2 0 2 0 A n n u a l R e p o r t A B N 1 1 0 0 4 0 8 9 9 3 6 2020 Annual Report Sustainably feed all Australians to help them lead healthier, happier lives Coles Group Limited ABN 11 004 089 936 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. Forward-looking statements DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM This report contains forward-looking statements in relation to Coles Group Limited (‘the Company’) and its controlled entities (together ‘Coles’ or ‘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’, ‘guidance’ and other similar expressions. COL1634_ DRAFT 1 AnnualReport_ September 23, 2020 7:52 PM d4a These forward-looking statements are based on the Group’s good-faith assumptions as to the financial, market, risk, 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. Past performance cannot be relied on as a guide to future performance. Non-IFRS Information This report contains IFRS and non-IFRS financial information. IFRS financial information is financial information that is presented in accordance with all relevant accounting standards. Retail or 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. Any non-IFRS financial information included in this report has been labelled to differentiate it from statutory or IFRS financial information. 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. Other Information Photographs in our Annual Report may have been taken before social distancing restrictions were in place. The image of FightMND campaign director Bec Daniher with Coles team members on page 11 of this report was photographed by News Ltd / Newspix. Front cover: In addition to the collection of unsold, edible food from our supermarkets and distribution centres, food and groceries to a retail value of $7.9 million were provided to SecondBite and Foodbank this year in response to increasing demand for food relief as a result of COVID-19. SecondBite CEO Jim Mullan said, ‘It’s incredible to see how our partnership with Coles has grown over the years and the impact this has had on the most vulnerable people in our community. Many shoppers wouldn’t be aware of the work that goes on behind the scenes to ensure edible unsold food ends up on the plates of those in need, rather than in landfill. We are proud to work with an organisation that is a clear leader with respect to both its social and environmental responsibilities.’ Contents Overview 2020 performance 2020 highlights Message from the Chairman Managing Director and Chief Executive Officer’s report Our vision, purpose and strategy How we create value Sustainability snapshot Support for customers, suppliers and communities Governance at Coles Operating and Financial Review Board of Directors Directors’ Report Remuneration Report Financial Report Independent Auditor’s Report Shareholder Information 4 5 6 8 11 12 14 19 24 30 65 68 73 96 150 158 Welcome to the Coles Group 2020 Annual Report Our vision is to become the most trusted retailer in Australia and grow long-term shareholder value. 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. 1 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM DRAFT 1 COL1634_ AnnualReport_ September 23, 2020 7:52 PM d4a The Pergoliti family at Harvey Citrus in Western Australia received a grant from the Coles Nurture Fund in FY20 to extend its supply of WA-grown citrus over the summer and increase local employment by expanding its cool room facility and installing solar panels on its packing shed. Pictured is Andrew Pergoliti with his father Steve and daughter Alyssa. Our purpose is to sustainably feed all Australians to help them lead healthier, happier lives. Coles Group Limited 2020 Annual Report 2020 performance 6.9% Sales growth1 DRAFT 1 88.2% Customer satisfaction for Supermarkets2 COL1634_ DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM 5.0% Supermarkets sales density growth3 AnnualReport_ September 23, 2020 7:52 PM d4a $1.4bn EBIT1 $362m Net debt4 111% Cash realisation5 57.5c Dividends per share6 7pp Improvement in team member engagement (percentage points) 18.3% Improvement in total recordable injury frequency rate7 1 On a non-IFRS basis. Refer to Non-IFRS Information section on page 39. 2 Q4 FY20, as measured by Tell Coles. 3 Growth in sales per square metre on a moving annual total (MAT), or exit rate calculated on a rolling 12 months of data basis. 4 Calculated as interest-bearing liabilities less cash and cash equivalents. 5 Calculated as operating cash flow excluding interest and tax, divided by EBITDA (excluding the impacts of AASB 16 and Significant items). 6 Comprising an interim dividend of 30.0 cents per share (paid) and a final dividend of 27.5 cents per share. 7 Refer to glossary of terms on page 49 for definition. 2020 highlights Highlights for the year spanned our business and store network, our customer base, our team of suppliers and our communities around Australia. 1,500+ new products at everyday low prices Almost doubled capacity of Coles Online $10bn+ in Coles Own Brand sales Tailored store format strategy 70 renewals New transport hubs to Progress with Witron & Ocado optimise logistics automation 4,700+ Direct milk sourcing Indigenous team members with dairy farmers in VIC & NSW $139m provided in community support 5 Coles Group Limited 2020 Annual Report Message from the Chairman The 2020 financial year was extraordinary for Coles and the whole Australian community as droughts, bushfires and COVID-19 created significant demands across our businesses. Coles strengthened its financial position during the year, DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 including extending the term of our debt maturity dates and, at year end, had net debt of $362 million, a 30% Copy September 23, 2020 7:52 PM reduction on the prior year. Leadership and team During the year we significantly expanded our leadership team with the appointment of new Executives in: Liquor – Darren Blackhurst; eCommerce – Ben Hassing; Emerging Businesses – George Saoud; Transformation – Ian Bowring; and Corporate Affairs – Sally Fielke. Under the leadership of our Chief Executive, Steven Cain, Coles has built a strong DRAFT 1 COL1634_ AnnualReport_ September 23, 2020 7:52 PM d4a The 2020 financial year was extraordinary for Coles and the whole Australian community as droughts, bushfires and COVID-19 created significant demands across our businesses. Pleasingly, with the positive engagement of our team members, our suppliers, our customers and governments we were able to adapt to new challenges at pace, with emphasis upon safety and performance. Financial leadership team with complementary skills which are well aligned to our vision of becoming the most trusted retailer in Australia and growing long-term shareholder value. We also saw an increase of more than 5,000 team members at year end, as we responded to the significant surge in customer demand across food and liquor driven by COVID-19. This increase in part reflected our underlying business growth and in part the extra focus upon customer and team member hygiene and safety in response to the coronavirus pandemic. With our commitment to increase our Aboriginal and For the year ended 28 June 2020, our first full year as a relisted Torres Strait Islander participation levels to 5% of our total ASX company, we saw strong financial results. On a statutory team members by 2023, further progress was made during basis, total sales revenue was $37,408 million; earnings before the year. By the end of the 2020 financial year we had interest and tax were $1,762 million; and net profit after surpassed 4,700 team members which was an increase of tax was $978 million ($951 million excluding the impacts of AASB 16 Leases and Significant items). more than 600 on the prior year. supply, logistics and services for the exceptional efforts reducing our electricity needs and increasing our that have been made during a year marked by so many utilisation of renewable energy sources. Full details of extraordinary events. Customers and community Throughout FY20 Coles played its part in supporting our customers and the Australian community as we engaged our nearly 2,500 retail outlets and rapidly growing online services. In times of community stress, large corporations have the opportunity, and responsibility, to bring much needed resources to address special needs. During this last financial year we provided special support to the emergency services and the rural fire services both financially and in food availability at the time of the East Coast bushfires; to our farmers and the Country Women’s Association through our Coles Nurture Fund as we responded to the these initiatives are set out in our 2020 Sustainability Report which is accessible at www.colesgroup.com.au. Importantly we are continually working with our suppliers to improve not only our Coles Own Brand and proprietary grocery product offerings but also to seek to ensure we source product in accordance with our ethical sourcing policy and requirements. At the 2019 Annual General Meeting concerns were raised as to the importance of labour standards amongst suppliers and since that time we have increased our resources and efforts in this important area. Working with suppliers, unions and other stakeholders we are seeking to ensure that all aspects of our supply chain support our dual objectives of trust and sustainability. Board drought-driven hardships experienced by so many in rural I extend a special thanks to all my fellow directors who have communities; and to the elderly and disabled to whom we greatly contributed to the progress which we have been provided special access to supermarkets and to our Coles able to make during this most unusual year. In particular, I Online Priority Service in response to the restrictions arising express appreciation on behalf of Coles to the contribution from COVID-19. These special community focused activities were in addition to our long-term support for national food rescue organisations, SecondBite and Foodbank; to children with cancer and their families through Redkite; to the crusade to address motor neurone disease – FightMND; as well as our made by Zlatko Todorcevski, who is retiring at the end of September 2020. Zlatko has been the Chairman of our Audit and Risk Committee since our demerger and has ensured that our systems and financial procedures have been robust and secure for our status as an ASX listed company and his sound counsel has been greatly valued. support of hospitals caring for sick children across Australia I also extend my thanks to our Chief Executive, Steven Cain. through the sale of Mum’s Sause; and many others. Steven has driven the development and implementation of In total, our community support was more than $139 million comprising $125 million from Coles directly and $14 million contributed by Coles’ customers, team members and suppliers. Technology and sustainability Throughout our business we are investing for the future. This investment is much more than the expansion of our footprint; it is directed at how we can become more efficient in meeting the needs of our customers and in doing so more responsibly. In every area there are opportunities where we can improve our performance. Our progress on our hallmark projects of automation of the two Witron distribution centres in Queensland and New South Wales and the development of the two Ocado Online customer fulfilment centres in Victoria and New South Wales, is advancing in line with our business plans. These two large projects are illustrative of how we will make a difference to our future operating effectiveness as we partner with global technology leaders our new strategy, the building of our leadership team, and the competitive positioning of the business in this rapidly changing world. I am also very pleased to welcome our new director Paul O’Malley. Paul O’Malley has a very strong financial and commercial background within prominent ASX listed companies which will complement the Board and our skills mix. Paul will join the Board on 1 October 2020 and will stand for election at our 2020 Annual General Meeting which is being held virtually on 5 November 2020. To all our shareholders, I express my thanks for your continuing support of Coles and look forward to our making further progress in the year ahead. James Graham AM Chairman, Coles Group Limited Team member safety remains a priority and through with fit for purpose retail solutions. Our final dividend for the year payable on 29 September increased training, technology and commitment we saw 2020 is 27.5 cents per share, fully franked, which together an improvement of 18.3% in our total recordable injury with our interim dividend of 30.0 cents per share paid in frequency rate through the year. March 2020, brings our full year dividend to 57.5 cents per share. This is a dividend payout equivalent to 82 per cent of our after tax profit (before Significant items). On behalf of the Board, I extend our thanks to all Coles team members and to our many strategic partners in But there are many other projects throughout our business operations where new technology is making a difference. Coles is committed to improving how we operate and to lessening our impact on the environment by improving our packaging, decreasing our waste, 6 7 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Managing Director and Chief Executive Officer’s report Since our successful demerger from Wesfarmers during the 2019 financial year, Coles has been executing our refreshed strategy to transform our business and lay the foundations for long-term sustainable growth. COVID-19 has seen Coles classified as an ‘essential service’ and our focus has been on team and customer safety and supporting vulnerable Australians in our community. for those most in need, including the elderly, was then DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 introduced. Copy September 23, 2020 7:52 PM We also worked closely with government experts and the Supermarkets Taskforce to formulate industry-wide hygiene and distancing protocols to keep our customers and team members safe and improve product supply. Coles provided $3 million in gift cards to around 6,000 rural fire brigades across Australia to thank volunteer fire fighters for helping to keep rural communities safe. Coles CEO Steven Cain is pictured at Wauchope with NSW Rural Fire Service Mid Coast District Incident Controller Kam Baker, Wauchope and King Creek Rural Fire Brigade fire fighters, Coles NSW State General Manager Ivan and local Coles team members from the Lake Innes supermarket in Port Macquarie. They will guide the day-to-day decisions and actions of We have prioritised building capabilities in a number of team members, shaping the way we work together to areas where COVID-19 has accelerated existing consumer get things done as we continue to transform Coles for a trends, including the growth of online shopping and second century of generating long-term returns for our cooking at home. shareholders. Inspire Customers We have grown our convenience offer, with dedicated convenience sections now in almost 150 supermarkets and with more than 240 new lines launched, including the new Coles Kitchen range from our recently acquired Jewel Fine Foods manufacturing facility in Sydney. In Liquor, our refreshed strategy is focused on being a simpler, more accessible, locally relevant drinks specialist with a differentiated offer, while our Exclusive Liquor Brands continue to collect accolades, bringing home a total of 372 medals and awards during the year. To manage the surge in volumes, our supply chain team set We were pleased to report an improvement in customer DRAFT 1 COL1634_ AnnualReport_ September 23, 2020 7:52 PM d4a up pop-up distribution centres in a matter of days to increase our capacity, while our recent investment in our integrated stock replenishment system and advanced data analytics helped to improve availability and ensure high-demand products were sent into stores to meet customer needs. satisfaction across Supermarkets, Liquor and Express in the fourth quarter. We continued tailoring our customer offer by using data- driven ranging tools, which allowed us to execute one of the largest range changes in Coles’ history and introduce As the community adapted to the ‘new normal,’ demand more than 1,600 new product lines. I am pleased to say that we have made substantial progress against each of the pillars of our strategy despite the challenges the 2020 financial year has presented, as our team worked hard to fulfil our purpose of sustainably feeding all Australians to help them lead healthier, happier lives. for food and liquor remained elevated as venue closures and working from home meant customers were increasingly cooking for themselves and staying in on weekends. COVID-19 restrictions reduced traffic on the road and fuel volumes at Coles Express. We delivered trusted value through our campaigns to Help Lower the Cost of Breakfast, Lunch and Dinner, Smarter Selling including the introduction of more than 1,500 new products Our Smarter Selling strategy achieved cost savings in excess at everyday low prices, while sales of Own Brand grew by of $250 million, driven by the increased use of technology 10% to exceed $10 billion for the first time – accounting for to drive efficiencies. Together during COVID-19 As ever, it was the tremendous efforts of our team members more than 31% of supermarket sales. that made everything possible, and we were pleased to As a designated ‘essential service’, Coles has played an be able to recognise their outstanding work with a thank important role in ensuring Australians can safely access the you payment to store and supply chain team members, food, drinks and fuel they need. doubling the team member discount on shopping at Coles and subsidising their flu vaccinations. As demand surged in early March, we worked collaboratively with suppliers, governments and industry stakeholders to I am immensely proud of the way we truly worked as one increase our supply chain capacity and also introduced Coles team to support our customers, our suppliers, our Community Hour to serve the vulnerable and emergency communities and each other. To further strengthen our services workers. culture, in June we launched our Coles values: Customer obsession, Passion and pace, Responsibility, and Health Coles Online briefly suspended service in March and April and happiness. in part due to limited and uncertain product availability, with capacity almost doubling across home delivery and These values are supported by our LEaD behaviours of contactless Click & Collect at service desks and to the Look ahead, Energise everyone and Deliver with pride, car boot. Coles Online Priority Service, focusing on service and were developed with input from our team members. Our values. Our behaviours. 8 9 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Coles Group Limited 2020 Annual Report Coles Group Limited 2020 Annual Report To our millions of customers across almost 2,500 supermarkets, convenience and liquor stores, I thank you for your understanding, patience, respectfulness and adherence to the new social distancing guidelines that keep us all safe. Our vision, purpose and strategy This included streamlining our Store Support Centre and implementing new systems across Finance and Procurement, more efficient use of logistics so more trucks carry both inbound and outbound loads, new technology to help our store teams order the right amount of stock, Looking ahead In the 106 years since Coles was founded as a single store in Melbourne’s Collingwood, our Company has weathered many challenges. Few of them would be greater than those reduced energy consumption through use of LED lights and that we have faced over the past financial year. Our vision Become the most trusted retailer in Australia and grow long-term shareholder value. refrigeration control systems, and improved measures to reduce stock loss in stores. Further progress was also made in tailoring our store formats to the needs of local communities, with 70 renewals I am extremely grateful for and proud of the resilience that our more than 118,000 team members have demonstrated in their response to the ongoing challenges that we face as a community, and for their dedication to safely serving our DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 completed during the year, including 10 Format A, 31 customers with a smile. Copy September 23, 2020 7:52 PM Format C and three Coles Local supermarkets. The first of our two distribution centres being built by global automation experts Witron is under construction in Queensland, and the second facility in New South Wales is in the approvals stage. Meanwhile we have entered long-term I would like to thank the Board for their support and valuable guidance throughout the year, and our leadership team for their tireless efforts to ensure our business could keep doing what it does best while simultaneously making the necessary changes to set Coles up for long-term success. leases to underpin the development of automated online customer fulfilment centres in Victoria and New South Wales DRAFT 1 COL1634_ by leading online retail technology experts Ocado. AnnualReport_ September 23, 2020 7:52 PM Our financial position d4a To our millions of customers across almost 2,500 supermarkets, convenience and liquor stores, I thank you for your understanding, patience, respectfulness and adherence to the new social distancing guidelines that In line with our objective of providing shareholders with sustainable earnings growth and attractive dividends, we keep us all safe. To our suppliers and community partners, none of what has been achieved could have happened without your collaboration, innovation and hard work for delivered a total shareholder return of 31.7% for the year. which I thank you sincerely. Total dividends of 57.5 cents per share were declared in relation to FY20. On a retail basis, full year sales revenue increased by 6.9% And finally to our shareholders – we will continue to transform Coles into the most trusted retailer in Australia and deliver long-term sustainable returns for you, your families and millions to $37,408 million with sales revenue growth across all of beneficiaries in Australia and beyond. segments, and we were pleased to mark a return to growth in full-year Group EBIT – up 4.7% to $1,387 million on a retail basis – the first increase since FY16. Importantly, we had begun to see benefits of the new strategy prior to the onset of COVID – providing assurance that Coles will be a stronger, more sustainable business long after the pandemic. Steven Cain Managing Director and Chief Executive Officer, Coles Group Limited 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. 