 issued by Australian Securities and Investments Commission (ASIC) to promote full and clear disclosure for investors and other users of ﬁnancial information and minimise the possibility of those users being misled by such information. Coles Prahran store manager Steve with long-serving team members Graeme and Sabah, who have worked at Coles for 50 years and 35 years respectively. Strategic highlights Earnings per share and dividends FY19 was a year of signiﬁcant achievement for our team members, shareholders, suppliers and community partners: Earnings per share (EPS) increased to 80.8 cents, a 4.1 cent increase from the prior year. • ASX-listed following a successful demerger from Wesfarmers • Strategic refresh to ‘sustainably feed all Australians to help them lead healthier, happier lives’ • Entered into an exclusive partnership with Ocado to bring the world’s leading online grocery website, two automated single pick fulﬁlment facilities and home delivery solution to Australia • Entered into a partnership with Witron to develop two world- class automated distribution centres • Strategic partnerships announced with Optus and SAP (HR and Procurement systems) to accelerate technology-led transformation of stores, support centres and supply chain • Entered into a New Alliance Agreement with Viva Energy to restore fuel growth • Established an incorporated joint venture with AVC in relation to Spirit Hotels and the associated Retail Liquor business • Own Brand penetration reached 30% at year end with over 1,200 new products launched in FY19 • Commenced rollout of new store formats with Eastgardens in New South Wales and Clayton, Ardeer and Surrey Hills in Victoria • Improved team member safety and engagement scores • Contributed $115m to communities and suppliers through SecondBite, Redkite, Community Bags, FightMND, drought relief and the Coles Nurture Fund. Proﬁt for the period from continuing operations ($ million) FY19 FY18 1,078.2 1,023.2 Weighted average number of ordinary shares for basic and diluted EPS (shares, million) 1,333.9 1,333.9 Basic and diluted EPS (cents) 80.8 76.7 The weighted average number of shares in FY18 has been restated to reﬂect the change in Coles’ capital structure as a result of the demerger from Wesfarmers, as if the change had occurred at the beginning of FY18. The Board has declared a fully franked total dividend of 35.5 cents per share (cps), comprising a ﬁnal and a special dividend, which covers the period from 28 November 2018 (being the effective date of the demerger) to 30 June 2019. DIVIDEND AMOUNT PERIOD (cps) 24.0 11.5 Final Special 31 December 2018 to 23 June 2019 28 November 2018 to 30 December 2018 and 24 June 2019 to 30 June 2019 Total 35.5 28 November 2018 to 30 June 2019 Note: Wesfarmers paid an interim dividend in March 2019, which reﬂected in part Coles’ earnings up to and including 27 November 2018. Coles Group Limited 2019 Annual Report 23 Proud moment We believe you can’t rush quality. It’s why we’ve partnered with expert French baker Laurent to create Coles Finest 30 Hour Recipe Stone Baked Sourdough using 100% Australian ﬂour. Coles Group Limited 2019 Annual Report 22 Balance sheet Cash ﬂow Key balance sheet accounts for the Group Cash ﬂows from continuing operations of the Group $ MILLION Assets Cash and cash equivalents Trade and other receivables Inventories Property, plant and equipment Intangible assets Deferred tax assets Other Total assets Liabilities Trade and other payables Provisions Interest-bearing liabilities Other Total liabilities Net assets 1 n/m denotes not meaningful. 30 JUNE 2019 30 JUNE 2018 CHANGE $ MILLION FY19 FY18 CHANGE Cash ﬂows from operating activities 940.4 359.7 1,964.7 4,119.2 1,540.6 364.9 487.5 686.1 497.2 37.1% Receipts from customers 41,125.5 41,756.1 (1.5%) (27.7%) Receipt from Viva Energy 137.0 - n/m1 3,442.3 (42.9%) Payments to suppliers and employees (38,664.6) (39,351.4) (1.7%) 5,223.0 (21.1%) Interest (paid) / received (28.6) 2.7 n/m 1,965.7 (21.6%) Income tax paid (293.9) (497.5) (40.9%) 540.3 190.1 (32.5%) Net cash ﬂows from operating activities 2,275.4 1,909.9 19.1% 156.4% Net cash ﬂows used in investing activities (279.8) (502.5) (44.3%) 9,777.0 12,544.7 (22.1%) Net cash ﬂows used in ﬁnancing activities (1,611.2) (1,237.0) 30.3% Net increase in cash and cash equivalents 384.4 170.4 125.6% 8,008.5 (57.8%) 1n/m denotes not meaningful. 3,379.9 1,341.3 1,460.0 238.7 6,419.9 3,357.1 1,091.7 - 194.9 22.9% n/m1 22.5% 9,295.1 (30.9%) 3,249.6 3.3% Net cash ﬂows from operating activities increased by 19.1% to $2,275.4m. This was largely driven by the one-off payment of $137.0m from Viva Energy and a tax timing beneﬁt due to the clear exit from the Wesfarmers’ Australian income tax consolidated group prior to demerger. Net cash ﬂows used in investing activities decreased by 44.3% to $279.8m driven by proceeds associated with the transfer of KTO to Wesfarmers and the net cash received from the sale of Spirit Hotels. This was partially offset by an increase in net capital expenditure during the year from increased investment in efficiency initiatives and the store renewal program. Cash and cash equivalents growth of 37.1% to $940.4m largely reﬂects increased cash on deposit. Trade and other receivables reduced by 27.7% to $359.7m, largely due to the settlement of intercompany balances prior to the demerger from Wesfarmers. The reduction in inventories, property, plant and equipment, deferred tax assets and intangible assets is largely the result of the transfer of Kmart, Target and Officeworks (KTO) to Wesfarmers as part of the corporate restructure associated with the demerger. Net cash ﬂows used in ﬁnancing activities increased by 30.3% to $1,611.2m largely driven by repayment of borrowings from Wesfarmers prior to demerger, partially offset by net proceeds from the drawdown of new external borrowing facilities. The increase in other assets is driven by the Group’s equity accounted investment in QVC. Trade and other payables reduced by 57.8% to $3,379.9m driven by the transfer of KTO and the repayment of intercompany borrowings from Wesfarmers prior to demerger. The increase in provisions of 22.9% to $1,341.3m largely reﬂects the Group’s self-insurance liabilities, which were previously recognised by Wesfarmers prior to demerger. Provisions at 30 June 2019 also include the $145.8m restructuring provision associated with the Supply Chain Modernisation program. Capital management Interest-bearing liabilities of $1,460.0m reﬂect Coles’ external borrowings. At the time of the demerger, Coles drew down $2,000.0m from its initial $4,000.0m committed debt facilities. Since then part of this debt has been repaid, taking gross debt to $1,460.0m as at 30 June 2019. The repayment of debt is a result of strong cash generation during the period, together with proceeds received from the New Alliance Agreement and the sale of Spirit Hotels. As at 30 June 2019, the average debt maturity was 4.6 years, with undrawn facilities of $2,210.8m. The leverage ratio as at 30 June 2019 was 0.5x with current published credit ratings of BBB+ with Standard & Poor’s and Baa1 with Moody’s. Borrowing costs for the period from 28 November 2018 to 30 June 2019 averaged approximately 2.9% per annum. Review of operations Employing more than 113,000 team members, Coles is a leading Australian retailer, with over 2,400 retail outlets nationally, providing customers with everyday products including fresh food, groceries, general merchandise, liquor, fuel and ﬁnancial services through its store network and online platforms. Following its demerger from Wesfarmers, Coles was listed on the ASX as an independent company on 21 November 2018. The Group’s reportable segments are set out below: • • • fresh food, groceries and general Supermarkets: merchandise retailer across a national network of 821 supermarkets, including Coles Online and Coles Financial Services Liquor: liquor retailer with 910 stores nationally under the brands Liquorland, First Choice, First Choice Liquor Market and Vintage Cellars, including online liquor delivery services through Coles Online and Liquor Direct Express: convenience store operator and commission agent for retail fuel sales across 714 outlets nationally. Coles is a 50% shareholder of ﬂybuys, one of Australia’s most popular loyalty programs with over eight million members, covering 6.6 million active households. ﬂybuys, as well as other business operations that are not separately reportable, such as Property, as well as costs associated with enterprise functions, such as Treasury, are included in Other on page 28. Coles Group Limited 2019 Annual Report 24 Supermarkets. Segment overview $ MILLION Sales revenue EBIT EBIT margin (%) Retail (non-IFRS) $ MILLION Sales revenue EBITDA EBIT Gross margin (%) Cost of doing business (CODB) (%) EBIT margin (%) Operating metrics (non-IFRS) Comparable sales growth (%) Customer satisfaction1 (%) Inﬂation / (deﬂation) excl. tobacco and fresh (%) Sales per square metre2 (MAT $/sqm) FY19 30,992.6 1,191.4 3.8 FY19 30,889.8 1,735.3 1,182.9 24.8 (20.9) 3.8 FY18 30,018.2 1,171.9 3.9 FY18 29,919.2 1,714.1 1,156.9 24.6 (20.7) 3.9 CHANGE 3.2% 1.7% (6bps) CHANGE 3.2% 1.2% 2.2% 20bps (24bps) (4bps) FY19 (52 WEEKS) 2H19 (25 WEEKS) 1H19 (27 WEEKS) 2.7 87.7 (1.2) 16,704 2.3 87.7 (1.2) 16,704 3.0 87.7 (1.2) 16,533 1 Based on Tell Coles data. See glossary on page 28 for explanation of Tell Coles. 2 Sales per square metre is a moving annual total (MAT) or exit rate calculated on a rolling 12 months of data basis. Highlights Statutory sales revenue increased 3.2% on the prior year to $30,992.6m driven by Coles Online, new stores and successful collectable campaigns, including Little Shop in the ﬁrst quarter and Fresh Stikeez in the third quarter. Inﬂation also started to increase, impacted by drought conditions in Australia. On a Retail calendar basis, sales increased by 3.2% to $30,889.8m, with comparable sales growth of 2.7%. For the fourth quarter, Supermarkets sales revenue increased by 3.0% and comparable sales growth was 2.2%, the 47th consecutive quarter of positive comparable sales growth. Comparable sales growth for the year was largely driven by basket size. Transaction growth also showed signs of improvement since the beginning of the second quarter. Sales growth for the year was recorded across all states; and category growth was particularly strong in bakery, meat and dairy. ﬂybuys also had a positive impact on customer engagement and sales, with ﬂybuys membership reaching record highs in the fourth quarter with 6.6 million active households. Coles continued to invest in lowering prices for its customers which saw deﬂation, excluding tobacco and fresh, of 1.2% for FY19. Adverse weather conditions throughout the year, most notably the drought, resulted in a marked inﬂationary period in fresh food. The Group continues to work hard with suppliers through these difficult times and to minimise the impact on our customers. Overall, total Supermarkets price inﬂation of 0.8% was recorded for FY19. Own Brand sales grew by 5.9% in FY19 and now represents a $9bn business. New products were key to delivering this result, with over 1,200 new products introduced during the year across areas such as health foods, prepared and ready- to-cook meals, personal care and meat alternatives. New brands launched include Wellness Road health products, Nature’s Kitchen vegan range, Curtis Stone’s Cook with Curtis and I’m Free From, designed for customers with allergies or intolerances. Of the new products introduced during the year, 90 products won awards for their quality, including Gold at the Sydney Royal Cheese & Dairy Awards for Coles Vanilla Bean and Coles Cookies and Cream ice cream and 2019 Product of the Year win for Coles Finest White Sourdough Vienna bread. In addition to Own Brand, Supermarkets continued to deliver trusted and targeted value via Everyday Low Prices. Supermarkets continued to invest in the store network with the rollout of new formats and tailored store offerings to meet local customer tastes and demand. The Group commenced the rollout of its new Format A stores focused on convenience and a premium fresh food offer. One store in Eastgardens, New South Wales, has already been completed. The rollout of Format C stores, focused on driving operational efficiencies, also continues with Clayton and Ardeer in Victoria already completed. Coles Local has opened in Surrey Hills Victoria. It is designed to provide the convenience of a supermarket with a product range and service proposition tailored to meet the needs of its local community. Separately, a dedicated front of store convenience space featuring our expanded 'food for now' and 'food for later' range is expected to be rolled out to 100 stores by the end of the 2019 calendar year. Coles Group Limited 2019 Annual Report 25 Coles unveiled its new look Eastgardens supermarket in New South Wales in November 2018 with an entire area dedicated to convenience meals; expanded dairy, deli and produce departments; and a continental delicatessen with a self-serve olive bar and a large selection of local and international cheeses. Supermarkets expanded and improved its network during the year with 51 refurbishments, 22 openings and 10 closures, ending the period with 821 supermarkets. Gross margin increased by 20bps to 24.8%, primarily due to strategic sourcing and the continued execution of Coles’ Own Brand powerhouse strategy. Costs of doing business (CODB) as a percentage of sales increased by 24bps to 20.9%. This was largely due to higher energy costs and higher wages following the implementation of the new store enterprise bargaining agreement in April 2018, which resulted in pay increases for the majority of Coles’ in- store team members. Statutory EBIT increased by 1.7% to $1,191.4m, while Retail EBIT increased by 2.2% to $1,182.9m driven by higher sales and improved gross margin, partially offset by higher administration expenses (noting second half EBIT included the Smarter selling restructuring provision of $18.7m). provides ﬂexibility for customers and, with over 1,000 locations at year end, contributed strongly to sales growth. Click & Collect now represents more than 30% of online sales and is the fastest growing channel in the Coles Online offering. By increasing the number of delivery slots available for customers, shortening delivery windows and simplifying delivery fees, online customer satisfaction was maintained in an increasingly competitive market. Financial services Through Coles Financial Services, the Group offers credit cards in partnership with Citigroup to approximately 350,000 customer accounts and home, car and landlord insurance in partnership with Insurance Australia Group (IAG) to approximately 400,000 policy holders. The Coles Financial Services business model changed in FY18, transitioning to a 100% white-labelled partnership via the sale of the Coles cards portfolio to Citigroup. Coles Online Anytime, anywhere shopping increasingly important for customers, and Coles Online achieved $1.1bn of sales revenue in FY19, an increase of 30% on the prior year. is becoming Coles Online now contributes 3.6% of Supermarkets sales and importantly, achieved proﬁtability for the ﬁrst time in its 20 year history. Proﬁtability has been largely achieved through scale, the growth in Click & Collect and technology investments in home delivery which have optimised van utilisation rates and reduced delivery times. Click & Collect also Coles Group Limited 2019 Annual Report 26 Segment overview $ MILLION Sales revenue EBIT EBIT margin (%) Retail excluding Hotels (non-IFRS) $ MILLION Sales revenue EBITDA EBIT Gross margin (%) Cost of doing business (CODB) (%) EBIT margin (%) Operating metrics (non-IFRS) Comparable sales growth (%) NYE1 adjusted comparable sales growth (%) Sales per square metre (MAT $/sqm)2 Liquor. Express. Coles Group Limited 2019 Annual Report 27 FY19 3,204.8 133.1 4.2 FY19 3,063.0 152.7 120.3 22.3 (18.4) 3.9 FY18 3,180.8 130.2 4.1 FY18 3,005.9 146.1 111.0 21.9 (18.2) 3.7 CHANGE 0.8% 2.2% 6bps CHANGE 1.9% 4.5% 8.4% 41bps (18bps) 23bps FY19 (52 WEEKS) 2H19 (25 WEEKS) 1H19 (27 WEEKS) 1.2 1.2 14,354 2.6 1.2 14,354 (0.1) 1.1 14,161 Segment overview $ MILLION Sales revenue EBIT EBIT margin (%) Retail excluding fuel sales (non-IFRS) $ MILLION Sales revenue EBITDA EBIT Gross margin (%) Cost of doing business (CODB) (%) EBIT margin (%) Operating metrics (non-IFRS) Comparable c-store sales growth (%) Weekly fuel volumes (million litres) Fuel volume growth (%) Comparable fuel volume growth (%) FY19 3,978.4 45.8 1.2 FY19 1,047.9 76.0 49.5 61.4 (56.7) 4.7 FY18 5,735.4 164.0 2.9 FY18 1,035.5 187.2 161.1 70.5 (55.0) 15.6 CHANGE (30.6%) (72.1%) (171bps) CHANGE 1.2% (59.4%) (69.3%) (909bps) (175bps) (1084bps) FY19 (52 WEEKS) 2H19 (25 WEEKS) 1H19 (27 WEEKS) 0.1 60.9 (13.0) (13.7) (1.4) 59.5 (9.6) (10.0) 1.5 62.4 (15.8) (16.7) 1 New Year's Eve. 2 Sales per square metre is a moving annual total (MAT) or exit rate calculated on a rolling 12 months of data basis. Highlights Incorporated joint venture with Australian Venue Co. Highlights New Alliance Agreement Liquor sales revenue was $3,204.8m for the year on a statutory basis, an increase of 0.8% from the prior year. Sales revenue on a Retail calendar basis (excluding Hotels) was $3,063.0m for the year, an increase of 1.9% from the prior year with comparable sales growth of 1.2%. Sales performance was positively impacted by the First Choice Liquor Market (FCLM) rollout during the year and growth in online, partially offset by moderating growth in the broader retail liquor market. Liquorland continued to grow during the year, albeit at a lower rate, as its renewal program neared completion. Investment in the Liquor store network continued, with 27 new Liquorland stores opened and 16 stores closed (one FCLM, two Vintage Cellars and 13 Liquorland), resulting in a total of 910 Liquor sites at the end of the year. Across all banners, Exclusive Liquor Brand (ELB) sales in the wine category continued to be strong, with ELB sales growth more than double the rate of the rest of the Liquor business. There were 64 new ELB lines launched, and a total of 189 medals and awards received over the year. Gross margin increased by 41bps to 22.3% driven by margin improvements from ELB and improved supplier collaboration. EBIT growth of 2.2% on a statutory basis or 8.4% on a retail basis was driven by gross margin improvements. As previously announced, Coles entered into an incorporated joint venture with AVC, for the operation of: • • the 87 hotels that comprised the Group’s hotel and gaming business (Spirit Hotels); and the 243 retail liquor stores in Queensland, and the 10 retail liquor stores in South Australia and Western Australia attached to Spirit Hotels’ venues (collectively the ‘Retail Liquor business’). These operations were previously held within a wholly- owned subsidiary of the Group, Liquorland (Qld) Pty Ltd, and its controlled entities (collectively, ‘LLQ’). Under the new structure, LLQ has been converted into an incorporated joint venture company, QVC, whereby: • Coles holds ‘R-class’ shares in QVC which confer rights to the economic beneﬁts of the Retail Liquor business; and • AVC holds ‘H-class’ shares in QVC which confer rights to the economic beneﬁts of Spirit Hotels. The transaction was completed on 29 April 2019. Coles recognised a net gain of $133.0m relating to the sale of Spirit Hotels, the transfer of its Retail Liquor business assets to QVC and the fair value of its interest in QVC. Statutory sales revenue for Express decreased by 30.6% to $3,978.4m driven by a decline in fuel volumes and the move to a commission agent model under the New Alliance Agreement, effective 1 March 2019. In accordance with the terms of the New Alliance Agreement, Express no longer recognises fuel sales revenue; however, it is entitled to commission income (recognised in ‘other operating revenue’) from fuel sold at Alliance sites. The New Alliance Agreement with Viva Energy aims to deliver a more competitive customer offer, providing an opportunity to expand the network and better align contributions and incentives for both Coles and Viva Energy to jointly grow the business. It allows each party to leverage their core competencies: Coles in respect of convenience retailing and Viva Energy in respect of fuel retailing, together in a competitive, integrated offering. Certain terms relating to Coles achieving a satisfactory return on capital over the medium term have also been included in the New Alliance Agreement. Coles received a one-off payment of $137.0m at transaction close in consideration of forgoing the retail fuel margin (recognised in ‘other income’). Ongoing commission per litre is recognised in ‘other operating revenue’. Statutory EBIT decreased by 72.1% to $45.8m, largely the result of lower fuel volumes. Convenience store (c-store) sales growth was 1.2% for the year and 0.1% on a comparable c-store sales growth basis, largely a result of declining tobacco sales. Outside of tobacco, the trends were positive with the food-to- go (FTG) category growing at double digit rates. Coles Express continues to rollout convenience offerings in store, delivering healthy meal solutions, with the FTG offer now rolled out to 93% of stores. Express has an extensive network, and during the year, six new sites were opened and three sites closed, taking the total network to 714 sites. Fuel volumes declined by 13.0% during the year, with comparable fuel volumes declining by 13.7%. CODB as a percentage of sales increased 175bps to 56.7%, impacted by higher store operating costs. Coles Group Limited 2019 Annual Report 28 Coles Group Limited 2019 Annual Report 29 Other Other includes corporate costs, Coles’ 50% share of ﬂybuys net proﬁt and the net gain generated by the Group's property portfolio. In aggregate, this resulted in a $27.8m net loss for the year. This result was predominantly due to investment in setting up ﬂybuys to operate as an independent standalone business and higher redemptions experienced in the ﬁrst half, particularly during the Christmas period. Corporate costs incurred in FY19 were slightly below the estimated annualised costs of $66.0m. This was due to the full run rate of costs only being reached in the second half once all corporate functions had been established. Coles’ share of net proﬁt for its 50% equity interest in ﬂybuys was $5.0m in FY19, down from $16.3m in the prior year. A net gain of $7.0m from property related activities was also recognised for the year, along with one-off demerger costs of $17.0m. Glossary of terms Average basket size: A measure of how much each customer spends on average per transaction Leverage ratio: Gross debt less cash at bank and on deposit, divided by EBITDA bps: Basis points. One basis point is equivalent to 0.01% Cash realisation: Calculated as operating cash ﬂow excluding interest and tax, divided by EBITDA (excluding Signiﬁcant Items) CODB: Cost of doing business. These are expenses which relate to the operation of the business below gross proﬁt and above EBIT Comparable sales: A measure which excludes stores that have been opened or closed in the last 12 months and excludes demonstrable impact on existing stores from store disruption as a result of store refurbishment or new store openings EBIT: Earnings before interest and tax EBITDA: Earnings before amortisation EPS: Earnings per share interest, tax, depreciation and Gross margin: The residual income remaining after deducting cost of goods sold, total loss and logistics from sales, divided by sales revenue Group sales revenue or Group EBIT: Total sales revenue or EBIT generated by the Group for the period IFRS: International Financial Reporting Standards MAT: Moving Annual Total. Sales per square metre is calculated as sales divided by Net Selling Area. Both sales and Net Selling Area are based on a MAT, or exit rate calculated on a rolling 12 months of data basis pp: Percentage point Retail calendar basis: A reporting calendar based on a deﬁned number of weeks, with the annual reporting period ending on the last Sunday in June Signiﬁcant Items: Large gains, losses, income, expenditure or events that are not in the ordinary course of business. They typically arise from events that are not considered part of the core operations of the business Tell Coles: A post-shop customer satisfaction survey completed by over two million customers annually, through which we monitor customers' satisfaction with service, product availability, quality and price TRIFR: Total Recordable Injury Frequency Rate. The number of lost time injuries, medically treated injuries and restricted duties injuries per million hours worked, calcuated on a rolling 12 month basis. TRIFR includes all injury types including all musculoskeletal injuries Looking to the future. Our vision is to become the most trusted retailer in Australia and grow long-term shareholder value. Competition in the Australian food and liquor market is strong and constantly evolving with new entrants challenging the existing operating model. Guided by our purpose to 'Sustainably feed all Australians to help them lead healthier, happier lives' we are transforming Coles into a retailer of the future leveraging global partnerships, technology and the energy and ideas of our more than 113,000 team members. In FY20, we will continue to implement our refreshed strategy, focusing on our programs of work to Inspire customers through best value food and drink solutions to make lives easier; deliver Smarter selling through efficiency and pace of change; and Win together with our team members, suppliers and communities. We will aim to inspire customers by being customer obsessed in our decision making processes enabling a more tailored offer with trusted value to be rolled out across our stores and sites. We will continue to drive innovation and differentiation by growing our Own Brand range of products and building a destination for convenience and health. This will include introducing a convenience destination at the front of around 100 supermarkets. Our anytime, anywhere shopping offer will continue to evolve to meet customer needs including expansion of our Click & Collect network in Supermarkets, re-platforming of the Liquor online site and trials with UberEats. Given the competitor activity in the market, cycling the comparable sales growth in Supermarkets from last year’s highly successful Little Shop will be challenging in the early part of FY20. In Express, it will take time to build fuel volumes to target levels, following the reset of the Alliance with Viva Energy. in new markets will Acceleration of growth include further investment into ﬂybuys to enable new offers, products and services. The recently established export team will continue to build our meat export business from today's sales baseline of approximately $400m. Implementing Smarter selling initiatives will be a focus as we work towards our cumulative cost-out target of $1bn by FY23. Deployment of technology in stores and supply chain to drive efficiency, control loss and lower expenses will be a key activity for our operations teams. The Store Support Centre will become simpler and more efficient through removing 450 roles and introducing agile working practices. We expect to deliver in excess of $150m annualised gross cost savings in FY20 as a result of these initiatives. Optimisation of our network and formats will continue with the rollout of approximately 75 Format A and Format C renewals in Supermarkets, further Coles Local rollouts, First Choice Liquor Market renewals in Liquor, and the opening of new stores predominantly in population growth corridors. Longer term, the partnerships with Witron, to build two automated distribution centres, and Ocado, to build two customer fulﬁllment centres for online orders, will be important components of the Smarter selling agenda. Dedicated teams for delivery of these transformational initiatives are well established and property and design work is underway. Working with our team, suppliers and communities has always been integral to the culture of Coles and that will not change in FY20. We will continue to improve safety outcomes, foster a culture that embraces diversity and create a workplace our team are proud of. Driving generational sustainability is an important priority for us. By FY22 we are aiming to divert 90% of waste from landﬁll and we are working to develop new greenhouse emission reduction targets. Continuing to enhance our ethical and responsible sourcing programs in FY20 to ensure we meet stakeholder and community expectations will build upon the good work done in this space over the last decade. While we have made early progress on our refreshed strategy, there is more work to do, and FY20 will be an important year in embedding our strategy pillars. Coles Group Limited 2019 Annual Report 30 Coles Group Limited 2019 Annual Report 31 How we manage risk. Our enterprise risk management program is a critical and integrated component of our operations. The program allows Coles to manage material and emerging risks that may impact the delivery of our strategy and supports our ability to identify and unlock new opportunities. Managing our risks and opportunities Coles operates in a rapidly changing environment that is becoming increasingly competitive. The following describes the material risks to Coles, including strategic, operational, compliance and ﬁnancial risks, and how we seek to manage them. Our performance may also be impacted by risks that apply generally to Australian businesses and the retail industry, as well as by the emergence of new material risks not reported below. report on We continually monitor, assess, manage and implementation of our Coles Risk our risks through the Management Framework. information about our Risk Management Framework by viewing the Coles Corporate Governance Statement, available on our website www.colesgroup.com.au/corporategovernance. You can ﬁnd more Additional information on environmental and sustainability risks is available in our 2019 Sustainability Report. Strategic Risks Competition, changing consumer behaviour and digital disruption Our market is changing, with new entrants, including international discount retailers, digital disruptors and specialist retailers contributing to an increasingly competitive market. Consumer behaviours and expectations are also rapidly evolving, with more reliance placed on digital platforms and greater expectations for convenience, lower prices and targeted range. If Coles fails to respond to competitive pressures or to meet customer behaviours and expectations, or if an existing or new competitor adapts to these more rapidly, this could result in loss of market share and, ultimately, declining proﬁts. Key programs to manage these risks are embedded in the implementation of our strategy, which is focused on Inspiring customers, Smarter selling and Winning together. Programs include using advanced analytics to support ranging decisions, forecasting, promotions and markdowns; introducing changes to store formats, products and pricing to better meet customer needs; trialling new technologies and in-store initiatives to keep pace with emerging trends; and developing strategic technology partnerships such as those recently established with SAP and Optus. Strategy and transformation To deliver our strategy, we are currently running multiple large- scale programs, including our partnerships with Witron and Ocado; pursuing growth from exports; executing our Smarter selling program; and undertaking technology implementations, including SAP Ariba and HR/Success Factors. We have joint ventures with Wesfarmers (ﬂybuys) and AVC (Spirit Hotels and associated liquor retail) and an alliance with Viva Energy. In addition to these existing programs and partnerships, Coles may undertake future acquisitions and divestments and may enter into other third-party relationships, so we can more effectively execute our strategy. Implementation and delivery of these programs may be challenged by several variables, including changes to the macro-economic environment, ineffective project management, loss of key talent, Supply chain conformance specialist Giulia. lack of specialist skills, or ineffective change management. Inability to properly execute these programs of work or manage our third-party relationships could result in failure to maintain or increase operating margins, loss of market share, and variability in earnings to Coles. through our ongoing ‘mysay’ surveys. Our Better Together pillars (Accessibility, Gender balance, Pride, Flexibility, and Indigenous) are critical to our engagement program. More information on these pillars can be found online in our Corporate Governance Statement and in our 2019 Sustainability Report. We have governance structures and processes in place to oversee, manage and execute strategic and transformational programs of work. We also have contractual agreements and governance arrangements in place to manage our joint venture partners and strategic partnerships. We recently appointed a Group Executive, Transformation to oversee the execution of our Smarter selling program; and, in concert with our people resources, we are investing in systems, data collection and automation technology. Operational Risks Talent management and capability We know that our team members are central to our success; and we must attract, retain, develop, and effectively engage our team to execute and deliver on our strategy. To manage our talent and people risks, we have talent retention, succession planning and talent development programs, such as our Retail Leaders Program in Supermarkets, our leading graduate programs, and Coles’ functional academies. Our culture is underpinned by our LEaD behaviours (Look ahead, Energise everyone, and Deliver with pride), which embodies the behaviours of our team and are integrated throughout our ways of working. We assess and drive actions to address team member engagement Workplace relations As we execute our strategy, there is a risk that workforce changes may lead to industrial action and/or disruptions to operations. We take proactive steps to manage these risks, including appropriate enterprise bargaining and employee relations strategies; maintaining and developing strong working industry organisations; and relationships with unions and constructively liaising with our team members, third-party suppliers, transport and service logistic providers. We also continue to manage the renegotiation of collective bargaining agreements when they expire, and we have business continuity plans in place to mitigate disruption to operations if industrial action occurs. Climate change Climate change presents an evolving set of risks for Coles. These include potential for disruption to our operations due to extreme weather events and changing weather patterns; changing customer behaviours as demand moves to food and products with lower carbon footprints; changes to government policy, law and regulation, which can result in increased costs to operate and potential for litigation; and failure to meet expectations of Coles Group Limited 2019 Annual Report Coles Group Limited 2019 Annual Report 32 stakeholders (investors, non-government organisations) resulting in reputational damage. In the case of extreme weather events, we have business continuity processes for sourcing and delivering goods to stores. To minimise the impact of climate change over the longer term, we are supporting suppliers to implement new technology and growing methods as well as providing ongoing support of climate- change resilience strategies to industry. To reduce our impact on the environment, we have an Energy includes our approach to energy purchasing, Strategy that monitoring and management; commitment to initiatives and investment in renewable energy. Security of supply Potential disruption to the supply of goods for resale can occur due to production risks associated with climate change, disruption to key growing regions and suppliers, changes in overseas and domestic competitor demand, and regulatory risks. Potential consequences include loss of market share, price volatility, inﬂation, and adverse ﬁnancial impacts. We have business continuity plans to manage the supply chain and goods to stores during extreme weather events. We also monitor commodity prices to determine cost pressures and have agreements in place to secure supply across key food categories. Future plans to manage this risk include analysis of Coles’ supply chain resilience across a number of food categories being conducted in a collaborative project with CSIRO. The results will be used to contain possible future disruptions to supply. Health and safety The safety of our team, customers, third parties and contractors is paramount to Coles. We employ an extensive workforce, including third parties, with high volumes of people interactions daily. This brings risk of fatality, or life-threatening injuries to team members, customers, suppliers, contractors or visitors, due to unsafe work practices, accidents or incidents. Our Coles SafetyCARE System is the documented safety management system that provides a framework for Coles to look after the health, safety and wellbeing of our team members, customers, contractors, suppliers and visitors. Implementation of the system is measured through a range of indicators, and the effectiveness of the system is assessed through a veriﬁcation program. A rolling ﬁve-year Safety and Wellbeing Plan focuses on the three pillars of: Safety leadership and culture, Critical risk reduction, and Mind your health, which is focused on supporting a positive, healthy team member experience. Product and food safety Product and food safety and quality are critical for Coles. Serious illness, injury or death are the most severe potential consequences from compromised product or food safety. Loss of customer trust, damage to reputation, loss of sales and market share, regulatory exposure and potential litigation could also occur. We have a Food Safety governance program in place, with oversight by an experienced technical team. We have targeted policies and procedures, including well-established food recall and withdrawal processes, speciﬁc supplier requirements for different food categories (for example, chilled versus ambient) and a supporting assurance program to ensure key controls are operating and effective. A Product and Food Safety Steering Committee was established in FY19 to oversee continuous improvement of food and product safety risks and issues across Coles. Food and plastic waste There is a potential for signiﬁcant reputational risk if we do not reduce food and plastic waste in line with consumer, shareholder and government expectations. Food and plastic waste negatively impacts the environment, economy and society, particularly given the current external waste collection and recycling challenges in Australia. Coles also has an opportunity to become a leader in reducing food and packaging waste within Australia. We have made public commitments to minimise waste and promote recycling including to divert 90% of all waste from landﬁll by 2022 and to help customers recycle by rolling out the Australasian Recycling Label on Own Brand products and have all Own Brand packaging recyclable by the end of 2020. We have waste management strategies in place to support these commitments, which include multiple food donation partnerships (SecondBite, Foodbank and local farmers) that divert food waste from landﬁll, and industry partnerships and internal programs that target recycling (such as REDcycle). Detailed information on how we manage food and packaging waste is provided in our 2019 Sustainability Report. Legal, regulatory and compliance The diversity of our operations necessitates compliance with extensive legislative requirements at all levels of government, including Corporations Law, Competition and Consumer Law including the Grocery Code of Conduct and Country of Origin labelling standards, Product and Food Safety, Environment, Council By-Laws, Privacy and Bio-security. Non-compliance with key laws and regulations could expose Coles to signiﬁcant enforcement action, including loss of licence to operate, substantial ﬁnancial penalties, reputational risk and a deterioration in relationships with regulators. Furthermore, regulatory changes may adversely impact the execution of our strategy and result in increased cost to operate, resulting in adverse ﬁnancial performance. We maintain relationships with regulators and industry bodies, monitor new and impending legislative and policy changes and implement our Compliance Framework, which sets out the standards, requirements and accountability for managing compliance obligations across the Group. Coles has targeted controls in place across the various areas of compliance, including policies, procedures, training and system controls. The framework is subject to assurance to ensure controls are in operation and operating effectively. 