10 11 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. Nurture Fund Innovation R&D Coles Online Coles Strategy Five Freedoms for animal welfare Australian farmers and producers Suppliers, processors and packaging DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Convenience Copy September 23, 2020 7:52 PM Transport and distribution Retail and store network Team members Customers and community Coles Supermarkets has an Thousands of suppliers provide us with Working with our logistics partners, We support local economic growth With more than 118,000 team Through community partnerships, Australian-first sourcing policy to Own Brand and proprietary branded we are reducing our environmental through investment in new stores and members, including the largest we are supporting Australians and provide our customers with quality products. We are working with Own footprint through more efficient fleet infrastructure, while continuing to number of Aboriginal and Torres Strait reducing our environmental impact. Australian-grown fresh produce. Brand suppliers to improve Own Brand movements. We are also ensuring reduce greenhouse gas emissions. Islander team members in Australia’s Our work with SecondBite and By doing this, we are supporting DRAFT 1 packaging recyclability, including COL1634_ customers are provided with quality, Australian farmers and growers who labelling on Own Brand products to AnnualReport_ September 23, 2020 7:52 PM help customers recycle. REDcycle d4a products. Our support includes the soft plastics recycling is available provide us with healthy, quality $50 million Coles Nurture Fund. in our supermarkets. safe products by conducting selected quality checks when produce arrives at our fresh produce distribution centres, with additional checks for chilled products. Innovation is key to providing online private sector, our workforce reflects Foodbank provides Australians in grocery and convenient shopping the diversity of our customers and need with healthy, nutritious food that experiences to make life easier for our the community. A safe and inclusive might otherwise go to waste. Disaster customers. Providing safe, responsibly workforce for all is our priority. relief and business continuity plans sourced, nutritious products at competitive prices is fundamental. support customers and communities in times of extreme weather events and other crises. Our economic value creation Our sustainability achievements1 Suppliers Team members Shareholders Governments Community $29.9bn $4.8bn $873m $2.6bn $139m supplier and payments and benefits total dividends cash taxes paid community services spend to team members paid and collected support Sustainable communities Sustainable products Sustainable environmental practices Meals to people in need since 2003 (equivalent of) 147m+ Best Sustainable Seafood Supermarket in Australia Awarded by MSC. Holder of the award since 2017 Broadest range of RSPCA Pieces of flexible plastic through REDcycle since 2011 1bn+ Funds to Redkite since 2013 $38m Approved products of any Waste diverted from landfill 79% major Australian supermarket Grants announced for 15 producers through Coles Nurture Fund in FY20 Own Brand products $3.6m displaying Health Star Rating 2,400+ Greenhouse gas emissions (Scope 1 and 2) from 2009 36.5% All figures above are as at 28 June 2020, with the exception of community support (30 June 2020). 1 All references are as at 30 June 2020, with the exception of funds to Redkite which is as at 28 June 2020. 12 13 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Sustainability snapshot Just over a year ago, we launched our vision to become the most trusted retailer in Australia and grow long-term shareholder value. We also launched our purpose to sustainability feed all Australians to help them lead healthier, happier lives. Central to that purpose is trust and that means delivering against our key sustainability pillars. Drought, devastating bushfires, a global pandemic – 2020 brought challenges of exceptional scale. In this extraordinary year, our team members, suppliers and customers rose to the challenges and provided essential supplies to Australians in need, helping to bring our vision and purpose to life. Central to that vision and purpose is trust. We will build trust by continuously improving our management, performance and reporting in regard to social and environmental impacts and opportunities under the three key pillars of our Sustainability Strategy – Sustainable communities, Sustainable products and Sustainable environmental practices. We contribute to the following United Nations Sustainable Development Goals: DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM DRAFT 1 COL1634_ AnnualReport_ September 23, 2020 7:52 PM d4a Together with Michelin-starred chef and Coles ambassador Curtis Stone, Coles announced a new partnership with the Stephanie Alexander Kitchen Garden Foundation in February 2020. Providing thousands of children across Australia access to a pleasurable food education program helps them develop a healthy relationship with food, self-confidence and life skills. 14 15 Coles Group Limited 2020 Annual Report Sustainable products Sustainable products focuses on healthy food choices We want to make life easier for our customers by offering and healthy lifestyles. It also means sourcing products quality, safe and trusted products – sourced in an ethical responsibly and ethically. It includes our commitment to and transparent way – to help them make healthy and animal welfare and to responsibly sourced seafood. sustainable choices. We introduced new health food ranges including vegan As customers’ needs are changing, we continue to offer new and vegetarian options, and supported healthy lifestyle ranges and products. An affordable healthy food range was programs. Our new three-year partnership with the launched in FY20 and we provided more meat-free protein Stephanie Alexander Kitchen Garden Foundation gives alternatives. Our Own Brand food and drink standard range thousands of children, at more than 2,000 schools and early is now free of artificial colours and artificial flavours. learning centres, access to food education to help them develop a healthy relationship with food. We are committed to providing our customers with safe, high-quality Own Brand products. Our commitment is In FY20, Coles was awarded the MSC Best Sustainable supported by our rigorous supplier requirements, our Seafood Supermarket in Australia. The MSC has named auditing and inspection program and in-store standards. Coles holder of the award since 2017, recognising that we have the widest eco-labelled fresh seafood range of any Australian supermarket. Julie and her son, Reece, with Mum’s Sause, which was launched in July 2019 to raise funds to help sick children in hospitals across Australia as part of the Curing Homesickness initiative. DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM Victorian dairy farmer Peter Hemphill (pictured with his grandchildren) was among 15 producers awarded a Coles Nurture Fund grant in FY20. DRAFT 1 COL1634_ AnnualReport_ September 23, 2020 7:52 PM d4a Sustainable communities Sustainable communities involves supporting our customers, Sustainable communities means creating a workplace team members and producers. It is about investing in and for more than 118,000 team members that reflects the giving back to the community and doing the right thing by communities in which they live and work. With more than farmers, suppliers and their workers. 4,700 Aboriginal and Torres Strait Islander team members, Coles is proud to be the largest private sector employer of Coles Supermarkets has an Australian-first sourcing policy to provide our customers with quality Australian-grown fresh Indigenous Australians. produce as a first priority. In FY20, 96% of fresh produce, by A company-wide Human Rights Strategy was introduced volume, was sourced from our supply partners from all over in FY20, including a refreshed Ethical Sourcing Policy and Australia, excluding floral, nuts, dried fruit, sauces, dressings supplier requirements. and packaged salads. In FY20, 100% of fresh lamb, pork, chicken, beef, milk and eggs and 100% of Own Brand frozen vegetables were Australian grown. In a first for the Australian retail sector, Coles worked with three key unions to develop the Coles Ethical Retail Supply Chain Accord which aims to achieve a safe, sustainable, During the year, we announced $3.6m in Coles Nurture ethical and fair retail supply chain for workers regardless of Fund grants provided to 15 recipients who are improving their employment, citizenship or visa status. their sustainability, rebuilding after bushfires and producing more Australian made food and beverages. More about our community partnerships and support can be found in our 2020 Sustainability Report. 16 17 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Support for customers, suppliers and communities Coles supported farmers and communities dealing with the impact of drought conditions across many parts of Australia during the past year. With help from our community partners, we also provided much-needed assistance to flood-affected communities. Responding to drought and floods Over the past two financial years, Coles has committed more than $18 million to drought relief. In FY20, Coles donated $1 million from the Coles Nurture Fund to the Country Women’s Association’s Drought Relief Fund to distribute to farming families affected by drought. In addition, Coles raised a further $864,476 for the CWA Drought Appeal through customer donations at supermarkets and liquor stores and from the sale of $2 donation cards in the lead-up to Christmas. Together, these funds donated and raised by Coles in FY20 for the CWA Drought Appeal resulted in more than 920 farming families receiving grants to help them pay household expenses such as medical, energy and grocery bills. During October and November 2019, Coles donated Coles Tenterfield Store Manager Kyle (left) with Tenterfield Shire Councillor and NSW Farmers local branch chair Bronwyn Petrie (middle), Tenterfield Shire Deputy Mayor Greg Sauer (right) and local residents Howard and Carmel with one of many truckloads of donated bottled water. Coles donated around 140,000 litres of bottled water to local communities in northern New South Wales of which around 100,000 litres was donated to Tenterfield residents. and delivered around 140,000 litres of drinking water to Amid heavy rainfall and flooding in parts of Queensland in local communities in northern New South Wales including Tenterfield, Guyra, Glen Innes, Ebor and Armidale, where local catchments were depleted by the combination of February 2020, Coles converted its delivery of goods from rail to road to ensure food and groceries could reach our customers. drought and bushfires. To help people and communities to recover from the bushfires, we also launched a fundraising appeal for Red Cross. By raising $3.2 million for bushfire support, our funds enabled Red Cross to provide grants to hundreds of people to help them meet immediate needs, make repairs, cover hospital costs or re-establish a safe place to live. Campaigns to support farmers With many fresh produce suppliers finding their crops impacted by drought during the year, Coles worked with farmers to vary our product specifications and worked with industry stakeholders to encourage customers to look beyond a few surface imperfections. This provided valuable support to farmers by helping them sell their crops at the best possible price, while ensuring ongoing supply of great quality Australian fruit and vegetables for our customers. DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM DRAFT 1 COL1634_ AnnualReport_ September 23, 2020 7:52 PM d4a Team members at our Coles Local Rose Bay store wear polo shirts made from 65% recycled plastic bottles. Sustainable environmental practices REDcycle soft plastics collection is offered in our supermarkets. Since the program began at Coles in 2011, Sustainable environmental practices means reducing the more than one billion pieces of soft plastic have been impact of our own operations as well as making it easier for diverted from landfill. customers to reduce their environmental impact. As a food retailer, we love food and do not want it to go to waste. Every Coles supermarket and distribution centre is connected with a food waste solution, something first We are facing into the impacts of climate change and need to adapt to respond to extreme weather events and to maintain security of food supply. More information about our response to climate change is in the Risk Management achieved at the end of FY19. Our first choice for unsold, section of this report. edible food is to donate it to food rescue organisations. Following that, we have other food waste solutions including donation to farmers and animal or wildlife services, organics collections and in-store food waste disposal equipment. Coles has a responsibility to support our team members, customers, suppliers and the communities in which we live and work and is committed to making a positive difference. Packaging continues to be a focus. In November 2019, Coles won the APCO’s large retailer industry award for our achievements in sustainable packaging design, recycling Understanding and meeting these responsibilities are key to achieving our vision to becoming Australia’s most trusted retailer and growing long-term value for our shareholders. initiatives and product stewardship. 18 19 Flooding caused havoc on roads in some parts of New South Wales and Queensland in early 2020 while some areas barely received a drop of rain. Pictured is a Coles truck at Warriewood in northern Sydney in February. Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Bushfires Bateman’s Bay Coles regularly supports Australians through times of hardship and natural disaster. During the summer bushfires , we played an important role in supporting affected communities and emergency services with direct donations and fundraising to support longer-term relief. DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM DRAFT 1 COL1634_ AnnualReport_ September 23, 2020 7:52 PM d4a Firefighter donations Food donations Red Cross donations To acknowledge the amazing courage and dedication of volunteer firefighters, Coles Coles donated food, water Through Coles Supermarkets, and other essentials to bushfire- Coles Liquor stores and Coles Express affected communities and stores, we launched an appeal for donated $3 million in gift cards emergency services. to over 6,000 rural fire brigades across Australia in December 2019. We worked with Foodbank, the Red Cross Disaster Relief and Recovery Fund in November 2019. donating 47 pallets of food, fresh By double matching customer This provided essential funds fruit, UHT milk, coffee, tea and donations for a specific period, for brigades to stock up supplies snacks for relief centres, aged care Coles contributed more than of food and essentials for their facilities and emergency services. $1 million and together with our stations or run a thank you event with their members. The gift cards were distributed via the NSW Rural Fire Service, Queensland Rural Fire Service, We supported animal sanctuaries and zoos including Mogo Zoo customers provided more than $3.2 million to the fund. (Bateman’s Bay), Adelaide Koala Our donations enabled Red Cross and Wildlife Hospital, Kangaroo to provide emergency assistance, Island Wildlife Network, and Live psychological first aid and longer- Country Fire Authority in Victoria, Stock SA with donations of fruit, term community support to SA Country Fire Service, Tasmanian vegetables and animal feed. Australians affected by bushfires. Fire Service, the ACT Rural Fire Service, Bushfire Volunteers (WA), WA Volunteer Fire and Rescue Service, WA Volunteer Fire and Emergency Service and Bushfires NT. John, Regional Manager, at the Bateman’s Bay store (top left), Coles State General Manager for South Australia and Northern Territory, Sophie, at a fundraising trivia night that raised funds for people affected by the Cudlee Creek and Kangaroo Island bushfires (top right), the burnt remains of a Coles team member’s house and car (middle left), residents evacuated as fires sweep through Bateman’s Bay in New South Wales (middle right) and fire trucks re-fuelling at the Moss Vale Coles Express during the bushfires (bottom). 20 21 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report COVID–19 The COVID-19 pandemic highlighted our role as an essential service to the community, and we worked closely with government and industry bodies to ensure all Australians had safe access to essential food and groceries. Safety our greatest priority and vulnerable customers on Mondays, Wednesdays and Fridays; and to emergency services and healthcare workers DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Since the outbreak of COVID-19, Coles has played an on Tuesdays and Thursdays. Copy September 23, 2020 7:52 PM important role in providing an essential service to the community while prioritising the safety of our team members and customers. To further support more vulnerable Australians, we established Coles Online Priority Service (COPS) in April to offer home delivery and Click & Collect services to Team member and customer safety is our highest priority, customers who were unable to visit a store. and Coles followed the expert advice from state and federal health authorities on how to reduce the risk of DRAFT 1 COL1634_ infection in our stores and through our supply chain. The frequency with which we clean our stores was increased, d4a particularly in high-traffic areas such as checkouts, while AnnualReport_ September 23, 2020 7:52 PM safety screens and floor decals were installed to assist with social distancing measures including the introduction of limits Another way we provided extra support to disadvantaged people was by donating additional food and groceries to our food relief partners, Foodbank and SecondBite, during COVID-19. In addition to the food we regularly donate from our stores and distribution centres, we donated extra food and groceries to the retail value of nearly $7.9 million to Foodbank and SecondBite to distribute to food charities on the number of customers in stores at our busiest times. across Australia. Responding to demand To help address the unprecedented customer demand seen early in the outbreak, we invested in our supply chain, opening pop-up distribution centres in New South Wales, Victoria and Queensland. We introduced product limits on the most in-demand products so that more customers could access essentials. We also worked with suppliers to prioritise production of groceries they could deliver in the greatest volume until demand returned to more normal levels. Prioritising our vulnerable citizens In April, we also teamed up with Indigenous corporations and local charities to deliver and donate more than 80 pallets – the equivalent of 50 tonnes – of food and grocery essentials to Indigenous communities across the Northern Territory. Recruiting Australians in store To serve more customers, replenish shelves faster, keep stores cleaner and offer employment for Australians whose jobs had been impacted by COVID-19, we recruited thousands of additional casual team members. More security guards were also employed to help manage customer numbers and keep customers and team We also provided Australia’s elderly and most vulnerable, members safe. together with emergency and healthcare workers, with better access to groceries by introducing Coles Community Hour at all our supermarkets across Australia in March. This initiative, which ran until May 8, involved temporarily changing our trading hours to 7am to 8pm on weekdays and dedicating the first hour of trade exclusively to elderly Team members working throughout the challenging period were rewarded for their extraordinary efforts with an additional team member discount and a thank you payment for those working in stores and supply chain. Throughout COVID-19, we prioritised the safety of our team members and customers, providing Australians access to essential goods and services, and supporting communities and people in need. Customers at Coles Southland (top), Brisbane mother Anna with her daughter Olivia using sanitiser in store (middle left), Salvation Army’s Major Brendan Nottle with Coles Online team member Matthew and Collingwood Football Club Director of Stadia and Community, David Emerson, with donations of 2,000 convenience meals as well as frozen vegetables and pantry items for residents in Magpie Nest’s housing program which accommodates people who have been sleeping rough on Melbourne’s streets and women fleeing domestic violence (middle right); and Coles Eastland Store Support Manager Drew delivers groceries to 97 year-old World War II veteran Des (bottom right). 