33 loss of consumer conﬁdence, loss of market share, regulator ﬁnes and penalties, and reputational damage. We manage the risk of a disruption to our technology environment through continuous monitoring of our technology operations and the existence of a service management function to respond to incidents. A Change Advisory Board manages technology changes, to reduce the risk of system instability especially during peak trading periods. We also have information technology recovery plans in place. Our Group Privacy and Digital Security frameworks include policies, procedures, governance forums, and education and awareness programs to help assess and manage ongoing data and cyber security threats. We regularly test and review our information technology infrastructure, systems and processes to assess security threats and the adequacy of controls. We are also committed to the ongoing delivery of our Cyber Security program to continually improve our people, process and technology controls. Financial Risks Financial and treasury The availability of funding and management of capital and liquidity are important requirements to support our business operations and growth. In addition, we are exposed to material adverse ﬂuctuations in interest rates, foreign exchange rates and commodity movements, which could impact business proﬁtability. We have Treasury policies approved by the Board, which govern the management of our ﬁnancial risks, including liquidity, interest rates, foreign currency, commodity risks and the use of other derivatives. To manage these risks we have a Treasury function that is responsible for managing our cash funding positions and supports the management of these ﬁnancial, interest rate and foreign currency risks. Further information is included in the Notes to the consolidated ﬁnancial statements. Insurance Insurance is a tool to protect our customers, team members and the Group against losses from accidents, natural disasters and other unplanned events. In some cases, we choose to self-insure risks. This means that, in the event of an incident, we cannot make a claim against a third-party insurer but we will pay or absorb the losses ourselves. We monitor our self-insured risks and have active programs to help us pre-empt and mitigate losses. Our Insurance function is also responsible for managing the purchase of insurance where we determine this is prudent. Litigation If Coles is a party to litigation, it can involve brand reputation, investment of ﬁnancial costs, potential penalties and high Company resources and time. Our legal team works in partnership with our compliance teams to monitor and manage any legal issues, matters, claims or disputes. We are supported by pre-agreed panel arrangements with external legal ﬁrms and undertake risk analysis on any potential litigation claims to understand loss potential. Third-party management Coles is reliant on third parties to provide us with products, goods and services and to manage delivery. This may expose Coles to risks related to compromised safety and quality, misalignment with ethical and sustainability objectives, disruptions to supply or operations, unrealised beneﬁts, mishandling or inadequate security of data and conﬁdential information, and legal and regulatory exposure. We have due diligence processes to assess the adequacy and suitability of suppliers in accordance with our requirements and contractual protections, and we monitor and manage quality and performance of third parties throughout their engagement with Coles. Ethical sourcing We are a responsible retailer and continually aim to ensure we are sourcing and operating ethically in all areas, with speciﬁc emphasis on compliance with the Modern Slavery legislation and Fair Work Act, including working with our third parties to ensure they are also acting responsibly and in compliance with the law. An ethical sourcing incident in our supply chain or operations, such as committing human rights abuses or breaching labour rights, can result in material reputational damage, loss of consumer conﬁdence and market share, regulatory ﬁnes and penalties, and adverse ﬁnancial performance. We have an Ethical Sourcing policy, program and requirements, which establish the minimum standards for all suppliers providing Own Brand products, fresh produce and meat sold in Coles supermarkets. A whistle-blower hotline enables reporting of breaches of ethical obligations. Our Human Rights Steering Committee oversees ethical sourcing governance, including human rights risks, issues and improvement actions across Coles. Plans are in place to roll out the ethical sourcing program more broadly across Coles. Technology resilience, data and cyber security Coles relies on our own, as well as third-party, information technology applications and infrastructure for its operations, including processing customer transactions, maintaining our websites, product ordering, warehouse management and logistics systems, and maintaining other back-office functions. Any failure of or disruption to these systems, including a cyber security event, could impede the processing of customer transactions or limit our ability to procure or distribute stock for our stores. Furthermore, our technology and data-rich environment also expose us to the risk of unintentional or unauthorised release of secret, conﬁdential, ﬁnancial, or private information, which can result in Coles Group Limited 2019 Annual Report 34 Proud moment Fruit and vegetable grower Brian Crust and his sons Matthew and Clinton hope to increase their water storage by 20% by using $183,000 support from the Coles Nurture Fund to line a dam on their property at Mt Sylvia near Toowoomba in Queensland. They also installed a new pumping station to reduce their use of water and power. Coles Group Limited 2019 Annual Report 35 Climate change. As one of Australia’s largest companies, we know we have a responsibility to minimise our environmental footprint. Our business is impacted by climate change, and we need to adapt to be able to respond to extreme weather events and maintain security of food supply as our climate changes in order to sustainably feed all Australians. Climate change presents an evolving set of risks and opportunities for Coles. These range from potential disruption to our operations due to extreme weather events, to changes to government policy, law and regulation. We understand that stakeholders expect us to manage and mitigate climate change risks in line with local and global commitments and recommendations. We support the United Nations Sustainable Development Goals and the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). The information in this section responds to the four thematic areas against which the TCFD recommendations are structured. Going forward, we will work towards more comprehensive disclosures. Governance The Board has oversight of material risks, including climate change, through the Audit and Risk Committee. Members of this committee are listed on page 43, and further information is available in the Corporate Governance Statement on our website www.colesgroup.com.au/corporategovernance. In recognition of the importance of climate change as an emerging issue, we have a Climate Change Steering Committee chaired by our Chief Property and Export Officer, who reports includes to the Chief Executive Officer. The committee representatives from across Coles, including senior members of the risk and compliance, ﬁnance and operational functions, and will prepare quarterly updates on material risks for the Audit and Risk Committee. Risk management Our Risk Management Framework and Risk Management Policy detail our approach to identifying, assessing and managing risk, including climate-related risks. Our approach to risk management can be found on page 30 and in the corporate governance section of our website. While we have tactical plans to manage climate-related risks and opportunities, as detailed in the following section, the Climate Change Steering Committee is preparing a more comprehensive Climate Change Strategy, which will be informed by further risk analysis and scenario planning and will include new greenhouse emission reduction targets. An external consultant will assist us with this work. Following the development of the Climate Change Strategy, we expect to provide more detailed information in next year’s Annual and Sustainability Reports. Strategy In FY19, following the Coles demerger from Wesfarmers and as part of the development of the corporate risk proﬁle, climate change was identiﬁed as a material business risk. The risk proﬁle was presented to and endorsed by the Audit and Risk Committee in May 2019 and approved by the Board in June 2019. We acknowledge that climate change is a complex and multidimensional risk to the business and to our supply chains and includes risks related to: • potential disruption to our operations due to extreme weather events and changing weather patterns; Coles Group Limited 2019 Annual Report 37 Proud moment The Crowe family, located near Coolac in New South Wales, has established an automated factory with support from the Coles Nurture Fund. This is allowing them to produce fodder indoors to supplement grass for their cattle. Coles Group Limited 2019 Annual Report 36 DAM Crust Farms received support from the Coles Nurture Fund for drought-prooﬁng initiatives. • • changing customer behaviours as demand moves to food and products with lower carbon footprints; changes to government policy, law and regulation (including pricing carbon) that could result in increased operational costs and potential for litigation; and • failure to meet expectations of stakeholders. We recognise that the impacts of climate change are varied and long-ranging over different time horizons. The risks identiﬁed could prevent us from meeting our strategic objectives and could result in reputational damage and adverse operational, compliance and ﬁnancial impacts. The risks identiﬁed are consistent with the assessment of the TCFD, which groups risks into two major categories: risks related to the transition to a lower-carbon economy (policy and legal, technology, market and reputation) and physical risks (acute and chronic). We also understand that, in managing these risks, there are associated opportunities, such as improved energy efficiency, reduced water use and improved recycling. These are detailed in our 2019 Sustainability Report. We apply an internal carbon price to inform decisions on selected large capital projects and plan to continue this approach. Our Energy Strategy includes our approach to energy purchasing and maintaining security of energy supply. During FY19, Coles’ supply chain entered into an electricity demand response program run by the Australian Energy Market Operator to assist it to reduce energy load during times of high demand. Maintaining supply to customers We understand that climate change and extreme weather events can impact supply security and our ability to provide goods to our customers. This could include severe or total disruption to the production and transportation of goods due to extreme weather events, as well as production risks associated with climate change. We seek to manage these risks through business continuity processes for sourcing and delivering goods to stores in the event of extreme weather events, such as ﬂoods, storms and bushﬁres. For example, following ﬂoods in far north Queensland in early 2019, special road trains and air freight were organised to transport food and groceries to our supermarkets. We work with suppliers impacted by extreme weather events. In early 2018 and early 2019, apple suppliers in South Australia were hit by severe hailstorms. As a result, we introduced the ‘hailstorm heroes’ apple range, providing suppliers with the opportunity to sell hail-damaged fruit. An excessively hot summer in FY19 also impacted the growth of citrus and apples. We amended our speciﬁcations to allow smaller fruit to be sold in our stores. To minimise the impact of climate change on supply of products over the longer term, we are supporting suppliers in developing new technology and growing methods and supporting industry with climate change resilience strategies. Lack of action could include loss of market share, increased costs and price volatility. Through the Coles Nurture Fund, we are supporting suppliers with climate adaptation programs, particularly to mitigate the impact of drought. More information can be found in the 2019 Sustainability Report. We participate in the Australian Beef Sustainability Framework, an initiative of the Red Meat Advisory Council managed by Meat and Livestock Australia. The framework has identiﬁed six priority areas to drive continuous improvement across the value chain. We consider the framework as the most appropriate way to address climate and environmental issues facing the beef industry from a national and industry-wide perspective. Metrics and targets We had set a target to reduce greenhouse emissions by 30% from a 2009 baseline by 2020. Through a focus on reducing all emissions, particularly emissions associated with refrigeration, we were able to meet this target in 2016. This included refrigeration upgrades and replacement and investment in leak detection technology. New greenhouse targets are being developed as part of our Climate Change Strategy, and details on our energy and greenhouse emissions reduction activities can be found in our 2019 Sustainability Report. Coles Group Limited 2019 Annual Report 38 Coles Group Limited 2019 Annual Report 39 Corporate governance. The Board and the management team of Coles are committed to the highest standards of corporate governance and believe that a robust and transparent corporate governance framework is central to the success of our business. We are committed to maintaining and building on the conﬁdence of our shareholders, our customers, our suppliers, our team members and the broader community as we strive to achieve our vision to become the most trusted retailer in Australia and to grow long-term shareholder value. FY19 corporate governance highlights Corporate governance framework FY19 was a signiﬁcant year for Coles with its demerger from Wesfarmers Limited and listing on the ASX as an independent company. As a standalone entity, Coles has established a strong governance framework and continues to be committed to a high level of integrity and ethical standards in all its business practices. The FY19 corporate governance highlights and focus areas included: Board Strategy Establishing the new Board of Directors, appointing a new Managing Director and Chief Executive Officer (CEO) Steven Cain and adopting new Board and Committee Charters and Group policies. Announcing our refreshed strategy to 'Win in our second century', which is underpinned by our vision to become the most trusted retailer in Australia and grow long-term shareholder value. Risk management Reviewing and updating the Group’s risk management processes and procedures. Diversity and Inclusion Continuing our progress towards achieving our Better Together commitments and objectives, including in relation to gender diversity, with the proportion of men and women across Coles' workforce for FY19 being 49% men, 51% women. Reviewing gender pay equity to identify, target and reduce any gender pay gaps within the organisation. Remuneration Reviewing the executive remuneration framework so that there is a greater focus on performance-based pay, including the development of new principles to guide future decisions in relation to remuneration. Introducing a minimum shareholding policy for executives and Directors to drive greater alignment with shareholders. The 2019 Corporate Governance Statement contains a comprehensive overview of Coles' corporate governance framework and FY19 highlights and is available on our website www.colesgroup.com.au/corporategovernance. Shareholders The Board Nomination Committee Audit and Risk Committee People and Culture Committee Managing Director and Chief Executive Officer Executive Leadership Team Coles Team Members Board role and responsibilities Board composition The Board provides leadership and approves the strategic direction and objectives of the Group in the long-term interests of, and to maximise value to, shareholders. The Board is accountable to shareholders for the overall performance of the Company, having regard to the interests of other stakeholders, including team members, customers, suppliers and the broader community. The Constitution states that the number of Directors shall be not less than three Directors and not more than 10 Directors. Other than the Managing Director, Directors may not retain office without re-election for more than three years or past the third annual general meeting following their last election or re-election. Any newly appointed Directors are required to seek re-election at the ﬁrst annual general meeting after their appointment. The Board has a Charter that outlines the responsibilities of the Board, including powers that are expressly reserved to the Board and powers that are speciﬁcally delegated to the CEO and management. The Board will review periodically its composition and the duration of terms served by Directors, upon recommendation from the Nomination Committee. Our Board of Directors. Left to right: David Cheesewright, Jacqueline Chow, Wendy Stops, James Graham (Chairman), Steven Cain (Managing Director and CEO), Zlatko Todorcevski, Abi Cleland and Richard Freudenstein. Coles Group Limited 2019 Annual Report 40 Coles Group Limited 2019 Annual Report 41 James Graham AM David Cheesewright BE (Chem) (Hons), MBA, FIEAust, FTSE, FAICD, SF Fin BSc Mathematics and Sports Science (1st) Abi Cleland MBA, BCom/BA Wendy Stops BAppSc (Information Technology), GAICD Chairman, Chairman, Nomination Committee and Member of the People and Culture Committee Non-executive Director, Member of the Nomination Committee and the People and Culture Committee Non-executive Director, Member of the Nomination Committee and the People and Culture Committee Non-executive Director, Member of the Nomination Committee and the Audit and Risk Committee Age: 71 Age: 57 Age: 45 Age: 58 investment, corporate and James Graham has extensive governance experience, including as a Non-executive Director of Wesfarmers Limited for 20 years, prior to his retirement in July 2018. James is Chairman of Gresham Partners Limited, having founded the Gresham Partners Group in 1985. From 2001 to 2009, he was a Director of Rabobank Australia Limited, initially as Deputy Chairman and then Chairman, responsible for the Bank’s operations in Australia and New Zealand. He was also Chairman of the Darling Harbour Authority between 1989 and 1995. James was made a member of the Order of Australia in 2008. Directorships of listed entities, current and recent (last three years): Director of Wesfarmers Limited (May 1998 to July 2018) Steven Cain MEng (1st) Managing Director and CEO Age: 54 Steven Cain has over 20 years experience in Australian and international retail. Steven was previously Chief Executive Officer of Supermarkets and Convenience at Metcash Limited. He was Chief Executive of Carlton Communications plc, a FTSE 100 media group company, and Operating Director and Portfolio Company Chairman at Paciﬁc Equity Partners, a private equity ﬁrm. He was Group Marketing Director, Store Development Director and Grocery Trading Director of Asda Stores Ltd (UK) during its turnaround and has held roles at UK retail group Kingﬁsher plc, and Bain & Company. Steven was previously the Managing Director of Food, Liquor and Fuel at Coles Myer and was an advisor to Wesfarmers Limited on its takeover of the Coles Group in 2007. David Cheesewright retired in early 2018 as President and Chief Executive Officer of Walmart International, which comprises Walmart’s operations outside the United States, including more than 6,200 stores and more than 796,000 employees in 27 countries. David was also responsible for Walmart’s global sourcing operations and offices around the world. He was previously President and CEO of Walmart EMEA (Europe, Middle East and Africa) and Canada region, overseeing the integration of the Massmart acquisition, as well as growth in the UK and Canada. David’s other prior roles include Chief Operating Officer of Asda in the UK and a range of key positions with Mars Confectionery in the UK. David is also a previous board member of Chinese online grocery business Yihaodian, South African retailer and distributor Massmart, Queens Business School, The Retail Council of Canada and ECR Europe and is a prior Chair of Walmart Canada Bank. David currently sits on the Dean’s Advisory Board at the Queen’s University School of Business. Jacqueline Chow MBA, BSc (Hons), GAICD Non-executive Director, Member of the Nomination Committee and the Audit and Risk Committee Age: 47 Jacqueline Chow is a Director of nib Holdings Limited (appointed 2018) and a Senior Advisor at McKinsey Consulting RTS, advising clients across industrial, retail, telecommunications, ﬁnancial services and consumer sectors on performance transformation projects. From 2016 to June 2019, Jacqueline was a Director of Fisher & Paykel Appliances. Jacqueline previously held senior management positions with Fonterra Co-operative Group, one of the world’s largest dairy product producers and exporters, including most recently as Chief Operating Officer, Global Consumer and Food Service. Prior to that, she was in senior management with Campbell Arnott’s and Kellogg Company. She was also Programme Steering Group Director, Ministry for Primary Industries, NZ (2013 to 2016) and Deputy Chair, Global Dairy Platform Inc (2014 to 2018). Directorships of listed entities, current and recent (last three years): Director of nib Holdings Limited (since April 2018) Abi Cleland is a Director of Computershare Limited (appointed 2018), Sydney Airport Corporation Limited (appointed 2018) and Orora Limited (appointed 2014). Abi is also a Director of Swimming Australia and Chairman of Planwise Australia. Abi’s previous board appointments include Australian Independent Business Media and membership of the advisory committee of Lazard PE Fund 2. From 2012 to 2017, Abi established and ran an advisory and management business, Absolute Partners, focusing on strategy, mergers and acquisitions and disruption. Before that, she held senior management roles at KordaMentha’s 333, where she was Managing Director, and at ANZ, Incitec Pivot Limited and Amcor Limited. Directorships of listed entities, current and recent (last three years): Director of Computershare Limited (since February 2018); Director of Sydney Airport Corporation Limited (since April 2018); Director of Orora Limited (since February 2014); Director of BWX Limited (August 2017 to December 2017) Richard Freudenstein LLB (Hons), BEc Non-executive Director, Chairman, People and Culture Committee and Member of the Nomination Committee Age: 54 Richard Freudenstein has been a Director of REA Group Limited since 2006, including as Chairman from 2007 to 2012. He is also currently a board member of Cricket Australia, Deputy Chancellor of the University of Sydney and a member of the Advisory Committee of start-up artiﬁcial intelligence software company Aﬁniti Ltd. Richard was previously Chief Executive Officer of Foxtel (2011 to 2016), Chief Executive Officer of The Australian and News Digital Media at News Ltd (2006 to 2010), and Chief Operating Officer at British Sky Broadcasting plc (2000 to 2006). His previous board positions include Ten Network Holdings (2015 to 2016), Foxtel (2009 to 2011) and ESPN STAR Sports ESS (2009 to 2012). Directorships of listed entities, current and recent (last three years): Director of REA Group Limited (since November 2006); Director of Astro Malaysia Holdings Berhad (September 2016 to August 2019) Wendy Stops is a Director of Commonwealth Bank of Australia Limited (appointed 2015) and Altium Limited (appointed 2018). She is also a Director of Fitted for Work, a Council member at the University of Melbourne and Chair of the Advisory Board for the Melbourne Business School’s Centre for Business Analytics. Wendy was previously a senior management executive in the information technology and consulting sectors, including 16 years with Accenture in various senior management positions in Australia, Asia Paciﬁc and globally. Her previous board experience includes Accenture Software Solutions Australia and Diversiti. She is currently a member of Chief Executive Women. Directorships of listed entities, current and recent (last three years): Director of Commonwealth Bank of Australia Limited (since March 2015); Director of Altium Limited (since February 2018) Zlatko Todorcevski MBA, BCom Non-executive Director, Chairman, Audit and Risk Committee and Member of the Nomination Committee Age: 51 Zlatko Todorcevski is Deputy Chairman and Lead Independent Director of Adelaide Brighton Ltd, having served as Chairman from May 2018 to May 2019. He is also a Director of The Star Entertainment Group Ltd and a Council member of the University of Wollongong. Zlatko’s previous appointments include President of the Group of 100 and Chairman of the ASIC Accounting and Audit Standing Committee. Zlatko’s executive career included four years as Chief Financial Officer of Brambles Ltd and from 2009 to 2012 as Chief Financial Officer of Oil Search Ltd. From 1986 to 2009, he held various senior roles at BHP, including Chief Financial Officer of Energy based in London and Houston. Directorships of listed entities, current and recent (last three years): Deputy Chairman of Adelaide Brighton Limited (since March 2017); Director of Star Entertainment Group (since May 2018) Coles Group Limited 2019 Annual Report 42 Coles Group Limited 2019 Annual Report 43 Board skills matrix The Board recognises the importance of having Directors who possess a broad range of skills, background, expertise, diversity and experience in order to facilitate constructive decision making and facilitate good governance processes and procedures. The Board, on the recommendation of the Nomination Committee, determines the composition, size and structure requirements for the Board and will regularly review its mix of skills to make sure it covers the skills needed to address existing and emerging business and governance issues relevant to the entity. The current mix of skills and experience represented on the Board is set out in the below skills matrix: Number of Directors with the requisite skill Corporate governance Executive experience Financial acumen Strategic thinking People, culture and remuneration Risk management Retail and FMCG skills and experience Customer service delivery Supply chains Interstate / global business experience Property development and asset management Marketing Digital technology and innovation Sustainability, environment, health and safety Regulatory and public policy 8 8 8 8 8 8 6 7 6 8 4 6 8 7 7 Skill/ experience Explanation Experience serving on boards in diverse industries and for a range of organisations, including public listed entities or other large, complex organisations. An awareness of global practices and trends. Experience in implementing high standards of governance in a large organisation and assessing the effectiveness of senior management. Effective senior leadership in a large, complex organisation or public listed company. Successfully leading organisational transformation and delivering sustained business success, including through line management responsibilities. Senior executive or other experience in ﬁnancial accounting and reporting, internal ﬁnancial and risk controls, corporate ﬁnance and/ or restructuring, corporate transactions, including ability to probe the adequacies of ﬁnancial and risk controls. Demonstrated ability to identify and critically assess strategic opportunities and threats and to develop and implement successful strategies to create sustained, resilient business outcomes. Ability to question and challenge delivery against agreed strategic planning objectives. Experience overseeing or implementing a company’s culture and people management framework, including succession planning to develop talent, culture and identity. Board or senior executive experience in applying remuneration policy and framework, including linking remuneration to strategy and performance, and the legislative and contractual framework governing remuneration. Understanding of and experience in identifying and monitoring key risks to an organisation and implementing appropriate risk management frameworks and procedures and controls. Senior management experience in the retail and fast moving consumer goods (FMCG) industry, particularly in the food and liquor industry, including an in-depth knowledge of merchandising, product development, exporting, logistics and customer strategy. Board committees The Board has established three committees and has delegated to each committee a number of duties to assist the Board in exercising its responsibilities and discharging its duties. Together, they play an important role in assisting the Board’s oversight and governance of the Group’s operations. Each committee has a separate charter that sets out the roles and responsibilities of that committee, as well as the membership and any other requirements for the running of the committee. All committees are chaired by, and comprise a majority of, independent Non-executive Directors. Each committee keeps the Board informed of its activities through the provision of the minutes of each meeting, and the Chairman of each committee formally advises the Chairman of the Board of any matters or recommendations requiring the Board’s attention. The Remuneration Committee was renamed the 'People and Culture Committee' in August 2019 to more accurately reﬂect the Committee’s role and responsibilities. The members of each committee are set out in the table below. Nomination Committee James Graham (Chairman) David Cheesewright Jacqueline Chow Abi Cleland Richard Freudenstein Wendy Stops Zlatko Todorcevski Zlatko Todorcevski (Chairman) Jacqueline Chow Wendy Stops Advanced understanding of customer service delivery models, benchmarking and oversight. Audit and Risk Committee People and Culture Committee Richard Freudenstein (Chairman) David Cheesewright Abi Cleland James Graham Senior executive experience in managing or overseeing the operation of supply chains and distribution models in large, complex entities, including retail suppliers. Senior manager or equivalent experience in national or international business, providing exposure to a range of interstate or international political, regulatory and business environments. Experience in property development and asset management. Senior executive experience in consumer and brand marketing and in e-commerce and digital media, including in the retail industry. Expertise and experience in the adoption and implementation of new technology. Understanding of key factors relevant to digital disruption and innovation, including opportunities to leverage digital technologies and cyber security and understanding the use of data and analytics. Identiﬁcation of key health and safety issues, including management of workplace safety, and mental and physical health. Experience in managing and driving environmental management and social responsibility initiatives, including in relation to sustainability and climate change. Senior management experience working in diverse political, cultural, regulatory and business environments. Experience in regulatory and competition policy and inﬂuencing public policy decisions and outcomes, particularly in relation to regulation relevant to food and liquor industries. A culture of acting lawfully, ethically and responsibly Our LEaD framework LEaD provides a framework for the behaviours and actions expected of all team members, including executives and Directors. The LEaD framework comprises three key pillars that drive the way we work to execute our strategy, deliver against our purpose and build long-term sustainable value for our shareholders. The three pillars are: Look ahead, Energise everyone and Deliver with pride. is all about being Look ahead focused: knowing the landscape, being less reactive and more planned and communicating the vision well. future Energise everyone is all about bringing people on the journey: collaborating across the business, supporting and empowering everyone, while taking the time to celebrate the wins along the way. Deliver with pride is all about executing: being accountable and holding each other to account, staying the course and having fun while we do it. LEaD underpins our recruitment, induction, training and development programs for all team members and managers. By meeting these behaviours, we can build deeper long- term relationships with our suppliers, provide an outstanding customer experience and have caring and passionate team members. Our behaviours and the LEaD framework reﬂect the expectations of our customers, investors, regulators and the community. Our LEaD behaviours Look ahead Energise everyone Know your stuff Have a plan Explain the why Build it together Empower and support Celebrate progress Deliver with pride Own it Stay the course Have fun with it Code of Conduct Coles has a Code of Conduct that sets out the standards of behaviour expected of its Directors and team members (including senior executives). This is supported by key policies, including our Whistleblower Policy; Anti-bribery Policy; Health, Safety and Wellbeing Policy; Securities Dealing Policy; as well as a number of other Company policies which outline expected standards of behaviour of Directors and team members. Coles Group Limited 2019 Annual Report 44 Our Executive Leadership Team. Steven Cain Managing Director and Chief Executive Officer Leah Weckert Chief Financial Officer Greg Davis Chief Executive - Commercial and Express Matthew Swindells Chief Operations Officer Thinus Keeve Chief Property and Export Officer Lisa Ronson Chief Marketing Officer Kris Webb Chief People Officer Roger Sniezek Chief Information and Digital Officer David Brewster Chief Legal Officer Cathi Scarce Acting Chief Executive Liquor Alister Jordan Chief Executive Online and Corporate Affairs Ian Bowring Group Executive, Transformation Daniella Pereira Company Secretary Directors’ report. Coles Group Limited 2019 Annual Report 46 Coles Group Limited 2019 Annual Report 47 The Directors present their report on the consolidated entity consisting of Coles Group Limited ('Coles' or the 'Company') and its controlled entities at the end of, or during the financial year ended, 30 June 2019 (the 'Group'). The information referred to below forms part of and is to be read in conjunction with this Directors’ Report: • the Operating and Financial Review comprising the Message from the Chairman (pages 6 to 7), the Managing Director and Chief Executive Officer's report (pages 8 to 10), Our financial and operating performance (pages 20 to 28), Looking to the future (page 29) and How we manage risk (pages 30 to 36); • the Remuneration Report (pages 50 to 62); • biographical details of the current Directors (pages 40 to 41) and the Company Secretary (page 46); • Note 9.5 (Events after the reporting period) to the financial statements accompanying this report; • Note 9.3 (Auditor’s remuneration) to the financial statements accompanying this report; and • the auditor’s independence declaration required under section 307C of the Corporations Act 2001 (Cth) (page 49). Directors The Directors in office as at the date of this report are: Name Position held Period as a director during FY19 James Graham Steven Cain David Cheesewright Jacqueline Chow Abi Cleland Richard Freudenstein Wendy Stops Zlatko Todorcevski Chairman and independent, Non- executive Director Managing Director and Chief Executive Officer Non- executive Director (Wesfarmers Nominee) Independent, Non- executive Director Independent, Non- executive Director Independent, Non- executive Director Independent, Non- executive Director Independent, Non- executive Director Appointed 19 November 2018 Appointed Chief Executive Officer 17 September 2018 Appointed Managing Director and Chief Executive Officer 2 November 2018 Appointed 19 November 2018 Appointed 19 November 2018 Appointed 19 November 2018 Appointed 19 November 2018 Appointed 19 November 2018 Appointed 19 November 2018 Information about the Directors’ qualifications, experience, special responsibilities and other directorships is set out on pages 40 to 43. The following persons were also Directors during FY19: Directors’ meetings Name Position held Period as a director during FY19 Rob Scott Director 1 July 2018 to 19 November 2018 Anthony Gianotti Director 1 July 2018 to 19 November 2018 John Durkan Director 1 July 2018 to 17 September 2018 Leah Weckert Director 17 September 2018 to 19 November 2018 Company Secretary Daniella Pereira LLB (Hons), BA Daniella Pereira was appointed the Company Secretary of Coles Group Limited on 19 November 2018. Daniella has an extensive career in legal, governance and company secretariat, including a 14-year career with ASX-listed industrial chemicals company Incitec Pivot Limited. Daniella began her career as a lawyer with Ashurst (formerly Blake Dawson), advising on corporate transactions. The number of Directors’ meetings (including meetings of committees of Directors) and the number of meetings attended by each of the current Directors of the Company from 20 November 2018 (the day of the first Board meeting after the demerger was approved by Wesfarmers Limited (Wesfarmers) shareholders) to 30 June 2019 are listed below: Director Board Audit and Risk Committee People and Culture Committee1 Nomination Committee Held Attended Held Attended Held Attended Held Attended James Graham Steven Cain David Cheesewright Jacqueline Chow Abi Cleland Richard Freudenstein Wendy Stops Zlatko Todorcevski 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 9 5 5 5 5 5 3 5 5 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2 2 2 2 1 On 22 August 2019, the Remuneration Committee was renamed People and Culture Committee to more accurately reflect the committee’s roles and responsibilities. Directors’ shareholdings in Coles Details of Directors’ shareholdings in Coles as at the date of this Directors’ Report are shown in the table below. All Directors have met the minimum shareholding requirement under the Board Charter. Director James Graham Steven Cain2 David Cheesewright Jacqueline Chow Abi Cleland Richard Freudenstein Wendy Stops Zlatko Todorcevski Number of shares held1 460,188 50,000 20,000 20,000 19,816 19,000 20,000 19,201 1 The number of shares held refers to shares held either directly or indirectly by Directors as at 20 September 2019. Refer to the Remuneration Report tables for total shares held by Directors and their related parties directly, indirectly or beneficially as at 30 June 2019. 2 Steven Cain also holds 85,057 Restricted Shares and 85,057 Performance Shares. Principal activities The principal activities of Coles during the financial year were providing customers with everyday products, including fresh food, groceries, general merchandise, liquor, fuel and financial services through its store network and online platforms. Coles demerged from Wesfarmers during the financial year. Refer to the section titled State of Affairs below for further information. Additionally, on 6 February 2019, the Company entered into an agreement to restructure the terms of its Alliance Agreement with Viva Energy. Under the New Alliance Agreement which commenced on 1 March 2019, Viva Energy is responsible for setting the retail price of fuel and receives the retail fuel margin. The Company has been appointed as Viva Energy’s agent for selling fuel at Alliance sites. Ongoing commission per litre is payable to the Company. On 5 March 2019, the Company announced its agreement to enter into an incorporated joint venture with Australian Venue Co. Ltd (AVC), for the operation of: • the 87 hotels that comprised the Group’s hotel and gaming business (Spirit Hotels); and • the 243 retail liquor stores in Queensland, and the 10 retail liquor stores in South Australia and Western Australia attached to Spirit Hotels’ venues, which operate under the Liquorland, First Choice, First Choice Liquor Market and Vintage Cellars brands (collectively, the Retail Liquor business). These operations were previously held within a wholly-owned subsidiary of the Group, Liquorland (Qld) Pty Ltd, and its controlled entities (collectively LLQ). Under the new structure, LLQ has been converted into an incorporated joint venture company, Queensland Venue Co. Pty Ltd (QVC). Under the new structure, Coles has rights to the economic performance of the Retail Liquor business and AVC has rights to the economic performance of Spirit Hotels. The transaction was completed on 29 April 2019. There were no other significant changes in the nature of the principal activities of Coles during the financial year. State of affairs Demerger A significant change in the state of affairs of Coles Group Limited was its demerger from Wesfarmers during the financial year. Details of the demerger proposal were set out in the Demerger Scheme Booklet dated 5 October 2018, which was distributed to Wesfarmers shareholders. The demerger was approved by Wesfarmers shareholders on 15 November 2018. On Wednesday 21 November 2018, Coles Group Limited listed as a separate standalone entity on the ASX. Economic separation was effective on Wednesday 28 November 2018. To implement the demerger, changes were made to the corporate structure of Coles. In particular, ownership of Kmart, Target and Officeworks and associated entities (KTO) was transferred to Wesfarmers. The results of the Group for the year ended 30 June 2019 therefore include the results of the KTO businesses up until the date of transfer, being 19 November 2018. These businesses have been reported as discontinued operations in the Financial Report. Deed of Cross Guarantee On 17 December 2018, certain of Coles’ Australian wholly owned subsidiaries entered into a Deed of Cross Guarantee (Deed) with Coles in accordance with ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (ASIC Instrument). Under the ASIC Instrument, relief has been granted from specific accounting and financial reporting requirements. Refer to Note 7.4 of the financial statements on pages 90 to 91 for further information in relation to the Deed. There were no other significant changes in the state of affairs of the Group during the year. Coles Group Limited 2019 Annual Report 48 Coles Group Limited 2019 Annual Report 49 Review and results of operations Indemnification of Auditors A review of the operations of the Group during the financial year, the results of those operations and the Group’s financial position are contained in the Operating and Financial Review (OFR), comprising the Message from the Chairman, the Managing Director and Chief Executive Officer's report, Our financial and operating performance, Looking to the future and How we manage risk. Business strategies and prospects for future financial years The OFR sets out information on the business strategies and prospects for future financial years and refers to likely developments in Coles’ operations and the expected results of those operations in future financial years. Information in the OFR is provided to enable shareholders to make an informed assessment about the business strategies and prospects for future financial years of the Group. Information that could give rise to likely material detriment to the Group, for example, is commercially sensitive, confidential or could give a third party a commercial advantage, has not been included. Other than the information set out in the OFR, information about other likely developments in the Group’s operations and the expected results of these operations in future financial years has not been included. information that Dividends On 22 August 2019, the Directors declared a total fully franked dividend of 35.5 cents per share, comprising a final dividend of 24.0 cents per share and a special dividend of 11.5 cents per share, which covers the period from 28 November 2018 to 30 June 2019. Environmental regulations The activities of the Company are subject to a range of environmental regulations under the law of the Commonwealth of Australia and its states and territories. The Group is also subject to various state and local government food licensing requirements, and may be subject to environmental and town planning regulations incidental to the development of shopping centre sites. The Group has not incurred any significant liabilities under any environmental legislation during the financial year. The Group has introduced a range of initiatives to make a positive difference on waste and recycling, resource efficiency and responsible and ethical sourcing. More specific details about our sustainability initiatives and performance can be found in the 2019 Sustainability Report. Indemnification and insurance of officers The Company’s Constitution requires the Company to indemnify any person who is, or has been, an officer of the Company, including the Directors, the Company Secretary and other executive officers, against the liabilities incurred whilst acting as such officers to the extent permitted by law. In accordance with the Company’s Constitution, the Company has entered into a Deed of Indemnity, Insurance and Access with each of the Company’s Directors, Company Secretary, Chief Financial Officer and certain executives. No Director or officer of the Company has received benefits under an indemnity from the Company during or since the end of the financial year. The Company has paid a premium in respect of a contract insuring current and former directors, company secretaries and executives of the Company and its subsidiaries against liability that they may incur as an officer of the Company, including liability for costs and expenses incurred by them in defending civil or criminal proceedings involving them as such officers, with certain exceptions. It is a condition of the insurance contract that no details of the premiums payable or the nature of the liabilities insured are disclosed. Pursuant to the terms of engagement Coles has with its auditors, Ernst and Young (EY), Coles has agreed to indemnify EY to the extent permitted by law and professional regulations, against any losses, liabilities, costs or expenses incurred by EY where they arise out of or occur in relation to any negligent, wrongful or wilful act or omission by Coles. No payment has been made to EY by Coles pursuant to this indemnity, either during or since the end of the financial year. Non-audit services and Auditor’s independence Details of the non-audit services undertaken by, and amounts paid to EY are detailed in Note 9.3 to the financial statements in section 9. The Board is satisfied that the provision of non–audit services during the year by the Auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 (Cth) for the following reasons: • all non-audit services provided by EY were reviewed and approved to ensure they do not impact the integrity and objectivity of the Auditor; and • the non–audit services provided did not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants as they did not involve reviewing or auditing the Auditor’s own work, acting in a management or decision making capacity of the Company, acting as an advocate of the Company or jointly sharing risks or rewards. A copy of the Auditor’s independence declaration is contained on page 49 and forms part of this report. Proceedings on behalf of Coles No application has been made under section 237 of the Corporations Act 2001 (Cth) in respect of Coles, and there are no proceedings that a person has brought or intervened in on behalf of Coles under that section. Rounding The amounts shown in this report and in the financial statements have been rounded off, except where otherwise stated, to the nearest one hundred thousand dollars, with the Company being in a class specified in the ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. Signed on behalf of the Board in accordance with a resolution of the Directors of the Company. James Graham AM Chairman 20 September 2019 Steven Cain Managing Director and Chief Executive Officer 20 September 2019 Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au Auditor’s Independence Declaration to the Directors of Coles Group Limited As lead auditor for the audit of the financial report of Coles Group Limited for the financial year ended 30 June 2019, I declare to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Coles Group Limited and the entities it controlled during the financial year. Ernst & Young Fiona Campbell Partner 20 September 2019 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Coles Group Limited 2019 Annual Report 50 Remuneration Report 2019. Letter to shareholders from the Chair of the People and Culture Committee Dear shareholder, Looking to the future On behalf of the Board, I am pleased to present to you the inaugural Remuneration Report for Coles. The Remuneration Report provides you with information on the remuneration arrangements for our Key Management Personnel (‘KMP’) which include the Managing Director and Chief Executive Officer (‘Managing Director and CEO’), Other Executive KMP and Non- executive Directors of the Company. A year of transition As FY19 was a year of signiﬁcant transition for Coles, we have outlined the remuneration framework that was in place for FY19, the remuneration outcomes for FY19 and a summary of the changes to the KMP remuneration arrangements that we propose to make for future years. The remuneration arrangements put in place by Wesfarmers for FY19 were intended to be transitionary only. The remuneration structure for our Executive KMP at the time of demerger reﬂected minimal change from prior years, provided much needed stability and focused our leadership team on the task at hand to support our successful demerger. Outcomes for FY19 For the purposes of calculating short-term incentive awards for Executive KMP, the Board assessed performance against a number of metrics including EBIT, safety, team member engagement and other key strategic measures that set the foundation for strong growth as a newly listed public company. Statutory EBIT performance (pre-Signiﬁcant Items) for the Group was below the target level set by the Board as part of the demerger from Wesfarmers, but above the threshold target. Notwithstanding outperformance in the Supermarkets category, this had a material impact on the overall STI outcome for the Executive KMP. In a strong display of leadership across a year of such signiﬁcant change, the Board is pleased to report that management were able to deliver outperformance against both safety and engagement. Safety performance improved by 20.3% and team member engagement increased by three percentage points when compared to the prior year. Key strategic outcomes were also achieved with our ﬁrst proﬁtable year in Coles Online, a reset of the Group strategy and new alliances with Australian Venue Co. for the Spirit Hotels business and Viva Energy for Coles Express. While the FY19 remuneration arrangements were appropriate for supporting Coles’ transition as a separate listed company, as a newly formed People and Culture Committee, we have spent considerable time and effort this year considering what a fresh, ﬁt-for-purpose remuneration framework for a successful Coles looks like. In doing so, we recognise that our remuneration framework needs to support sustainable short and long-term performance for Coles and outcomes for our shareholders as we put in place a new strategy to transform the business. We know that we will need a market competitive framework to attract the best talent to help us do this. We also understand that the external environment we are operating in is changing – with heightened community, regulatory and shareholder expectations of executive remuneration. We have developed principles to guide future decisions in relation to remuneration at Coles: be market competitive, be performance-based, create long-term value for shareholders, and be ﬁt-for-purpose. Our new framework for FY20, which applies to the Managing Director and CEO and all of his executive-level direct reports, is a step towards achieving this. This new remuneration framework, outlined in section 5 of this report will include a change to how we assess short-term performance and achieve a greater focus on performance-based pay through the removal of restricted shares as a long-term incentive vehicle. The Board is also of the belief that encouraging executives to build their own shareholdings in Coles will drive alignment between executives and shareholders. As such, equity will be a greater feature from FY20, with the introduction of a deferral into equity for the short-term incentive plan and minimum shareholding guidelines for the Managing Director and CEO, and all of his executive-level direct reports. As a Board, we believe this new remuneration framework is a true enabler of our strategy, and delivers on the expectations of you, our shareholders. Richard Freudenstein Chair of the People and Culture Committee Introduction Section 1: Key Management Personnel Coles Group Limited 2019 Annual Report 51 The Directors of Coles Group Limited (‘Coles’ or the ‘Company’) present the Remuneration Report (‘Report’) for the Company and its controlled entities (collectively, the ‘Group’) for the ﬁnancial year ended 30 June 2019 (‘FY19’). This Report forms part of the Directors’ Report and has been prepared in accordance with section 300A of the Corporations Act 2001 (Cth) and is audited. Coles is required to prepare a Remuneration Report in respect of the Group’s KMP, being the people who have the authority and responsibility for planning, directing and controlling the Group’s activities, either directly or indirectly, including any Director. For FY19, the Remuneration Report covers the full ﬁnancial year (pre and post demerger) and captures any individuals who were Coles KMP during this period. This is Coles’ ﬁrst Remuneration Report as a newly listed public company following our demerger from Wesfarmers Limited (‘Wesfarmers’). On 15 November 2018, shareholders of Wesfarmers approved the demerger of Coles. On 21 November 2018, Coles shares commenced trading on the ASX on a deferred settlement basis. Effective 28 November 2018, the demerger was completed, and Coles ceased to be a wholly owned subsidiary of Wesfarmers. In this Remuneration Report, ‘Executive KMP’ includes the Managing Director and CEO, and all other executives considered to be KMP. References to ‘Other Executive KMP’ means the Executive KMP excluding the Managing Director and CEO. Table 1 sets out the details of those persons who were considered KMP of the Coles Group during FY19. Table 1 This Remuneration Report therefore covers two periods: Non-executive Directors • the pre demerger period from 1 July 2018 to 27 November 2018; and Name Position held Period as KMP during FY191 • the post demerger period from 28 November 2018 to 30 June 2019. James Graham Chairman and Non- executive Director From 19 November 2018 While this Remuneration Report covers both the pre and post demerger periods, the focus of this Remuneration Report is on the remuneration arrangements of Coles as a separately listed entity post demerger, including Coles’ remuneration policy, opportunities and components that will apply with effect from FY20. Structure of this report The Remuneration Report is divided into the following sections: David Cheesewright Non-executive Director From 19 November 2018 Jacqueline Chow Non-executive Director From 19 November 2018 Abi Cleland Non-executive Director From 19 November 2018 Richard Freudenstein Non-executive Director From 19 November 2018 Wendy Stops Non-executive Director From 19 November 2018 Zlatko Todorcevski Non-executive Director From 19 November 2018 Section (1) Key Management Personnel (2) Remuneration governance (3) FY19 remuneration policy and structure overview (4) FY19 Executive KMP remuneration outcomes (5) FY20 Executive KMP remuneration framework (6) FY19 Non-executive Director remuneration Page No. 51 52 53 54 60 62 Executive KMP Name Steven Cain Leah Weckert2 Position held Period as KMP during FY19 From 17 September 2018 From 17 September 2018 Chief Executive Officer from 17 September 2018 Managing Director and CEO from 2 November 2018 Director of Coles between 17 September and 19 November 2018 Chief Financial Officer from 28 November 2018 Greg Davis3 Chief Operating Officer From 28 November 2018 Additional persons considered KMP in the pre demerger period only Name Rob Scott4 Chairman of Coles Position held Period as KMP during FY19 Anthony Gianotti4 Director of Coles John Durkan5 Director of Coles Between 1 July 2018 – 19 November 2018 Between 1 July 2018 – 19 November 2018 Between 1 July 2018 – 17 September 2018 1For the Non-executive Directors, the date on which they were appointed to the Board as a Non- executive Director is their commencement date as KMP. 2Ms Weckert was a Director of Coles from 17 September 2018 to 19 November 2018 but did not receive any remuneration in relation to her service as a Director of Coles during that period. Ms Weckert is considered Executive KMP following legal separation of Coles from Wesfarmers on 28 November 2018 due to her role as Chief Financial Officer. 3Mr Davis is considered Executive KMP following legal separation of Coles from Wesfarmers on 28 November 2018. 4Mr Scott and Mr Gianotti are considered KMP as they were Directors of Coles during the pre demerger period. 5Mr Durkan ceased to be a KMP of Wesfarmers on 14 September 2018, however his resignation as a Director of Coles was effective on 17 September 2018. Coles Group Limited 2019 Annual Report 52 Section 2: Remuneration governance 2.1 Governance framework The diagram below provides an overview of the remuneration governance framework that has been established by Coles. Further information regarding the membership and meetings of the People and Culture Committee is provided on page 47 of this Annual Report. Remuneration consultants and external advisors External advisors may be engaged either directly by the People and Culture Committee or through management, to provide information on remuneration- related issues, including benchmarking information and market data. During FY19, the People and Culture Committee engaged KPMG to provide independent benchmarking and market analysis in relation to executive remuneration. No remuneration recommendations were made by KPMG. Section 3: Remuneration policy and structure overview Coles Group Limited 2019 Annual Report 53 3.1 Remuneration policy for FY19 3.2 FY19 remuneration framework for Executive KMP The FY19 remuneration policy for Coles reﬂects arrangements that were put in place by Wesfarmers pre demerger and the remuneration principles applicable for FY19 are outlined in the diagram under section 3.2. The Demerger Scheme Booklet noted that the Coles Board was committed to reviewing executive remuneration in FY19 to ensure that it continued to be appropriate for Coles as a newly listed public company. Further details of the proposed changes for FY20 are outlined in section 5. Executive KMP remuneration is delivered using both ﬁxed and variable (at-risk) components as outlined below. Speciﬁc performance measures and outcomes for FY19 are included in section 4. During FY19, to support the transition of our business through the demerger, we followed three remuneration principles: The Board The Board maintains overall accountability for oversight of the Group’s remuneration policies. Speciﬁcally, the Board approves all remuneration and beneﬁts arrangements as they relate to the Managing Director and CEO and executive-level direct reports to the Managing Director and CEO, having regard to the recommendations made by the People and Culture Committee, and the remuneration arrangements for Non- executive Directors. Reward for sustained business performance Retention of key talent (during a period of signiﬁcant change) Minimise change from established remuneration framework To drive this, we delivered remuneration through ﬁve separate elements: Fixed elements Variable elements Total Fixed Compensation (TFC) Restricted Shares (ERS) Short-term incentive (STI) Transition Incentive Long-term incentive (LTI) Cash Equity Cash Cash Equity Shareholders and other stakeholders The People and Culture Committee may consult with shareholders, proxy advisors and other relevant stakeholders, in determining appropriate remuneration policies for the Group, including remuneration arrangements for the Managing Director and CEO, and executive-level direct reports to the Managing Director and CEO. People and Culture Committee External advisors The role of the Committee is to assist the Board in fulﬁlling its responsibilities to shareholders and regulators in relation to the Group’s remuneration policies. The Committee does this by reviewing and making recommendations to the Board on matters including (but not limited to): • remuneration arrangements of Non-executive Directors, Managing Director and CEO and executive-level direct reports to the Managing Director and CEO • annual performance review of the Managing Director and CEO and executive-level direct reports to the Managing Director and CEO • remuneration outcomes for the Managing Director and CEO and executive-level direct reports to the Managing Director and CEO • delegating power for the operation and administration of all Group incentive and equity plans to management (as appropriate) The People and Culture Committee may seek advice from independent remuneration consultants in determining appropriate remuneration policies for the Group, and speciﬁcally remuneration arrangements for the Managing Director and CEO, and executive-level direct reports to the Managing Director and CEO. How it is delivered How it works Management makes recommendations, to the People and Culture Committee on matters including (but not limited to): Management • remuneration arrangements of executive-level direct reports to the Managing Director and CEO, including the establishment of any new, or amendment to the terms of any existing, incentive and equity plans • annual performance review of executive-level direct reports to the Managing Director and CEO • changes to the Group’s remuneration policies • delivered as Restricted Shares • equivalent to 50% of TFC • Restricted Shares vest after 3 years, subject to the satisfaction of a service condition • dividend escrowed and paid upon vesting • consists of base salary and superannuation • set in relation to the external market, considering size and complexity of role, and the individual’s experience, skills and performance target TFC position is the 75th percentile of the ASX 100 comparator group (plus reference to local and international retailers, as appropriate) • 2.2 Corporate governance policies related to remuneration 2.2.2 Minimum Shareholding Policy What it does Aimed at attracting and retaining key talent in the competitive retail environment • paid as cash • opportunity levels (all Executive KMP): = 60% of TFC at Target = 120% of TFC at Maximum • Other Executive KMP measured against a Company scorecard (consisting of EBIT, Safety, Engagement and Discretionary Financial measures), and an individual performance rating • Managing Director and CEO measured against a balanced scorecard consisting of Financial, Safety, People, and Individual Strategic metrics Incentivises strong individual and group performance through variation, at risk awards • paid as cash • opportunity levels (all Other Executive KMP): = 60% of TFC at Target = 90% of TFC at Maximum • Other Executive KMP measured against personal individual performance in supporting Group operational and strategic goals, subject to the satisfaction of a service condition Note: The Managing Director and CEO was not a part of this Transition Incentive. • delivered as Performance Shares • equivalent to 50% of TFC • Performance Shares vest after 3 years, subject to the satisfaction of the following performance conditions: = 50% relative TSR (ASX 100 comparator group) = 50% cumulative EBIT with a ROC gateway • dividends escrowed and paid upon vesting Retains key talent during a period of transition, rewards for personal performance to support the delivery of Company operational and strategic goals Aligns reward with creation of sustainable, long-term customer and shareholder value To support a robust remuneration framework, Coles has a number of corporate governance policies related to remuneration in place, including those outlined below. 2.2.1 Securities Dealing Policy Coles has adopted a Securities Dealing Policy that applies to all Coles team members including Non-executive Directors and Executive KMP and their connected persons, as deﬁned within the policy. This policy has been introduced to ensure compliance with insider trading laws, to protect the reputation of the Group, maintain conﬁdence in trading in Coles securities, and prohibit speciﬁc types of transactions being made which are not in accordance with market expectations or may otherwise give rise to reputational risk. To build strong alignment between KMP and our shareholders, Coles has established a Minimum Shareholding Policy. The policy requires both Executive KMP and Non-executive Directors to build and maintain a signiﬁcant shareholding in Coles. Executive KMP Each Executive KMP is required to achieve a minimum shareholding equivalent to 100% of total ﬁxed compensation (‘TFC’) by the later of ﬁve years from the date they commence, or ﬁve years from the introduction of the policy on 1 July 2019. In addition to Executive KMP, this policy also applies to all other executive- level direct reports to the Managing Director and CEO. Non-executive Directors Each Non-executive Director is required to hold at least 1,000 ordinary shares in the Company within six months of their appointment. The shares may be held by a Non-executive Director either in his or her own name, or indirectly in the name of either an entity controlled by the Non-executive Director or a closely related party. As at the date of this Remuneration Report, each Non-executive Director meets this requirement. Within ﬁve years of appointment, each Non-executive Director is expected to increase his or her shareholding to an amount equivalent to 100% of their annual base fee at that time. 3.3 FY19 remuneration mix for Executive KMP 3.4 Executive KMP service agreements The remuneration mix for Executive KMP for FY19 is based on the remuneration arrangements in place prior to demerger. Chart 1 highlights the portion of total remuneration (at-target) attributable to each remuneration component during the FY19 transition year. The terms of employment for the Executive KMP are formalised in employment contracts that have no ﬁxed term. Speciﬁc information relating to the terms of the Executive KMP’s employment contracts is set out in Table 2. Chart 1 Executive KMP1 LTI 19.2% STI 23.1% ERS 19.2% Total ﬁxed compensation (TFC) Short-term incentive (STI) Restricted Shares (ERS) Long-term incentive (LTI) TFC 38.5% 1Excludes all Transition Awards as detailed in section 4.6. Table 2 Name Steven Cain Leah Weckert Greg Davis Notice Period1 Restraint of Trade 12 months 12 months 6 months 12 months 12 months 6 months 1Executive KMP can be terminated without notice if they were found to have engaged in serious or wilful misconduct, are seriously negligent in the performance of their duties, commit a serious or persistent breach of their employment contract, or commit an act, whether at work or otherwise, that would bring the Group into disrepute. Coles may also make a payment in lieu of notice. Coles Group Limited 2019 Annual Report 54 Section 4: FY19 Executive KMP remuneration outcomes 4.3 Short-term incentive (STI) (continued) Coles Group Limited 2019 Annual Report 55 4.1 Company performance 4.2 Total fixed compensation (TFC) For FY19, TFC was designed to be competitive to retain, motivate and attract the right talent. In order to benchmark TFC, the TFC for Executive KMP was compared to the ASX 100, as well as both local and international retailers. TFC was targeted at the 75th percentile of this peer group for comparable roles. There were no increases in TFC for any Executive KMP during FY19. For Mr Cain and Ms Weckert, their TFC remained as disclosed in the Demerger Scheme Booklet, at $2,100,000 for Mr Cain and $900,000 for Ms Weckert. 