22 23 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Governance at Coles In our first full year as a listed entity, Coles’ corporate governance framework has been integral to our response to the events of FY20. We are committed to the highest standards of corporate governance and believe that a robust and transparent governance framework is central to our success. The Group’s FY20 key corporate governance highlights and focus areas included: Overseeing Coles’ response to the unforeseen national DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 and global challenges presented during FY20 including September 23, 2020 7:52 PM Copy Board their impact on our team members, customers, suppliers and local communities. Hosting the Company’s first Annual General Meeting in November 2019, conducting the first Board performance review and adopting the new Coles values which build on Chairman James Graham AM addresses shareholders at the first Coles Annual General Meeting in November 2019. Corporate governance framework Board role and responsibilities Coles’ 2020 Corporate Governance Statement contains a The Board provides leadership and approves the strategic comprehensive overview of our corporate governance direction and objectives of the Group in the long-term framework and highlights and is available at interests of, and to maximise value to, shareholders. The www.colesgroup.com.au/corporategovernance. Board is accountable to shareholders for the overall DRAFT 1 the existing LEaD framework and behaviours. COL1634_ The Board d4a Strategy Risk management Diversity and inclusion AnnualReport_ September 23, 2020 7:52 PM Executing the first year of our strategy, with good progress made on delivering our vision to ‘Become the most trusted retailer in Australia and grow long-term shareholder value’ underpinned by our three strategic pillars: Inspire Customers, Smarter Selling and Win Together. This includes progress against our eight strategic KPIs, which were laid out to measure the success of our strategy. Implementing initiatives that continue to drive an uplift in our risk management maturity. This has entailed the establishment of our risk appetite framework, including definition, measurement, monitoring and reporting of risk appetite for our material risks. We also implemented a technology platform to facilitate the management of risks and major compliance programs. Continuing our progress towards achieving our Better Together objectives, including in relation to gender diversity, with the proportion of men and women across the entire Coles workforce for FY20 being 49.3% men and 50.7% women. In addition, at the end of FY20 we employed more than 4,700 Aboriginal and Torres Strait Islander people across our stores, distribution centres and store support centres, representing 3.8% of team members. Audit and Risk Nomination Committee Committee People and Culture Committee Managing Director and Chief Executive Officer Executive Leadership Team Coles Team Members 24 25 performance of the Company, having regard to the interests of other stakeholders, including team members, customers, suppliers and the broader community. The Board has a charter that outlines its responsibilities, including powers that are expressly reserved to the Board, and powers that are specifically delegated to the CEO and management. Board composition 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 election at the first annual general meeting after their appointment. The Board will review periodically its composition and the duration of terms served by directors, upon recommendation from the Nomination Committee. Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Board skills matrix SKILL/ EXPERIENCE EXPLANATION 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 Company. The current mix of skills and experience represented on the Board is set out in the skills matrix below: Number of Directors with the requisite skill 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 on 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. DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 September 23, 2020 7:52 PM Copy 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. Advanced understanding of customer service delivery models, benchmarking and oversight. 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. Board of Directors Steven Cain Managing Director and Chief Executive Officer Jacqueline Chow Member of the Nomination Committee and the Audit and Risk Committee Richard Freudenstein Chairman of the People and Culture Committee and Member of the Nomination Committee Zlatko Todorcevski Chairman of the Audit and Risk Committee and Member of the Nomination Committee James Graham AM Chairman of the Board Chairman of the Nomination Committee and Member of the People and Culture Committee David Cheesewright Member of the Nomination Committee and the People and Culture Committee Abi Cleland Member of the Nomination Committee and the People and Culture Committee Wendy Stops Member of the Nomination Committee and the Audit and Risk Committee Biographical details of the Board of Directors can be found on pages 66–67. 8 8 8 8 8 6 7 6 8 4 6 8 7 7 26 27 DRAFT 1 COL1634_ 8 AnnualReport_ September 23, 2020 7:52 PM Corporate governance Executive experience Financial acumen Strategic thinking People, culture and remuneration Risk management d4a 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 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report A culture of acting lawfully, ethically and responsibly Executive Leadership Team Anti-bribery and Corruption Policy Coles has an Anti-bribery and Corruption Policy. In FY20, the Board approved updates to the policy in response to regulatory changes. The policy stipulates that Coles has zero tolerance for bribery and corruption in any form. It prohibits directors and team members from engaging in activity Steven Cain Managing Director and Chief Executive Officer Leah Weckert Chief Financial Officer Greg Davis Chief Executive Commercial & Express Coles has a number of company policies that promote a culture of acting lawfully, ethically and responsibly and outline expected standards of behaviour. These policies include the following: Code of Conduct Coles has a Code of Conduct which sets out the standards of behaviour which are expected of its directors and team members in their interactions with customers, suppliers, the community and each other. The Code of Conduct was reviewed in FY20 and was updated to reflect the Company’s vision, purpose and strategy as well as the values and LEaD behaviours. Our values of Customer obsession, Passion and pace, Responsibility and Health and happiness define what’s important to us, and our LEaD behaviours of Look ahead, Energise everyone and Deliver with pride guide how we work that constitutes bribery or corruption and sets out a number of guidelines to assist team members to determine what DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 constitutes bribery or corruption. It covers any activity or behaviour undertaken in connection with Coles, regardless of Copy September 23, 2020 7:52 PM the geographical location in which that activity or behaviour occurs. Sustainability, Health, Safety and Wellbeing Coles is committed to providing a safe and healthy as a team and continue to build on the strong relationships DRAFT 1 COL1634_ with our suppliers and customers. environment for team members, customers, suppliers, contractors, visitors and supply chain partners. The Health, AnnualReport_ September 23, 2020 7:52 PM Safety and Wellbeing Policy describes the systems and processes in place to manage the risks and hazards that Whistleblower Policy d4a As part of Coles’ commitment to the highest standards of conduct and ethical behaviour in all its business activities, the Company has a Whistleblower Policy to encourage anyone to come forward with concerns. The policy, which was reviewed and updated in FY20, requires Coles team members, directors and officers who have reasonable grounds to suspect that ‘Potential Misconduct’ has occurred or is occurring within or against Coles to make a report. The policy also encourages anyone else who has reasonable grounds to suspect that ‘Potential Misconduct’ has occurred or is occurring within or against Coles to make a report. Potential Misconduct is any suspected or actual misconduct or an improper state of affairs or circumstances in relation to Coles. It includes any unethical, illegal, corrupt, fraudulent or undesirable conduct or any breach of Coles’ policies such as its Code of Conduct by a Coles director, team member, contractor, supplier, tenderer or any other person who has business dealings with Coles. come with operating Coles’ business and ensure that Coles’ actions are appropriate to our risk profile. Securities Dealing Policy Coles has a Securities Dealing Policy to ensure compliance with insider trading laws, protect the reputation of the Group, its directors and team members, maintain confidence in the trading of the Company’s securities and prohibit specific types of transactions. In general, directors, members of the Executive Leadership Team and other executives at the General Manager level and above (Restricted Persons) may not deal in Coles’ securities during specified periods (known as ‘blackout periods’) that cover the period leading up to and immediately following the release of the quarterly retail sales results, half-yearly results and full-year results. Outside of those blackout periods, Restricted Persons must seek prior approval to deal in Coles’ securities from the Company Secretary (or their delegate). Matthew Swindells Chief Operations Officer Darren Blackhurst Chief Executive Liquor Ben Hassing Chief Executive eCommerce Thinus Keevé Chief Sustainability, Property & Export Officer George Saoud Chief Executive Emerging Businesses David Brewster Chief Legal & Safety Officer Kris Webb Chief People Officer Roger Sniezek Chief Information Officer Lisa Ronson Chief Marketing Officer Daniella Pereira Company Secretary Ian Bowring Group Executive Transformation Sally Fielke General Manager Corporate Affairs 28 29 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Operating and Financial Review DRAFT 1 COL1634_ AnnualReport_ September 23, 2020 7:52 PM d4a DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM Business model and strategy Coles operates and maintains 2,447 stores nationally across its businesses and employs more than 118,000 team members. Coles is a leading Australian retailer selling customers Other business operations that are not separately reportable, everyday products including fresh food, groceries, general such as Property, as well as costs associated with enterprise merchandise and liquor, through its extensive store network functions, such as Treasury, are included in Other. and online platforms. Coles also sells convenience products and, under its alliance and grow long-term shareholder value. Achieving this vision with Viva Energy (Viva), is a commission agent for retail requires us to deliver on our purpose, which is to sustainably fuel sales operating under the Coles Express brand. Coles feed all Australians to help them lead healthier, happier lives. Our vision is to become the most trusted retailer in Australia operates some of Australia’s most well recognised brands, including Coles, Coles Local, Coles Express, Liquorland, First Choice Liquor Market and Vintage Cellars. In addition, Coles sells customers financial and lifestyle services and is a 50% shareholder of flybuys, a loyalty program covering more than six million active households. Our strategy, ‘Winning in our Second Century’, represents our plan to deliver on this purpose. There are three strategic pillars: Inspire Customers, Smarter Selling, and Win Together. Across each of these pillars, we are planning to win in our second century by ensuring that our strategy delivers a competitive advantage through five strategic Coles operates and maintains 2,447 stores nationally differentiators: across its businesses and employs more than 118,000 team members. Coles’ core competencies include merchandising and supplier relationships, marketing, maintaining and operating a national store network, operating a fully integrated supply chain, including logistics, and a national distribution centre network. The Group’s reportable segments are: 1. Win in online food and drinks with an optimised store and supply chain network 2. Be a great value Own Brand powerhouse and destination for health 3. Achieve long-term structural cost advantage through automation and technology partnerships 4. Create Australia’s most sustainable supermarket 5. Deliver through team engagement and pace of • Supermarkets: fresh food, groceries and general execution merchandise retailer with a national network of 824 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 713 outlets nationally We have made progress against each of these three pillars over the past year, supported by our existing Look ahead, Energise everyone and Deliver with pride (LEaD) behaviours framework and our newly-launched Coles values. 30 31 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Inspire Customers Smarter Selling Inspire Customers through best value food and drink solutions of…’ campaign focused on lowering the cost of breakfast, Smarter Selling through efficiency and pace of change. critical element of efficiency in the Store Support Centre with to make lives easier. lunch and dinner. • Customer obsessed • Tailored offer with trusted and targeted value • Own Brand powerhouse • Destination for convenience and health • Leading anytime, anywhere shopping • Accelerate growth through new markets Continuing to innovate to build an Own Brand powerhouse, and reinforcing the 10% sales growth achieved in FY20, are critical to our commitment to deliver trusted value and to lower the cost of living for our customers through affordable quality. • Technology-led stores & supply chain • Strategic sourcing • Optimised network and formats • Efficient and agile Store Support Centres Coles is also delivering on those areas that are increasing in importance for our customers as lifestyles change. DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 This includes expanding our convenience meal range Copy September 23, 2020 7:52 PM and rolling it out to approximately 150 stores in FY20, and multiple SAP system investments underway or completed. Coles is building an optimised store network by opening new stores in key network gaps and growth corridors, while closing underperforming stores. This process of optimisation is being reinforced by an ongoing program of store renewals, with the rollout of ‘Format A’ stores, a premium mainline supermarket format Coles is committed to establishing a structural cost for our best trading stores, and ‘Format C’ stores, a highly advantage by increasing efficiency through rapid efficient format for lower trading stores that allows Coles to innovation and execution at pace. Technology and digital continue to deliver a high quality offer to customers that investment supporting efficiency and automation in our may otherwise not be able to access that offer. supply chain, stores and Store Support Centre is critical, as is the continued optimisation of our network and store formats, and our supplier network. The technology-led optimisation and automation of our supply chain to reduce costs and improve availability is continuing to accelerate with construction starting on our first fully automated distribution centre in Queensland. Leases have also been signed for two online fulfilment centres in Sydney and Melbourne that will enable Coles to win in online food and drinks. Technological innovation is a Coles is also rolling out the innovative Coles Local format, a premium smaller format supermarket that delivers both great value and premium solutions to customers. Coles now has 29 Format A stores, 33 Format C and four Coles Local stores across the network, including the first Coles Local in New South Wales at Rose Bay. Delivering inspiring solutions, with the right offer at the right price, where and when our customers want it. enhancing our customer offer to ensure we are their preferred destination for convenience and health solutions. At Coles, we strive to be customer obsessed and our customers are responding, with our customer satisfaction score, as measured by Tell Coles, increasing to 88.2% in the fourth quarter as availability improved following initial COVID-19 DRAFT 1 COL1634_ pantry stocking impacts (83.4% in the third quarter). d4a Customer obsession pervades our strategy. Landing the AnnualReport_ September 23, 2020 7:52 PM Customers are increasingly seeking options in terms of where and when they shop. To this end, Coles is investing to become Australia’s leading digital retailer, with online sales growing by 18% in FY20, by delivering an expanded, personalised and targeted offer online. Coles is also offering solutions to new customer groups, right offer in the right location and ensuring our customers trust Coles to deliver them the best value, with 20% of FY20 sales at everyday low prices and the ‘Helping lower the cost continuing the drive to expand both our export and B2B businesses. Coles recently opened an office in Shanghai to better support our export customers in Asia. In 2020, Coles launched a ‘What’s for Dinner?’ campaign to provide customers with a collection of easy and fast recipes to produce tasty meals at great value. Team members Karra and Jess at the Parkinson Distribution Centre in Brisbane plan logistics for the transport of food and groceries across Queensland. 32 33 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Win Together Win Together with our team members, suppliers and Our support for Australian communities has never been communities. • Wellbeing and safety in our DNA • Great place to work • Drive generational sustainability • Better together through diversity • Innovation through partnerships Coles is focused on helping all Australians to lead healthier and happier lives, including our team members, our suppliers and our communities. Ensuring the wellbeing and safety of team members is a key part of making Coles a great place to work and partner with. In FY20, Coles improved its TRIFR by 18.3% to 22.7. more apparent than in the drought, bushfire and COVID-19 pandemic affected FY20. Coles’ contribution to the Australian community in FY20 included donations of gift cards to rural fire brigades and additional food and groceries to charity partners. We are focused on making life easier for our customers by offering quality, trusted products while at the same time, working to minimise our environmental impacts through sustainable environmental practices. DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Coles is committed to being a diverse and inclusive workplace that is reflective of the customers and community September 23, 2020 7:52 PM Copy we serve. Coles is proud to be Australia’s largest private sector employer of Aboriginal and Torres Strait Islander people. Coles believes that respect for human rights is essential to achieving Coles’ vision to become the most trusted retailer in Australia. We have continued to enhance our DRAFT 1 COL1634_ To help deliver on our purpose, Coles is committed to attracting, engaging and retaining the very best talent. d4a Engagement continues to improve, with our engagement AnnualReport_ September 23, 2020 7:52 PM Ethical Sourcing Program, including the development and adoption of Coles’ first Human Rights Strategy, and the strengthening of our ethical sourcing team with dedicated team members with specialised skills. score increasing by seven percentage points in FY20. Coles is committed to driving generational sustainability by creating Australia’s most sustainable supermarket. Our Sustainability Strategy, aligned with the United Nations Global Compact and United Nations Sustainable Development Goals, is focused on supporting sustainable communities, delivering sustainable products, and following sustainable environmental practices. Improvement in team member engagement (percentage points) Total recordable injury frequency rate (TRIFR) Number of all injury types per million hours worked 38.8 34.4 27.8* 22.7 7pp FY17 FY18 FY19 FY20 * Restated due to maturation of data 34 Coles proudly announced a five-year partnership in FY20 with the AFL. The stunning growth of AFLW has made a powerful statement about inclusion of females in professional sport. AFL General Manager Commercial Kylie Rogers said, ‘The partnership is a natural fit, with both the AFL and Coles dedicated to giving back to local communities and providing opportunities for all Australians. Our commitment to each other ensures we can continue to invest back into our sport to promote participation and growth at all levels of the game.’ Coles Group Limited 2020 Annual Report Group performance Highlights Performance overview • Statutory sales revenue growth of 6.5% in Supermarkets and The financial and operating performance of the Group is 3.2% in Liquor • Group EBIT on a retail (non-IFRS) basis returned to growth for the first time in four years • Robust balance sheet with investment-grade credit metrics • The Board has determined a fully franked final dividend of 27.5 cents per share For continuing operations of the Group: presented on a statutory (IFRS) basis. Results prepared on a retail (non-IFRS) basis have also been included to support an understanding of comparable business performance. Further details relating to the presentation of retail results are provided in the Non-IFRS Information section. DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM FY20 FY19 CHANGE $M 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)2 Group sales revenue3 Group EBIT4 Profit after tax4 DRAFT 1 COL1634_ AnnualReport_ September 23, 2020 7:52 PM d4a 32,993 3,308 1,107 37,408 30,993 3,205 3,978 38,176 1,618 1,191 138 33 (27) - 1,762 (443) (341) 978 133 46 (27) 124 1,467 (42) (347) 1,078 37,408 1,387 951 35,001 1,325 888 6.5% 3.2% (72.2%) (2.0%) 35.9% 3.8% (28.3%) - n/m1 20.1% n/m1 (1.7%) (9.3%) 6.9% 4.7% 7.1% Statutory Sales revenue for the Group reduced by 2.0% to $37,408 million, due to a 72.2% reduction in Express revenues driven by 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 gross fuel sales revenue; however, it is entitled to commission income from fuel sold at Alliance sites (recognised in ‘other operating revenue’). Partly offsetting this decline was sales growth in the Supermarkets and Liquor segments. On a retail basis, sales revenue for the Group increased 6.9% to $37,408 million driven by improved trading performance in Supermarkets from successful value and collectible campaigns, tailored range reviews and Own Brand sales growth. Liquor revenue also increased from sales growth in Exclusive Liquor Brands (ELB) and benefits from First Choice Liquor Market conversions. Both Supermarkets and Liquor experienced a trading uplift in the latter part of the year from increased demand for in-home consumption associated with the COVID-19 pandemic. Statutory Group EBIT increased 20.1% to $1,762 million primarily due to the impact of a new accounting standard, AASB 16 Leases (AASB 16), which was effective for the Group from 1 July 2019. This resulted in an increase in EBIT of $375 million for the year. In accordance with an allowable election under the standard, prior year comparatives have not been restated. For a more detailed analysis of the financial effects of applying AASB 16, refer to Impact of AASB 16 Leases below. Partially offsetting this increase was a pre-tax gain of $124 million relating to significant items recognised in the prior year. Trading impacts Supermarkets and Liquor COVID-19 impacted Coles significantly in the second half of the financial year, starting in late February with a spike in trade from customer pantry stocking amid growing concerns of a global pandemic. Demand continued to build in Supermarkets, peaking in late March, as government- imposed social distancing measures were introduced. To meet the challenge of unprecedented customer demand, Coles worked closely with suppliers and supply chain partners to ensure stock was delivered to stores as quickly as possible, including the opening of pop- up distribution centres in New South Wales, Victoria and Queensland. Limits were also introduced for the most in- demand products so that more customers could access essentials. In March, the Coles Online platform was repurposed as a priority service for vulnerable customers, impacting ordinary trading operations until late April when the platform was fully reopened to all customers. To further support the community, Coles donated additional food and groceries to our charity partners SecondBite and Foodbank to distribute to food charities across Australia. Supermarkets trading levels moderated in April, however remained above that experienced pre-COVID-19. Store and service costs also remained elevated, reflecting the need for increased cleaning/sanitising and ongoing measures to support social distancing in stores. Liquor sales remained elevated throughout the fourth quarter as government restrictions on the opening of hotels, pubs, clubs and licensed venue operators remained On a retail basis, Group EBIT increased 4.7% to $1,387 in place across most states. million reflecting improved trading performance and cost management initiatives in Supermarkets, partly offset by the New Alliance Agreement and lower fuel volumes in Express. Liquor EBIT remained consistent with the prior year. Statutory profit after tax for the Group decreased 9.3% to $978 million driven by lower Express earnings, the net cost associated with the application of AASB 16, and a reduced net profit contribution from significant items relative to the prior year. Collectively, these impacts offset growth in Supermarkets earnings during the year. On a retail basis, profit after tax increased by 7.1% to $951 Throughout this time, Coles’ priority was to maintain the safety of team members and customers by investing in store service, security and cleaning. This focus included the installation of safety screens and signage to assist with social distancing measures and limiting the number of customers in stores at our busiest times. To recognise the significant commitment of our team during this unprecedented period, our team member discount was temporarily doubled on eligible purchases and thank you payments were also made to our store and distribution centre team members. million driven by earnings growth in Supermarkets, partly Express offset by lower fuel volumes in Express. 1 n/m denotes not meaningful. 2 Refer to Non-IFRS Information section for a comparison of statutory (IFRS) and retail (non-IFRS) results. 3 Retail sales revenue for FY19 excludes fuel sales and hotel sales. 4 Retail EBIT and profit after tax excludes the impact of AASB 16 and significant items in FY20, and hotels and significant items in FY19. Impacts of COVID-19 Coles has played an important role during the COVID-19 pandemic, providing an essential service to the community while prioritising the safety of our team members and customers. 36 Coles Express was adversely impacted by lower fuel volumes associated with the government-imposed stay- at-home measures. The decrease in road traffic resulted in significantly lower revenue, while costs increased to support safety measures in store. With the easing of these measures late in the year, fuel volumes began to increase but did not return to pre- COVID-19 levels. Earnings remained under pressure with fixed costs and ongoing safety measures in store more than offsetting revenue generated for the second half of the financial year. 37 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Financial reporting impacts separate and reliably measure the impacts from underlying into the subject matter of the announcement. Coles has and financial conditions, and risk management practices. business performance is limited. Furthermore, the had ongoing communications with the FWO since then. Forward-looking statements can generally be identified by Impairment of non-financial assets (including goodwill) Forecast future cash flows used to support assets and cash generating units (CGUs) have been updated to reflect the best estimate of future impacts of the COVID-19 pandemic on income and expenses. These impacts did not result in any impairments during the year. Furthermore, as at the reporting date, the Group’s freehold proprieties are not considered to be significantly impacted by the ongoing effects of COVID-19 as these assets are expected to maintain a steady yield in a low interest rate environment. Equity accounted investment in associates and joint ventures On 22 March 2020, the Australian Federal and State governments announced restrictions for ‘non-essential’ businesses, forcing the closure of pubs, clubs, bars and restaurants across all States and Territories. These restrictions impacted Queensland Venue Co. Pty Ltd (QVC), in which Coles has a 50% joint venture interest, through the closure of hotel venues. pandemic has impacted our operations such that many of the additional measures introduced to address and mitigate the risks of COVID-19 during the reporting period are likely to form part of business as usual activities for the foreseeable future. On this basis, the impacts of COVID-19 have not been presented as a significant item in the FY20 Financial Report. Impact of AASB 16 Leases The Group applied AASB 16 for the first time in this reporting period. The impact of the adoption of AASB 16 on the Group’s FY20 Statement of Profit or Loss is set out below: PRE-AASB 16 AASB 16 FY20 IMPACT STATUTORY FY20 EBIT Financing costs Profit before tax Income tax expense $M 1,387 (44) 1,343 (348) $M 375 $M 1,762 (399) (443) DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 1,319 (24) 7 (341) September 23, 2020 7:52 PM 978 (17) Copy Under the terms of the joint venture, Coles’ joint venture Profit after income tax 995 partner Australian Venue Co. (AVC) is economically exposed to the operations and performance of the hotels business. Coles’ economic rights under the joint venture are limited to the retail liquor business which has not been adversely impacted by COVID-19. Consequently, there are no implications for the carrying value of Coles’ investment DRAFT 1 COL1634_ in QVC at the reporting date. Receivables d4a The timing and recoverability of receivables has been AnnualReport_ September 23, 2020 7:52 PM closely monitored for COVID-19 impacts on customers and suppliers. Where appropriate, the deterioration in credit quality has been considered in the measurement of expected credit losses. No material financial impacts have been recognised in the reporting period. Self-insurance liabilities Coles engaged an independent actuary to ensure actuarial liabilities appropriately reflect all relevant risks as at 28 June 2020. COVID-19 assumptions have not been material to the determination of self-insurance liabilities as at the reporting date. Leases Coles, as a lessor has granted certain lessees concessions with respect to contractual lease payments referred to as rent abatements. Rent abatements have not had a material impact on financial performance in FY20. Classification of COVID-19 as a significant item While COVID-19 significantly impacted Coles’ financial performance during the reporting period, the ability to Under AASB 16, operating lease expenses are no longer recognised. Depreciation of the right-of-use assets and financing costs associated with lease liabilities are recognised in the Statement of Profit or Loss. The application of AASB 16 resulted in a favourable impact to Group EBIT of $375 million due to the depreciation charge associated with lease assets being less than operating lease expenses no longer recognised. The application of AASB 16 resulted in an unfavourable impact to profit after income tax of $17 million, due to the elimination of operating lease expenses being more than offset by the recognition of depreciation and financing costs associated with the Group’s AASB 16 lease portfolio. Award covered salaried team member review In February 2020, Coles announced it was conducting a review into the pay arrangements for team members who receive a salary and are covered by the General Retail Industry Award 2010 (GRIA). The review does not relate to team members who are remunerated in accordance with approved enterprise agreements and who comprise over 90% of our workforce. As announced in February 2020, Coles recognised a provision of $20 million in its half year report in relation to expected remediation costs. Coles has continued to be supported by a dedicated team of external experts as we complete the review. Remediation to affected current and former team members commenced in June 2020 and, at the date of this report, this process is nearing its conclusion. Following the announcement in February 2020, the Fair Work Ombudsman (FWO) commenced an investigation In May 2020, Coles was notified that a class action proceeding had been filed in the Federal Court of Australia in relation to payment of Coles managers employed in the use of words such as ‘forecast’, ‘estimate’, ‘plan’, ‘will’, ‘anticipate’, ‘may’, ‘believe’, ‘should’, ‘expect’, ‘intend’, ‘outlook’, ‘guidance’ and other similar expressions. supermarkets. Coles is defending the proceeding. As These forward-looking statements are based on the the court proceeding is at an early stage, the potential Group’s good-faith assumptions as to the financial, market, outcome and total costs associated with this matter are risk, regulatory and other relevant environments that will uncertain as at the date of this report. exist and affect the Group’s business and operations in the Non-IFRS information This report contains IFRS and non-IFRS financial information. IFRS financial information is financial information that is presented in accordance with all relevant accounting standards. Retail or 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. Retail information is presented to enable an understanding of comparable business performance by excluding the impacts of certain items that do not impact both the current and comparative reporting period (for example, the impact of AASB 16 and significant items). Retail results are also presented using a retail reporting period to ensure the current year’s results are prepared for a period that is comparable to the prior year’s results. Both statutory and retail results for FY20 have been prepared on a 52 week basis, beginning on 1 July 2019 and ending on 28 June 2020. FY19 statutory results reflect a 52 week and 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. Past performance cannot be relied on as a guide to future performance. Earnings per share and dividends 1 day reporting period, while FY19 retail results reflect a 52 Earnings per share (EPS) decreased to 73.3 cents, a 9.3% week reporting period. decrease from the prior year. The table below provides further details relating to the statutory and retail reporting periods: STATUTORY (IFRS) RETAIL (NON-IFRS) FY20 FY19 FY20 FY19 Reporting 1 Jul – 1 Jul – 1 Jul – 25 Jun – period 28 Jun 30 Jun 28 Jun 23 Jun Number of days 364 days 365 days 364 days 364 days Number 52 weeks Profit for the period from continuing operations ($M) Weighted average number of ordinary shares for basic and diluted EPS (shares, million) Basic and diluted EPS (cents) Basic and diluted EPS, excluding FY20 FY19 978 1,078 1,334 73.3 1,334 80.8 significant items (cents) 70.1 67.5 of weeks 52 weeks 1 day 52 weeks 52 weeks The Board has determined a fully franked final dividend of 27.5 cents per share (cps). Any non-IFRS financial information included in this report has been labelled to differentiate it from statutory or IFRS financial information. 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. Forward-looking statements This report contains forward-looking statements in relation to 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 FY20 Interim dividend Final dividend FY19 Interim dividend Final dividend Special dividend Total dividend FRANKED AMOUNT CPS PER SECURITY 30.0 cents 27.5 cents nil 24.0 cents 11.5 cents 35.5 cents 30.0 cents 27.5 cents nil 24.0 cents 11.5 cents 35.5 cents 38 39 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Balance sheet A summary of key balance sheet accounts for the Group: 28 JUNE 30 JUNE $M Assets Cash and cash equivalents Trade and other receivables Inventories Property, plant and equipment Right-of-use assets Intangible assets Deferred tax assets Other Total assets Liabilities Trade and other payables Provisions Interest-bearing liabilities Lease liabilities Other Total liabilities Net assets 1 n/m denotes not meaningful. DRAFT 1 COL1634_ AnnualReport_ September 23, 2020 7:52 PM d4a 2020 992 434 2,166 4,127 7,660 1,597 849 524 18,349 3,737 1,333 1,354 9,083 227 15,734 2,615 2019 CHANGE 940 360 1,965 4,119 5.5% 20.6% 10.2% 0.2% DRAFT 21 COL1634_An- - nualReport_d31a – Rnd 16 1,541 3.6% September 23, 2020 7:52 PM n/m1 132.6% 365 Copy 487 9,777 3,380 1,341 1,460 - 239 6,420 3,357 7.6% 87.7% 10.6% (0.6%) (7.3%) n/m1 (5.0%) 145.1% (22.1%) Cash and cash equivalents increased to $992 million largely driven by increased trading activity in the last week of the financial year and the timing of trade payables settlements relative to the same time last year. Capital management Interest-bearing liabilities reflect external borrowings and debt capital funding commitments. During the year, Coles issued $600 million of fixed rate Australian dollar medium The uplift in Trade and other receivables to $434 million reflects increased supplier and other trading related term notes (Notes), comprising $300 million of seven-year Notes and $300 million of 10-year Notes. The proceeds from balances owing to the Group from higher sales, particularly these issuances, along with surplus cash, was used to pay in the final quarter of the year. down term debt. Inventories increased to $2,166 million primarily in response to increased trading activity across Supermarkets and As at 28 June 2020, Coles’ average debt maturity was 5.6 years, with undrawn facilities of $2,182 million. Borrowing Liquor. A legislative change relating to the recognition of costs for the year were $32 million and averaged duties and taxes on tobacco stock has also contributed to approximately 2.13% per annum. Coles is committed to the increase in inventories during the year. diversifying funding sources and extending its debt maturity The application of AASB 16 from 1 July 2019 resulted in a significant increase in Deferred tax assets to $849 million attributable to the deferred tax impact associated with the implementation of AASB 16 during the year (refer to Impact of AASB 16 Leases). The increase in Other assets to $524 million is predominantly attributable to an increase in income tax receivable. The movement in this balance reflects a timing difference in the settlement of tax balances driven by the Group’s exit from the Wesfarmers tax consolidated group in the prior year. Trade and other payables increased to $3,737 million, largely driven by elevated inventory holdings to support COVID-19 related demand towards the end of the year. Other liabilities have reduced to $227 million, with the net movement reflecting an uplift in gift card liabilities from lower redemptions offset by a reduction in lease related obligations which have been reclassified to lease liabilities as part of the transition to AASB 16. profile over time. The lease-adjusted leverage ratio at the reporting date was 3.1x with current published credit ratings of BBB+ with Standard & Poor’s and Baa1 with Moody’s. Impact of AASB 16 Leases The application of AASB 16 impacted the following items in the Balance Sheet on 1 July 2019: • • • • recognition of right-of-use assets: $7,481 million recognition of lease liabilities: $8,856 million increase in deferred tax assets: $356 million elimination of lease related provisions recognised under previous lease accounting: $188 million The net impact to retained earnings on 1 July 2019 was a decrease of $831 million. Set out below are the carrying amounts of recognised right-of-use assets and movements during the period: As at 1 July 2019 Additions1 Depreciation expense At 28 June 2020 NON- PROPERTY PROPERTY LEASES LEASES $M 7,339 1,024 (822) 7,541 $M 142 16 (39) 119 Set out below are the carrying amounts of recognised lease liabilities and movements during the period: As at 1 July 2019 Additions1 Accretion of interest Payments At 28 June 2020 TOTAL $M 7,481 1,040 (861) 7,660 $M 8,856 1,073 399 (1,245) 9,083 Coles opened its new Coles supermarket and Liquorland store at Ormeau Village in July 2019. The supermarket is part of an investment of more than $120 million by Coles across the Gold Coast since 2016, including new and refurbished supermarkets at Ormeau Village, Australia Fair, Mudgeeraba, Southport Park, Coomera City Centre, Coomera Westfield, Pimpama and Palm Beach. 