4.3 Short-term incentive (STI) The FY19 Coles STI was designed to reward Executive KMP for the achievement of key short-term performance measures. In FY19, the STI component of Executive KMP remuneration was delivered 100% in cash. Going forward, the Board has resolved to introduce deferral of a portion of STI into equity as detailed in section 5 of this report. For FY19, the Managing Director and CEO was assessed against a balanced scorecard (as demonstrated in Table 4) consisting of Financial, Safety, People, and Individual Strategic metrics. This structure is more closely aligned to the FY20 STI scorecard structure for all Executive KMP. This section of the report provides an overview of how the Company’s performance for FY19 has driven remuneration outcomes for our Executive KMP. Coles’ remuneration framework has been designed to reward Executive KMP for their contribution to the collective performance of Coles and to support the alignment between the remuneration of Executive KMP and shareholder returns. Table 3 summarises key indicators of the performance of Coles and relevant shareholder returns over FY19. As Coles only listed on the ASX on 21 November 2018, it is not possible to address the statutory requirement that Coles provides a five-year discussion of the link between Company performance and remuneration. This table will be expanded in future years to provide comparative metrics for the financial years in which Coles is listed. Table 3 Financial Summary for year ended 30 June Earnings before interest and tax (EBIT) ($)1 Return on capital (ROC) (%)1 Dividends paid per ordinary share (cents) 2 Closing share price (as at 30 June) 3 Total shareholder return (TSR) (%)4 2019 $1,466.7m 36.0% nil $13.35 6.9% 1EBIT is calcuated on a statutory basis. ROC is EBIT divided by capital employed. Capital employed is calculated on a seven-month rolling average basis. 2 Subsequent to 30 June 2019, the Directors declared a total fully franked dividend of 35.5 cents per fully paid ordinary share, to be paid on 26 September 2019. 3The opening share price on listing on the ASX on 21 November 2018 was $12.49. 4TSR is calculated as the change in share price since listing on the ASX, plus dividends paid during the financial year, divided by the opening share price for the financial year. Table 4 Managing Director and CEO FY19 scorecard Performance Metric Weighting Rationale for Performance Metric Outcome Summary of Achievement Financial: earnings before interest and tax (EBIT)1 Safety: total recordable injury frequency rate (TRIFR) People: engagement 45% 10% 15% EBIT aligns STI awards with Coles’ focus on delivering strong earnings through the business cycle, which aligns with shareholder interests. Between threshold and target Coles is committed to reinforcing a strong safety culture and improving safety leadership. This metric maintains a focus on safety performance, as measured by TRIFR, to prevent serious injuries. People are at the core of Coles’ business. Engagement measures the level of connection, motivation and commitment our team members feel for Coles based on our Company result in the mysay engagement survey. Above target Above target Statutory EBIT1 decreased by 0.9%, with an increase in Supermarkets (1.7%) and Liquor (2.2%) offset by declines in Express (72.1%) and higher corporate costs associated with Coles being a separately listed entity. The total number of recordable injuries dropped by more than 700 compared to the prior year – a 20.3% improvement in TRIFR. Team member engagement increased by 3 percentage points compared to the prior year’s survey. Individual strategic metrics 30% A number of strategic metrics and measures to determine the individual performance and effectiveness of the Managing Director and CEO as assessed by the Board. Majority fully achieved The Board assessed each strategic metric and the achievements delivered during FY19, and determined the Managing Director and CEO met or exceeded the target performance for most metrics. 1The Board has adjusted the statutory EBIT result to ensure the assessment appropriately recognises outcomes that are within the control and influence of Executive KMP. The Board reviewed each exceptional item to assess if it should be included in the result for the purposes of deriving the STI outcome. Ultimately the Board resolved to make both positive and negative adjustments to the EBIT outcome for the purposes of the STI calculation, which included the exclusion of Significant Items detailed in the financial statements, as well as the loss of EBIT due to the new alliance with Viva Energy and AVC (Spirit Hotels) partnership, and one-off costs due to corporate restructuring. Had the Board chosen not to make any adjustments to statutory EBIT for the purpose of STI calculations, it would have resulted in an above target outcome for the EBIT performance metric for Executive KMP. For FY19, the STI for Other Executive KMP was calculated using two key performance factors, one based on Company performance, and one based on individual performance. 1. Company performance is based on a scorecard with four key performance categories, Financial, Safety, People, and a Discretionary Financial component, allowing the Board the flexibility to adjust a small portion of the scorecard (either downward or upward) to deliver appropriate outcomes. 2. Individual performance is based on the individual performance rating assessment for each Executive KMP. Performance ratings are determined based on both the achievement of strategy aligned objectives within the Other Executive KMP’s direct area of influence, and the way those outcomes were delivered. The STI award calculation for Other Executive KMP is demonstrated in the diagram below. The Board retains ultimate discretion to adjust the Company performance component, the individual performance component, or the overall STI outcome to ensure outcomes remain appropriate. This includes considering compliance with Company policies and governance requirements. Company Performance Based on Financial, Safety, People, and Discretionary Financial X Individual Performance Based on Individual Performance Rating X STI Target Opportunity 60% x TFC ($) = STI Outcome ($) Maximum Opportunity 120% of TFC FY19 Company Performance Scorecard Table 5 provides an overview of the specific performance metrics included within the FY19 Company Performance Scorecard, and the actual performance achieved against each metric. Table 5 Performance Metric Weighting Rationale for Performance Metric Outcome Summary of Achievement Financial: earnings before interest and tax (EBIT) 60.0% EBIT aligns STI awards with Coles’ focus on delivering strong earnings through the business cycle, which aligns with shareholder interests. Between threshold and target See Table 4 Safety: total recordable injury frequency rate (TRIFR) 13.33% People: engagement 13.33% Discretionary Financial 13.33% FY19 STI Award Outcomes Coles is committed to reinforcing a strong safety culture and improving safety leadership. This metric maintains a focus on safety performance, as measured by TRIFR, to prevent serious injuries. People are at the core of Coles’ business. Engagement measures the level of connection, motivation and commitment our team members feel for Coles based on our Company result in the mysay engagement survey. Above target See Table 4 Above target See Table 4 This element is to provide an opportunity to recognise achievements across the Group of strategic importance, whilst ensuring the affordability of the overall STI award. Fully achieved The Board awarded full achievement of this metric due to strong performance in Supermarkets, reset of Group strategy, progress of strategic projects including Witron, Ocado, SAP investment, as well as commercial transactions for the Hotels business and Viva Energy Alliance. At the conclusion of FY19, the Board assessed the Company’s performance against the scorecard and the individual performance of each Executive KMP to determine any STI award outcome payable based on this assessment. Details of the Executive KMP STI opportunity and actual payments received for FY19 are provided in Table 6. Table 6 Name Steven Cain4 Leah Weckert Greg Davis STI Maximum Opportunity1 94.3% of TFC 120% of TFC 120% of TFC STI Target Opportunity 47.2% of TFC 60% of TFC 60% of TFC STI Awarded2 ($) STI Awarded2 (% of TFC) STI Forfeited3 (%) $822,314 $408,240 $362,880 39.2% 45.4% 45.4% 58.5% 62.2% 62.2% 1The minimum STI opportunity was nil. 2The FY19 STI was paid on 15 September 2019. 3As a percentage of STI Maximum Opportunity. 4Mr Cain’s FY19 STI was pro-rated to his date of commencement 17 September 2018. Coles Group Limited 2019 Annual Report 56 Terms of the FY19 STI Short-term incentive (STI) Terms of the FY19 ERS Offer Restricted Shares 4.5 Long-term incentive (LTI) (continued) Performance Shares will vest subject to the satisfaction of the following performance conditions: What is the Performance Period? Coles Group Limited 2019 Annual Report 57 What was the Performance Period? How is the award delivered? 1 July 2018 – 30 June 2019 What were the performance conditions? For the Managing Director and CEO, the STI award was calculated using a balanced scorecard that includes both Company and Individual metrics. For Other Executive KMP, two key performance factors were used: 1. Company performance: comprising financial, safety, people, and discretionary financial metrics; and 2. Individual performance rating. See above for further details. How were the conditions assessed? Performance against the Company Group Performance Scorecard and Managing Director and CEO Scorecard was assessed by the Board based on the Company’s annual audited results and financial statements and other data provided to the Board. For the individual performance of the Managing Director and CEO, the Board, upon recommendation of the People and Culture Committee, determined the assessment of the Managing Director and CEO’s individual performance. For Other Executive KMP, the Board, upon recommendation of the People and Culture Committee and Managing Director and CEO, determined their individual performance rating. The methods adopted to assess performance were chosen as the Board believes they are the most appropriate way to assess the true financial performance of the Company, the Executive KMP’s individual contribution and determine remuneration outcomes. When was the FY19 STI award paid? 15 September 2019 What happens if an Executive KMP left the organisation? In the event of resignation or dismissal for cause or significant underperformance prior to payment of the STI, an Executive KMP would not be eligible for any STI award. If an Executive KMP had ceased employment on or after 1 April 2019 due to retirement, redundancy, permanent disability, or death, they may have been eligible for a pro rata STI award calculated up to the last day of their employment. Any such STI award would have been paid in September 2019 in the ordinary course. Can the Board amend the STI program? The Board retains discretion to, at any time, suspend or terminate the program, or amend all or any elements of the program up until the date of payment. Restricted Shares, being fully paid ordinary shares in Coles held in trust and restricted from trading until they vest at the end of a Restriction Period. Restricted Shares were allocated to Executive KMP at no cost to the Executive KMP. When were the Restricted Shares allocated? 19 December 2018 What is the Restriction Period? 19 December 2018 – 19 December 2021. The Restricted Shares will be held in trust on the Executive KMP’s behalf during the Restriction Period. During that time, the Executive KMP will be unable to sell, transfer or otherwise deal in the Restricted Shares. What happens if an Executive KMP ceases employment? In the event of resignation, termination for cause or significant underperformance, the Executive KMP will forfeit all unvested Restricted Shares, unless the Board determines otherwise. In any other circumstances (including by reason of redundancy, permanent disability, death or ill health), a pro rata number of unvested Restricted Shares (based on the proportion of the Restriction Period that has elapsed) will remain on foot and subject to the original terms of offer as though the Executive KMP had not ceased employment, unless the Board determines otherwise. Do Restricted Shares have voting rights? Yes. Restricted Shares carry the same voting rights as other ordinary shares. Are dividends paid on Restricted Shares? During the Restriction Period, dividends paid on Restricted Shares will be held in escrow. If an Executive KMP incurs a tax liability on dividends held in escrow, an amount will be released to cover that tax liability. Dividend payments will only be released to the Executive KMP to the extent that the underlying shares vest (less any amount already released to satisfy tax payable in respect of dividends). How can the Board apply discretion to clawback outcomes? The Board has broad clawback powers to determine that any Restricted Shares granted under the FY19 ERS Offer may be forfeited or that the Executive KMP is required to pay as a debt the net proceeds of the sale of shares or dividends provided in certain circumstances (for example, where the Executive KMP has acted fraudulently or dishonestly, has engaged in gross misconduct, brought the Group into disrepute or breached their obligations to the Group). This protects Coles against the payment of benefits where participants have acted inappropriately. 4.4 Restricted Shares What happens if there is a change of control? The FY19 Executive Restricted Share Offer (‘FY19 ERS Offer’) was designed to support Executive KMP in accumulating a shareholding in the Company, with the aim of driving alignment between Executive KMP and shareholders and aid in the attraction and retention of local and international talent. The Executive Restricted Share Offer will be discontinued in FY20 (see section 5 for a summary of remuneration changes for FY20). Under the terms of the Offer, the Board may determine in its absolute discretion that some or all the Executive KMP’s Restricted Shares will vest or cease to be subject to restrictions on a likely change of control. Where there is an actual change in control of the Company then, unless the Board determines otherwise, unvested Restricted Shares will vest on a pro rata basis (based on the proportion of the Restriction Period that has elapsed). Under the FY19 ERS Offer, Executive KMP were allocated shares that are subject to a continued service condition and a three-year dealing restriction. 4.5 Long-term incentive (LTI) The maximum opportunity for all Executive KMP under the FY19 ERS Offer was 50% of TFC. Shares were allocated to each Executive KMP on 19 December 2018, with the number of shares allocated calculated by dividing the opportunity value by the volume weighted average price of shares traded on the ASX over the 10 trading days up to and including 19 December 2018, being $12.344647, rounded down to the nearest whole number. Details of the number of Restricted Shares awarded to Executive KMP under the FY19 ERS Offer are outlined in section 4.8. The FY19 LTI was designed to reward Executive KMP for the achievement of long-term sustainable returns for shareholders. As outlined in section 3.2, for FY19 the LTI component of Executive KMP remuneration is delivered in Performance Shares. The Performance Period for the FY19 LTI runs from the date that Coles was listed on the ASX (21 November 2018) to 27 June 2021 (‘Performance Period’) being the last day in the retail calendar for FY21. • 50% of Performance Shares are subject to a cumulative earnings before interest and tax (‘EBIT’) hurdle over the Performance Period, subject to a return on capital (‘ROC’) gateway (‘EBIT and ROC component’); and • 50% of Performance Shares are subject to a relative total shareholder return (‘TSR’) performance hurdle, measured over a period commencing on 20 February 2019 (the day after Coles’ FY19 half-year results announcement) and ending on 27 June 2021 (‘TSR measurement period’) (‘TSR component’). Coles’ relative TSR will be compared to companies in the ASX 100 (‘Comparator Group’). EBIT and ROC component Vesting of the Performance Shares in the EBIT and ROC component is subject to achievement of at least 90% of the cumulative ROC target over the Performance Period. The number of Performance Shares in the EBIT and ROC component that vest, if any, will then be based on the Group’s cumulative EBIT performance determined over the Performance Period by reference to the following vesting schedule: The total Performance Period is 21 November 2018 (Coles’ listing date) to 27 June 2021. The cumulative EBIT and ROC hurdles are measured over this period. The TSR hurdle is measured over the period from 20 February 2019 (the day after Coles’ FY19 half-year results announcement) to 27 June 2021. What are the performance conditions? Performance Shares are subject to the following performance conditions: • 50% of the LTI award is subject to an EBIT hurdle with a ROC gateway; and • 50% of the LTI award is subject to a TSR hurdle. Further information on the performance conditions is provided earlier in section 4.5. How are the performance conditions assessed? TSR performance is independently assessed over the Performance Period against the constituents of the S&P ASX 100 index. EBIT and ROC is calculated using Coles’ audited financial results. TSR performance and EBIT and ROC have been chosen as performance conditions for the LTI as the Board felt these were relevant in the circumstances. Group cumulative EBIT over the Performance Period % of Performance Shares that vest When does testing and vesting occur? Less than 90% of the cumulative EBIT target is achieved 90% of the cumulative EBIT target is achieved 0% 50% Between 90% and 100% of the cumulative EBIT target is achieved Straight-line pro rata vesting between 50% - 100% 100% or more of the cumulative EBIT target is achieved 100% The ROC and EBIT targets are considered by Coles to be commercially sensitive. However, the Board will disclose the relevant vesting outcomes following the end of the Performance Period. TSR component The number of Performance Shares in the TSR component that vest, if any, will be based on Coles’ TSR ranking within the ASX 100 Comparator Group over the TSR measurement period, as set out in the following vesting schedule: Testing of performance against performance conditions will occur after the end of the Performance Period (being 27 June 2021). Following testing, the Board will determine the number of Performance Shares to vest, which is expected to occur in September 2021. If the anticipated vesting date falls within a Blackout Period (as defined within the Company’s Securities Dealing Policy), vesting will be delayed until the end of that period. Following testing, any Performance Shares that do not vest will be forfeited. What happens if an Executive KMP ceases employment? In the event of resignation or dismissal for cause or significant underperformance, all unvested Performance Shares will be forfeited, unless the Board determines otherwise. In any other circumstances (including by reason of redundancy, permanent disability, death or ill health), a pro rata number of Performance Shares (based on the proportion of the Performance Period that has elapsed) will remain on foot and subject to the original performance conditions as though the Executive KMP had not ceased employment, unless the Board determines otherwise. Do Performance Shares have voting rights? Coles TSR rank in the Comparator Group % of Performance Shares that vest Yes. Performance Shares carry the same voting rights as other ordinary shares. Below the 50th percentile Equal to the 50th percentile 0% 50% Between 50th percentile and 75th percentile Straight-line pro rata vesting between 50% - 100% Equal to the 75th percentile or above 100% Following testing, any Performance Shares that do not vest will be forfeited. There is no re-testing of awards. Are dividends paid on Performance Shares? During the Performance Period, dividends paid on Performance Shares will be held in escrow. If an Executive KMP incurs a tax liability on dividends held in escrow, an amount will be released to cover that tax liability. Dividend payments will only be released to the Executive KMP to the extent that the underlying shares vest (less any amount already released to satisfy tax payable in respect of dividends). FY19 LTI outcomes How can the Board apply discretion to clawback outcomes? Performance Shares granted under the FY19 LTI will be tested in 2021. Details of the number of Performance Shares granted under the FY19 LTI on 19 December 2018 are included in section 4.8. Terms of the FY19 LTI Long-term incentive (LTI) How is the LTI award delivered? Performance Shares, being fully paid ordinary shares in Coles which vest subject to achievement of relevant performance conditions. Performance Shares are allocated to Executive KMP at no cost to the Executive KMP. When were Performance Shares allocated? 19 December 2018 The Board has broad clawback powers to determine that any Performance Shares may be forfeited or that the Executive KMP is required to pay as a debt the net proceeds of the sale of shares or dividends in certain circumstances (e.g. the Executive KMP has acted fraudulently or dishonestly, has engaged in gross misconduct, brought the Group into disrepute or breached their obligations to the Group). This protects Coles against the payment of benefits where participants have acted inappropriately. What happens if there is a change of control? Under the Offer terms, the Board may determine in its absolute discretion that some or all the Executive KMP’s Performance Shares will vest or cease to be subject to restrictions on a likely change of control. Where there is an actual change in control of the Company then, unless the Board determines otherwise, unvested Performance Shares will vest on a pro rata basis (based on the proportion of the Performance Period that has elapsed). 4.8 Summary of Executive KMP shareholding Coles Group Limited 2019 Annual Report 59 Table 8 shows the movements of Coles ordinary shares, Restricted Shares and Performance Shares, held directly, indirectly or beneficially, by each Executive KMP, including their related parties during FY19. Table 8 NAME AND HOLDING Steven Cain Coles Ordinary Shares Coles Restricted Shares Coles Performance Shares Leah Weckert Coles Ordinary Shares Coles Restricted Shares Coles Performance Shares Greg Davis Coles Ordinary Shares Coles Restricted Shares Coles Performance Shares Movements during the financial period Additional Information BALANCE OF SHARES HELD AT 1 JULY 2018 SHARES ACQUIRED THROUGH DEMERGER SHARES ACQUIRED AS REMUNERATION OTHER CHANGES DURING THE YEAR1 CLOSING BALANCE AT 30 JUNE 20192 ACCOUNTING FAIR VALUE OF GRANT YET TO VEST ($)3 - - - 10,000 - 40,000 - 85,057 - 85,057 - 11,511 - - - 24,8194 36,453 - 36,453 - 23,445 - - - 29,1784 32,402 - 32,402 - - - - - - - - 50,000 85,057 85,057 11,511 61,272 36,453 23,445 61,580 32,402 - $881,191 $696,617 - $377,653 $298,550 - $335,685 $265,372 1Includes shares purchased or sold on-market. 2 No shareholdings were held nominally by the Executive KMP or their related parties as at 30 June 2019. 3The fair value of Restricted Shares and Performance Shares is an estimate of the total value of grants in future financial years. Restricted Shares and Performance Shares are subject to the satisfaction of conditions and therefore the minimum total value of the awards for future financial years is nil. 4Restricted Shares acquired through demerger are only subject to a holding lock whilst Ms Weckert and Mr Davis remain employed by Coles, or until the date the Wesfarmers shares, that these Coles shares were allocated as a result of, vest, whichever date is earlier. Coles Group Limited 2019 Annual Report 58 4.6 Transition awards Wesfarmers put in place a small number of transition arrangements for certain Coles executives. These arrangements were temporary and will not be replicated post demerger. The transition arrangements are outlined below. Managing Director and CEO As part of Mr Cain’s employment agreement with Coles, Wesfarmers agreed to compensate Mr Cain for short and long-term incentives that were forfeited or forgone with his prior employer, due to his acceptance of the role with Coles. As disclosed in the Demerger Scheme Booklet, the maximum cash amount of compensation payable to Mr Cain is $3,900,000. This amount has been structured into three tranches: Other Executive KMP Prior to the demerger, Ms Weckert and Mr Davis participated in an incentive arrangement provided by Wesfarmers linked to the business’ operational and strategic goals referred to earlier in the Report as the Transition Incentive. Under that arrangement, and as disclosed in section 4.6.1 of the Demerger Scheme Booklet, both Ms Weckert and Mr Davis were entitled to receive a cash payment based on personal performance in supporting the business’ operational and strategic goals, and provided they remain employed by the Group until the payment date. Both Ms Weckert and Mr Davis satisfied these conditions and the following payments were made: 1. $709,560, which was paid to Ms Weckert on 25 June 2019; and 1. $900,000, which was paid by Coles on 4 December 2018; 2. $630,720, which was paid to Mr Davis on 25 June 2019. 2. $1,500,000, which was paid by Coles on 28 December 2018; 4.7 Summary of remuneration received by Executive KMP 3. $1,500,000, which will be paid by Coles at the end of December 2019. In order to receive the final instalment (tranche 3), on the date of payment, Mr Cain must not have tendered his resignation or been dismissed for cause. The payments made at the end of December 2018 and December 2019 are subject to clawback (for example, where there is a material misstatement in, or omission from, the Company’s financial statements or as a result of fraud, dishonesty or breach of obligations) for a period of two years from the date of payment. Table 7 details the nature and amount of each element of remuneration of the Executive KMP. There were no transactions or loans between Executive KMP and the Company or any of its subsidiaries during FY19. Table 7 NAME Current Executive KMP Steven Cain Leah Weckert3 Greg Davis4 Former KMP John Durkan5 TOTAL YEAR 2019 2019 2019 2019 2019 Short-term Long-term Post employment Value of share- based payments2 BASE SALARY OTHER BENEFITS1 CASH STI LONG SERVICE LEAVE SUPERANNUATION BENEFITS SHARE-BASED PAYMENTS TOTAL COMPENSATION $1,815,929 $2,403,010 $686,674 $465,265 $710,255 $631,667 $822,314 $408,240 $362,880 $447,089 $6,501 $687,123 $3,414,957 $3,751,433 $2,280,557 $10,284 $6,988 $8,136 $7,635 $33,043 $25,665 $16,197 $12,148 $5,133 $59,143 $319,110 $443,693 $364,142 $5,396,312 $2,272,047 $1,844,238 $365,158 $1,518,639 $1,492,103 $11,031,236 1 Other benefits include costs associated with employment (including any applicable fringe benefits tax) including awards noted under section 4.6. 2 The figures in this column for share-based payments represent share-based awards that are not actually vested in favour of the Executive KMP in the financial period presented (with the exception of Mr Durkan, see footnote 5). The amounts represent the accounting fair value of the grants of Restricted Shares, Performance Shares, and legacy Wesfarmers share awards allocated to Ms Weckert and Mr Davis prior to the demerger pursuant to Wesfarmers share plans, which Ms Weckert and Mr Davis received as Wesfarmers employees and are being expensed over the relevant performance period. In accordance with the Accounting Standards the accounting fair value of the grants is recognised proportionally over the grant’s performance period. Refer to sections 4.4 and 4.5 for further details of the grants, their performance conditions and performance periods. If the performance conditions are not met, the Executive KMP will not be entitled to the shares. 3Represents remuneration received as Coles KMP from 17 September 2018. Total base salary received by Ms Weckert for FY19 was $875,877. Prior to the demerger, Ms Weckert participated in the 2015, 2016 and 2017 Wesfarmers Employee Share Acquisition Plan (WESAP) and was granted a total of 29,368 Wesfarmers Restricted Shares subject to service conditions and 6,962 Wesfarmers Performance Shares subject to service and performance conditions. On 26 November 2018, 11,511 Wesfarmers Restricted Shares granted under the 2015 WESAP were released from holding lock. 10,895 Wesfarmers Restricted Shares granted under the 2016 WESAP are eligible to be released from holding lock on or around November 2019 and 6,962 Wesfarmers Restricted Shares and 6,962 Wesfarmers Performance Shares granted under the 2017 WESAP are eligible to vest and be released from holding lock on or around December 2020. 4Represents remuneration received as Executive KMP from 28 November 2018. Total base salary received by Mr Davis for FY19 was $785,354. Prior to the demerger, Mr Davis participated in the 2015, 2016 and 2017 Wesfarmers Employee Share Acquisition Plan (WESAP) and was granted a total of 22,646 Wesfarmers Restricted Shares subject to service conditions and 22,646 Wesfarmers Performance Shares subject to service and performance conditions. On 26 November 2018, 8,057 Wesfarmers Restricted Shares and 2,819 Wesfarmers Performance Shares granted under the 2015 WESAP vested and were released from holding lock. 7,627 Wesfarmers Restricted Shares and 7,627 Wesfarmers Performance Shares granted under the 2016 WESAP are eligible to vest and be released from holding lock on or around November 2019 and 6,962 Wesfarmers Restricted Shares and 6,962 Wesfarmers Performance Shares granted under the 2017 WESAP are eligible to vest and be released from holding lock on or around December 2020. 5Mr Durkan was a Director of Coles in FY19 from 1 July 2018 until 17 September 2018 (during the pre demerger period). The value of share-based payments disclosed in Table 7 relates to Wesfarmers Performance Rights, Wesfarmers Performance Shares and Wesfarmers Restricted Shares received by Mr Durkan pre demerger under the Wesfarmers 2016 and 2017 Key Executive Equity Performance Plan and the 2015 Wesfarmers Long-Term Incentive Plan and are subject to the satisfaction of vesting conditions. Refer to the 2019 Wesfarmers Remuneration Report for further details. Coles Group Limited 2019 Annual Report 60 Section 5: FY20 Executive KMP remuneration framework Following completion of the demerger and as part of our commitment to ensuring a remuneration framework which is fit-for-purpose for Coles into the future, new remuneration principles have been developed during the year. We have developed these principles to guide future decisions in relation to remuneration at Coles: be market competitive, be performance- based, create long-term value for shareholders, and be fit-for-purpose. As a newly listed entity, we have developed our business strategy to enable Coles to 'win in our second century'. The People and Culture Committee and the Board have spent a significant amount of time and effort considering the most appropriate remuneration framework to support the delivery of this new strategy, and to enable the business culture we want to create. This process included consultation with external stakeholders, including the proxy advisor community and working with subject matter experts in KPMG and Mercer, to help inform our final position. The FY20 framework is more heavily focused on performance-based pay delivered through equity awards. Under the terms of his appointment, the Managing Director and CEO was contractually entitled to an LTI award for FY20 equal to 150% of TFC. With the shift to greater performance-based pay under the FY20 framework, the Company will instead provide the Managing Director and CEO with an LTI opportunity for FY20 which is equal to 175% of TFC and remove the time-based Restricted Share arrangements which applied in FY19. This results in a shift from 51.7% of the Managing Director and CEO’s overall remuneration package being performance-based in FY19, to 71.8% in FY20. The People and Culture Committee considers the new levels of ‘at risk’ remuneration to be appropriate, when balanced with the performance conditions to be met, and believe the overall framework is appropriately aligned to our new strategy and the interests of our shareholders. Market competitive Retail is a globally competitive industry. We need to be able to attract, motivate and retain high calibre executives in both the local and global talent market. Performance-based A strong link to performance- based pay to support the achievement of strategy aligned short, medium and long-term financial targets. Creates long-term value for shareholders Ensuring there is a common interest between executives and shareholders by aligning reward to the achievement of sustainable shareholder returns. Fit-for-purpose Designed to be relevant to how Coles operates. It needs to be simple to articulate, drive the right behaviours and ensure we deliver on our strategy. Aligned to our guiding principles, our new remuneration framework for FY20: Is market competitive, but does not lead the market Is better aligned to Company and individual performance outcomes Is better aligned with shareholders through more focus on equity Is fit-for-purpose for Coles, aligned to our new strategy Delivered through a simpler, three-element structure: How it is delivered How it works Fixed elements Total Fixed Compensation (TFC) Variable elements Short-term incentive (STI) Long-term incentive (LTI) Cash Cash Equity Equity • • consists of base salary and superannuation target position is the 50th percentile of the ASX 10- 40 comparator group (plus reference to local and international retailers, as required) • • • paid as part cash, part deferred equity = Managing Director and CEO 50% is deferred for 2 years = Other Executive KMP 25% is deferred for 1 year opportunity levels (all Executive KMP): = 80% of TFC at Target = 120% of TFC at Maximum • • delivered in performance rights, subject to a 3 year Performance Period opportunity levels: = Managing Director and CEO 175% of TFC = Other Executive KMP 150% of TFC measured against an individual balanced scorecard consisting of: = 60% financial measures = 40% strategic and non-financial measures • measured against: = 50% relative TSR (ASX 100 comparator group) • = 50% cumulative ROC • includes a mixture of group and functional strategic metrics • dividend equivalent payment made in shares upon vesting What it does Allows us to attract and retain key talent through competitive and fair fixed remuneration Incentivises strong individual and Company performance, based on strategically aligned deliverables, through variable, at risk payments Aligns reward with creation of sustainable, long-term customer and shareholder value Table 9 Summary of key changes for FY20 Coles Group Limited 2019 Annual Report 61 Component FY19 FY20 (Change) Rationale Fixed remuneration Market Positioning and Benchmark Comparator Group 75th Percentile against the ASX 100 and reference to local and international retailers 50th Percentile against the ASX 10-40 and reference to local and international retailers A more focused comparator group, and relative positioning against that comparator group, that better aligns with the size of the Group and still includes the organisations we compete with most for talent. Short-term incentive Structure Company and Individual Performance components Balanced Scorecard 60% Financial 40% Strategic and Non-financial metrics A balanced scorecard approach to STI calculation is consistent with market practice. It also provides more transparency regarding performance priorities, performance outcomes against each weighted metric, and more clarity regarding the connection between the performance assessment and reward outcome. Target amount: 60% of TFC Maximum: 120% of TFC Target amount: 80% of TFC Maximum: 120% of TFC New target opportunity requires the deferral of a portion into equity and is appropriately benchmarked across the ASX 10-40. 100% Cash No Deferral Managing Director and CEO: 50% Cash and 50% Deferred into equity (2-year deferral) Other Executive KMP: 75% Cash and 25% Deferred into equity (1-year deferral) A deferred equity element assists in the alignment between Executive KMP and shareholder interests and supports the introduction of a minimum shareholding policy for Executive KMP. Forfeiture conditions also apply on cessation of employment, to support retention. Introducing an equity component will also allow the application of malus and clawback to the STI. Managing Director and CEO: 50% of TFC Other Executive KMP: 50% of TFC Nil – no offer for FY20 (reflecting increased performance-based LTI) Coles is committed to performance-based pay and is removing the Restricted Share component from FY20, in favour of an increased performance-based LTI award (see below). Opportunity Delivery Restricted Shares Opportunity Long-term incentive Opportunity Managing Director and CEO: 50% of TFC Managing Director and CEO: 175% of TFC Other Executive KMP: 50% of TFC Other Executive KMP: 150% of TFC Delivery Performance Shares Performance rights allocated at face value Performance Conditions 50% relative TSR against ASX 100 comparator group 50% relative TSR against ASX 100 comparator group 50% cumulative EBIT with a ROC gateway 50% cumulative ROC Coles is committed to delivering long-term value for shareholders. To support this strategy a greater shift to long-term performance- based pay has been made. The overall quantum of the LTI award has been benchmarked against the ASX 10-40 and the Board believes this quantum appropriately recognises a transition from the FY19 structure, specifically the removal of Restricted Shares (which were not subject to performance conditions). Performance rights are considered the most widely used instrument for LTI programs across the ASX 100. With the use of performance rights Executive KMP do not receive an entitlement to a Coles share until the vesting conditions are satisfied. Coles considers relative TSR (benchmarked against the broader ASX 100) to be an appropriate external metric aligned to the interests of shareholders. The shift from cumulative EBIT (with a ROC gateway) to cumulative ROC ensures Coles maintains an appropriate internal return metric and removes duplication of EBIT across both the STI and LTI programs. Treatment of Dividends Dividends held in escrow on behalf of the participant with funds released to the extent that the underlying shares vest. Dividend equivalent payment in the form of additional shares provided upon vesting. This approach is to ensure Executive KMP continue to receive a similar benefit in the transition from Performance Shares to performance rights. Other Minimum Shareholding Policy Applicable to Non-executive Directors only: 1,000 shares within 6 months from appointment. Holding equivalent to 100% of base fees within 5 years. Applicable to both Non-executive Directors (no change) and Executive KMP. For Executive KMP: 100% of TFC within 5 years from the later of the date they commence acting as KMP or commencement of policy. Coles considers the accumulation of shares in the Company by both Non-executive Directors and Executive KMP will drive an increase in the alignment between those individuals and the shareholders of our Company. Coles Group Limited 2019 Annual Report 62 Section 6: FY19 Non-executive Director remuneration 6.1 Non-executive Director remuneration framework Non-executive Director remuneration is designed to ensure that the Company can attract and retain suitably qualified and experienced Non-executive Directors. Non-executive Directors receive a base fee for their service as a director of the Company, and other than the Chairman, an additional fee for membership of, or for chairing a Board committee. To maintain the independence of directors, Non-executive Directors do not receive shares or any performance-related incentives as part of their remuneration from the Company. A minimum shareholding policy applies to Non-executive Directors (see section 2.2.2). Non-executive Directors are reimbursed for travel and other expenses reasonably incurred when attending meetings of the Board or conducting the business of the Company. The People and Culture Committee reviews and makes recommendations to the Board with respect to Non-executive Directors’ fees and Board committee fees. 6.2 Current Non-executive Director remuneration policy The Non-executive Director remuneration policy enables the Company to attract and retain high-quality directors with relevant experience. The remuneration policy is reviewed annually by the People and Culture Committee. Non-executive Director fees are set after consideration of fees paid by companies of comparable size, complexity, industry, and geography, and reflect the qualifications and experience necessary to discharge the Board’s responsibilities. The current Non-executive Director aggregate fee limit is $3,600,000 and was approved by the then shareholders of Coles at a general meeting held on 19 September 2018 prior to listing. Table 10 sets out the Board and committee fees in Australian dollars (inclusive of superannuation) for FY19. Table 10 Board and committee fees Board Audit and Risk Committee People and Culture Committee Nomination Committee Chair $695,0001 $55,000 $55,000 No fee Member $220,000 $27,000 $27,000 No fee 1The Chairman of the Board does not receive Committee fees in addition to his Board fee. 6.3 FY19 Non-executive Director remuneration 6.3.1 Directors considered KMP in the pre demerger period During the pre demerger period, Rob Scott and Anthony Gianotti (as MD and CEO and CFO of Wesfarmers respectively) both acted as Directors of Coles. Mr Scott and Mr Gianotti received remuneration from Wesfarmers in their capacity as executives of Wesfarmers and did not receive remuneration in their capacity as Directors of Coles. For this reason, no remuneration details have been disclosed for Mr Scott or Mr Gianotti in Table 11 below. Their role as Directors of Coles ceased on 19 November 2018. Full details of the remuneration received by Mr Scott and Mr Gianotti for their role as executives of Wesfarmers will be disclosed by Wesfarmers in its FY19 Remuneration Report. Ms Weckert was a Director of Coles from 17 September 2018 to 19 November 2018. She did not receive remuneration in her capacity as a Director of Coles. For the purposes of this Remuneration Report, Mr Durkan was an Executive Director from 1 July 2018 to 17 September 2018 and received remuneration for his role as an executive of Wesfarmers. Details of Ms Weckert’s and Mr Durkan’s executive remuneration for FY19 is disclosed in Table 7. 6.3.2 FY19 remuneration for Non-executive Directors Table 11 outlines the remuneration for the Non-executive Directors of Coles during FY19. There were no transactions or loans between Non-executive Directors and the Company or any of its subsidiaries during FY19. Table 11 Name Financial Year Base and committee fees (excluding superannuation) Other benefits1 Superannuation benefits Total compensation James Graham David Cheesewright2 Jacqueline Chow Abi Cleland Richard Freudenstein Wendy Stops Zlatko Todorcevski TOTAL 2019 2019 2019 2019 2019 2019 2019 2019 $416,344 $149,111 $140,329 $140,329 $157,401 $140,329 $157,401 $1,301,244 $131 $0 $187 $0 $0 $109 $60 $487 $15,399 $4,328 $13,110 $13,110 $13,432 $13,110 $13,432 $85,921 $431,874 $153,439 $153,626 $153,439 $170,833 $153,548 $170,893 $1,387,652 1Other benefits include costs associated with employment (inclusive of any applicable fringe benefits tax). 2 Mr Cheesewright's superannuation benefits reflect the proportion of time spent working in Australia as a Non-executive Director of the Company during FY19. 6.4 Non-executive Director Ordinary Shareholdings Table 12 shows the shareholdings and movements in shares held directly, or indirectly, by each Non-executive Director, including their related parties during FY19. Table 12 Name James Graham David Cheesewright1 Jacqueline Chow Abi Cleland1 Richard Freudenstein Wendy Stops1 Zlatko Todorcevski TOTAL Financial Year Balance of shares held at 1 July 2018 Shares acquired Shares disposed Closing Balance as at 30 June 20192 2019 2019 2019 2019 2019 2019 2019 2019 - - - - - - - - 460,988 - 20,000 1,816 19,000 11,910 19,201 532,915 800 - - - - - - 800 460,188 - 20,000 1,816 19,000 11,910 19,201 532,115 1Mr Cheesewright, Ms Cleland and Ms Stops have all increased their shareholding since the closing balance date of 30 June 2019. Refer to the Directors’ Report for further details. 2No shareholdings were held nominally by the Non-executive Directors or their related parties as at 30 June 2019. Financial report. Coles Group Limited 2019 Annual Report 64 Financial report contents. Consolidated financial statements. Statement of Profit or Loss Statement of Other Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to the consolidated financial statements. 2.1 Basis of preparation and accounting policies 2.2 Significant items 3: Performance. 3.1 Segment reporting for continuing operations 3.2 Earnings per share 3.3 Sales revenue 3.4 Administration expenses 3.5 Financing costs Income tax 3.6 4: Assets and liabilities. Inventories 4.1 Cash and cash equivalents 4.2 Trade and other receivables 4.3 Other assets 4.4 4.5 Property, plant and equipment 4.6 4.7 Trade and other payables 4.8 Provisions Intangible assets 5: Capital. 5.1 Interest-bearing liabilities 5.2 Contributed equity and reserves 5.3 Dividends paid and proposed Impairment of non-financial assets 6: Risk. 6.1 6.2 Financial risk management 6.3 Financial instruments 7: Group structure. 7.1 Equity accounted investments 7.2 Non-current assets held for sale 7.3 Discontinued operations 7.4 Subsidiaries 7.5 Parent entity information 8: Unrecognised items. 8.1 Capital expenditure commitments 8.2 Operating lease commitments 8.3 Contingent liabilities 9: Other disclosures. 9.1 Related party disclosures 9.2 Share-based payments 9.3 Auditor’s remuneration 9.4 New accounting standards and interpretations 9.5 Events after the reporting period Directors’ Declaration. Independent Auditor’s Report. Coles Group Limited 2019 Annual Report 65 Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 $M $M 38,175.8 288.4 38,464.2 (29,253.4) 9,210.8 427.7 (8,031.0) (145.8) 5.0 1,466.7 (41.5) 1,425.2 (347.0) 1,078.2 356.5 1,434.7 38,934.4 211.0 39,145.4 (30,119.3) 9,026.1 168.7 (7,731.7) - 16.3 1,479.4 (0.1) 1,479.3 (456.1) 1,023.2 555.6 1,578.8 1,434.7 1,578.8 107.6 80.8 118.4 76.7 Statement of Profit or Loss for the year ended 30 June 2019. Notes 3.3 3.4 7.1 3.5 3.6 7.3 Continuing operations Sales revenue Other operating revenue Total operating revenue Cost of sales Gross profit Other income Administration expenses Other expenses Share of net profit of equity accounted investments Earnings before interest and tax (EBIT) Financing costs Profit before income tax Income tax expense Profit for the year from continuing operations Discontinued operations Profit from discontinued operations after tax Profit for the year Profit attributable to: Equity holders of the parent entity Earnings per share (EPS) attributable to equity holders of the Company Basic and diluted EPS (cents) EPS attributable to equity holders of the Company from continuing operations Basic and diluted EPS (cents) 3.2 The accompanying notes form part of the consolidated financial statements. Coles Group Limited 2019 Annual Report 66 Coles Group Limited 2019 Annual Report 67 Statement of Other Comprehensive Income for the year ended 30 June 2019. Statement of Financial Position as at 30 June 2019. Profit for the year Other Comprehensive Income Items that may be reclassified to profit or loss: Net movement in the fair value of cash flow hedges Income tax effect Other comprehensive income which may be reclassified to profit or loss in subsequent periods Total comprehensive income attributable to: Equity holders of the parent entity Total comprehensive income from continuing operations attributable to: Equity holders of the parent entity Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 $M 1,434.7 (2.0) 0.6 (1.4) $M 1,578.8 - - - Notes 3.6 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Non-current assets held for sale Other assets Total current assets Non-current assets 1,433.3 1,578.8 Property, plant and equipment 1,076.8 1,023.2 Intangible assets Deferred tax assets Equity accounted investments Other assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Income tax payable / (receivable) Provisions Other Total current liabilities Non-current liabilities Interest-bearing liabilities Provisions Other Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity Consolidated 30 JUNE 2019 30 JUNE 2018 Notes $M $M 4.1 4.2 4.4 7.2 4.3 4.5 4.6 3.6 7.1 4.3 4.7 4.8 5.1 4.8 5.2 940.4 359.7 1,964.7 94.1 47.0 3,405.9 4,119.2 1,540.6 364.9 212.3 134.1 6,371.1 9,777.0 3,379.9 0.1 742.9 167.6 4,290.5 1,460.0 598.4 71.0 2,129.4 6,419.9 3,357.1 1,627.8 42.0 1,687.3 3,357.1 686.1 497.2 3,442.3 - 99.5 4,725.1 5,223.0 1,965.7 540.3 - 90.6 7,819.6 12,544.7 8,008.5 (25.3) 819.3 178.4 8,980.9 - 272.4 41.8 314.2 9,295.1 3,249.6 2,192.6 38.8 1,018.2 3,249.6 The accompanying notes form part of the consolidated financial statements. The accompanying notes form part of the consolidated financial statements. Coles Group Limited 2019 Annual Report 68 Coles Group Limited 2019 Annual Report 69 Statement of Changes in Equity for the year ended 30 June 2019. Statement of Cash Flows for the year ended 30 June 2019. Attributable to equity holders of the parent CONTRIBUTED EQUITY SHARE-BASED PAYMENTS RESERVE CASH FLOW HEDGE RESERVE RETAINED EARNINGS TOTAL $M 2,192.6 - - - (538.0) - (26.8) - 1,627.8 $M 38.8 - - - - 4.6 - - 43.4 2,192.6 38.8 - - - - - - 2,192.6 38.8 $M - - (1.4) (1.4) - - - - (1.4) - - - - - $M 1,018.2 1,434.7 - $M 3,249.6 1,434.7 (1.4) 1,434.7 1,433.3 - - - (765.6) 1,687.3 1,047.4 1,578.8 1,578.8 (538.0) 4.6 (26.8) (765.6) 3,357.1 3,278.8 1,578.8 1,578.8 (1,608.0) (1,608.0) 1,018.2 3,249.6 Notes At 1 July 2018 Net profit for the year Other comprehensive income Total comprehensive income for the year Capital return Share-based payments expense Purchase of shares under Equity Incentive Plan 5.2 Distributions to Wesfarmers1 Balance as at 30 June 2019 At 1 July 2017 Net profit for the year Total comprehensive income for the year Distributions to Wesfarmers1 Balance as at 30 June 2018 1 Includes retained earnings relating to discontinued operations. Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 Notes $M $M Cash flows from operating activities from continuing operations Receipts from customers Receipt from Viva Energy Payments to suppliers and employees Interest (paid) / received Income tax paid Net cash flows from operating activities from continuing operations Cash flows used in investing activities from continuing operations Purchase of property, plant and equipment and intangibles Proceeds from sale of property, plant and equipment Proceeds from sale of controlled entities Net investment in joint venture Acquisition of businesses, net of cash acquired Net cash flows used in investing activities from continuing operations Cash flows used in financing activities from continuing operations Proceeds from borrowings Repayment of borrowings Proceeds from borrowings with related parties Repayment of borrowings with related parties Distributions to Wesfarmers Redemption of redeemable preference shares Capital return to Wesfarmers Purchase of shares under Equity Incentive Plan Net cash flows used in financing activities from continuing operations Net increase in cash and cash equivalents from continuing operations Cash at the beginning of the year from continuing operations Cash at the end of the year from continuing operations 4.1 4.1 41,125.5 137.0 (38,664.6) (28.6) (293.9) 2,275.4 (1,104.0) 288.4 544.4 (6.3) (2.3) (279.8) 10,260.0 (8,800.0) 169.6 (3,677.6) (320.4) 1,322.0 (538.0) (26.8) (1,611.2) 384.4 556.0 940.4 41,756.1 - (39,351.4) 2.7 (497.5) 1,909.9 (714.7) 213.0 - - (0.8) (502.5) - - - (131.0) (1,106.0) - - - (1,237.0) 170.4 385.6 556.0 The accompanying notes form part of the consolidated financial statements. The accompanying notes form part of the consolidated financial statements. Coles Group Limited 2019 Annual Report 70 Coles Group Limited 2019 Annual Report 71 The Notes Basis of consolidation Notes to the consolidated financial statements. The Notes include information which is required to understand the consolidated financial statements and is material and relevant to the operations and financial performance and position of the Group. Information is considered material and relevant if, for example: • the amount in question is significant because of its size or nature • it is important for understanding the results of the Group In preparing these consolidated financial statements, subsidiaries are consolidated from the date the Group gains control until the date on which control ceases. The Group’s share of results of its equity accounted investments is included in the consolidated financial statements from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. All intercompany transactions are eliminated. The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. it helps to explain the impact of significant changes in the Group’s business • • it relates to an aspect of the Group’s operations that is important to its future performance Foreign currency The Notes are organised into the following sections: 3. Performance: this section provides information on the performance of the Group, including segment results, earnings per share and income tax. 4. Assets and liabilities: this section details the assets used in the Group’s operations and the liabilities incurred as a result. 5. Capital: this section provides information relating to the Group’s capital structure and financing. 6. Risk: this section details the Group’s exposure to various financial risks, explains how these risks may impact the Group’s financial performance or position, and how the Group manages these risks. 7. Group structure: this section provides information relating to subsidiaries and other material investments of the Group. 8. Unrecognised items: this section provides information about items that are not recognised in the consolidated financial statements but could potentially have a significant impact on the Group’s financial performance or position in the future. 9. Other disclosures: this section provides other disclosures required by Australian Accounting Standards that are considered relevant to understanding the Group’s financial performance or position. These consolidated financial statements are presented in Australian dollars, which is the functional currency of the Group. Foreign currency transactions are translated into the functional currency using the exchange rates at the transaction date. Foreign exchange gains and losses resulting from the settlement of such transactions, and from the translation of monetary assets and liabilities denominated in foreign currencies at reporting date exchange rates are generally recognised in profit or loss. They are deferred in equity if they relate to qualifying cash flow hedges. Accounting policies Accounting policies that summarise the classification, recognition and measurement basis of financial statement line items and that are relevant to the understanding of the consolidated financial statements are provided throughout the Notes. Rounding of amounts The amounts contained in the Financial Report have been rounded to the nearest one hundred thousand dollars (unless specifically stated to be otherwise) under the option available to the Company under ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191. The Company is an entity to which this legislative instrument applies. The Financial Report of Coles Group Limited (the ‘Company’) in respect of the Company and the entities it controlled at the reporting date or during the year ended 30 June 2019 (collectively, the ‘Group’) was authorised for issue in accordance with a resolution of the Directors on 20 September 2019. Reporting entity The Company is a for-profit company limited by shares which is incorporated and domiciled in Australia and listed on the Australian Securities Exchange (ASX). The nature of the operations and principal activities of the Group are described in Note 3.1 Segment reporting for continuing operations. 2.1. Basis of preparation and accounting policies. The Financial Report is a general purpose financial report, which has been prepared in accordance with Australian Accounting Standards issued by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The Financial Report also complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The consolidated financial statements have been prepared on a historical cost basis except for certain financial instruments measured at fair value as explained in notes to the consolidated financial statements (the 'Notes'). Accounting policies have been applied consistently for all periods presented, except for the adoption of new standards effective as of 1 July 2018 (refer to Note 9.4). Reporting period and comparatives Following the demerger from Wesfarmers Limited (‘Wesfarmers’), the Group changed from a Gregorian calendar to a Retail calendar for statutory reporting purposes. Under a Gregorian calendar, the annual reporting period is 12 months (from 1 July to 30 June), whilst under a Retail calendar the reporting period is based on a defined number of weeks, with the annual reporting period ending on the last Sunday in June. The change to a Retail calendar has been applied prospectively from 1 July 2018 and, therefore, the statutory reporting periods for this Financial Report are as follows: Statutory reporting periods (Retail calendar applied prospectively) Current Commencing on 1 July 2018 and ending 30 June 2019 Comparative Commencing on 1 July 2017 and ending 30 June 2018 The comparative period commencing 1 July 2017 and ending 30 June 2018 reflects the original Gregorian calendar and has not been restated to a Retail calendar. Had the Retail calendar been applied retrospectively for statutory reporting purposes, the reporting periods would have been: Retail calendar applied retrospectively Current Commencing on 25 June 2018 and ending 30 June 20191 Comparative Commencing on 26 June 2017 and ending 24 June 2018 1For the current period, the Retail calendar covers 53 weeks (comparative period: 52 weeks) For the annual reporting period commencing on 1 July 2019 and ending 28 June 2020, the statutory reporting period will be aligned with the Retail calendar. This Financial Report presents reclassified comparative information where required for consistency with current year’s presentation. Key judgements, estimates and assumptions The preparation of the financial statements requires judgement and the use of estimates and assumptions in applying the Group’s accounting policies, which affect amounts reported for assets, liabilities, income and expenses. Judgements, estimates and assumptions are continuously evaluated and are based on the following: • historical experience • current market conditions • reasonable expectations of future events Actual results may differ from these judgements, estimates and assumptions. Uncertainty about these judgements, estimates and assumptions could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities in future periods. The key areas involving judgement or significant estimates and assumptions are set out below: Note Judgements Note 7.1 Equity accounted investments Control and significant influence Note 8.2 Operating lease commitments Classification of leases Note Note 3.6 Income tax Note 4.4 Inventories Note 4.4 Inventories Estimates and assumptions Tax cost base of revenue and capital assets Net realisable value Commercial income Note 6.1 Impairment of non-financial Assessment of recoverable amount assets Note 4.8 Provisions Note 4.8 Provisions Note 4.8 Provisions Employee benefits Self-insurance Restructuring Note 9.2 Share-based payments Valuation of share-based payments Detailed information about each of these judgements, estimates and assumptions is included in the Notes together with information about the basis of calculation for each affected line item in the financial statements. Coles Group Limited 2019 Annual Report 72 Coles Group Limited 2019 Annual Report 73 2.2. Significant Items. New Alliance Agreement with Viva Energy 3. Performance. Significant Items are large gains, losses, income, expenditures or events that are not in the ordinary course of business. They typically arise from events that are not considered part of the core operations of the Group. These items have been highlighted below to help users of the Financial Report understand the financial performance of the Group. Significant gains or income are included in ‘other income’, whilst significant losses or expenditures are included within ‘other expenses’ or ‘income tax expense’ in the consolidated Statement of Profit or Loss. Demerger of Coles and corporate restructure On 16 March 2018, Wesfarmers announced its intention to demerge its Coles division to create an independent ASX-listed company. To implement the demerger, Wesfarmers undertook a capital reduction, the proceeds of which were automatically applied to the acquisition of the Company’s shares on behalf of Wesfarmers' shareholders. Eligible Wesfarmers shareholders received one Coles Group Limited share for every Wesfarmers share held. Wesfarmers has retained a minority ownership interest of 15% in the Company following the demerger. The Company’s shares commenced trading on the ASX on 21 November 2018, initially on a deferred settlement basis. Trading of the Company’s shares on standard settlement terms commenced on 29 November 2018. Prior to the demerger, the Group and Wesfarmers undertook an internal corporate restructure. The restructure included the transfer of the following businesses from the Company to Wesfarmers: Kmart Target Retailer of apparel and general merchandise, including toys, leisure, entertainment, home and consumables Retailer of apparel, homewares and general merchandise, including accessories, electricals and toys Officeworks Retailer and supplier of office products and solutions for home and small to medium-sized businesses and education providers The statutory financial information for the Group has been presented for the year ended 30 June 2019 and for the comparative year ended 30 June 2018, including the results of Kmart, Target and Officeworks (KTO) until the date that control was transferred to Wesfarmers. The statutory financial information does not therefore present the performance of the Group as it is currently structured. Results from these discontinued operations are disclosed in Note 7.3. Coles supply chain modernisation – restructuring provision On 24 January 2019, the Company announced it had executed contracts to develop two new automated ambient distribution centres, one each in Queensland and New South Wales. Net profit before tax for the year includes a provision expense of $145.8 million (recognised in ‘other expenses’) relating to redundancies and lease exit costs for a number of existing distribution centres that will be closed as part of the Supply Chain Modernisation program. On 6 February 2019, the Company entered into an agreement to restructure the terms of its Alliance Agreement with Viva Energy Limited ('Viva Energy'). Under the New Alliance Agreement which commenced on 1 March 2019, Viva Energy is responsible for setting the retail price of fuel and receives the retail fuel margin. The Company has been appointed as Viva Energy’s agent for selling fuel at Alliance sites. The Company received a one-off payment of $137.0 million at transaction close in consideration for forgoing the retail fuel margin (recognised in ‘other income’). Ongoing commission per litre is payable to the Company and is recognised in ’other operating revenue’. Incorporated joint venture with Australian Venue Co. On 5 March 2019, the Company announced its agreement to enter into an incorporated joint venture with Australian Venue Co. Ltd (AVC) for the operation of: • the 87 hotels that comprised the Group’s hotel and gaming business (‘Spirit Hotels’); and • the 243 retail liquor stores in Queensland and the 10 retail liquor stores in South Australia and Western Australia attached to Spirit Hotels’ venues, which operate under the Liquorland, First Choice, First Choice Liquor Market and Vintage Cellars brands (collectively the ‘Retail Liquor business’). These operations were previously held within a wholly-owned subsidiary of the Group, Liquorland (Qld) Pty Ltd, and its controlled entities (collectively ‘LLQ’). Under the new structure, LLQ has been converted into an incorporated joint venture company, Queensland Venue Co. Pty Ltd (QVC), whereby: • the Company holds ‘R-class’ shares in QVC with entitlements that, in conjunction with its rights under an operations agreement, confer the right to the economic performance of the Retail Liquor business (‘R-Shares’) • AVC holds ‘H-class’ shares in QVC with entitlements that confer the right to the economic performance of Spirit Hotels (‘H-Shares’) • R-Shares and H-Shares each represent 50% of the total shares in QVC. The Company is responsible for managing the day-to-day operations of the Retail Liquor business and is considered, for accounting purposes, the principal in retail liquor sales transactions. AVC is responsible for managing the operations of Spirit Hotels. The transaction was completed on 29 April 2019. The Company recognised a net gain of $133.0 million (included in ‘other income’) relating to the sale of Spirit Hotels, the transfer of Retail Liquor business assets into the joint venture and the fair value of its interest in QVC. Tax consolidation During the year, the Company made a decision to form an income tax consolidated group with its 100% owned Australian resident subsidiaries with effect from 31 December 2018. As a consequence, the tax cost base of the Group’s assets has been reset resulting in a $49.9 million net credit to income tax expense. This section provides information on the performance of the Group, including segment results, earnings per share and income tax. 3.1 Segment reporting for continuing operations The Group has identified its operating segments based on internal reporting to the Managing Director and Chief Executive Officer (the chief operating decision maker). The Managing Director and Chief Executive Officer regularly reviews the Group’s internal reporting to assess performance and allocate resources across the operating segments. The segments identified offer different products and services and are managed separately. Other business operations that are not separately reportable (such as Property), as well as costs associated with enterprise functions (such as Treasury) are included in ‘Other’. There are varying levels of integration between operating segments. This includes the common usage of property, services and administration functions. Financing costs and income tax are managed on a Group basis and are not allocated to operating segments. The Group’s reportable segments are set out below: Supermarkets Fresh food, groceries and general merchandise retailing (includes Coles Online and Coles Financial Services) Liquor Express Liquor retailing, including online delivery services Convenience store operations and commission agent for retail fuel sales EBIT is the key measure by which management monitors the performance of the segments. The Group does not have operations in other geographic areas or economic exposure to any individual customer that is in excess of 10% of sales revenue. SUPERMARKETS LIQUOR EXPRESS OTHER $M $M $M $M 30,992.6 3,204.8 1,191.4 133.1 3,978.4 45.8 - (27.8) 30,018.2 1,171.9 3,180.8 130.2 5,735.4 164.0 - 13.3 Year ended 30 June 2019 Sales revenue Segment EBIT Significant Items Financing costs Profit before income tax Income tax expense Profit for the period from continuing operations Share of net profit of equity accounted investments included in EBIT Year ended 30 June 2018 Sales revenue Segment EBIT Financing costs Profit before income tax Income tax expense Profit for the period from continuing operations Share of net profit of equity accounted investments included in EBIT TOTAL $M 38,175.8 1,342.5 124.2 (41.5) 1,425.2 (347.0) 1,078.2 5.0 38,934.4 1,479.4 (0.1) 1,479.3 (456.1) 1,023.2 16.3 Coles Group Limited 2019 Annual Report 74 Coles Group Limited 2019 Annual Report 75 3.2 Earnings per share (EPS) Employee benefits expense includes the following: 3.6 Income tax (continued) YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 $M 4,155.5 345.8 31.6 $M 3,973.6 327.8 20.0 Remuneration, bonuses and on-costs Superannuation expense Share-based payments expense Total employee benefits expense 4,532.9 4,321.4 76.7 1,023.2 1,333.9 Employee benefits expense EPS attributable to equity holders of the Company from continuing operations Basic and diluted EPS (cents) Profit for the period from continuing operations ($M) Weighted average number of ordinary shares for basic and diluted EPS (shares, million) Calculation methodology 80.8 1,078.2 1,333.9 EPS is profit for the period from continuing operations attributable to ordinary equity holders of the Company, divided by the weighted average number of ordinary shares during the year. The weighted average number of ordinary shares for the year ended 30 June 2018 has been restated to reflect the change in the Company’s capital structure as a result of the demerger from Wesfarmers, as if the change had occurred at the beginning of the comparative period. Diluted EPS is calculated on the same basis except that it includes the impact of any potential commitments the Group has to issue shares in the future. For the period, the potential dilution to the weighted average number of ordinary shares from employee performance rights was nil as shares are already issued and held by the Plan Trustee on behalf of the participants. Between the reporting date and the issue date of the Financial Report, there have been no transactions involving ordinary shares or potential ordinary shares that would impact the calculation of EPS disclosed in the table above. 3.3 Sales revenue Sale of goods The Group operates a network of supermarkets, retail liquor stores and convenience stores, as well as online platforms. Revenue is recognised by the Group when it is the principal in the sales transaction. Revenue from the sale of goods is recognised when control of the goods has transferred to the customer. For goods purchased in-store, control of the goods transfers to the customer at the point of sale. For goods purchased online, control of the goods transfers to the customer upon delivery, or when collected by the customer. Revenue comprises the fair value of consideration received or receivable for the sale of goods and is recorded net of discounts and goods and services tax (GST). 3.4 Administration expenses Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 The Group’s accounting policy for liabilities associated with employee benefits is set out in Note 4.8. The policy relating to share-based payments is set out in Note 9.2. Share-based payments expense includes both awards granted by the Company that will be settled in equity of the Company and awards granted by Wesfarmers (pre demerger) to employees of the Group that will be settled in equity of Wesfarmers. Retirement benefit obligations The Group contributes to a number of superannuation funds on behalf of its employees, and the Group’s legal or constructive obligation is limited to these contributions. Contributions payable by the Group are recognised as an expense in the Statement of Profit or Loss when incurred. 