1 Includes reasonably certain options, remeasurements and new leases, net of leases terminated. 40 41 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Cash flow Supermarkets Summary cash flows of the Group $M Cash flows from operating activities Receipts from customers Receipt from Viva Energy Payments to suppliers and employees Interest paid Interest component of lease payments Interest received Income tax paid Net cash flows from operating activities Net cash flows used in investing activities Net cash flows used in financing activities Net increase in cash and cash equivalents 1 n/m denotes not meaningful. FY20 FY19 CHANGE 39,971 - 41,126 137 (36,486) (38,665) (33) (2.8%) n/m1 (5.6%) 12.1% (37) (399) 7 (504) 2,552 (658) (1,842) 52 n/m1 - DRAFT 21 COL1634_An- 4 nualReport_d31a – Rnd 16 (294) 75.0% 71.4% Copy 2,275 September 23, 2020 7:52 PM 12.2% (280) (1,611) 384 135.0% 14.3% (86.5%) The application of AASB 16 has necessitated the reclassification of lease related payments in the cash DRAFT 1 COL1634_ Net cash flows used in investing activities increased to $658 million reflecting investment in the Group’s annual flow statement during FY20. Specifically, operating lease d4a expenses which were included in payments to suppliers and employers in the prior year, have been reclassified AnnualReport_ September 23, 2020 7:52 PM capital program, partly offset by the proceeds from property sales during the year. Included in FY19 net cash flows were proceeds associated with the sale of Spirit Hotels and the between interest paid and financing costs. The impact of disposal of Kmart, Target and Officeworks (KTO) to Wesfarmers this is a reclassification of net cash outflows from operating as part of Coles’ demerger from Wesfarmers Limited. activities to financing activities to align with the accounting requirements of the new standard. As FY19 balances have not been restated, this reduces comparability against the prior year. Net cash flows used in financing activities increased to $1,842 million reflecting the net repayment of external borrowings during the year, the principal component of lease payments and dividends paid to shareholders. FY19 Net cash flows from operating activities increased to $2,552 million. The increase reflects the uplift associated cash flows also reflected the net settlement of capital and funding balances with Wesfarmers as part of the demerger. with the net reclassification of lease related payments to cash flows from financing activities, partially offset by an increase in cash tax paid. In FY19, Coles exited the Wesfarmers tax consolidated group which brought forward the settling of all tax related balances resulting in a lower net tax cash outflow in the prior year. The movement in operating cash flows for the year also reflects a net reduction in Express associated with the transition to a commission agent arrangement under the terms of the New Alliance Agreement. Segment overview $M Sales revenue EBIT EBIT margin (%)1 Retail (non-IFRS)2 $M Sales revenue EBITDA EBIT3 Gross margin (%) Cost of doing business (CODB) (%) EBIT margin (%)1 Operating metrics (non-IFRS) Comparable sales growth (%) Customer satisfaction4 (%) Inflation excl. tobacco and fresh (%) Sales per square metre5 (MAT $/sqm) FY20 32,993 1,618 4.9 FY20 32,993 1,879 1,310 25.1 (21.1) 4.0 FY19 30,993 1,191 3.8 FY19 30,890 1,735 1,183 24.8 (20.9) 3.8 CHANGE 6.5% 35.9% 106bps CHANGE 6.8% 8.3% 10.7% 30bps1 (16bps)1 14bps FY20 2H20 1H20 (52 WEEKS) (25 WEEKS) (27 WEEKS) 5.9 87.1 1.5 10.0 85.9 2.6 2.0 88.3 0.4 17,547 17,547 16,800 1 Changes are calculated on an absolute percentage basis to more precisely reflect the movement. 2 Refer to Non-IFRS Information section for a comparison of statutory (IFRS) and retail (non-IFRS) results. 3 Retail EBIT excludes the impact of AASB 16 Leases in FY20. 4 Based on Tell Coles data. See glossary for explanation of Tell Coles. 5 Sales per square metre is on a moving annual total (MAT), or exit rate calculated on a rolling 12 months of data basis. Highlights Statutory sales revenue increased 6.5% to $32,993 million Own Brand sales grew by 9.7% in FY20, achieving in excess driven by range reviews providing a more tailored offer of $10 billion sales for the year and launching over 1,850 new for customers, trusted value campaigns to lower the cost products. Range innovations, including the Coles Kitchen of breakfast, lunch and dinner, and execution of Coles’ and Coles Finest convenience ranges, have provided quick tailored store format strategy. Collectible campaigns and healthy meal solutions to support in-home consumption including Little Shop 2 and Spiegelau glassware also growth. Trusted value was delivered through the ‘Helping contributed to sales revenue growth during the year. lower the cost of…’ campaign, increased Own Brand sales Trading increased significantly in the later stages of the third and more than 1,500 products on everyday low prices. quarter as customers began pantry stocking in advance of COVID-19 social distancing measures being introduced. The associated transition to in-home consumption supported elevated trade through to the end of the year. Coles recorded inflation excluding tobacco and fresh of 1.5% for the year, with total inflation of 2.4%. Total cost inflation was largely a result of increases in tobacco due to excise, dairy following milk cost price increases earlier in the On a retail basis, sales increased by 6.8% to $32,993 million, year and vegetables, with some lines impacted by weather with comparable sales growth of 5.9%, the 51st consecutive conditions such as drought, bushfires and storms. Inflation quarter of positive comparative sales growth. was higher in the fourth quarter driven by cost inflation, 42 43 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Supermarkets (continued) lower availability and mix impacts. Reduced availability of On a retail basis, which excludes the impacts of AASB 16, key lines led to lower promotional activity, with increased EBIT increased by 10.7%. at-home eating trends also driving a shift to premium products during the quarter. Coles Online DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM Supermarkets continued to optimise the store network as part of its tailored store format strategy with 70 renewals completed in FY20. Coles Online sales revenue grew by 18.1% to $1,301 million in FY20, after services were temporarily disrupted in March and April during the COVID-19 pandemic. As government restrictions were introduced, the Coles Online Priority Coles now has 29 Format A stores focused on convenience DRAFT 1 COL1634_ and a premium fresh food offer; 33 Format C stores focused on driving operational efficiencies; and four Coles Local d4a stores focused on tailored local offerings, including the first in New South Wales at Rose Bay which opened in May. AnnualReport_ September 23, 2020 7:52 PM Coles’ dedicated convenience space was also successfully delivered to approximately 150 stores during the year. Service was established to support customers most in need, with service progressively restored for all customers throughout April and May. Coles Online invested heavily throughout the year in expanding capacity of Home Delivery, largely through extended pick-times and the recruitment of additional drivers. Click & Collect capacity increased, predominantly Gross margin increased 30bps to 25.1% driven by strategic through the expansion of contactless Click & Collect, and sourcing benefits, a more efficient supply chain from the unattended delivery was also introduced allowing Coles realisation of Smarter Selling initiatives, and favourable mix Online to service customers more quickly. as a result of COVID-19 customer purchasing, partly offset by investment in value. Leases were also signed during the year for the two Ocado sites in Sydney and Melbourne, with construction having CODB as a percentage of sales increased by 16bps to 21.1% commenced on the Melbourne site. driven by higher store expenses, including incremental costs to support team member and customer safety during COVID-19. Partly offsetting this increase were savings from Smarter Selling initiatives relating to a more streamlined Store Support Centre, enhanced end-to-end processes in store driven by data and technology related solutions, and energy and waste management reductions including the replacement of fluorescent lights with more efficient, lower Coles Financial Services Through Coles Financial Services, the Group offers credit cards and personal loans in partnership with Citigroup to approximately 330,000 customer accounts and home, car and landlord insurance in partnership with Insurance Australia Group (IAG) to approximately 350,000 policy holders. During the year, Coles launched pet insurance in maintenance LED lighting in stores. partnership with Guild Insurance. Statutory EBIT increased by 35.9% to $1,618 million driven by growth in sales, gross margin progression, cost management initiatives and an uplift in EBIT from the implementation of AASB 16 in FY20. 44 45 Above: Michael and Rob at the new Coles Local which opened in Glenferrie Road, Hawthorn during FY20, offering customers a tailored local range. Below: Brenda has worked at Coles for more than 53 years and in June 2020 she received an Order of Australia medal for services to the Malvern community. Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Liquor Segment overview $M Sales revenue EBIT EBIT margin (%)1 Retail (non-IFRS)2 $M Sales revenue3 EBITDA EBIT4 Gross margin (%) Cost of doing business (CODB) (%) EBIT margin (%)1 Operating metrics (non-IFRS) Comparable sales growth (%) Sales per square metre5 (MAT $/sqm) FY20 3,308 138 4.2 FY20 3,308 149 120 21.6 (17.9) 3.6 FY20 FY19 3,205 133 4.2 FY19 3,063 153 120 22.3 (18.4) 3.9 2H20 CHANGE 3.2% 3.8% 2bps CHANGE 8.0% (2.6%) - (72bps) 1 44bps1 (28bps) 1H20 (52 WEEKS) (25 WEEKS) (27 WEEKS) 7.3 15,438 13.9 15,438 1.5 14,370 1 Changes are calculated on an absolute percentage basis to more precisely reflect the movement. 2 Refer to Non-IFRS Information section for a comparison of statutory (IFRS) and retail (non-IFRS) results. 3 Retail sales revenue for FY19 excludes hotel sales. 4 Retail EBIT excludes the impact of AASB 16 Leases in FY20 and hotels in FY19. 5 Sales per square metre is a moving annual total (MAT) or exit rate calculated on a rolling 12 months of data basis. Highlights Liquor sales revenue was $3,308 million on a statutory basis, Targeted investment in online platforms, capacity and an increase of 3.2% from the prior year. On a retail basis sales revenue was $3,308 million, an increase of 8.0% for the year with comparable sales growth of 7.3%. The First Choice Liquor Market conversions continue to perform strongly with the format now rolled out to 61% of the First Choice network. ELB sales grew by 7.5% for the year, with 74 new ELB lines launched in FY20. Liquor experienced a trading uplift driven by COVID-19 in the latter part of the year from increased in-home consumption following government-imposed restrictions on hotels, pubs, clubs and licensed venue operators. A plan to simplify and refocus the Liquor operating model was customer experience across all three banners supported strong online sales growth of 40% for the year. For the fourth quarter, online sales increased in excess of 70% driven, in part, by changing customer preferences towards online shopping alternatives during COVID-19. Optimisation of the store network continued with 20 new stores opened and 20 stores closed, resulting in a total of 910 Liquor stores at the end of the year. Gross margin decreased by 72bps to 21.6% from customers moving towards more value-oriented products and ongoing clearance and promotional activities associated with tailored range reviews. accelerated by COVID-19, providing an opportunity to fast- Statutory EBIT increased by 3.8% to $138 million driven by track clearance activity for slow moving and deleted stock. increased sales and the implementation of AASB 16 in The closure of on-premise venues as a result of COVID-19 FY20, partly offset by margin deterioration and incremental also provided the opportunity to support and engage operating costs associated with COVID-19. with local suppliers, with over 300 new ‘local’ product lines launched during the fourth quarter. On a retail basis, which excludes the impacts of AASB 16, EBIT was flat for the year. DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM DRAFT 1 COL1634_ AnnualReport_ September 23, 2020 7:52 PM d4a Coles launched 115 new liquor products during FY20, including the Somma range of alcoholic mineral water (top left), Native Spirits range of gins (top right), an extended range of our craft beer Tinnies (middle left) and a new Vintage Cellars wine range (middle right). Winemakers Julian Langworthy and Andrew Bretherton from Deep Woods Estate in Western Australia’s Margaret River region with a bottle of award-winning Deep Woods Single Vintage Cabernet Malbec which is exclusive to Coles Liquor (bottom). Julian Langworthy was named Vintage Cellars Winemaker of the Year in 2019. 46 47 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Express Segment overview $M Sales revenue EBIT EBIT margin (%)1 Retail (non-IFRS)2 $M Sales revenue3 EBITDA EBIT4 Gross margin (%) Cost of doing business (CODB) (%) EBIT margin (%)1 Operating metrics (non-IFRS) FY20 1,107 33 3.0 FY20 1,107 12 (16) 53.7 (55.2) (1.5) FY20 FY19 3,978 46 1.2 CHANGE (72.2%) (28.3%) 180bps FY19 CHANGE Other 1,048 COL1634_An- DRAFT 21 (84.2%) 76 nualReport_d31a – Rnd 16 5.6% 50 (132.0%) Copy September 23, 2020 7:52 PM n/m5 61.4 (56.7) 4.7 2H20 153bps1 n/m5 1H20 Comparable convenience store (c-store) sales growth (%) Weekly fuel volumes (million litres) Fuel volume growth (%) Comparable fuel volume growth (%) d4a AnnualReport_ September 23, 2020 7:52 PM DRAFT 1 COL1634_ (52 WEEKS) (25 WEEKS) (27 WEEKS) 4.6 59.5 (2.3) (2.5) 6.4 54.2 (9.0) (9.9) 2.9 64.4 3.3 4.2 1 Changes are calculated on an absolute number / percentage basis to more precisely reflect the movement. 2 Refer to Non-IFRS Information section for a comparison of statutory (IFRS) 3 Retail sales revenue for FY19 excludes fuel sales. 4 Retail EBIT excludes the impact of AASB 16 Leases in FY20. 5 n/m denotes not meaningful. and retail (non-IFRS) results. Highlights Weekly fuel volumes averaged 59.5 million litres in FY20, a decline of 2.3% for the year. Prior to COVID-19, fuel volumes Statutory sales revenue for Express decreased by 72.2% to were trending positively compared to the prior year, peaking $1,107 million driven by lower fuel volumes and the move to a at approximately 70 million litres per week during the third commission agent model under the New Alliance Agreement quarter. Average weekly fuel volumes declined significantly in effective 1 March 2019. In accordance with the terms of the the early part of the fourth quarter, with less road traffic due to New Alliance Agreement, Express no longer recognises fuel government stay-at-home directives. The trajectory improved sales revenue; however, it is entitled to commission income throughout the fourth quarter as restrictions began to ease in (recognised in ‘other operating revenue’) from fuel sold at parts of the country. Alliance sites. CODB as a percentage of sales decreased by 153bps to 55.2% Glossary of terms Average basket size: A measure of how much each customer spends on average per transaction 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: Costs 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 On a retail basis, sales revenue increased by 5.6% to $1,107 reflecting cost control and efficiency measures throughout EBIT: Earnings before interest and tax Other includes corporate costs, Coles’ 50% share of flybuys net profit, the net gain generated by the Group’s property portfolio and self-insurance provisions. In aggregate, this resulted in a $27 million net loss for the year driven by corporate costs, partly offset by earnings from property- related activities. Coles’ share of net loss for its 50% equity interest in flybuys was $6 million in FY20 (FY19: $5 million net profit). IFRS: International Financial Reporting Standards Leverage ratio: Gross debt less cash at bank and on deposit, divided by EBITDA 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 Retail calendar: 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, million largely driven by COVID-19 related pantry stocking the year. and strong basket size growth in the latter part of the year which more than offset lower foot traffic in-store following government stay-at-home directives across the country. Express continued to invest in the customer offer in FY20, completing the implementation of fast-lane fridges and commencing a network wide roll out of new self-service coffee machines in the fourth quarter. During the year, seven new sites were opened and eight sites closed, taking the total network to 713 sites. Statutory EBIT decreased by 28.3% to $33 million for the year driven by the decline in fuel volumes and c-store margin, partly offset by an EBIT uplift from the implementation of AASB 16. On a retail basis, Express recorded an EBIT loss of $16 million for the year driven by the decline in fuel volumes and, in part, c-store margin deterioration as customers shifted towards top-up and non-food categories in the latter part of the year. Retail results exclude the impacts of AASB 16 and fuel sales. EBITDA: Earnings before interest, tax, depreciation and amortisation through which Coles monitors customer satisfaction with service, product availability, quality and price EPS: Earnings per share Gross margin: The residual income remaining after deducting cost of goods sold, total loss and logistics from sales, divided by sales revenue TRIFR: Total Recordable Injury Frequency Rate. The number of lost time injuries, medically treated injuries and restricted duties injuries per million hours worked, calculated on a rolling 12-month basis. TRIFR includes all injury types including musculoskeletal injuries 48 49 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Looking to the future Over the past year, Coles has made good progress on delivering on our vision to ‘Become the most trusted retailer in Australia and grow long-term shareholder value’. Despite the many challenges we have faced, we have strong plans in place to continue to deliver on this vision and our strategy to Inspire Customers through best value food and plans to renew approximately 65 stores in FY21, and to open DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 approximately 15 to 20 new stores, including five stores that were delayed in FY20 due to COVID-19. Technology Copy September 23, 2020 7:52 PM drink solutions to make lives easier, deliver Smarter Selling and automation will continue to play an important role in through efficiency and pace of change, and Win Together improving our supply chain, and our anytime, anywhere with our team members, suppliers and communities. offering. Our partnership with Witron to construct two ambient Coles’ priorities for the year ahead have not changed. With many of our customers facing tough times, value has never automated distribution centres in Queensland and New South Wales is well underway. Construction has commenced in Queensland and we expect construction to begin on the been more important, and an increasingly diverse customer DRAFT 1 COL1634_ base requires a tailored offer to ensure we meet their needs. We will provide trusted value by lowering prices, supported d4a by marketing efforts to lower the cost of breakfast, lunch and dinner. We will also accelerate Own Brand innovation across AnnualReport_ September 23, 2020 7:52 PM New South Wales site in FY21. Our partnership with Ocado to deliver an online fulfilment centre in Melbourne (where construction has already begun) and Sydney, will provide industry leading capability in online fulfilment. all price tiers and deliver range reviews at pace on the back Supporting our team members, suppliers and the of the successes we achieved in FY20. We also know that our communities in which we operate has never been more customers want convenience and are looking for healthier important than it is today. In the year ahead, we will continue food options. Coles is well positioned in these areas with our to embed wellbeing and safety in Coles’ DNA by continuing convenience range already rolled out to approximately 150 to focus on reducing TRIFR and building the capabilities of supermarkets. Growth in online shopping is also expected to all team members to look after their mental wellbeing and accelerate as existing and new online customers appreciate to create a mentally healthy workplace. the convenience of anytime, anywhere shopping. Coles’ export business remains a growth opportunity. Coles has continued to experience elevated sales and incur incremental COVID-19 costs in the early part of FY21. There During FY20, an operational review of the Liquor strategy is significant variation between states, and store locations was completed. This is a multi-year strategy with the within states, as a result of the ongoing impact of COVID-19 objective of creating a more relevant and accessible offer restrictions around Australia. The extent and duration of for our customers, delivered through improved service. It these impacts will depend upon a number of factors as we will be implemented over the three horizons of ‘Simplify and proactively manage the unfolding COVID-19 situation. refocus’, ‘Differentiate’ and ‘Grow’. Having made a strong start to the Smarter Selling program in members, suppliers and the communities we serve, and the FY20, Coles retains its $1 billion cost-out target to be achieved environment in which we operate remains highly uncertain, between FY20 and FY23. In FY21, Coles will continue to focus Coles is well placed to take advantage of opportunities as While COVID-19 continues to have an impact on our team on realising cost-out opportunities, however the timing will they arise. be dictated, in part, by COVID-19. Coles’ optimised store network and formats are already transforming the make- up and performance of our extensive store network with 50 To provide customers with fast, convenient service, Coles expanded its Click & Collect Concierge offer. Northlakes Coles Online Team Manager Jai delivers groceries for Leah and her son, William, in Darwin. Coles Group Limited 2020 Annual Report Risk management DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 strategic, September 23, 2020 7:52 PM identified material Copy During the year, Coles has continued to identify and manage Through application of the Coles Risk Management risks in accordance with the Coles Risk Management Framework, we have Framework. The design of this Framework is based on ISO operational, and financial risks which could adversely affect 31000:2018 Risk management – Guidelines (‘ISO 31000’), the achievement of our future financial prospects. Each of which provides an internationally recognised set of these material risks is described below along with our plans principles and guidelines for managing risks in organisations. to manage them. Although the risks have been described Further information about our Risk Management Framework individually, there is a high level of interdependency is available in Coles’ Corporate Governance Statement. between them, such that an increased exposure for one DRAFT 1 COL1634_ areas of our risk profile. In addition to these material risks, material risk can drive elevated levels of exposure in other AnnualReport_ September 23, 2020 7:52 PM d4a 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. COVID-19 There are high levels of uncertainty with regard to how the COVID-19 pandemic will evolve both internationally and domestically, along with corresponding responses from governments, organisations, customers and the broader community. This makes the impact of the COVID-19 pandemic for Coles, its business and its customers highly uncertain. Key areas of uncertainty include, but are not limited to: evolution of the virus, rates of infection, government regulatory and policy response (including government-imposed shutdowns of sectors of the economy, border closures, and variations in restrictions between states and countries), resilience of both domestic and international supply chains, the treatment and immunisation timeline, and quality of available healthcare. The emergence of the COVID-19 pandemic has created its own set of significant risks and impacts to Coles, and has also heightened Coles’ existing material risk profile. The table below summarises the most significant risks associated with COVID-19, and how these link to the broader set of material risks. In response to the COVID-19 pandemic, we implemented a large number of measures to keep our customers and team members safe, such as sneeze guards in supermarkets. Risk Description Operational disruption Relevant existing material risk(s) Risk of significant and/or prolonged disruptions in the supply chain, • Pandemic store and online operations which can impact on our ability to serve our customers and the community. This can be driven by government- imposed restrictions including border closures, industrial relations disputes, surges in customer demand, inability to access critical third parties whom we rely on to deliver our strategy and operations, and loss of critical digital applications and platforms due to cyber attacks. • Competition, changing consumer behaviour and digital disruption • Security of supply • • • Industrial relations Third party management Technology, resilience, data and cyber security Customer behaviour Failure to adequately respond to changes in customer expectations as • Pandemic a result of COVID-19 including increased focus on safety measures and increased reliance and demand on online shopping and digital channels. Any future government changes in restrictions may also lead to further surges in customer purchases of fresh food, homecare, grocery and • Competition, changing consumer behaviour and digital disruption • Strategy and transformation delivery pantry items, or declines in fuel volumes. • Security of supply Program execution Pauses or delays in the execution of areas within our strategy and • Pandemic transformation program due to disruptions brought about by the COVID-19 pandemic. These include re-allocation of program resources to focus on response activities, disruptions in supply of capital inputs and services, • Security of supply • Strategy and transformation delivery and to critical third parties whom we rely on to deliver our strategic and • Third party management transformational programs of work. Health and safety Adverse impacts to team member health and wellbeing (including mental • Pandemic health), the potential for clusters of COVID-19 infections at sites, and loss of key personnel due to infection. Regulatory changes • Health and safety Failure to appropriately respond to enhanced and rapidly moving regulatory • Pandemic requirements brought on by COVID-19, including for health and safety. • Health and safety • Legal and regulatory Cyber threats Heightened cyber security threats including remote access scams • Pandemic targeting team members working from home, payments fraud and business email compromise, phishing scams, and abuse of video conferencing applications. Financial costs and losses • Technology, resilience, data and cyber security Risk of higher input costs, additional operational costs associated with • Pandemic responding to the COVID-19 pandemic, reduction in sales and margins, increased risk of fraud, and working capital implications. • Financial, treasury and insurance COVID-19 has also adversely impacted the local and global economy but the severity, duration and extent of impact in each affected jurisdiction is uncertain. We anticipate that the evolving nature of the COVID-19 pandemic and the changing geopolitical and macro-economic environment (including impacts to population growth within Australia), will drive continual changes to Coles’ material and emerging risks during the next financial year. We will therefore continue to monitor and respond to further developments as required. 52 53 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Existing material strategic, operational and financial risks for Coles are set out below. Strategic risks Risk Description Pandemic Mitigations If Coles does not monitor and respond Coles continues to manage the evolution of the COVID-19 pandemic in to the evolution of the COVID-19 accordance with our Coles Group Response Policy and Program which sets pandemic, or that of any future out the governance arrangements, accountabilities, and processes for crisis pandemic, then it can expose us management and business continuity, and our Coles SafetyCARE System to material financial loss, legal and which is the safety management system that provides a framework for Coles to regulatory action, people, health look after the health, safety and wellbeing of our team members, customers, and safety issues, operational risks, contractors, suppliers and visitors. environmental and sustainability risks and/or reputational damage. Our response is led by our Executive-level Response Leaders who are supported by the Group Response Manager. Business continuity functional leads are assigned to manage dedicated streams of work to identify, prepare and respond to emerging risks and issues across the Group. Critical response decisions are discussed and approved by Coles’ Executive Leadership Team and elevated to the Board, where required. Business continuity plans are in place for critical functions and activities across our operations including merchandising, supply chain and store and online operations. Our plans include consideration of people, resources, physical sites, information technology and digital requirements, and critical DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM third parties required to continue to operate and serve our customers and community. These plans have been invoked when required during our response and continue to be refined given the evolving nature of, and our continued exposure to, the pandemic. This includes ongoing assessment of risks, contingency plans and resourcing DRAFT 1 arrangements. COL1634_ Macro-economic environment d4a AnnualReport_ September 23, 2020 7:52 PM A downturn in the local and global Assumptions about macro-economic conditions and monitoring of macro- economy, slump in consumer economic factors are built into the development of our strategic programs of confidence, and financial market work, and our forward-looking business planning. volatility may expose Coles to higher input costs, supply chain disruptions, credit risk, financial loss, and restricted access to liquidity. We continue to adapt our offer so it is consistent with customer needs and execute our Smarter Selling program with the objective of reducing costs. We also continuously monitor progress of execution against our strategy and transformational programs of work. We have a Board approved Treasury Policy which governs the management of our treasury risks, including liquidity, funding, interest rates, foreign currency, the use of derivatives and counterparty risk. These risks are managed day-to- day by our Group Treasury function. Competition, changing consumer behaviour and digital disruption If Coles fails to respond to competitive Key programs to respond to these risks and build on opportunities are pressures and changing customer embedded in the implementation of our strategy. Coles regularly monitors behaviours and expectations, it could customer sentiment, best practice global retailers, local and international result in loss of market share and, learnings, and customer insights and research, so we can quickly respond to ultimately, adverse margin impacts, changes in customer behaviours. reduced customer retention and impact to share price or value. In response to COVID-19 we launched initiatives which were focused on delivering our products and services safely to our customers. This included a shifting focus to contactless Home Delivery and Click & Collect, Community Hour for vulnerable and elderly customers, emergency services and health Competition, changing consumer behaviour and digital disruption (continued) care workers, and delivery of the ‘speedy shopper’ initiative including use of the Coles Product Finder App to help customers plan their shop ahead of time. We continue to focus on driving an enhanced digital customer experience through our digital catalogue and the new coles.com.au platform and have invested in new data analytics tools and platforms to give suppliers and category decision makers fast and detailed insights across products, stores, geographies and sales channels. Strategy and transformation delivery Inability to properly execute Delivery of our strategy and transformation program is determined by the and deliver our strategy and effective implementation of each of the three pillars of our strategy. transformational program could result in loss of market share, and variability in Coles’ earnings. Furthermore, elements of our strategy are supported by third-party strategic partnerships including Witron (automated distribution centres), Ocado (enhanced online capability) and Microsoft (cloud data platform, and enterprise resource planning platform for selected business units). We also have joint ventures with Wesfarmers (flybuys) and AVC (QVC), and an alliance with Viva (Coles Express). During the financial year, Coles acquired certain assets and liabilities of Jewel, an Australian ready-meals facility. In addition, Coles may undertake future acquisitions and divestments, and enter into other third-party relationships, so we can more effectively execute our strategy. We have governance structures and processes in place to oversee, manage and execute our strategy and transformational programs of work. Projects and programs are regularly reviewed in detail to monitor progress of program delivery, costs and benefits, and allocation of resources. We have maintained progress in the execution of our programs with Witron and Ocado during the COVID-19 pandemic, though our joint venture with AVC and Viva Alliance have been adversely impacted, with the temporary closure of hotel venues (which does not have any direct economic impact on Coles) and reduced fuel volumes. Climate change Climate change presents an evolving Coles has undertaken a gap analysis against the G20’s Financial Stability Board set of risks and opportunities for Coles, Task Force on Climate-related Financial Disclosures (TCFD) to understand and and has the potential to contribute improve its alignment to the TCFD recommended disclosures. A roadmap to and increase the exposure of has been developed and action commenced to improve Coles’ response to other material risks. These include climate change and its transition to a lower carbon economy. increased frequency/intensity of extreme weather events and chronic climate changes which can disrupt our operations and compromise the safety of our team members, customers, supply chain and the food we sell; 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 stakeholders resulting in reputational damage. During FY20, we worked with external climate change specialists to further assess our climate change risks and opportunities. Additional information on these risks and opportunities is set out in the Climate Change section. Further, in the case of extreme weather events, we have business continuity processes for sourcing and delivering goods to stores. To reduce our impact on the environment, we have an Energy Strategy that includes our approach to energy purchasing, monitoring and management. Through the Coles Nurture Fund, we are supporting suppliers with grants to help them adapt to climate change as well as to mitigate their impact. 54 55 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Operational risks Risk Description Industrial relations Mitigations Product and food safety As we execute our strategy, workforce Coles has in place a dedicated Employee Relations function which is Product and food safety and quality is Coles has a food safety governance program in place which is overseen by an changes may lead to industrial action responsible for monitoring and responding to industrial relations risks and issues. critical for Coles. Serious illness, injury experienced technical team. The program comprises targeted policies and and/or disruptions to operations, Key activities include implementation of appropriate enterprise bargaining or death are the most severe potential procedures, including well established food recall and withdrawal processes, which can result in increased costs, and employee relations strategies; maintaining and building strong working consequences from compromised specific supplier requirements for different food categories (for example litigation and financial impacts relationships with unions and industry organisations; and constructively liaising product or food safety. Loss in chilled versus ambient) and a supporting assurance program to ensure key from reputational damage. The with our team members, third-party suppliers and transport and logistic customer trust, reputational damage, controls are operating and effective. emergence of COVID-19 along with service providers. planned changes in our supply chain operations, has heightened our exposure to this risk. Security of supply The renegotiation of collective bargaining agreements is proactively managed and business continuity plans are in place to mitigate disruption to operations if industrial action occurs. loss in sales and market share, regulatory exposure, and potential litigation could also occur. We also have a Product Safety Program which covers non-food products, and work closely with our suppliers to ensure compliance with relevant mandatory standards to meet consumer guarantees under the Australian Consumer Law. Our Product and Food Safety Committee oversees continuous improvement of food and product safety risks and issues across Coles, including any presented by COVID-19. Potential disruption to the supply We have business continuity plans to manage the supply chain and delivery of goods for resale and services of goods to stores during extreme weather and business disruptive events. Food and plastic waste required to deliver our core These continuity plans were successfully invoked in response to the bushfires We recognise that food and plastic Coles is committed to working with the Australian Packaging Covenant operations can occur due to extreme and demand surges experienced during the early stages of Coles’ COVID-19 waste negatively impacts the Organisation. We have a waste management strategy in place which includes weather events and changes in climate, changes in domestic and international government policy and response. Our COVID-19 response includes sourcing alternative supply arrangements, scaling up production and distribution of substitute goods (potentially simplifying range to aid production efficiency), and removal of September 23, 2020 7:52 PM Copy DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 environment, economy and society. programs to divert waste from landfill, including partnerships with SecondBite, There is a potential for significant Foodbank and local farmers. In-store training and awareness programs are in reputational risk if Coles does not place to increase the effectiveness of our waste management program. Soft regulation, and disruptions caused promotions to suppress demand of impacted lines and customer limits. reduce food and plastic waste in plastics recycling through REDcycle is available in our supermarkets and the by the evolving COVID-19 pandemic, including suspension of production, domestic and international border closures, and restricted access to the workforce our suppliers rely on We continue to analyse Coles’ supply chain resilience across a number of key food categories, including for carbon footprint and water scarcity. The results will be used to contain possible future disruptions to supply. Medium and longer term international and domestic supply security risks and mitigations to produce goods. Supply chain DRAFT 1 continue to be assessed as the external environment evolves. COL1634_ disruptions can result in an inability to supply to customers, loss of market share, price volatility and increased AnnualReport_ September 23, 2020 7:52 PM d4a costs. Health and safety The safety of our team, customers, Our detailed Health, Safety, Environment and Injury Management system third parties and contractors is (SafetyCARE) is supported by a team of experienced safety professionals paramount to Coles. We employ an throughout our network. SafetyCARE’s performance is measured through a extensive and diverse work force, range of indicators and the effectiveness of the system is assessed through a including third parties, with high verification program. A rolling five-year Safety and Wellbeing Plan focuses on volumes of people interactions the three pillars of Safety leadership and culture, Critical risk reduction, and daily. This brings risk of fatality, life- Mind your health. threatening injuries or transmission of disease to team members, customers, suppliers, contractors or visitors, due to unsafe work practices, accidents or incidents. The health and safety of our customers and team members is the focal point of our response to the COVID-19 pandemic. Coles adheres to the hygiene practices recommended