3.5 Financing costs Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 $M 29.8 7.3 4.4 41.5 $M - 0.1 - 0.1 Interest expense Discount rate adjustment Other finance related costs Total financing costs Financing costs Financing costs consist of interest and other costs incurred in connection with the borrowing of funds as well as the discount rate adjustments associated with non-current provisions (excluding employee benefits). Financing costs are expensed in the period in which they are incurred. 3.6 Income tax The major components of income tax expense in the consolidated Statement of Profit or Loss are set out below: Employee benefits expense Occupancy and overheads Depreciation and amortisation Marketing expenses Impairment Other Total administration expenses $M 4,532.9 1,635.1 639.6 213.6 42.0 967.8 8,031.0 $M 4,321.4 1,600.3 649.6 212.5 49.0 898.9 7,731.7 Current income tax expense Adjustment in respect of current income tax of previous years Deferred income tax relating to origination and reversal of temporary differences Adjustment in respect of deferred income tax of previous years Income tax expense reported in Statement of Profit or Loss Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 $M 428.5 8.3 (85.6) (4.2) 347.0 $M 460.5 6.4 (6.3) (4.5) 456.1 The components of income tax expense recognised in the consolidated Statement of Other Comprehensive Income are set out below: Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 $M 0.6 0.6 $M - - Deferred tax related to items recognised in OCI during the year: Net loss on revaluation of cash flow hedges Deferred tax charged to OCI The tax expense included in the Statement of Profit or Loss consists of current and deferred income tax. Current income tax is: Deferred income tax is: • • • the expected tax payable on the taxable income for the year calculated using tax rates enacted or substantively enacted at the reporting date inclusive of any adjustment to income tax payable or recoverable in respect of previous years • recognised using the liability method • based on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for taxation purposes • calculated using the tax rates that are expected to apply in the period when the liability is settled or the asset realised, based on the tax rates that have been enacted or substantively enacted by the reporting date Both current and deferred income tax are charged or credited to the Statement of Profit or Loss. However, when it relates to items charged or credited directly to the Statement of Changes in Equity or Statement of Other Comprehensive Income, the tax is recognised in equity, or other comprehensive income (OCI), respectively. Reconciliation of the Group’s applicable tax rate to the effective tax rate Profit before tax from continuing operations Profit before tax from discontinued operations Profit before income tax At Australia’s corporate tax rate of 30% (30 June 2018: 30%) Adjustments in respect of income tax of previous years Share of results of joint venture Non-deductible expenses for income tax purposes Non-assessable income for income tax purposes1 Tax consolidation adjustments2 At the effective income tax rate of 25.8% (30 June 2018: 30.5%) Income tax expense reported in the consolidated Statement of Profit or Loss Income tax attributable to discontinued operations Tax Consolidation Pre demerger For the period up to 27 November 2018, the Group paid tax as part of Wesfarmers’ group taxation arrangements. On 28 November 2018, the Group exited Wesfarmers’ Australian income tax consolidated group. The Group’s entities exited clear from any further income tax liability; past or future tax obligations that may arise in respect of the period the Group was a member of the Wesfarmers’ Australian income tax consolidated group will be borne by Wesfarmers. Post demerger The Company has made a decision to form an income tax consolidated group with its 100% owned Australian resident subsidiaries with effect from 31 December 2018. The Company is the head entity of the tax consolidated group. Members of the group have entered into a taxation sharing agreement which operates to manage joint and several liability for group tax liabilities amongst group members, as well as enabling group members to leave the group clear of future group tax liabilities. Members of the group have also entered into a taxation funding agreement which provides that each member of the tax consolidated group pay a tax equivalent amount to or from the parent in accordance with their notional current tax liability or current tax asset. Such amounts are reflected in amounts receivable from or payable to the Company in the financial statements of subsidiaries and are settled as soon as practicable after lodgement of the consolidated tax return and payment of the tax liability. Key estimate: Tax cost base of revenue and capital assets Upon formation of the income tax consolidated group, the tax cost base of revenue and capital assets are required to be reset under Australian taxation legislation which is calculated by reference to independent market valuations. In performing these valuations, certain judgements and assumptions are made such as future earnings and discount rates. The tax cost base of revenue and capital assets was reset on 31 December 2018 giving rise to a $49.9m net credit to income tax expense with corresponding changes to deferred tax balances. The judgements and assumptions adopted in the independent market valuations may be subject to review at a future date which could impact the net credit to income tax expense and deferred tax balances recognised in the year ended 30 June 2019. Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 $M 1,425.2 508.5 1,933.7 580.1 4.1 (1.5) 14.9 (48.7) (49.9) 499.0 347.0 152.0 499.0 $M 1,479.3 791.5 2,270.8 681.2 1.9 (4.9) 13.8 - - 692.0 456.1 235.9 692.0 1 Reflects the accounting gain arising from the establishment of the incorporated joint venture that is not assessable for income tax purposes (refer to Note 2.2). 2 Reflects the reset of the tax cost base of revenue assets and capital assets associated with the formation of an income tax consolidated group (refer to Note 2.2). Coles Group Limited 2019 Annual Report 76 Coles Group Limited 2019 Annual Report 77 3.6 Income tax (continued) Deferred income tax balances recognised in the consolidated Statement of Financial Position 4. Assets and liabilities. 30 June 2019 Provisions Employee benefits Trade and other payables Inventories Property, plant and equipment Cash flow hedges Other individually insignificant balances Deferred tax assets Accelerated depreciation for tax purposes Intangible assets Other individually insignificant balances Deferred tax liabilities Net deferred tax assets 30 June 2018 Provisions Employee benefits Trade and other payables Inventories Property, plant and equipment Other individually insignificant balances Deferred tax assets Accelerated depreciation for tax purposes Intangible assets Other individually insignificant balances Deferred tax liabilities Net deferred tax assets OPENING BALANCE CHARGED TO PROFIT OR LOSS Consolidated CREDITED TO OCI ACQUISITIONS / (DISPOSALS) CLOSING BALANCE $M 80.2 277.0 11.7 65.1 241.2 - 48.8 724.0 59.3 69.9 54.5 183.7 540.3 $M 48.3 6.9 (2.5) (1.9) (2.5) - 1.4 49.7 29.8 (56.8) (2.6) (29.6) 79.3 $M - - - - - 0.6 - 0.6 - - - - $M (36.3) (68.6) 5.9 (22.2) (111.9) - (28.7) (261.8) (0.8) (6.0) 0.3 (6.5) 0.6 (255.3) $M 92.2 215.3 15.1 41.0 126.8 0.6 21.5 512.5 88.3 7.1 52.2 147.6 364.9 OPENING BALANCE CHARGED TO PROFIT OR LOSS Consolidated CREDITED TO OCI ACQUISITIONS / (DISPOSALS) CLOSING BALANCE $M 71.2 258.3 1.5 59.1 221.1 38.2 649.4 24.6 71.7 52.5 148.8 500.6 $M 9.0 18.7 10.2 6.0 20.1 10.6 74.6 34.7 (1.8) 2.0 34.9 39.7 $M $M - - - - - - - - - - - - - - - - - - - - - - - - $M 80.2 277.0 11.7 65.1 241.2 48.8 724.0 59.3 69.9 54.5 183.7 540.3 Note: Movement in deferred income tax balances includes KTO. Tax assets and liabilities Goods and Services Tax (GST) Deferred tax assets are recognised to the extent it is probable that taxable profits will be available against which deductible temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered. Deferred tax assets and liabilities are offset against each other when there is a legally enforceable right to set off current taxation assets against current taxation liabilities and it is the intention to settle these on a net basis. The Group has an unrecognised deferred tax asset relating to a deductible temporary difference arising from its investment in Loyalty Pacific Pty Ltd (operator of flybuys loyalty program). A deferred tax asset has not been recognised for this item because the Group has determined that, at this time, it is not probable that eligible capital gains will be available against which the Group can utilise these benefits. The unrecognised deferred tax asset is $55.2 million (2018: $nil). Tax provisions are recognised for uncertain tax positions where a risk of an additional tax liability has been identified and it is probable that the Group will be required to settle that tax. Measurement is based on expectations of the outcome of decisions by taxation authorities. There were no uncertain tax provisions recognised by the Group at 30 June 2019. Revenue, expenses and assets are recognised net of GST, except: • when the GST incurred on the sale or purchase of assets or services is not payable to or recoverable from the taxation authority, in which case GST is recognised as part of the revenue or the expense item or as part of the cost of acquisition of the asset; or • when receivables are stated with the amount of GST included. The net amount of GST recoverable from or payable to the taxation authority is included as part of receivables or payables in the Statement of Financial Position. Commitments and contingencies are disclosed net of the amount of GST recoverable from or payable to the taxation authority. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities where recoverable or payable to the taxation authority is classified as part of operating cash flows. This section details the assets used in the Group’s operations and the liabilities incurred as a result. 4.1 Cash and cash equivalents 4.2 Trade and other receivables Cash and cash equivalents are comprised of the following: Consolidated 30 JUNE 2019 30 JUNE 20181 $M 530.0 410.4 - 940.4 $M 555.0 1.0 130.1 686.1 Trade receivables1 Other receivables Allowance for expected credit losses Total trade and other receivables Consolidated 30 JUNE 2019 30 JUNE 20182 $M 225.5 142.2 367.7 (8.0) 359.7 $M 310.8 204.5 515.3 (18.1) 497.2 Cash on hand and in transit Cash at bank and on deposit Cash attributable to discontinued operations Total cash and cash equivalents 1 Includes commercial income due from suppliers of $102.0 million (2018: $124.0 million). 2 EFT, debit and credit card transactions not yet settled have been reclassified from trade receivables to cash and cash equivalents (resulting in a $230.9 million adjustment for the comparative period). Trade and other receivables are classified as financial assets held at amortised cost. Trade receivables Trade receivables are initially recognised at fair value and subsequently at amortised cost using the effective interest method, less an allowance for expected credit losses (impairment provision). The carrying value of trade and other receivables, less impairment provisions, is considered to approximate fair value, due to the short-term nature of the receivables. Impairment of trade receivables The collectability of trade and other receivables is reviewed on an ongoing basis. Individual debts which are known to be uncollectable are written off when identified. The Group recognises an impairment provision based upon anticipated lifetime losses of trade receivables. The anticipated lifetime losses are determined with reference to historical experience and are regularly reviewed and updated. The amount of the impairment loss is recognised in the Statement of Profit or Loss within ‘administration expenses’. 4.3 Other assets Other assets are comprised of the following: Prepayments Other assets Total other current assets Prepayments Other assets Total other non-current assets Consolidated 30 JUNE 2019 30 JUNE 2018 $M 45.8 1.2 47.0 23.7 110.4 134.1 $M 97.9 1.6 99.5 - 90.6 90.6 1 Electronic funds transfer (EFT), debit and credit card transactions not yet settled have been reclassified from trade receivables to cash and cash equivalents (resulting in a $230.9 million adjustment for the comparative period). All receivables from EFT, credit card and debit card point of sale transactions during the period are classified as cash and cash equivalents. For the purpose of the Statement of Cash Flows, cash and cash equivalents includes cash on hand and in transit, at bank and on deposit, net of outstanding bank overdrafts which are repayable on demand. Cash at bank earns interest at floating rates based on daily bank deposit rates. Short-term deposits earn interest at the respective short-term deposit rates. Reconciliation of profit for the period from continuing operations to net cash flows from operating activities Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 $M $M 1,078.2 1,023.2 639.6 42.0 (133.0) 4.7 (5.0) 4.6 - (3.8) 137.0 (44.6) (1.0) (11.1) (91.0) 143.1 (9.0) 586.0 (61.3) 649.6 49.0 - (25.7) (16.3) - 16.3 (7.7) 1.7 16.9 4.3 (3.2) (21.0) (23.5) 182.3 50.4 13.6 Profit for the period Adjusted for: Depreciation and amortisation Impairment and write-off of non-current assets Net gain on sale of controlled entities Net loss / (gain) on disposal of non-current assets Share of profit of equity accounted investments Share-based payments expense Dividends and distributions received from equity accounted investment Other Changes in assets and liabilities: Decrease in inventories (Increase) / decrease in trade and other receivables (Increase) / decrease in prepayments Increase in other assets Increase in deferred tax assets Increase / (decrease) in income tax payable (Decrease) / increase in trade and other payables Increase in provisions (Decrease) / increase in other liabilities Net cash flows from operating activities 2,275.4 1,909.9 Note: Changes in assets and liabilities reflect continuing operations only and exclude KTO. Coles Group Limited 2019 Annual Report 78 Coles Group Limited 2019 Annual Report 79 4.4 Inventories Inventories comprise goods held for resale which are valued at the lower of cost and net realisable value, which is the estimated selling price less estimated costs to sell. The cost of inventory is based on purchase cost, after deducting certain types of commercial income and including logistics and store remuneration incurred in bringing inventories to their present location and condition. Volume-related supplier rebates, and supplier promotional rebates where they exceed spend on promotional activities, are accounted for as a reduction in the cost of inventory and recognised in the Statement of Profit or Loss when the inventory is sold. Key estimate: Net realisable value An inventory provision is recognised where the realisable value from sale of inventory is estimated to be lower than the inventory’s carrying value. Inventory provisions for different product categories are estimated based on various factors, including expected sales profile, prevailing sales prices, seasonality and expected losses associated with slow-moving inventory items. Commercial income Commercial income represents various discounts or rebates provided by suppliers. These include: • settlement discounts for the purchase of inventory • discounts based on purchase or sales volumes • contributions towards promotional activity for a supplier’s product Depending on the type of arrangement with the supplier, commercial income will either be deducted from the cost of inventory (where it relates to the purchase of inventory) or recognised as a reduction in related expenses (where it relates to the sale of goods). Amounts due from suppliers are recognised within trade receivables, except in cases where the Group currently has a legally enforceable right of set-off, in which case only the net amount receivable or payable is presented. Refer to Note 6.3 for details of amounts offset in the consolidated Statement of Financial Position. Key estimate: Commercial income The recognition of certain types of commercial income requires the following estimates: • the volume of inventory purchases that will be made during a specific period • the amount of the related product that will be sold • the balance remaining in inventory at the reporting date. Estimates are based on historical and forecast sales and inventory turnover levels. 4.5 Property, plant and equipment Property, plant and equipment is carried at cost less accumulated depreciation and any recognised impairment. Cost comprises expenditure that is directly attributable to the acquisition of the item and subsequent costs incurred that are eligible for capitalisation. Repairs and maintenance costs are charged to the Statement of Profit or Loss during the period in which they are incurred. Property, plant and equipment is depreciated on a straight-line basis to its residual value over its expected useful life. Consolidated LAND BUILDINGS PLANT & EQUIPMENT LEASEHOLD IMPROVEMENTS TOTAL $M $M $M $M $M Useful life (range) Not applicable 20 – 40 Years 3 – 20 Years Term of lease At 30 June 2019 Cost Accumulated depreciation and impairment Net carrying amount Carrying amount at beginning of the financial year Additions Transfers between classes Transfer to non-current assets held for sale Depreciation Impairment Disposals and write-offs1 Carrying amount at end of the financial year Construction work in progress included above At 30 June 2018 Cost Accumulated depreciation and impairment Net carrying amount Carrying amount at beginning of the financial year Additions Transfers between classes Depreciation Impairment Disposals1 Carrying amount at end of the financial year Construction work in progress included above 472.1 - 472.1 627.9 59.9 - (68.9) - (38.0) (108.8) 472.1 - 627.9 - 627.9 676.5 58.1 21.7 - (53.7) (74.7) 627.9 - 260.1 (8.7) 251.4 334.8 64.0 - (10.2) (5.5) - (131.7) 251.4 92.1 354.9 (20.1) 334.8 380.5 73.1 (21.0) (4.2) - (93.6) 334.8 97.9 6,245.0 (3,298.3) 2,946.7 3,800.8 864.4 9.6 (14.4) (533.0) (4.0) (1,176.7) 2,946.7 345.1 8,255.3 (4,454.5) 3,800.8 3,873.5 656.8 (2.6) (663.0) (18.7) (45.2) 3,800.8 312.8 967.9 (518.9) 449.0 459.5 88.2 4.4 (0.6) (68.4) - (34.1) 449.0 57.4 978.2 (518.7) 459.5 436.6 87.7 1.9 (65.1) (0.8) (0.8) 459.5 52.4 7,945.1 (3,825.9) 4,119.2 5,223.0 1,076.5 14.0 (94.1) (606.9) (42.0) (1,451.3) 4,119.2 494.6 10,216.3 (4,993.3) 5,223.0 5,367.1 875.7 - (732.3) (73.2) (214.3) 5,223.0 463.1 1 Net loss on disposal of property, plant and equipment during the year from continuing operations was $4.7 million (2018: $28.2 million net gain). Coles Group Limited 2019 Annual Report 80 Coles Group Limited 2019 Annual Report 81 4.6 Intangible assets The Group’s intangible assets comprise licences, software and goodwill. Licences and software Goodwill Licences and software are measured initially at acquisition cost or costs incurred to develop the asset. Intangible assets acquired in a business combination are recognised at fair value at the acquisition date. Following initial recognition, intangible assets with finite useful lives are carried at cost less accumulated amortisation and accumulated impairment losses. They are amortised on a straight-line basis over their estimated useful lives. Intangible assets with indefinite useful lives are not amortised. Instead they are tested for impairment annually or more frequently if events or changes in circumstances indicate they may be impaired. Licences have been assessed as having indefinite lives on the basis that the licences are expected to be renewed in line with business continuity requirements. The goodwill recognised by the Group has arisen as a result of business combinations and represents the future economic benefits that arise from assets that are not capable of being individually identified and separately recognised. Goodwill is initially measured as the amount the Group has paid in acquiring a business over and above the fair value of the individual assets and liabilities acquired. Goodwill is considered to have an indefinite useful economic life. It is therefore not amortised but is instead tested annually for impairment or more frequently, if events or changes in circumstances indicate that it might be impaired. Goodwill is carried at cost less any accumulated impairment losses and, for the purpose of impairment testing, is allocated to cash generating units. 4.7 Trade and other payables Trade and other payables are comprised of the following: Trade payables Other payables Consolidated 30 JUNE 2019 30 JUNE 2018 $M 2,662.0 717.9 $M 4,198.7 3,809.8 Total trade and other payables 3,379.9 8,008.5 Trade payables are non-interest-bearing and are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. 4.8 Provisions Provision Employee benefits Provisions for employee entitlements to wages, salaries and annual leave (which are expected to be settled wholly within 12 months of the reporting date) represent the amount which the Group has a present obligation to pay, resulting from employees’ services up to the reporting date. All other short-term employee benefit obligations are presented as payables. Liabilities for long service leave and non-current annual leave (which are not expected to be settled wholly within 12 months of the reporting date) are recognised within the non-current provision for employee benefits and measured as the present value of expected future payments to be made in respect of services up to the reporting date. Refer to Note 6.1 for further details on impairment testing. Consolidated Restructuring For internally generated software, research costs are expensed as incurred. Development expenditure is capitalised when management has the intention to develop the asset, it is probable that future economic benefits will flow to the Group and the cost can be reliably measured. Consolidated GOODWILL BRANDS SOFTWARE LICENCES $M $M $M $M Useful life Not applicable Indefinite 5 years Indefinite At 30 June 2019 Cost Accumulated amortisation and impairment Net carrying amount Carrying amount at beginning of the financial year Additions Transfers between classes Disposals and write-offs Amortisation Carrying amount at end of the financial year Development work in progress included above At 30 June 2018 Cost Accumulated amortisation and impairment Net carrying amount 1,152.5 - 1,152.5 1,193.1 0.4 - (41.0) - 1,152.5 - 1,193.1 - 1,193.1 Carrying amount at beginning of the financial year 1,192.4 Additions Disposals and write-offs Amortisation Carrying amount at end of the financial year Development work in progress included above 0.7 - - 1,193.1 - - - - 100.0 - - (100.0) - - - 100.0 - 100.0 - 100.0 - - 100.0 - 1,191.0 (829.1) 361.9 517.0 86.3 (14.0) (103.7) (123.7) 361.9 82.1 1,387.0 (870.0) 517.0 531.3 130.4 - (144.7) 517.0 92.4 27.0 (0.8) 26.2 155.6 0.6 - (130.0) - 26.2 - 159.2 (3.6) 155.6 154.7 1.3 (0.4) - 155.6 - TOTAL $M 2,370.5 (829.9) 1,540.6 1,965.7 87.3 (14.0) (374.7) (123.7) 1,540.6 82.1 2,839.3 (873.6) 1,965.7 1,878.4 232.4 (0.4) (144.7) 1,965.7 92.4 Key estimates • expected future wages and salaries • attrition (applicable to long service leave provisions only) • discount rates Restructuring provisions are based on a number of estimates including, but not limited to: • number of employees impacted • employee tenure and costs • restructure timeframes • discount rates Self-insurance provisions are based on a number of estimates including, but not limited to: • discount rates • future inflation • average claim size • claims development • risk margin Current Employee benefits Restructuring provision Lease provision Self-insurance liabilities Other Total current Non-current Employee benefits Restructuring provisions Lease provisions Self-insurance liabilities Other Total non-current 30 JUNE 2019 30 JUNE 2018 $M $M 600.6 18.7 6.5 108.1 9.0 742.9 87.1 149.5 105.5 256.3 - 787.9 17.3 1.7 - 12.4 819.3 108.3 0.5 156.4 - 7.2 598.4 272.4 Restructuring provisions are recognised when restructuring has either commenced or been publicly announced and the Group has a detailed formal plan identifying: • the business or part of the business impacted • the location and approximate number of employees impacted • an estimate of the associated costs • the timeframe for restructuring activities Self-insurance The Group is self-insured for workers compensation and general liability risks. The Group seeks external actuarial advice in determining self-insurance provisions. Provisions are discounted and are based on claims reported and an estimate of claims incurred but not reported. These estimates are reviewed bi-annually, and any reassessment of these estimates will impact self- insurance expense. Provisions are: • recognised when the Group has a legal or constructive obligation as a result of a past event, it is probable that cash will be required to settle the obligation and the amount can be reliably estimated • measured at the present value of the estimated cash outflow required to settle the obligation. Where a provision is non-current, and the effect is material, the nominal amount is discounted. The discount is recognised as a financing cost in the Statement of Profit or Loss. Movements in restructuring, leases, self-insurance and other provisions RESTRUCTURING LEASE1 SELF-INSURANCE OTHER TOTAL Consolidated $M 17.8 164.7 (3.8) - 3.5 (14.0) 168.2 18.7 149.5 $M 158.1 4.4 (6.8) - - (43.7) 112.0 6.5 105.5 $M - 423.6 (66.6) (9.8) 17.2 - 364.4 108.1 256.3 $M 19.6 3.8 (4.4) - - (10.0) 9.0 9.0 - $M 195.5 596.5 (81.6) (9.8) 20.7 (67.7) 653.6 142.3 511.3 At 1 July 2018 Arising during the year Utilised Unused amounts reversed Unwind / changes in the discount rate Disposal of subsidiaries At 30 June 2019 Current Non-current 1The lease provision covers stepped lease arrangements to enable lease expenses to be recognised on a straight-line basis over the lease term. Actual lease payments may vary from the amounts provided where alternate uses are found for these premises, including attraction of new tenants. Coles Group Limited 2019 Annual Report 82 Coles Group Limited 2019 Annual Report 83 5. Capital. 6. Risk. This section provides information relating to the Group’s capital structure and ﬁnancing. This section details the Group’s exposure to various ﬁnancial risks, explains how these risks may impact the Group’s ﬁnancial performance or position and how the Group manages these risks. 5.3 Dividends paid and proposed The Company considers current earnings, future cash ﬂow requirements, targeted credit metrics and availability of franking credits in determining the amount of dividends to be paid. Dividends are recognised as a liability in the Statement of Financial Position in the period in which they are declared by the Board. Dividends proposed and not recognised as a liability Since the reporting date, the Directors have declared a total dividend of 35.5 cents per fully paid ordinary share. This comprises a ﬁnal dividend of 24.0 cents per fully paid ordinary share and a special dividend of 11.5 cents per fully paid ordinary share, fully franked at the corporate tax rate of 30%. The aggregate amount of the total dividend to be paid out of proﬁts, but not recognised as a liability at 30 June 2019, will be $473.5 million. The record date for determining entitlements to both dividends was 29 August 2019, with the payment date being 26 September 2019. Franking account Franking account balance as at reporting date at 30% Franking credits that will arise from the payment of income tax payable as at the end of the ﬁnancial year Total franking credits available for subsequent ﬁnancial years based on a tax rate of 30% 30 JUNE 2019 30 JUNE 2018 $M 277.4 0.1 277.5 $M - - - The Group’s capital management strategy aims to ensure the Group has continued access to funding for current and future business activities by maintaining a mix of equity and debt ﬁnancing, while maximising returns to shareholders. The Group’s objective is to maintain an investment grade credit rating to optimise the weighted average cost of capital over the long term, enable access to long term debt capital markets and build investor conﬁdence. The Directors consider the capital structure at least twice a year and provide oversight of the Group’s capital management. Capital is managed through the following: • the amount of ordinary dividends paid to shareholders • raising and returning capital • repaying or raising debt in line with ongoing business requirements and growth opportunities aligned with the Group’s strategic objectives. 5.1 Interest-bearing liabilities Prior to the demerger, the Group was funded through working capital facilities and intercompany loans provided by Wesfarmers. In November 2018, the Group entered into a number of revolving multi-option and term loan facilities. These bilateral bank loan facilities in aggregate total $4,000.0 million (‘Coles facilities’). The Coles facilities have the following maturities: $2,540.0 million in November 2021, $1,310.0 million in November 2023 and $150.0 million in November 2025. At 30 June 2019, the facilities maturing in November 2023 and November 2025 were fully drawn. Interest-bearing loans and borrowings are initially recorded at fair value, net of attributable transaction costs. Subsequent to initial recognition, interest-bearing loans and borrowings are measured at amortised cost using the effective interest method. Gains and losses are recognised in the Statement of Proﬁt or Loss when the liabilities are derecognised. 5.2 Contributed equity and reserves Ordinary shares No. (millions) $M At 30 June 2018 1,200.3 2,192.6 Share split associated with the demerger 133.6 Capital return to Wesfarmers Purchase of shares under Equity Incentive Plan - - - (538.0) (26.8) At 30 June 2019 Ordinary shares 1,333.9 1,627.8 Ordinary shares issued are classiﬁed as equity, are fully paid and carry one vote per share and the right to dividends. Incremental costs directly attributable to the issue of new shares are recognised as a deduction from equity, net of any related income tax beneﬁt. Cash ﬂow hedge reserve The hedging reserve records the portion of the gain or loss on a cash ﬂow hedging instrument that is determined to be in an effective hedge relationship. The effective portion of the gain or loss on the hedging instrument is recognised in the Statement of Other Comprehensive Income within the cash ﬂow hedge reserve, while any ineffective portion is recognised immediately in the Statement of Proﬁt or Loss. Share-based payments reserve The share-based payments reserve reﬂects the fair value of awards recognised as an expense in the Statement of Proﬁt or Loss. 6.1 Impairment of non-ﬁnancial assets The Group tests property, plant and equipment and intangible assets for impairment to ensure they are not carried above their recoverable amounts: For the year ended 30 June 2019, net impairment of non-ﬁnancial assets of $42.0 million was recognised for continuing operations, of which $38.0 million ($87.9 million offset by $49.9 million reversal) relates to the Group’s property portfolio. • at least annually for goodwill • where there is an indication that assets may be impaired (which is assessed at least at each reporting date). These tests are performed by assessing the recoverable amount of each individual asset or, if this is not possible, the recoverable amount of the cash generating unit (CGU) to which the asset belongs. CGUs are the lowest levels at which assets are grouped and generate separately identiﬁable cash inﬂows. The recoverable amount, measured at the asset or CGU level, is the higher of fair value less costs of disposal (FVLCOD), or value in use (VIU). VIU calculations are based on the discounted cash ﬂows expected to arise from the asset or CGU. Key estimate: Assessment of recoverable amount In assessing VIU, the estimated future cash ﬂows are discounted to their present value using a discount rate that reﬂects the current market assessment of the time value of money and the risks speciﬁc to the asset or CGU. These calculations depend on judgements and estimates. In particular, signiﬁcant judgements and estimates are made in relation to the following: • Forecast future cash ﬂows These are based on the Group’s latest Board approved internal ﬁve-year forecasts and reﬂect management’s best estimate of income, expenses, capital expenditure and cash ﬂows for each asset or CGU. Changes in selling prices and direct costs are based on past experience and management’s expectation of future changes in the markets in which the Group operates. • Discount rates Estimated future cash ﬂows are discounted to their present value using discount rates that reﬂect the Group’s weighted average cost of capital, adjusted for risks speciﬁc to the asset or CGU. The rates have been calculated in conjunction with independent valuation experts. • Expected long-term growth rates Cash ﬂows beyond the ﬁve-year period are extrapolated using estimated long-term growth rates. The growth rates are based on historical performance as well as expected long-term market operating conditions speciﬁc to each CGU and are consistent with long-term average industry growth rates. Growth rates have been calculated with the assistance of independent valuation experts. The judgements and estimates used in assessing impairment are best estimates based on current and forecast market conditions and are subject to change in the event of shifting economic and operational conditions. Actual cash ﬂows may therefore differ from forecasts and could result in changes to impairment recognised in future years. The net impairment is included in administration expenses in the Statement of Proﬁt or Loss as it relates to the day-to-day management of the Group’s freehold property portfolio (included within ‘other’ for segment reporting purposes). For the year ended 30 June 2018, net impairment of non-ﬁnancial assets of $49.0 million was recognised for continuing operations, of which $45.4 million ($52.7 million offset by $7.3 million reversal) related to the Group’s property portfolio (included in administration expenses in the Statement of Proﬁt or Loss and within ‘other’ for segment reporting purposes). Recognised impairment An impairment loss is recognised in the Statement of Proﬁt or Loss if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses recognised in respect of CGUs are allocated ﬁrst to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of the other assets in the CGU. Reversal of impairment Where there is an indication that previously recognised impairment losses may no longer exist or may have decreased, the asset is re-tested for impairment. The impairment loss is reversed only to the extent that the carrying amount of the asset does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, had no impairment loss been recognised. Impairments recognised for goodwill are not reversed. Goodwill impairment testing For the purpose of impairment testing, goodwill is allocated to CGUs or groups of CGUs according to the level at which management monitors goodwill. The VIU valuation methodology was applied to determine the recoverable amount of CGUs in the current year. The following table presents a summary of the goodwill allocation and the key assumptions used in determining the recoverable amount of each CGU: SUPERMARKETS LIQUOR EXPRESS Goodwill allocation ($M) 983.0 Indeﬁnite-life intangible assets ($M) Post-tax discount rate (%) Growth rate (%) - 8.3 3.0 124.5 26.2 8.3 3.0 45.0 - 8.6 2.0 In the year ended 30 June 2018, goodwill and indeﬁnite life intangibles were allocated to CGUs on a consistent basis. The FVLCOD valuation methodology was used to determine the recoverable amount of each CGU, using a post-tax discount rate of 8.6% and a growth rate of 3.0%. Based on current economic conditions and CGU performance, no reasonably possible change in a key assumption used in the determination of the recoverable value of CGUs is expected to result in a material impairment for the Group. Coles Group Limited 2019 Annual Report 84 Coles Group Limited 2019 Annual Report 85 6.2 Financial risk management 6.2 Financial risk management (continued) Liquidity risk for continuing operations The following note outlines the Group’s exposure to and management of financial risks. These arise from the Group’s requirement to access financing (bank loans and overdrafts), from the Group’s operational activities (cash, trade receivables and payables) and from instruments held as part of the Group’s risk management activities (derivative financial instruments). The Group’s financial risk management is carried out by the Group Treasury function and governed by the Board-approved Treasury Policy (the ‘Policy’). The Policy strictly prohibits speculative positions to be taken. The Policy requires periodic reporting of financial risks to the Board, and its application is subject to oversight from the Chief Financial Officer and the Chair of the Audit and Risk Committee. Management of financial risks is undertaken by the Group in line with its risk management principles and includes the following key steps: risk identification, risk measurement, setting risk tolerances and hedging objectives, strategy design and strategy implementation. The Policy allows the use of various derivatives to hedge financial risks and provides guidance in relation to volume and tenor of these instruments. In the normal course of business the Group’s continuing operations are exposed to various risks as set out below: Risk Exposure Management Market risks Interest rate risk Foreign exchange risk The Group’s exposure to interest rate risk relates primarily to interest-bearing liabilities where interest is charged at variable rates. The Group manages interest rate risk by having access to both fixed and variable debt facilities. In line with the Policy, this risk is further managed by hedging a portion of the variable rate debt exposures with derivative financial instruments to convert floating rate debt obligations to fixed rate obligations. The Group has exposure to foreign exchange risk principally arising from purchases of inventory and capital equipment denominated in foreign currencies. To manage foreign currency transaction risk, the Group hedges material foreign currency denominated expenditure at the time of the commitment and hedges a proportion of foreign currency denominated forecast exposures (mainly relating to the purchase of inventory) through the use of forward foreign exchange contracts. Liquidity risk The Group is exposed to liquidity and funding risk from operations and external borrowings. Credit risk Liquidity risk is the risk that unforeseen events cause pressure on, or curtail, the Group’s cash flows. Funding risk is the risk that sufficient funds will not be available to meet the Group’s financial commitments in a timely manner. The Group is exposed to credit risk from its financing activities, including deposits with financial institutions and other financial instruments. With respect to credit risk arising from cash and cash equivalents, trade and other receivables and certain derivative instruments, the Group’s exposure arises from default of the counterparty. Credit risk for the Group also arises from various financial guarantees in which members of the Group act as guarantor. Liquidity risk is measured under both normal market operating conditions and under a crisis situation which curtails cash flows for an extended period. This approach is designed to ensure that the Group’s funding framework is sufficiently flexible to ensure liquidity under a wide range of market conditions. The Group regularly reviews its short, medium and long term funding requirements. The Policy requires that sufficient committed funds are available to meet medium term requirements, with flexibility and headroom in the event a strategic opportunity should arise. The Group maintains a liquidity reserve in the form of undrawn facilities of at least $1 billion. The majority of the Group’s sales are on cash terms, and the Group’s exposure to credit risk from customer sales is therefore minimal. The Group’s trade and other receivables relate largely to commercial income due from suppliers and other receivables from creditworthy third parties. Counterparty limits, credit ratings and exposures are actively managed in accordance with the Policy. The Group’s exposure to bad debts is not significant, and default rates have historically been very low. The credit quality of trade and other receivables neither past due nor impaired has been assessed as high on the basis of credit ratings (where available) or historical information about counterparty default. Since the Group trades only with recognised creditworthy third parties, there is no requirement for collateral by either party. The carrying amount of trade and other receivables and other financial assets in the consolidated Statement of Financial Position represents the Group’s maximum exposure to credit risk. There is also exposure to credit risk where members of the Group have entered into guarantees; however, the probability of being required to make payments under these guarantees is considered remote. Refer to Note 8.3 for further details. Foreign exchange risk for continuing operations The Group is primarily exposed to foreign exchange risk in relation to the United States dollar (USD) and the Euro (EUR). The Group considers its exposure to USD and EUR arising from purchases to be a long-term and ongoing exposure that is highly probable. The table below sets out the total forward exchange contracts at the reporting date and the carrying value of the derivative asset / (liability) positions: At the reporting date, the Group has the following exposures to USD and EUR: USD $M EUR €M 2019 2018 2019 2018 NOTIONAL VALUE CARRYING VALUE Buy / sell USD / AUD 2019 $M 63.1 EUR / AUD 419.6 2018 $M - - 2019 $M 0.9 (13.3) 2018 $M - - WEIGHTED AVERAGE HEDGE RATE 2019 2018 0.71 0.58 - - Financial assets Cash and cash equivalents Forward exchange contracts Financial liabilities 2.2 45.0 - - Trade and other payables (39.2) (28.9) Net exposure 8.0 (28.9) - 242.61 (16.3) 226.3 - - (12.8) (12.8) 1 EUR forward exchange contracts of $212.6 million relate to capital commitments. The remaining contracts hedge current and future trade payables denominated in EUR. The Group aims to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts and bank loans with a variety of counterparties. The committed facilities of the Group are set out below: Consolidated 30 JUNE 2019 30 JUNE 2018 $M $M Foreign exchange rate sensitivity for continuing operations At the reporting date, had the Australian dollar moved against the USD and EUR (with all other variables held constant), the Group’s post-tax profit and OCI would have been affected by the change in value of its financial assets and financial liabilities. The following sensitivities are based on the foreign exchange risk exposures in existence at the reporting date and the determination of reasonably possible movements based on management’s assessment of reasonable fluctuations: POST-TAX PROFIT INCREASE / (DECREASE) POST-TAX OCI INCREASE / (DECREASE) 2019 $M 0.2 (0.2) (0.6) 0.7 2018 $M 2.5 (3.1) 1.3 (1.6) 2019 $M (0.9) 1.1 (22.7) 27.8 2018 $M - - - - Rate Change AUD / USD +10% -10% AUD / EUR +10% -10% Financing facilities available: Bank overdrafts Revolving multi-option facilities Term loan facilities Financing facilities utilised: Revolving multi-option facilities Guarantees issued1 Term loan facilities Interest rate risk for continuing operations At the reporting date, the Group has the following financial assets and liabilities exposed to variable interest rate risk that, with the exception of interest rate swaps, are not designated as cash flow hedges: Financing not utilised: Bank overdrafts Revolving multi-option facilities1 13.0 2,640.0 1,360.0 4,013.0 100.0 342.2 1,360.0 1,802.2 13.0 2,197.8 2,210.8 - - - - - - - - - - - 1 At 30 June 2019, the Company has issued bank guarantees totalling $342.2 million (2018: $nil) through the revolving multi-option facilities. While the Company has entered into these guarantees, the probability of having to make payments under these guarantees is considered remote. Refer to Note 8.3 for further details. The Group holds, at the reporting date, $940.4 million (2018: $686.1 million) cash and cash equivalents. Assets pledged as security for continuing operations A controlled entity has issued a floating charge over assets, capped at $80.0 million (30 June 2018: $80.0 million), as security for payment obligations for fuel sales collected on behalf of Viva Energy in accordance with the New Alliance Agreement. The assets are, therefore, excluded from financial covenants in all debt documentation. Consolidated EXPOSURE WEIGHTED AVERAGE INTEREST RATE EXPOSURE WEIGHTED AVERAGE INTEREST RATE 2019 $M 410.4 (1,460.0) 400.0 (649.6) % 1.6 (2.4) (0.4) 2018 $M 1.0 - - 1.0 % 1.0 - - Financial assets Cash at bank and on deposit Financial liabilities Bank loans Less: interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk Interest rate sensitivity for continuing operations A 100 basis point increase or decrease represents management’s assessment of the reasonably possible change in interest rates. Based on the variable interest rate exposures in existence at the reporting date, if interest rates moved by +/- 100 basis points, with all other variables held constant, the impact would be: POST-TAX PROFIT INCREASE / (DECREASE) POST-TAX OCI INCREASE / (DECREASE) Impacts of reasonably possible movements: +1.0% (100 basis points) -1.0% (100 basis points) 2019 $M (4.5) 4.5 2018 $M - - 2019 $M 7.9 (7.9) 2018 $M - - Coles Group Limited 2019 Annual Report 86 Coles Group Limited 2019 Annual Report 87 6.3 Financial instruments (continued) Hedge accounting Where the Group undertakes a hedge transaction it documents at the inception of the transaction the type of hedge, the relationship between hedging instruments and hedged items and its risk management objective and strategy for undertaking the hedge. The documentation also demonstrates, both at hedge inception and on an ongoing basis, that the hedge has been, and is expected to continue to be, highly effective. The Group uses derivative financial instruments for cash flow hedging purposes and designates them as such. Cash flow hedge Derivatives or other financial instruments that hedge the exposure to variability in cash flows attributable to a particular risk associated with an asset, liability or forecast transaction. The Group uses cash flows hedges to mitigate the risk of variability of: • future cash flows attributable to foreign currency fluctuations over the hedging period where the Group has highly probable purchase or settlement commitments denominated in foreign currencies; and • interest rate fluctuations over the hedging period where the Group has variable rate debt obligations. Recognition date At the date the hedging instrument is entered into. Measurement Measured at fair value. Changes in fair value Changes in the fair value of derivatives designated as cash flow hedges are recognised directly in OCI and accumulated in equity in the hedging reserve to the extent that the hedge is highly effective. To the extent that the hedge is ineffective, changes in fair value are recognised immediately in the Statement of Profit or Loss. Amounts accumulated in equity are transferred to the Statement of Profit or Loss, or the Statement of Financial Position for a non-financial asset, at the same time as the hedged item is recognised. At the time the forecast transaction impacts profit or loss or when the forecast transaction is no longer expected to occur, the cumulative gain or loss accumulated in equity is reclassified into profit or loss. 6.2 Financial risk management (continued) Maturity analysis for continuing operations The table below sets out the Group’s financial liabilities across the relevant maturity periods based on their contractual maturity date. At the reporting date, the remaining undiscounted contractual cash flows of the Group’s financial liabilities and their carrying amounts are as follows: Consolidated < 12 MONTHS 1-2 YEARS 2-5 YEARS > 5 YEARS TOTAL CONTRACTUAL CASH FLOWS CARRYING AMOUNT $M $M $M $M $M $M 3,378.1 - - - 3,378.1 3,378.1 44.2 44.2 1,400.0 155.4 1,643.8 1,461.9 1.6 1.1 2.6 0.6 5.9 6.5 0.6 2.8 9.3 - 12.7 12.4 30 June 2019 Trade and other payables Bank loans (principal and interest) Interest rate swaps Forward exchange contracts Total 3,424.5 48.1 1,411.9 156.0 5,040.5 4,858.9 30 June 2018 Trade and other payables 6,136.0 Total 6,136.0 - - - - - - 6,136.0 6,136.0 6,136.0 6,136.0 For variable rate instruments, the amount disclosed is determined by reference to the interest rate at the last re-pricing date. Contractual cash flows are undiscounted and as such will not necessarily agree with their carrying amounts. 6.3 Financial instruments Financial assets and liabilities measured at fair value The following table sets out the fair value measurement hierarchy of the Group’s financial assets and liabilities at 30 June 2019 for continuing operations: Consolidated LEVEL 1 LEVEL 2 LEVEL 3 TOTAL $M $M $M $M - - - 1.3 (6.5) (13.7) - - - 1.3 (6.5) (13.7) Financial assets Forward exchange contracts Financial liabilities Interest rates swaps Forward exchange contracts Valuation of financial instruments The Group measures certain financial instruments, such as derivatives, at fair value at each reporting date. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of an asset or liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. The Group uses valuation techniques that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy based on the lowest level input that is significant to the fair value measurement as a whole. Level 1 Fair value is calculated using quoted prices in active markets for identical assets or liabilities. Level 2 Fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices). Level 3 Fair value is estimated using inputs for the asset or liability that are not based on observable market data (unobservable inputs). For financial instruments that are carried at fair value on a recurring basis, the Group reassesses categorisation at the end of each reporting period. There have been no transfers between Level 1, Level 2 and Level 3 during the period. Derivatives The Group enters into derivative financial instruments with various counterparties, principally financial institutions with investment grade credit ratings. Foreign exchange forward contracts and interest rate swap contracts are valued using forward pricing techniques. This includes the use of market observable inputs, such as foreign exchange spot and forward rates, yield curves of the respective currencies and interest rate curves. Accordingly, these derivatives are classified as Level 2. Fair value of financial instruments that are not measured at fair value on a recurring basis The carrying value of cash and cash equivalents, trade and other receivables, trade and other payables and interest bearing liabilities of the Group appriximate their fair value. Offsetting of financial instruments The Group presents its derivative assets and liabilities on a gross basis, with the exception of derivative financial instruments which are subject to enforceable master netting arrangements, such as an International Swaps and Derivatives Association (ISDA) master netting agreement. In certain circumstances, for example when a credit event such as default occurs, all outstanding transactions under an ISDA agreement are terminated. The termination value is assessed, and only a single net amount is payable in settlement of all transactions. Commercial income due from suppliers is recognised within trade receivables, except in cases where the Group currently has a legally enforceable right of set-off and the intention to settle on a net basis, in which case only the net amount receivable or payable is recognised. The following table sets out the Group’s financial assets and financial liabilities which have been offset in the consolidated Statement of Financial Position at the reporting date: GROSS FINANCIAL ASSETS / (LIABILITIES) Consolidated GROSS FINANCIAL (LIABILITIES) / ASSETS SET OFF NET FINANCIAL ASSETS / (LIABILITIES) PRESENTED IN THE STATEMENT OF FINANCIAL POSITION $M $M $M 30 June 2019 Trade and other receivables 499.8 Trade and other payables (3,520.0) 30 June 2018 Trade and other receivables Trade and other payables 605.7 (8,117.0) (140.1) 140.1 (108.5) 108.5 359.7 (3,379.9) 497.2 (8,008.5) Coles Group Limited 2019 Annual Report 88 7. Group structure. This section provides information relating to subsidiaries and other material investments of the Group. 7.1 Equity accounted investments Loyalty Pacific Pty Ltd NAME OF COMPANY PRINCIPAL ACTIVITY PLACE OF INCORPORATION TYPE Ownership interest 30 JUNE 2019 30 JUNE 2018 Loyalty Pacific Pty Ltd Operator of flybuys loyalty program Queensland Venue Co. Pty Ltd Operator of Spirit Hotels and Queensland Retail Liquor business Australia Joint venture 50% 50% Australia Associate 50% - A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. An associate is an entity that is not controlled or jointly controlled by the Group, but over which the Group has significant influence. The Group accounts for its investments in joint ventures and associates using the equity method of accounting in the consolidated financial statements. Under the equity method, the investment in a joint venture or associate is initially recognised at cost. Thereafter, the carrying amount of the investment is adjusted to recognise the Group’s share of profit after tax of the joint venture or associate, which is recognised in profit or loss. The Group’s share of OCI is recognised within the Statement of Other Comprehensive Income. Dividends received from a joint venture or associate reduce the carrying amount of the investment. After application of the equity method, the Group determines whether it is necessary to recognise an impairment loss for its investment in a joint venture or associate. At each reporting date, the Group determines whether there is objective evidence that the investment in the joint venture or associate is impaired. If there is such evidence, the Group calculates the amount of impairment as the difference between the recoverable amount of the joint venture or associate and its carrying value. Any impairment loss will be recognised within ‘share of net profit of equity accounted investments’ in the consolidated Statement of Profit or Loss. Key judgement: Control and significant influence The Group has a number of management agreements relating to its joint venture and associate investments which it considers when determining whether it has control, joint control or significant influence. The Group assesses whether it has the power to direct the relevant activities of the investee by considering the rights it holds to appoint or remove key management and the decision making rights and scope of powers specified in the agreements. The Group’s interests in Loyalty Pacific Pty Ltd and Queensland Venue Co. Pty Ltd are accounted for using the equity method in the consolidated Statement of Financial Position. A reconciliation of the carrying amount of the Group’s investment in Loyalty Pacific Pty Ltd is set out below: Beginning of the period Net investment Profit for the period Dividends paid End of the period Consolidated 30 JUNE 2019 30 JUNE 2018 $M - 6.3 5.0 - 11.3 $M - - 16.3 (16.3) - Queensland Venue Co. Pty Ltd As disclosed in Note 2.2 Significant Items, during the year the Company entered into an incorporated joint venture with AVC for the operation of: • the 87 hotels that comprised the Group’s hotel and gaming business (Spirit Hotels); and • the 243 retail liquor stores in Queensland, and the 10 retail liquor stores in South Australia and Western Australia attached to Spirit Hotels’ venues, which operate under the Liquorland, First Choice, First Choice Liquor Market and Vintage Cellars brands (collectively the ‘Retail Liquor business’). As part of the transaction a group subsidiary company, LLQ, was converted into an incorporated joint venture company, QVC. To facilitate the transaction, QVC restructured its share capital by issuing two classes of shares: R-Shares which confer the right to the full economic benefit of the Retail Liquor business and H-Shares which confer the right to the full economic benefit of Spirit Hotels. The Company sold the H-shares to AVC, while retaining the R-shares. The transaction was implemented through a number of agreements, the most relevant of which are described below: • the Shareholders’ Deed, which governs the respective shareholding and decision making rights of the holders of H-shares and R-shares • the Retail Liquor Business Operations Agreement (RLBOA), which governs the rights and obligations of the parties in relation to the continued operation of the Retail Liquor business • the Supply Agreement which governs the supply of liquor by members of the Group to QVC for the Retail Liquor business. Under the Shareholders’ Deed the Company holds all R-shares in QVC and operates the Retail Liquor business through its wholly owned subsidiary, Liquorland (Australia) Pty Ltd (LLA), subject to the terms of the RLBOA. Through its ownership of R-shares, the Company has significant influence over QVC for accounting purposes and its investment in QVC is classified as an investment in an associate. Accordingly, the Company has recognised its interest in QVC at fair value using the equity method. This reflects the combined fair value of the R-shares and the economic rights under the RLBOA as a single arrangement. For accounting purposes, and under the operation of the RLBOA and Supply Agreement, LLA is considered the principal in relation to retail liquor sales due to its exposure to the economic risks and benefits associated with the Retail Liquor business. Accordingly, LLA recognises revenue from retail liquor sales by QVC directly in its Statement of Profit or Loss. Revenue recognised by QVC relates solely to Spirit Hotels. Furthermore, due to the application of service fees and cost recoveries between the Company and QVC, net profit relating to the Retail Liquor business as recognised by QVC is nominal. Coles Group Limited 2019 Annual Report 89 7.1 Equity accounted investments (continued) The table below provides summary financial information for QVC based on 100% ownership. The table also reconciles the Company’s rights to the net assets of the Retail Liquor business to the carrying amount of the Company’s investment in QVC: Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Net assets Net assets attributable to R-class shareholding1 Fair value adjustment2 Carrying amount of interest in associate 30 JUNE 2019 $M 56.8 279.1 335.9 63.0 14.5 77.5 258.4 40.1 160.9 201.0 1Reflects net assets used in the operations of the Retail Liquor business. 2Reflects the fair value of the R-shares and the associated economic rights under the RLBOA at the acquisition date. Revenue Profit for the period Other comprehensive income Total comprehensive income for the period Total comprehensive income for the period attributable to R-class shareholding 30 JUNE 2019 $M 49.8 1.0 - 1.0 - 7.2 Non-current assets held for sale At 30 June 2019, six of the Group’s properties with a total carrying value of $94.1 million have been classified as held for sale (2018: $nil). The Group classifies non-current assets and disposal groups as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. They are measured at the lower of their carrying amount and fair value less costs to sell. The criteria for held for sale classification is met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. A sale is considered highly probable when actions required to complete the sale indicate that it is unlikely significant changes to the sale will be made or that the decision to sell will be withdrawn, and where management is committed to a plan to sell the asset and the sale is expected to be completed within one year from the date of the classification. 7.3 Discontinued operations The Group presents as discontinued operations any component of the Group that has either been disposed of or is classified as held for sale, and: • represents a separate major line of business or geographical area of operations; and is part of a single coordinated plan to dispose of a separate major line of business, or geographical area of operations; or is a subsidiary acquired exclusively with a view to resale. • • The net results of discontinued operations are presented separately in the consolidated Statement of Profit or Loss. The following entities were material wholly-owned subsidiaries during the financial year until 19 November 2018 when the Company transferred control of these entities to Wesfarmers as part of the corporate restructure: • Kmart Australia Limited and controlled entities (‘Kmart’) • Target Australia Pty Ltd and controlled entities (‘Target’) • Officeworks Ltd and controlled entities (‘Officeworks’) The profit for the year for KTO discontinued operations is set out below, including comparative information: Revenue Expenses Profit before income tax Income tax expense Profit for the period from discontinued operations YEAR ENDED 30 JUNE 20191 YEAR ENDED 30 JUNE 2018 $M $M 4,341.2 11,023.6 (3,832.7) (10,232.1) 508.5 (152.0) 356.5 791.5 (235.9) 555.6 1 Financial performance reflects the period up to 19 November 2018. Assets and liabilities of KTO discontinued operations at the date of transfer to Wesfarmers are set out below, including comparative information: Assets Cash and cash equivalents Trade and other receivables Inventories Property, plant and equipment Goodwill and intangibles Other assets Total assets disposed Liabilities Trade and other payables Other liabilities Total liabilities disposed Net assets disposed 19 NOVEMBER 2018 30 JUNE 2018 $M $M 138.3 76.8 1,707.4 997.0 236.0 279.8 130.1 90.5 1,337.3 984.7 253.8 291.4 3,435.3 3,087.8 2,205.4 874.6 3,080.0 1,709.0 612.0 2,321.0 355.3 766.8 Cash flows for KTO discontinued operations during the year are set out below, including comparative information: Net cash flows from operating activities Net cash flows from / (used in) investing activities Net cash flows used in financing activities Net increase in cash and cash equivalents from discontinued operations 1 Cash flows reflect period up to 19 November 2018. YEAR ENDED 30 JUNE 20191 YEAR ENDED 30 JUNE 2018 $M 321.8 219.0 (531.6) $M 1,007.7 (328.9) (630.6) 9.2 48.2 EPS for KTO discontinued operations is set out below: Basic and diluted EPS (cents) 26.7 41.7 YEAR ENDED 30 JUNE 20191 YEAR ENDED 30 JUNE 2018 1 EPS reflects period up to 19 November 2018. Gain / loss on disposal Gain or loss on disposal is the difference between: • the carrying amount of the net assets plus any attributable goodwill and amounts accumulated in OCI; and • the proceeds of sale. No gain or loss has been recognised for the disposal of KTO. Coles Group Limited 2019 Annual Report 90 7.4 Subsidiaries The Company, which is the ultimate parent of the Group, is incorporated in Australia. Subsidiaries are consolidated from the date of acquisition, being the date the Company obtains control, and continue to be consolidated until the date that such control ceases. Control exists where the Company has the power to govern the financial and operating policies of the entity in order to obtain benefits from its activities. Set out below are the subsidiaries within the Group. All entities controlled by the Company at 30 June 2019 were incorporated in Australia and are wholly-owned unless stated otherwise. Andearp Pty Ltd Australian Liquor Group Ltd * Bi-Lo Pty. Limited * Charlie Carter (Norwest) Pty Ltd Chef Fresh Pty Ltd CMPQ (CML) Pty Ltd Coles Ansett Travel Pty Ltd (97.5% ownership) Coles Group Deposit Services Pty Ltd Coles Group Finance (USA) Pty Ltd Coles Group Finance Limited * Coles Group Properties Holdings Ltd * Coles Group Property Developments Ltd * Coles Group Superannuation Fund Pty Ltd Coles Group Supply Chain Pty Ltd * Coles Supermarkets Australia Pty Ltd * CSA Retail (Finance) Pty Ltd e.colesgroup Pty Ltd Eureka Operations Pty Ltd * GBPL Pty Ltd Grocery Holdings Pty Ltd * Katies Fashions (Aust) Pty Limited Liquorland (Australia) Pty. Ltd. * Newmart Pty Ltd now.com.au Pty Ltd Procurement Online Pty Ltd Retail Ready Operations Australia Pty. Ltd. * Richmond Plaza Shopping Centre Pty Ltd Tickoth Pty Ltd Coles Group Treasury Pty Ltd (formerly Coles Group Payments Pty Ltd) * Tooronga Holdings Pty Ltd Coles Online Pty Ltd * Coles Property Management Pty Ltd Coles Retail Services Pty Ltd Tyremaster Pty Ltd Waratah Cove Pty Ltd Entities formed/incorporated or acquired during the financial year Coles Financial Services Pty Ltd Coles FS Holding Company Pty Ltd (formerly Wesfarmers Finance Holding Company Pty Ltd) WFPL No 2 Pty Ltd WFPL Security SPV Pty Ltd Coles WFS Pty Ltd (formerly Wesfarmers Finance Pty Ltd) WFPL SPV Pty Ltd WFPL Funding Co Pty Ltd Entities disposed of during the financial year ACN 007 870 484 Pty Ltd ACN 061 462 593 Pty Ltd (formerly Mycar Automotive Pty Ltd) ACN 092 194 904 Pty Ltd LHG Pty Ltd LHG2 Pty Ltd LHG3 Pty Ltd ANKO Global Holdings Pty Ltd (formerly KAS Global Holdings Pty Ltd) Queensland Venue Co. Pty Ltd (formerly Liquorland (Qld) Pty Ltd) ANKO Retail Incorporated Brian Pty Ltd CMNZ Investments Pty Ltd Officeworks Businessdirect Pty Ltd Officeworks Ltd Officeworks NZ Limited Wesfarmers International Holdings Pty Ltd (formerly Coles Group International Pty Ltd) Officeworks Property Pty Ltd Kmart NZ Holdings Pty Limited (formerly Coles Group New Zealand Holdings Limited) Relationship Services Pty Limited Fitzgibbons Hotel Pty Ltd Fitzinn Pty Ltd Fosseys (Australia) Pty Ltd Hotel Wickham Investments Pty Ltd KAS Direct Sourcing Private Limited KAS Global Trading Pty Ltd KAS International Sourcing Bangladesh Pvt Ltd KAS International Trading (Shanghai) Company Limited KAS Pty Limited KAS Services India Private Limited Kmart Australia Limited Entities deregistered during the financial year CMFL Services Ltd Coles Melbourne Ltd Coles Properties WA Ltd Retail Investments Pty Ltd Target Australia Pty Ltd Target Australia Sourcing (Shanghai) Co Ltd Target Australia Sourcing Limited The Grape Management Pty Ltd Tyre and Auto Pty Ltd Tyremaster (Wholesale) Pty Ltd Viking Direct Pty Ltd W4K-World 4 Kids Pty Ltd Wesfarmers Risk Management (Singapore) Pte Ltd e.tailing (Coles Group) Pty Ltd FBP Awards Fund Pty Ltd * These entities are parties to the Deed of Cross Guarantee and members of the Closed Group as at 30 June 2019. Coles Group Limited 2019 Annual Report 91 Closed Group 30 JUNE 2019 $M 940.4 358.5 1,964.0 90.6 47.1 3,400.6 4,103.4 1,540.6 364.9 238.1 212.3 134.1 6,593.4 9,994.0 3,528.3 0.3 742.5 167.6 4,438.7 1,460.0 598.6 70.8 2,129.4 6,568.1 3,425.9 1,627.8 42.0 1,756.1 3,425.9 7.4 Subsidiaries (continued) Deed of Cross Guarantee Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (‘ASIC Instrument’) the wholly-owned subsidiaries listed on page 90 (*) are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and Directors’ Reports. As a condition of the ASIC Instrument, the Company and the subsidiaries listed on page 90 entered into a Deed of Cross Guarantee on 17 December 2018 (the ‘Deed’). The effect of the Deed is that the Company guarantees to pay any deficiency in the event of winding up any controlled entity, or if they do not meet their obligations under the terms of any overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities have also given a similar guarantee in the event that the Company is wound up or if it does not meet its obligations under the terms of any overdrafts, loans, leases or other liabilities subject to the guarantee. A Statement of Comprehensive Income, retained earnings and a Statement of Financial Position, comprising the Company and controlled entities which are a party to the Deed, after eliminating all transactions between the parties to the Deed, for the year ended 30 June 2019 are set out below: Statement of Comprehensive Income and retained earnings Closed Group Statement of Financial Position Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Non-current assets held for sale Other assets Total current assets Non-current assets Property, plant and equipment Intangible assets Deferred tax assets Investment in subsidiaries Investment in joint venture Other assets Total non-current assets YEAR ENDED 30 JUNE 2019 Total assets $M Liabilities Continuing Operations Sales revenue Other operating revenue Total operating revenue Cost of sales Gross profit Other income Administration expenses Other expenses Share of net profit of equity accounted investments Earnings before interest and tax Financing costs Profit before income tax Income tax expense Profit for the year Items that may be reclassified to profit or loss: Net movement in the fair value of cash flow hedges Income tax effect Other comprehensive income which may be reclassified to profit or loss in subsequent periods Total comprehensive income for the year Retained earnings Retained earnings at the beginning of the year Distributions to Wesfarmers Retained earnings at the end of the year Current liabilities Trade and other payables Income tax payable Provisions Other Total current liabilities Non-current liabilities Interest-bearing liabilities Provisions Other Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity 37,262.5 185.7 37,448.2 (28,591.5) 8,856.7 416.5 (8,198.9) (145.8) 5.0 933.5 (41.5) 892.0 (290.8) 601.2 (2.0) 0.6 (1.4) 599.8 1,497.3 (341.0) 1,756.1 Coles Group Limited 2019 Annual Report 92 Coles Group Limited 2019 Annual Report 93 7.5 Parent entity information Summary financial information for the Company is set out below: Profit for the period Other comprehensive income YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 $M $M 1,266.3 1,458.2 - - Total comprehensive income for the period 1,266.3 1,458.2 Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Equity Contributed equity Share-based payments reserve Retained earnings Total equity 30 JUNE 2019 30 JUNE 2018 $M $M 1,903.2 5,070.6 6,973.8 741.3 3,405.1 4,146.4 1,627.8 38.8 1,160.8 699.6 3,903.5 4,603.1 1,678.9 477.9 2,156.8 2,192.6 38.8 214.9 2,827.4 2,446.3 As at 30 June 2019, the Company has no guarantees in relation to the debts of its subsidiaries (2018: $nil). As at 30 June 2019, the Company has no contingent liabilities (2018: $nil). As at 30 June 2019, the Company has bank guarantees totalling $310.2 million (2018: $nil). As at 30 June 2019, the Company has contractual commitments for the acquisition of property, plant and equipment totalling $589.9 million (2018: $nil). 8. Unrecognised items. This section provides information about items that are not recognised in the financial statements but could potentially have a significant impact on the Group’s future financial performance or position. 8.1 Capital expenditure commitments Group as lessor Future minimum rentals receivable under non-cancellable operating leases at the reporting date are set out below: A commitment represents a contractual obligation to make a payment in the future. The Group’s commitments relate to capital expenditure and operating leases. Commitments are not recognised in the Statement of Financial Position, but are disclosed. Capital expenditure commitments of the Group at the reporting date are set out below: Within one year Consolidated Between one and five years 30 JUNE 2019 30 JUNE 2018 More than five years Consolidated 30 JUNE 2019 30 JUNE 2018 $M 13.1 11.5 21.1 45.7 $M 10.9 22.9 3.4 37.2 Within one year Between one and five years Total capital expenditure commitments $M 139.8 514.4 654.2 $M 90.5 5.2 95.7 The commitment amounts disclosed above represent the maximum amounts that the Group is obliged to pay. 8.2 Operating lease commitments Group as lessee Future minimum rentals under non-cancellable operating leases at the reporting date are set out below: Within one year Between one and five years More than five years Consolidated 30 JUNE 2019 30 JUNE 2018 $M 1,214.1 4,134.4 5,228.2 $M 1,765.1 5,878.3 6,823.5 Total operating lease commitments 10,576.7 14,466.9 The reported lease commitments of the Group exclude rent that was considered contingent at lease inception. The effect of this exclusion on the reported lease commitments is not considered material. Leases are classified as operating leases whenever the terms of the lease do not transfer substantially all the risks and rewards of ownership to the lessee. Leases that transfer substantially all the risks and rewards of ownership to the lessee are classified as finance leases. Finance leases are recognised as assets by the lessee, whereas operating leases are recognised as assets by the lessor and disclosed as a commitment by the lessee. Operating lease payments are recognised as an operating expense in the Statement of Profit or Loss on a straight-line basis over the lease term. Key judgement: Classification of leases The Group classifies leases as either finance or operating depending on whether the Group holds substantially all of the risks and rewards incidental to ownership. In making this assessment, the Group primarily considers asset ownership at the end of the lease term, any purchase options, the lease term in relation to the asset’s life, the present value of future lease payments in relation to the asset’s fair value and the nature of the asset. Total rental receivable Rental income is accounted for on a straight-line basis over the lease term and is included in ‘other operating revenue’ in the Statement of Profit or Loss. Initial direct costs incurred in negotiating and arranging an operating lease are added to the carrying amount of the leased asset and recognised over the lease term on the same basis as rental income. Contingent rent is recognised as revenue in the period in which it is earned. 