by the Australian Government through Safe Work Australia and based on information from the World Health Organization, the Australian Department of Health, state and territory governments and departments of health and other applicable regulatory bodies. A large number of measures have been implemented including programs to keep our customers and team members safe incorporating social distancing measures, sneeze guards, sanitiser, masks, additional cleaning and security, immediate escalation and reporting protocols, and the implementation of large-scale mental health and wellbeing programs for all of our team members. line with consumer, shareholder and volumes of material submitted for recycling continue to increase. government expectations. We continue to look for new opportunities to reduce waste, including working with our suppliers, partnering with our communities to use food we do not sell, and trialling new solutions to better process our in-store waste. Third party management An inability to successfully manage Coles has due diligence processes in place to assess the adequacy and and leverage our strategic third-party suitability of key suppliers, service providers and strategic partners in relationships, or a critical failure of accordance with our requirements. We monitor and manage quality and a key supplier or service provider, performance of key suppliers and strategic third parties throughout their may expose Coles to risks related to engagement with Coles. Defined service level and key performance indicators compromised safety and quality, are in place for key supply contracts. Risks are managed via contractual misalignment with ethical and protections. sustainability objectives, disruptions to supply or operations, unrealised benefits, and legal and regulatory exposure. Legal and regulatory During FY20, we delivered the source to pay process for goods and service providers (goods not for resale) via implementation of the SAP Ariba technology platform. Third party management (goods not for resale) is governed by the Third Party Management Policy and includes risk assessment requirements for the sourcing process. Plans for FY21 include the continued uplift and embedding of contract management and supplier management requirements for goods not for resale engagements. The diversity of our operations Coles has in place a Compliance Framework, which is based on AS ISO necessitates compliance with 19600:2015 Compliance Management Systems – Guidelines, and which sets extensive legislative requirements at out the standards, requirements and accountability for managing regulatory all levels of government, including compliance obligations across the Group. Coles has targeted controls in corporations law, competition and place across the various areas of compliance, including policies, procedures, consumer law, health and safety, training and system controls. The Framework is subject to assurance to employee relations, product and food ensure controls are in operation and operating effectively. We also maintain safety, environment, council by-laws, relationships with regulators and industry bodies and actively monitor new privacy and bio-security. and impending legislative and policy changes. 56 57 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Legal and regulatory (continued) Information technology, resilience, data and cybersecurity Non-compliance with key laws Our legal teams work in partnership with our compliance teams to monitor A failure or disruption to our We have a rolling five-year technology strategy and continuously monitor our and regulations, could expose and manage legal issues, matters, claims or disputes. We are supported by information technology applications technology operations. Our service management function is responsible for Coles to loss of license to operate, pre-agreed panel arrangements with external legal firms and undertake risk and infrastructure, including a cyber responding to incidents, and we actively manage technology changes to substantial financial penalties, analysis on any potential litigation claims to understand loss potential. security event, could impede the reduce the risk of system instability, especially during peak trading periods. reputational damage, a deterioration in relationships with regulators, and additional regulatory changes which may adversely impact the execution of our strategy and result in increased cost to operate. Furthermore, if Coles is a party to litigation, it can involve reputational damage, financial costs, and high investment of Company resources and time. Ethical sourcing Failure to source product or conduct Our Ethical Sourcing Policy and supplier requirements are based on our business in a manner that internationally recognised standards and establish the minimum standards for complies with our Coles Ethical all suppliers. Sourcing Policy and relevant legal requirements across Australia and the countries we source from, can result in impact to worker safety, wellbeing or living conditions, material reputational damage, loss in consumer confidence and market share, regulator fines and penalties, and adverse financial performance. DRAFT 1 Coles’ Ethical Sourcing Program takes a risk-based approach which defines the level of due diligence and monitoring that applies to suppliers based on risk exposure and includes a requirement for ethical audits of selected Copy September 23, 2020 7:52 PM DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 suppliers. The program covers Supermarkets Own Brand and fresh produce suppliers. During the past financial year, we extended program coverage to include Own Brand suppliers to Express, and began preparation to implement the program for Own Brand suppliers to Liquor, as well as Goods Not For Resale suppliers. Coles’ Human Rights Steering Committee oversees ethical sourcing COL1634_ governance including human rights risks, issues and improvement actions AnnualReport_ September 23, 2020 7:52 PM d4a across the business. The role of the committee extends to reviewing the application of relevant legislative and regulatory requirements concerning human rights, such as the reporting requirement under the Commonwealth’s Modern Slavery Act 2018. In March 2020 the Board endorsed our Human Rights Strategy which focuses on systems and processes to prevent, mitigate and remedy actual or potential adverse human rights impacts. Coles allocates dedicated resources to the delivery of our Human Rights Strategy and Ethical Sourcing Program. This includes an in-house certified social compliance auditor (certified by the Association of Professional Social Compliance Auditors) to manage the ethical audit program. Coles’ whistle- blower hotline and dedicated supply chain wages and conditions hotline enable reporting of unethical, illegal, fraudulent or undesirable conduct. processing of customer transactions or Information technology recovery plans are in place should an information limit our ability to procure or distribute technology disruption occur. stock for our stores. Furthermore, our technology and data-rich environment also exposes us to the risk of unintentional or unauthorised access to confidential, financial, or private information, which may result in loss in consumer confidence, loss in market share, regulator fines and penalties, and reputational damage. Our privacy and digital security policies, procedures, governance forums, and education and awareness programs help to assess and manage ongoing data, privacy 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 also benchmark security capabilities and identify opportunities for improvement, and are committed to the ongoing delivery of Coles’ cyber security program to continually improve our people, process, and technology controls. In response to COVID-19, we regularly assess new and increased cyber-crime attack vectors, have deployed resources and invested in areas of threat which have arisen, and continue to be vigilant as the threat evolves. Financial risks Risk Description Financial, treasury and insurance Mitigations The availability of funding and Our Group Treasury function is responsible for managing our cash funding management of capital and liquidity position and supporting the management of interest rate and foreign are important requirements to fund currency risks. Our Treasury Policies are approved by the Board, and govern our business operations and growth. the management of our financial risks, including liquidity, interest rates, In addition, we are exposed to foreign currency and commodity risks and the use of other derivatives. Further material adverse fluctuations in information is included in Note 4.2 Financial Risk Management of the Financial interest rates, foreign exchange rates Report. and commodity movements which could impact business profitability. We may also be exposed to financial loss from accidents, natural disasters and other events. Insurance is a tool to protect our customers, team members and the Group against financial loss, where applicable. In some cases, we choose to self-insure a significant proportion of the risk. This means that, in the event of an incident, the cost is covered from internal premiums charged to the business or the losses are absorbed. Our insurance function is responsible for managing both self-insurance and the purchase of external insurance where we determine this is prudent. We monitor our self-insured risks and have active programs to help us pre-empt and mitigate losses. We engage an external actuary to determine the self-insurance liabilities recognised in the Statement of Financial Position. COVID-19 has impacted Coles significantly in the second half of the financial year and in the Operating and Financial Review we have documented the trading and financial reporting impacts of the pandemic. 58 59 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Climate change As one of Australia’s largest companies, we know we have The Audit and Risk Committee assists the Board in fulfilling a responsibility to minimise our environmental footprint. Our its responsibilities. The Committee evaluates the adequacy business is also impacted by climate change, and we need and effectiveness of Coles’ identification and management to adapt to be able to respond to extreme weather events of environmental and social sustainability risks as well as and maintain security of food supply to sustainably feed all reporting of those risks. The Committee receives reports Australians. We support the TCFD, and information in this section responds to the four thematic areas against which the TCFD from management on new and emerging sources of risk and the controls and mitigation measures management has put in place to address these risks. recommendations for climate-related disclosures are structured. The Group’s Sustainability During the reporting period we engaged an external consultant to complete a gap analysis of Coles’ previous reporting against the TCFD recommendations. While the analysis found we are partially aligned with the majority of the TCFD recommended disclosures, we are continuing to refine and enhance our disclosures as we develop and embed our climate change strategy. management committee, is responsible for overseeing Steering Committee, a DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Group wide identification and response to sustainability September 23, 2020 7:52 PM Copy risks, including climate change. It is chaired by the Chief Property and Export Officer, a member of the Executive Leadership Team reporting to the Chief Executive Officer. Its standing members comprise management from functions with key sustainability responsibilities including Risk and Compliance, Sustainability, Own Brand, Company • Sustainable communities – supporting Australian farmers, suppliers, team members and the communities • Business continuity planning for sourcing and delivering goods to stores in the occurrence of extreme weather in which we live and work events, such as floods, storms and bushfires. • Sustainable products – sourcing quality products in an • Research into supply chain resilience with the ethical and responsible way • Sustainable environmental practices – minimising environmental impacts across our operations, including climate change impacts Initiatives that address and support this component of our corporate strategy include: • Our Energy Strategy which guides our approach to energy purchasing and management and maintaining security of energy supply. In FY20, we were the first major Commonwealth Scientific and Industrial Research Organisation (CSIRO), where we have investigated the security of key products in our fresh food supply chain. • Opportunities for new product development to support customers seeking products with lower environmental impacts. We understand that minimising environmental impacts of food production is an important issue for many customers, and we have responded by increasing our range of plant-based products including introducing Nature’s Kitchen, a range of plant-based products. Australian retailer to commit to buying renewable energy • through a power purchase agreement. The 10-year The Coles Nurture Fund which provides support to suppliers through grants for climate change adaptation agreement is in place to purchase power from three solar and mitigation initiatives. plants in New South Wales with the projects expected to provide 10% of Coles’ national power needs. We expect the solar plants will be operational in FY21. • Participation the Australian Beef Sustainability Framework, an initiative of the Red Meat Advisory Council managed by Meat and Livestock Australia. We consider in • Our approach to refrigeration management which includes investing in transcritical CO2 refrigerants – natural gas compounds that have little or no impact on the ozone the framework the most appropriate way to address climate and environmental issues facing the beef industry (such as emissions reduction and deforestation) layer and do not contribute to greenhouse gas emissions. from a national and industry-wide perspective. • Environmental improvements in stores by enhancing sustainability features on the store design blueprint such as doors on freezers, optimising lighting and installing new gas and water meters. We will continue to identify opportunities to mitigate risk and respond to opportunities. We also prepared a detailed roadmap and action plan DRAFT 1 COL1634_ Secretariat and Corporate Affairs. to enhance our climate change response and support our transition to a lower-carbon economy. The roadmap, d4a which was endorsed by the Board, also highlights the key AnnualReport_ September 23, 2020 7:52 PM milestones we need to meet to enable more comprehensive climate change responses and disclosures. Our first priority was the requirement for a climate change risk assessment, noting climate risk has already been identified as a material business risk as part of the risk identification processes defined within Coles’ Risk Management Framework. During the year, we worked with external climate change specialists to further assess our climate change risks and opportunities. The assessment considered three climate scenarios to prompt innovative thinking, as described below in the Risk Management section. The next steps in developing our climate change strategy will be assessing our corporate strategy against different climate scenarios and releasing new greenhouse gas Our climate change agenda and program are coordinated by a Climate Change Subcommittee which oversees Coles’ climate change approach and reports to the Sustainability Steering Committee and its Chair. The Subcommittee is chaired by the General Manager Sustainability and Property Services and includes senior leaders from key functions within Coles, including Finance, Strategy, Risk and Compliance, and Sustainability. The Subcommittee also reviews the application of relevant legislative and regulatory requirements concerning climate change. Our approach to climate change governance will continue to develop as we embed roles and responsibilities throughout the organisation, recognising that responsibilities for managing and mitigating climate change risks are organisation wide. Strategy and approach emission reduction targets for our operational emissions. During FY20, we continued to develop a comprehensive The strategy will also reference and respond to the risks climate change strategy in line with the recommended already identified. Governance The Board oversees the effectiveness of Coles’ environment, sustainability and governance policies and retains ultimate oversight of material environmental and sustainability risks and opportunities, including those related to climate change. TCFD disclosures. Our approach to climate change is captured under the Win Together pillar of our corporate strategy, which incorporates Coles’ response to climate change risk and opportunities, and has three key focus areas: Construction has commenced on the development of a solar farm outside Junee in regional New South Wales. It is one of three solar farms from which Coles will source 10% of its national power needs. The other two solar farms will be located outside the regional centres of Wagga Wagga and Corowa. All three solar farms are being developed and constructed by Metka EGN Australia. 60 61 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Risk management Through the application of the Coles Risk Management Framework, climate change has been identified as a material business risk to the Group. During FY20, we further assessed our climate change risks and opportunities including the potential for climate change risks to contribute to or increase other material 3. runaway climate change – Where there is no limit placed on carbon emissions and warming is set to reach 4°C above pre-industrial levels. The risk assessment included interviews and workshops with stakeholders across the Group including Property, Export, Supply Chain, Product, Own Brand, Coles Liquor, Coles Express and Procurement. risks. The qualitative risk assessment applied the risk Analysis of the risk exposure considered financial, management processes defined within Coles’ Risk reputational, health and safety, legal and regulatory, and Management Framework and used the following three operational consequences over the next 10 years. The climate scenarios to prompt innovative thinking: 1. stated policies – Where governments deliver on current policies already in place which result in approximately 3.2°C warming above pre-industrial levels 2. ambitious global action – Where there movement towards the goals set in the Paris Agreement is active to keep ‘global average temperature to well below 2°C, or preferably to 1.5°C above pre-industrial levels’ assessment also identified associated metrics and targets used to monitor the management of risk and opportunities and evaluated risk exposure against Coles’ climate change risk appetite. Our most significant climate-related risks, mitigants and opportunities are presented in the following table, along with our approach to managing them. The risks identified have been grouped into the two major categories of climate-related risks identified by the TCFD: (1) risks related to the transition to a lower-carbon economy and (2) Transition risks Risk and impact Reputational physical risks (acute and chronic). Mitigants and opportunities DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 Copy September 23, 2020 7:52 PM We recognise our customers and community expect We have in place teams and processes to monitor, strong and responsible action from Coles on climate understand and respond to the concerns and change. We know we have a responsibility to minimise expectations of our key stakeholders and society more our impact on the environment through our operations. broadly. A roadmap has been developed and action has Failure to take action on climate change would harm the commenced to enhance our climate change response environment and Coles’ reputation. and transition to a lower-carbon economy. DRAFT 1 COL1634_ AnnualReport_ September 23, 2020 7:52 PM d4a Changing regulatory requirements We take our regulatory obligations seriously and manage Coles has a Compliance Framework based on AS non-compliance with regulatory requirements as a risk, ISO 19600:2015 Compliance Management Systems – with supporting risk appetite statements set by the Board. Guidelines which sets out the standards, requirements New and evolving climate-related regulations may and accountability for managing regulatory compliance result in breaches and/or increased implementation or obligations across the Group. operational cost to deliver compliance. Carbon pricing Changes in policy affecting the cost of carbon may result Coles consistently looks for opportunities to improve in increased business costs including energy, transport, operational efficiency including energy efficiency. water, goods, materials and services. Strategies to source energy from renewable