8.3 Contingent liabilities Contingent liabilities are potential future cash outflows where the likelihood of payment is more than remote but is not considered probable or cannot be reliably measured. Contingent liabilities are not recognised in the Statement of Financial Position but are disclosed. As at 30 June 2019, the Group has bank guarantees totalling $342.2 million (2018: $9.8m relating to KTO). While the entities in the Group have entered into these guarantees, the probability of having to make payments under these guarantees is considered remote. The nature of the guarantees provided is set out below: • guarantees in the normal course of business relating to conditions set out in property development applications and for the sale of properties • guarantees relating to workers compensation self-insurance liabilities as required by State WorkCover authorities. These guarantees provide the authorities with security in the event that the Group is unable to meet its workers compensation insurance obligations. The guarantees required are determined by reference to the value of the self-insurance provisions for workers compensation which form part of the self- insurance provisions recognised by the Group and disclosed in Note 4.8. Key judgement: Contingent liabilities Contingent liabilities are possible obligations whose existence will be confirmed only on the occurrence or non-occurrence of uncertain future events outside the Group’s control, or present obligations that are not recognised because it is not probable that a settlement will be required or the value of such a payment cannot be reliably estimated. Coles Group Limited 2019 Annual Report 94 Coles Group Limited 2019 Annual Report 95 9. Other disclosures. 9.2 Share-based payments 9.4 New accounting standards and interpretations This section provides other disclosures required by Australian Accounting Standards that are considered relevant to understanding the Group’s financial performance or position. 9.1 Related party disclosures Joint ventures and associates Loyalty Pacific Pty Ltd Sale of goods to members of flybuys Purchase of points from Loyalty Pacific Pty Ltd Amounts receivable from Loyalty Pacific Pty Ltd Amounts owing to Loyalty Pacific Pty Ltd Queensland Venue Co. Pty Ltd (QVC) Sales to QVC Amounts paid to QVC Amounts receivable from QVC Other related parties Wesfarmers Limited and its controlled entities Rental income received Rental expenses paid Sales to Wesfarmers Limited and its controlled entities Purchases from Wesfarmers Limited and its controlled entities Amounts owing to Wesfarmers Limited and its controlled entities Parent entity Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 $M $M 269.1 232.9 - 169.8 1.4 8.9 39.9 2.6 14.9 1.9 56.9 6.1 235.0 192.4 14.9 - - - - - - - 50.8 2.3 The ultimate parent entity of the Group is Coles Group Limited, which is domiciled and incorporated in Australia. Prior to the demerger from Wesfarmers and subsequent listing as a standalone entity on the ASX, the ultimate parent entity of the Group was Wesfarmers Limited. Transactions with subsidiaries Intercompany transactions, assets and liabilities between entities within the Group have been eliminated in the consolidated financial statements. Transactions with entities transferred from the Group to Wesfarmers have been treated as related party transactions following the transfer of these entities to Wesfarmers. The nature of these transactions is set out below. Transactions with joint venture and associate Various transactions occurred between the Group and Loyalty Pacific Pty Ltd (operator of flybuys) during the year ended 30 June 2019, including: • reimbursement of costs incurred • sale of goods to members of flybuys • purchase of points from Loyalty Pacific Pty Ltd Various transactions occurred between the Group and QVC during the year ended 30 June 2019, including: • service fees paid • sales to QVC of inventory Transactions with Wesfarmers Limited and its controlled entities (‘Wesfarmers Group’) As part of the demerger, certain members of the Wesfarmers Group and the Group entered into Transitional Services Agreements (TSA) for the provision of services for up to 24 months. All services provided under a TSA are charged at cost. The transitional services to be provided by the Wesfarmers Group to the Group are: • workers compensation services • general insurance services • other services, including the support of a merchandise ordering system The transitional services to be provided by the Group to the Wesfarmers Group are: • information technology services • payroll services and business process outsourcing • finance services and systems support • other services including the management and facilitation of telecommunications and other third-party recharge products In addition, the Company is party to arrangements with third parties which were negotiated on behalf of all subsidiaries of Wesfarmers prior to demerger. These arrangements include amongst others, property leases where the Group is a head lessee and a sub-lessor to its related parties and vice versa. Where these arrangements remain in place, the Group or its related party settle the liabilities on each other’s behalf and subsequently recover the third party costs by on-charging without a margin. The Group views the on-charging of third party costs without a margin as transactions with a third party. Therefore, these transactions have not been disclosed as related party transactions. However, as balances that remain unsettled at the reporting date are amounts owed to or from related parties, these are disclosed as related party payables or receivables. Transactions with Key Management Personnel Compensation of Key Management Personnel (KMP) of the Group: Short-term employee benefits Post-employment benefits Other long-term benefits Share-based payments Total compensation paid to KMP Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 $ $ 9,446,947 3,182,374 59,143 33,043 20,049 36,666 1,492,103 1,673,163 11,031,236 4,912,252 The transactions with KMP for the year ended 30 June 2019 include the compensation of the Company's Executive and Non-executive Directors as detailed in the Remuneration Report. Transactions with KMP for the year ended 30 June 2018 reflect compensation for the previous Managing Director of Coles as detailed in the Remuneration Report section of the Wesfarmers 2018 Annual Report. Terms and conditions of transactions with related parties Sales to and purchases from related parties are made on terms equivalent to those that prevail in arm’s length transactions. Outstanding balances at the reporting date are unsecured and interest free and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables or payables. For the year ended 30 June 2019, the Group has not recognised a provision for expected credit losses relating to amounts owed by related parties (2018: $nil). The Group applied AASB 15 Revenue from Contracts with Customers (‘AASB 15’) and AASB 9 Financial Instruments (‘AASB 9’) for the first time in this annual reporting period. The nature and effect of the changes as a result of adoption of these new accounting standards are described below. Several other amendments and interpretations apply for the first time in this financial year but do not have a material impact on the consolidated financial statements of the Group. The Group has not early adopted any standards, interpretations or amendments that have been issued but are not yet effective. AASB 15 The Group adopted this standard from 1 July 2018. The introduction of this standard did not have a material impact on the Group’s financial statements; accordingly there are no retrospective adjustments. Additional disclosure of the Group’s revenue accounting policies required by the standard are included in Note 3.3. AASB 9 The Group adopted this standard from 1 July 2018. The introduction of this standard did not have a material impact on the financial statements; accordingly there are no retrospective adjustments. The Group has applied AASB 9 in accordance with the transitional provisions set out in the standard. The key change for the Group as a result of adopting this standard is in relation to the impairment of financial assets (mainly loans and receivables). Specifically, the new standard requires the Group to account for expected credit losses at the point these financial assets are first recognised, and to recognise full lifetime expected losses for financial assets where the credit risk has increased significantly since initial recognition. During the year, the Group established the Coles Group Limited Equity Incentive Plan (the ‘Plan’) to assist in the motivation, retention and reward of employees. The Plan provides flexibility for the Group to offer rights, options and restricted shares as incentives, subject to the terms of individual offers and the satisfaction of performance and/or service conditions determined by the Board. It also provides the Group with the ability to invite employees to acquire Coles Group Limited shares through a salary sacrifice arrangement. Additional information on award schemes Details of grants made under the Plan during the year are set out in the Remuneration Report. Key estimate: Share-based payments The fair value of share-based payment transactions has been determined by an independent valuation expert. Estimating the fair value of share-based payment transactions requires the determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. Assumptions regarding the most appropriate inputs to the valuation model including, but not limited to, share price volatility, discount rate and dividend yield must also be made. In measuring the fair value of awards issued under the Long-Term Incentive (LTI) plan subject to the relative total shareholder return (TSR) vesting condition, an adjusted form of the Black-Scholes Model that includes a Monte Carlo Simulation Model has been utilised. The Monte Carlo Simulation Model has been modified to incorporate an estimate of the probability of achieving the TSR hurdle. In valuing the awards subject to non-market based vesting conditions, the Black-Scholes Model has been utilised. 9.3 Auditor’s remuneration Amounts received, or due and receivable, by Ernst & Young (Australia) for: Audit services Audit or review of the Financial Report of the Company and entities in the Group Assurance related Non-audit services Tax compliance services Total auditor’s remuneration Consolidated YEAR ENDED 30 JUNE 2019 YEAR ENDED 30 JUNE 2018 $000 $000 1,900 2,1781 140 4,218 1,738 246 130 2,114 1Fees for assurance related services for the current year include $1,750,000 for services associated with the demerger from Wesfarmers. The auditor of the Group is Ernst & Young (EY). Fees charged by EY for ‘Assurance related services’ are for services that are reasonably related to the performance of the audit or review of financial reports, for other assurance engagements (such as assurance over the Group’s Sustainability Report) and for other assurance related engagements which are appropriate to be performed by our external auditor. The total fees for non-audit services of $140,000 represents 3% (2018: 6%) of the total fees paid or payable to EY and related practices for the year ended 30 June 2019. Coles Group Limited 2019 Annual Report 96 Coles Group Limited 2019 Annual Report 97 9.4 New accounting standards and interpretations (continued) New and revised Australian accounting standards and interpretations on issue but not yet effective The expected impact for the Group of significant new and revised accounting standards and interpretations, which are not yet effective, are summarised below: AASB 16 Leases (‘AASB 16’) Nature of change Impact This standard introduces a single lessee accounting model and requires a lessee to recognise assets and liabilities for all leases with a term of greater than 12 months, unless the underlying asset is of low value. A lessee is required to recognise a right-of-use (ROU) asset representing its right to use the underlying leased asset and a lease liability representing its obligation to make lease payments. A depreciation charge for ROU assets and interest expense for lease liabilities will be recognised in the Statement of Profit or Loss. The Group will also be required to remeasure the lease liability upon the occurrence of certain events (e.g. a change in the lease term or a change in future lease payments resulting from a change in an index or rate). The Group will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the ROU asset. Lessor accounting under AASB 16 is substantially unchanged from the accounting under AASB 117 Leases. The Group will apply AASB 16 from 1 July 2019 using the modified retrospective transition approach. Under this approach, the Group will elect on a lease-by-lease basis whether to calculate the ROU asset as either equal to the lease liability, or to retrospectively measure the ROU asset at the incremental borrowing rate on transition. The cumulative effect of adopting AASB 16 will be recognised as an adjustment to the opening retained earnings at 1 July 2019, with no restatement of comparatives. The Group will elect to apply a number of the practical expedients available on transition including: • the application of a single discount rate to a portfolio of leases with reasonably similar characteristics • utilising previous assessments of onerous leases • the use of hindsight in determining the lease term. A practical expedient also available to the Group is to combine lease and non-lease components, and account for these as a single lease component. The Group will not elect to apply this practical expedient for its property leases. As such, the calculated lease liability for property leases will exclude an estimate of the stand-alone price of any non- lease components. The Group has substantially completed the impact assessment of adopting AASB 16. The estimated impact on the consolidated Statement of Financial Position as at 1 July 2019 is as follows: • new (incremental) ROU assets of $7.2 billion to $7.7 billion • new (incremental) lease liability of $8.5 billion to $9.0 billion • the net impact of these balances, adjusted for deferred tax and reversal of current lease accounting, will be recognised within retained earnings. Assuming AASB 16 had been adopted from 1 July 2018, the estimated impact on profit before tax from continuing operations for the year ended 30 June 2019 would have remained broadly neutral, including: • • increase in depreciation of $750 million to $800 million increase in financing costs of $400 million to $450 million. The actual impact on the financial performance and position for the financial year ended 28 June 2020 will depend on the composition of the Group’s lease portfolio and any new leases that are entered into during the financial year. There are no other standards that are not yet effective and that would be expected to have a material impact on the Group in the current or future reporting periods. 9.5 Events after the reporting period On 22 August 2019, the Directors declared a total dividend of 35.5 cents per fully paid ordinary share to be paid on 26 September 2019, fully franked at the corporate tax rate of 30%. This comprises a final dividend of 24.0 cents per fully paid ordinary share and a special dividend of 11.5 cents per fully paid ordinary share. The aggregate amount of the total dividend to be paid out of profits, but not recognised as a liability at 30 June 2019, is $473.5 million. The Group is not aware of any other matter or circumstance that has occurred since the end of the reporting date 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 subsequent financial years. Directors’ Declaration. 1. The directors of Coles Group Limited (the Company) declare that, in the directors’ opinion: (a) the financial statements and the notes that are set out on pages 65 to 96, are in accordance with the Corporations Act 2001 (Cth), including: (i) complying with the accounting standards and Corporations Regulations 2001; and (ii) giving a true and fair view of the financial position and performance of the Company and its consolidated entities; (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. A statement of compliance with the International Financial Reporting Standards is included in Note 2.1 to the consolidated financial statements. 3. The directors have been given the declaration required by section 295A of the Corporations Act 2001 from the Managing Director and Chief Executive Officer and Chief Financial Officer for the financial year ended 30 June 2019. 4. As at the date of this declaration, there are reasonable grounds to believe that the members of the closed group identified in Note 7.4 to the financial statements 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 7.4. Signed in accordance with a resolution of the directors. James Graham AM Chairman 20 September 2019 Steven Cain Managing Director and Chief Executive Officer 20 September 2019 Coles Group Limited 2019 Annual Report 98 Coles Group Limited 2019 Annual Report 99 Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au Independent Auditor's Report to the Members of Coles Group Limited Report on the Audit of the Financial Report Opinion We have audited the Financial Report of Coles Group Limited (the Company) and its subsidiaries (collectively, the Group), which comprises the Consolidated Statement of Financial Position as at 30 June 2019, the Consolidated Statement of Profit or Loss, Consolidated Statement of Other Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Cash Flows for the year then ended, notes to the consolidated financial statements, including a summary of significant accounting policies, and the Directors' Declaration. In our opinion, the accompanying Financial Report of the Group is in accordance with the Corporations Act 2001, including: a) b) giving a true and fair view of the consolidated financial position of the Group as at 30 June 2019 and of its consolidated financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the Directors of Coles Group Limited, would be in the same terms if given to the Directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current year. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the Financial Report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying Financial Report. 1. Commercial income Why significant How our audit addressed the key audit matter Commercial income (also referred to in the retail industry as “Supplier rebates”) comprises discounts and rebates received by the Group from its suppliers. Our audit procedures in respect of commercial income included the following: The value and timing of commercial income recognised through the Consolidated Statement of Profit or Loss requires judgement and the consideration of a number of factors including: ► ► ► The terms of each individual rebate agreement The nature and substance of the arrangement to determine whether the amount reflects a reduction in the purchase price of inventory, requiring the rebate to be applied against the carrying value of inventory or can be otherwise recognised in the Consolidated Statement of Profit or Loss The application of Australian Accounting Standards and the Group’s related processes and controls to these arrangements. Disclosures relating to the measurement and recognition of commercial income can be found in Note 4.4 Inventories. ► We gained an understanding of the nature of each material type of commercial income and assessed the significant agreements in place ► We assessed the effectiveness of relevant controls in place relating to the recognition and measurement of amounts related to these arrangements ► We performed comparisons of the various arrangements against the prior year, including analysis of ageing profiles and where material variances were identified, obtained supporting evidence ► We selected a sample of supplier agreements and assessed whether appropriate agreements or other documentation supported the recognition and measurement of the rebates in the 30 June 2019 Financial Report, including an assessment of amounts recorded before and after the balance date ► We inquired of the Group including business category managers, supply chain managers and procurement management as to the existence of any non-standard agreements or side arrangements. 2. Impairment of non-current assets including intangible assets Why significant How our audit addressed the key audit matter The determination of the recoverable amounts of property, plant and equipment, goodwill and other intangible assets required significant judgement by the Group. Impairment assessments are complex and involve significant management judgement. The assessment completed by the Group includes numerous assumptions and estimates that will be impacted by future performance and market conditions. Key assumptions, judgements and estimates applied in the Group’s impairment assessment are set out in Note 6.1. Based upon the disclosed sensitivity analysis, changes to the key assumptions applied in the impairment test are not expected to give rise to an impairment of the carrying value of the Group’s cash generating units. Our audit procedures included an evaluation of the following assumptions utilised in the Group’s assessment: ► ► ► ► ► ► Determination of cash generating units Forecast cash flows Growth rates Discount rates Comparative industry valuation multiples Other market evidence. We involved our valuation specialists to evaluate the appropriateness of these key inputs, where relevant to the impairment tests: ► ► Discount rates Terminal growth rates ► Market evidence of industry earnings valuation multiples ► ► Long-term inflation and growth rate assumptions Forecast exchange rate assumptions. We also considered the adequacy of the Financial Report disclosures regarding the impairment testing approach, key assumptions and sensitivity analysis. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Coles Group Limited 2019 Annual Report 100 Coles Group Limited 2019 Annual Report 101 3. IT environment 5. Inventory existence Why significant How our audit addressed the key audit matter Why significant How our audit addressed the key audit matter A significant part of the Group’s financial processes are heavily reliant on IT systems with automated processes and controls over the capturing, valuing and recording of transactions. We performed procedures to understand the IT environment, including procedures to identify the Group’s manual and automated controls relevant to financial reporting. We tested the Group’s controls which included assessing the key IT controls over changes made to the material financial reporting systems and controls over appropriate access to these systems. This was a key audit matter because of the: ► complex IT environment supporting diverse business processes, with varying levels of integration between them; ► mix of manual and automated controls; ► multiple internal and outsourced support arrangements; and ► continuing enhancements to the Group’s IT systems which are significant to our audit. 4. AASB 16 Leases At 30 June 2019, the Group held inventories of $1,964.7 million. Being one of the most significant balances on the Consolidated Statement of Financial Position, the Group’s inventory verification process is extensive and occurs routinely throughout the financial year. This inventory is held at geographically diverse locations around Australia at various stores and distribution centres. Our audit procedures included the following: ► ► ► ► Selected a sample of stores so as to observe and assess the Group’s stocktake processes throughout the year. For the stocktakes we attended, we assessed whether the required adjustment to inventory determined by the stocktake was processed correctly. Observed and assessed the daily stocktake process at a sample of distribution centres near period end. Validated that daily counts occurred at distribution centres during the year. 6. Accounting for the demerger of the Group from Wesfarmers Limited Why significant How our audit addressed the key audit matter Why significant How our audit addressed the key audit matter During the year, the Group demerged from Wesfarmers Limited (Wesfarmers) which gave rise to consequential events with complex accounting and financial reporting implications. These included: AASB 16 Leases (“AASB 16”) applies to the Group from 1 July 2019. The adoption of this accounting standard is inherently complex due to the need to apply its requirements to: ► ► ► existing commitments, including embedded lease agreements; the volume of operating leases held by the Group; and the judgements applied by management when determining how to apply key requirements of this standard such as the impact of lease options. During the period the Group substantially completed the analysis of the impact of this new standard on the Group. Disclosure is required of the expected financial impact on first time adoption in the Financial Report for the year ended 30 June 2019. These disclosures can be found in Note 9.4. We assessed the Group’s process for determining the expected impact of the new standard. We assessed the analysis of the expected financial impact of the new standard and the accounting policies, estimates and judgements made in respect of the products and services of the Group. We selected a sample of lease agreements to determine the appropriateness of the judgements applied including: ► ► ► ► ► ► ► ► the treatment of lease options; the treatment of sub-lease arrangements; the identification of non-lease components; the treatment of adjustments to lease payments (both fixed and variable rate adjustments); the impact of contract variations; the interest rate implicit in the agreements; the application of practical expedients available under AASB 16; and whether there were any material contracts containing a lease. We evaluated the effectiveness of the Group’s processes and controls to capture and measure the right of use asset and associated liability including the completeness of the balances. We tested the calculation of the adjustment to opening retained earnings calculated by the Group. We evaluated the adequacy of disclosures included in Note 9.4. Our audit procedures included the following: ► We examined significant agreements relating to the demerger to consider the rights and obligations of each party, and the appropriateness of resultant accounting positions adopted. ► We assessed the appropriateness of the deconsolidation of Kmart, Target, and Officeworks, and the related disclosure of these as discontinued operations, as included in Note 7.3. Transitional service agreements were executed between the Group, Wesfarmers, and certain Wesfarmers subsidiaries Kmart, Target, and Officeworks were deconsolidated and transferred to Wesfarmers ► ► ► ► New debt facility agreements were executed 7. Accounting for major contracts Group entities exited the Wesfarmers tax consolidated group, without any further income tax liability relating to periods whilst part of that tax consolidated group ► Involving our tax specialists, we assessed the implications of the Group exiting the Wesfarmers tax consolidated group and evidenced the payment of the Group’s final obligations to exit that tax consolidated group. ► We examined the new debt facility agreements to understand the obligations, restrictions, and any financial covenants applicable to the Group. ► We evaluated the presentation and disclosure of these matters in the Financial Report. Why significant How our audit addressed the key audit matter During the year the Group entered into major capital expenditure contracts and various other business arrangements that have had or will have a significant impact on the Group’s operations and business relationships. We examined each of these contracts and the conclusions reached by management in respect of the related accounting and financial reporting outcomes. Where specialist expertise was required, we involved our subject matter specialists in these procedures. Each of these contracts and agreements included complexities that required the Group to make judgements and estimates involving extensive analysis to ensure compliance with the applicable accounting standards. Where estimation processes were involved, we conducted sensitivity analysis to understand the impact of reasonably possible changes. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Coles Group Limited 2019 Annual Report 102 Coles Group Limited 2019 Annual Report 103 Information Other than the Financial Report and Auditor’s Report Thereon The Directors are responsible for the other information. The other information comprises the information included in the Company’s 2019 Annual Report, but does not include the Financial Report and our auditor’s report thereon. Our opinion on the Financial Report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the Financial Report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors 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 preparing the Financial Report, the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. • • • Conclude on the appropriateness of the Directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the Financial Report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the Financial Report, including the disclosures, and whether the Financial Report represents the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the Financial Report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the Directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the Directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated to the Directors, we determine those matters that were of most significance in the audit of the Financial Report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Auditor's Responsibilities for the Audit of the Financial Report Report on the Audit of the Remuneration Report Our objectives are to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • • • Identify and assess the risks of material misstatement of the Financial Report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit 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 Group’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. Opinion on the Remuneration Report We have audited the Remuneration Report included in the Directors’ report for the year ended 30 June 2019. In our opinion, the Remuneration Report of Coles Group Limited for the year ended 30 June 2019, complies with section 300A of the Corporations Act 2001. Responsibilities 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. Ernst & Young Fiona Campbell Partner Melbourne 20 September 2019 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Coles Group Limited 2019 Annual Report 104 Coles Group Limited 2019 Annual Report 105 Listing information Voting Rights Coles Group Limited is listed, and our issued shares are quoted on the Australian Securities Exchange (ASX) under the code: COL. Substantial shareholdings in Coles Group Limited as at 26 August 2019 Votes of shareholders are governed by the Company’s Constitution. In broad summary, but without prejudice to the provisions of these rules, the Constitution provides for votes to be cast: Shareholder information. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Holder Wesfarmers Limited Number of fully paid shares 200,089,454 Twenty largest ordinary fully paid shareholders as at 26 August 2019 Coles Group Limited Number of fully paid shares % of issued capital HSBC Custody Nominees (Australia) Limited 268,471,371 Wesfarmers Retail Holdings Pty Ltd 200,089,454 (a) on a show of hands, one vote for each shareholder; and (b) on a poll, one vote for each fully paid share. On market share acquisitions During the 2019 financial year 2,148,375 Coles ordinary shares were purchased on market at an average price of AUD$12.87 per share for the purposes of various Coles employee incentive schemes. Refer to the Remuneration Report on pages 50 to 62 for further details of Coles’ employee incentive schemes. There is no current on-market buy-back of the Company's shares. Corporate Governance Statement A copy of the Corporate Governance Statement can be found on our website at www.colesgroup.com.au/corporategovernance. J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Nominees Pty Ltd < Agency Lending DRP A/C> BNP Paribas Noms Pty Ltd HSBC Custody Nominees (Australia) Limited Australian Foundation Investment Company Limited Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited- GSCO ECA 12. ARGO Investments Limited 13. Woodross Nominees Pty Ltd 14. 15. AMP Life Limited HSBC Custody Nominees (Australia) Limited 16. Milton Corporation Limited 17. Australian Executor Trustees Limited 18 Mutual Trust Pty Ltd 19. Mr Peter Alexander Brown 20. Netwealth Investments Limited 20.13 15.00 13.80 6.17 3.02 1.58 1.27 0.75 184,124,225 82,237,368 40,294,153 21,010,992 16,969,772 9,984,003 6,722,500 0.50 6,555,777 0.49 5,299,201 0.40 5,040,027 3,707,841 3,166,599 2,902,623 2,877,375 2,623,993 1,699,926 1,552,825 1,502,739 0.38 0.28 0.24 0.22 0.22 0.20 0.13 0.12 0.11 Distribution of shareholders and shareholdings as at 26 August 2019 Size of holding Number of shareholders Number of shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total 373,376 76,174 8,792 4,524 140 113,824,358 159,278,231 61,123,704 91,860,376 907,843,027 463,006 1,333,929,696 There were 34,913 shareholders holding less than a marketable parcel ($500). Coles Group Limited 2019 Annual Report 107 Shareholder Calendar* Event Record date for final dividend Final dividend payment date Date 29 August 2019 26 September 2019 Coles Group Limited Annual General Meeting in Melbourne 13 November 2019 Half-year end Year-end * Timing of events is subject to change Annual General Meeting 29 December 2019 28 June 2020 The 2019 Annual General Meeting of Coles Group Limited will be held on Wednesday 13 November 2019 commencing at 1.30pm (Melbourne time) at the Melbourne Convention and Exhibition Centre, Melbourne Room, 1 Convention Centre Place, South Wharf, Melbourne, Victoria, Australia. Coles Group Limited 2019 Annual Report 106 Corporate Directory Registered office 800-838 Toorak Road Hawthorn East VIC 3123 Australia Telephone +61 3 9829 5111 Website www.colesgroup.com.au Chairman Mr James Graham AM Managing Director and Chief Executive Officer Mr Steven Cain Non-executive directors Mr James Graham AM Mr David Cheesewright Ms Jacqueline Chow Ms Abi Cleland Mr Richard Freudenstein Ms Wendy Stops Mr Zlatko Todorcevski Company Secretary Ms Daniella Pereira Auditor Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia Coles Share Registry Computershare Investor Service Pty Limited Yarra Falls 452 Johnston Street Abbotsford VIC 3067 Australia Postal address GPO Box 2975 Melbourne VIC 3001 Australia Telephone 1300 171 785 (within Australia) +61 3 9415 4078 (outside Australia) Online www.investorcentre.com/contact Website www.computershare.com Coles Group Limited 2019 Annual Report 108 Coles Group Limited ABN 11 004 089 936 800-838 Toorak Road Hawthorn East VIC 3123

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