sources and reduce energy usage have been developed for store operations, transport and refrigeration. Incremental improvements are implemented through asset replacement regimes. This is supported by internal engineering standards which incorporate technological advances and changing operating conditions. Export market growth Changing policies in existing and future markets may Export remains an area of growth for Coles. Business impact growth due to the introduction and/or expansion planning considers future market conditions and of trading taxes, barriers on high emissions and water consumer preferences, which are monitored routinely. intensive products, and bans on non-recyclable Coles mitigates exposures to macro-economic conditions packaging. Growth may also be further impacted by and regulatory requirements through diversification of consumer transition to lower carbon lifestyles. products and markets. Tom and Vickie Tyson from Lachlan Valley Grazing near Condobolin in New South Wales received a Nurture Fund grant to install solar panels to power new, efficient irrigation equipment. The project, completed in FY20, has minimised the business’ carbon footprint, reduced its reliance on electricity and enabled the family to produce grass-fed beef for 12 months of the year. 62 63 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Physical risks Risk and impact Health and safety Mitigants and opportunities The frequency and intensity of extreme weather events, The Coles Health, Safety, Environment and Injury Management as well as changes in weather patterns, will create more system (SafetyCARE) factors in the acute (for example instances in which conditions may become unsafe for our bushfires) and chronic impacts (for example heat fatigue) of team members, contractors and customers. climate change. The system is integrated with emergency management (our response to physical threats or events as coordinated by the Health and Safety team), and Coles Group Response Policy and Program, which sets out the governance arrangements, accountabilities and processes for crisis management and business continuity. Learnings from incidents and events, and opportunities for improvement, are identified and incorporated into our safety, emergency management and response plans and processes. Supply chain disruption Our ability to move, procure and sell products and services We have business continuity plans to manage the supply will be impacted by climate change both domestically chain and delivery of goods to stores during extreme and internationally. Key impacts include decreased weather and business disruptive events. We continue to agricultural productivity due to extreme temperature shifts; droughts and other extreme weather events; disrupted transport routes; and disrupted suppliers’ analyse Coles’ supply chain resilience across a number of key food categories, including for carbon footprint and DRAFT 21 COL1634_An- nualReport_d31a – Rnd 16 water scarcity. The results will be used to contain possible Copy September 23, 2020 7:52 PM operations due to extreme weather events. future disruptions to supply. Food safety Changes in growing and operating conditions may Coles’ Food Safety program, which includes recall and affect the persistence and occurrence of pests and monitoring processes, is updated to adapt to changing diseases and, as a result, increase food safety risks during conditions. The program aligns with externally accredited production, handling and processing in manufacturing programs such as Safe Quality Food (SQF) and British DRAFT 1 COL1634_ plants, distribution and storage along the value chain. AnnualReport_ September 23, 2020 7:52 PM d4a Retail Consortium’s Global Standard for Food Safety. We work with suppliers, industry and regulators to understand and anticipate new and incremental risks. Board of Directors Asset integrity and continuity of operations Changing weather conditions will result in an increase Emergency response plans and business continuity in physical damage to assets; access interruption; plans are in place to mitigate potential disruptions and prolonged power outages; decreased equipment store design specifications consider future conditions to reliability and efficiencies; and essential services. improve their resilience in extreme conditions. We also conducted an assessment with respect to potential While our target has been met, we continue to invest in impacts on Coles’ financial statements which found that, energy efficiency and greenhouse gas reduction programs while the risks identified to date may result in financial including our energy strategy, refrigeration management impacts such as increased costs and loss of income for future and opportunities in store. financial years, none are considered to give rise to material financial reporting impacts for the FY20 financial year. Work will continue in FY21 to further explore opportunities to manage the risks identified in the climate change risk assessment referenced above and determine how these will be addressed in our climate change strategy. Metrics and targets We met our 2020 greenhouse gas emissions target, which was to reduce greenhouse gas emissions by 30% from a 2009 baseline, four years early in 2016 through a focus on reducing emissions particularly emissions associated with refrigeration. Work is well progressed on developing new greenhouse gas emission targets. We measure and report on Scope 1 and Scope 2 greenhouse gas emissions in line with the National Greenhouse and Energy Reporting Scheme (NGERS) requirements. NGERS requires companies to report annually each October. As such, metrics, including greenhouse gas metrics, will be included in our FY20 Sustainability Report. 64 65 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Board of Directors: Biographical details James Graham AM BE (Chem) (Hons), MBA, FIEAust EngExec, FTSE, FAICD, SF Fin David Cheesewright BSc Mathematics and Sports Science (1st) Abi Cleland MBA, BCom/BA Wendy Stops BAppSc (Information Technology), GAICD Chairman and Non-executive Director, Chairman of the Nomination Committee and Member of the People and Non-executive Director, Member of Committee and the People and Culture Committee the Nomination Non-executive Director, Member of Committee and the People and Culture Committee the Nomination Non-executive Director, Member of Committee and the Audit and Risk Committee the Nomination Culture Committee Age: 72 Age: 58 Age: 46 Age: 59 David Cheesewright retired in early 2018 as President Abi Cleland is a Director of Computershare Limited, Sydney Wendy Stops is a Director of Commonwealth Bank of James Graham has extensive investment, corporate and and Chief Executive Officer of Walmart International, Airport Corporation Limited and Orora Limited. Abi is also Australia Limited. She is also a Director of Fitted for Work, governance experience, including as a Non-executive which comprises Walmart’s operations outside the United a Director of Swimming Australia. Abi’s previous board a Council member at the University of Melbourne, Chair Director of Wesfarmers Limited for 20 years, prior to his States, including more than 6,200 stores and over a million appointments include Australian Independent Business of the Advisory Board for the Melbourne Business School’s retirement in July 2018. James is Chairman of Gresham associates in 27 countries. David was also responsible for Media, Chairman of Planwise Australia and membership of Centre for Business Analytics and a member of the Partners Limited, having founded the Gresham Partners Walmart’s global sourcing operations and offices around the advisory committee of Lazard PE Fund 2. From 2012 to Advisory Committee to the Digital Technology Taskforce Group in 1985. From 2001 to 2009, he was a Director of the world. He was previously President and CEO of Walmart 2017, Abi established and ran an advisory and management of the Department of Prime Minister and Cabinet. Wendy Rabobank Australia Limited, initially as Deputy Chairman EMEA (Europe, Middle East and Africa), CEO Walmart business, Absolute Partners, focusing on strategy, mergers was previously a senior management executive in the and then Chairman, responsible for the Bank’s operations Canada, and COO Asda. David’s other prior roles include and acquisitions and disruption. Before that, she held senior information technology and consulting sectors, including in Australia and New Zealand. He was also Chairman of the a range of key positions with Mars Confectionery in the UK management roles at KordaMentha’s 333, where she was 16 years with Accenture in various senior management Darling Harbour Authority between 1989 and 1995. James across manufacturing, marketing, sales and logistics. David Managing Director, and at ANZ, Incitec Pivot Limited and positions in Australia, Asia Pacific and globally. Her previous was made a member of the Order of Australia in 2008. is also a previous board member of Walmex (Walmart Amcor Limited. Directorships of listed entities, current and recent (last three years): Mexico), Chinese online grocery business Yihaodian, South African retailer and distributor Massmart, The Retail Council of Canada and ECR Europe and is a prior Chair of Walmart Director of Wesfarmers Limited (May 1998 to July 2018) Canada Bank and Gazeley Holdings (UK). David currently Steven Cain MEng (1st) Managing Director and CEO Age: 55 Steven Cain has over 20 years of experience in Australian and international retail. Steven was previously Chief Executive Officer of Supermarkets and Convenience sits on the Deans Advisory Board of the Smith Business School and is a Non-executive Director of Rapha Racing (UK). Jacqueline Chow MBA, BSc (Hons), GAICD Non-executive Director, Member of Committee and the Audit and Risk Committee the Nomination Age: 48 at Metcash Limited. He was Chief Executive of Carlton Jacqueline Chow is a Non-executive Director of nib Communications plc, a FTSE 100 media group company, Holdings Limited and a Senior Advisor at McKinsey and Operating Director and Portfolio Company Chairman Consulting RTS, advising clients across industrial, retail, at Pacific Equity Partners, a private equity firm. He was telecommunications, financial services and consumer Group Marketing Director, Store Development Director and sectors on performance transformation projects. She is also Grocery Trading Director of Asda Stores Ltd (UK) during its a Director of the Australia-Israel Chamber of Commerce turnaround and has held roles at UK retail group Kingfisher of New South Wales. From 2016 to June 2019, Jacqueline plc, and Bain & Company. Steven was previously the was a Director of Fisher & Paykel Appliances. Jacqueline Managing Director of Food, Liquor and Fuel at Coles Myer previously held senior management positions with and was an advisor to Wesfarmers Limited on its takeover of Fonterra Co-operative Group, one of the world’s largest the Coles Group in 2007. dairy product producers and exporters, including 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 and Deputy Chair, Global Dairy Platform Inc. Directorships of listed entities, current and recent (last three years): Directorships of listed entities, current and recent (last three years): board experience includes Altium Limited, Accenture Software Solutions Australia and Diversiti. She is currently a member of Chief Executive Women. Director of Computershare Limited (since February 2018); Director of Sydney Airport Corporation Limited (since April Directorships of listed entities, current and recent (last three years): 2018); Director of Orora Limited (since February 2014); Director of Commonwealth Bank of Australia Limited (since Director of BWX Limited (August 2017 to December 2017) March 2015); Director of Altium Limited (February 2018 to Richard Freudenstein LLB (Hons), BEc Non-executive Director, Chairman of the People and Culture Committee and Member of the Nomination Committee Age: 55 November 2019) Zlatko Todorcevski MBA, BCom Non-executive Director, Chairman of the Audit and Risk Committee and Member of the Nomination Committee Age: 52 Richard Freudenstein is a Director of REA Group Limited Zlatko Todorcevski is a Director of The Star Entertainment (since 2006), including as Chairman from 2007 to 2012. He is Group Ltd and was appointed as Chief Executive Officer also currently a board member of Cricket Australia, Deputy and Managing Director of Boral Limited, effective 1 July Chancellor of the University of Sydney and a member 2020. Zlatko’s previous appointments include Deputy Chair of the Advisory Board of start-up artificial intelligence and Director of Adelaide Brighton Ltd, having served as software company Afiniti. Richard was previously Chief Chairman from May 2018 to May 2019. Zlatko was also a Executive Officer of Foxtel (2011 to 2016), Chief Executive Council member of the University of Wollongong, President Officer of The Australian and News Digital Media at News of the Group of 100 and Chairman of the ASIC Accounting Ltd (2006 to 2010), and Chief Operating Officer at British and Audit Standing Committee. Zlatko’s executive career Sky Broadcasting plc (2000 to 2006). His previous board positions include Ten Network Holdings (2015 to 2016), Foxtel included four years as Chief Financial Officer of Brambles Ltd and from 2009 to 2012 as Chief Financial Officer of Oil (2009 to 2011) and ESPN STAR Sports ESS (2009 to 2012). Search Ltd. From 1986 to 2009, he held various senior roles Directorships of listed entities, current and recent (last three years): at BHP, including Chief Financial Officer of Energy based in London and Houston. Director of REA Group Limited (since November 2006); Director of Astro Malaysia Holdings Berhad (September Directorships of listed entities, current and recent (last three years): Director of nib Holdings Limited (since April 2018) 2016 to August 2019) Director of Adelaide Brighton Limited (March 2017 to June 2020); Director of Star Entertainment Group (since May 2018); Executive Director of Boral Limited since July 2020 66 67 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Directors’ Report Directors’ Report 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 28 June 2020 (‘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 the Remuneration Report • Board of Directors: Biographical Details • Note 7.3 Auditor’s remuneration to the financial statements accompanying this report • Note 7.6 Events after the reporting period to the financial statements accompanying this report • the Auditor’s Independence Declaration required under section 307C of the Corporations Act 2001 (Cth). Directors The Directors in office during the financial year and up to the date of this report are: NAME POSITION HELD PERIOD AS A DIRECTOR James Graham AM Chairman and Independent, Appointed 19 November 2018 Steven Cain Non-executive Director Managing Director and Chief Executive Officer Appointed Chief Executive Officer 17 September 2018 Appointed Managing Director 2 November 2018 David Cheesewright Jacqueline Chow Abi Cleland Independent, Non-executive Director Appointed 19 November 2018 Independent, Non-executive Director Appointed 19 November 2018 Independent, Non-executive Director Appointed 19 November 2018 Richard Freudenstein Independent, Non-executive Director Appointed 19 November 2018 Wendy Stops Zlatko Todorcevski Independent, Non-executive Director Appointed 19 November 2018 Independent, Non-executive Director Appointed 19 November 2018 The biographical details of the current Directors set out information about the Directors’ qualifications, experience, special responsibilities and other directorships. 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). 68 69 Coles Group Limited 2020 Annual Report Directors’ meetings Review and results of operations The number of Directors’ meetings (including meetings of committees of Directors) and the number of meetings attended A review of the operations of the Group during the financial year, the results of those operations and the Group’s financial by each of the current Directors of the Company during the financial year are listed below: position are contained in the Operating and Financial Review (OFR). DIRECTOR BOARD COMMITTEE COMMITTEE COMMITTEE AUDIT AND RISK PEOPLE AND CULTURE NOMINATION 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 Held Attended Held Attended Held Attended Held Attended developments in Coles’ operations and the expected results of those operations in future financial years. Information in the James Graham Steven Cain David Cheesewright Jacqueline Chow Abi Cleland Richard Freudenstein Wendy Stops Zlatko Todorcevski 12 12 12 12 12 12 12 12 12 11* 12 12 12 12 11* 12 5 5 5 5 5 5 5 5 5 5 5 4 5 5 3 3 3 3 3 3 3 3 3 3 3 3 3 3 * Mr Cain and Ms Stops were apologies for extraordinary meetings which were convened at short notice. 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 500,188 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 18 August 2020. Refer to the Remuneration Report tables for total shares held by Directors and their related parties directly, indirectly or beneficially as at 28 June 2020. 2 As at 18 August 2020, Steven Cain also holds 85,057 Restricted Shares, 85,057 Performance Shares and 275,901 Performance Rights. 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. No significant changes have occurred in the nature of these activities during the financial year. State of affairs Cessation of Wesfarmers substantial shareholding On 19 February 2020, Wesfarmers announced that it had sold 4.9% of the issued share capital of Coles. On 31 March 2020, Wesfarmers announced that it had sold a further 5.2% of the issued share capital of Coles. Following the sale, Wesfarmers retains a 4.9% interest in Coles. Coles and Wesfarmers continue to operate the flybuys joint venture, with both parties retaining a 50.0% interest in the business. 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, information that 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. Events after the reporting date On 18 August 2020, the Directors determined a final dividend of 27.5 cents per fully paid ordinary share to be paid on 29 September 2020, fully franked at the corporate tax rate of 30%. The aggregate amount of the final dividend to be paid out of profits, but not recognised as a liability at 28 June 2020, is expected to be $367 million. Dividends Dividends since Coles’ last Annual Report: TYPE Paid during the year 2019 final dividend 2019 special dividend 2020 interim dividend To be paid after end of year 2020 final dividend CENTS PER AMOUNT FRANKED TOTAL SHARE $M PERCENTAGE DATE OF PAYMENT 24.0 11.5 30.0 27.5 320 154 399 100% 100% 100% 26 September 2019 26 September 2019 27 March 2020 367* 100% 29 September 2020 DEALT WITH IN THE FINANCIAL REPORT AS Dividends paid Events after the reporting period NOTE 3.3 7.6 $M 873 367* * Estimated final dividend payable, subject to variations in the number of shares up to the record date. 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. The Group has not incurred any significant liabilities under any environmental legislation during the financial year. 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 while acting as As a result of Wesfarmers’ interest falling below 10.0%, the Relationship Deed agreed between Coles and Wesfarmers at such officers to the extent permitted by law. the time of the demerger terminated and Wesfarmers no longer has the right to nominate a director to the Coles Board. Mr David Cheesewright who was previously nominated to the Coles Board by Wesfarmers, continues as a director on the Coles Board. In light of Wesfarmers no longer being a substantial shareholder in Coles and Mr Cheesewright ceasing to be a nominee to the Coles Board by Wesfarmers, the Board has concluded that Mr Cheesewright is an independent director. 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 70 71 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 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 or any of its subsidiaries, 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. Indemnification of Auditors Pursuant to the terms of engagement Coles has with its auditors, Ernst & 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 7.3 Auditor’s remuneration to the financial statements. 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 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 million 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 18 August 2020 Steven Cain Managing Director and Chief Executive Officer 18 August 2020 Remuneration Report D i r e c t o r s ’ R e p o r t 72 73 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual ReportOverviewOperating and Financial ReviewFinancial ReportShareholder information Remuneration Report Letter to shareholders from the Chair of the People and Culture Committee Company performance was strong against all financial metrics included in the Executive KMP STI for FY20. Group sales revenue (adjusted retail basis) increased by 6.6% to $38,109 million; and for the first time in four years, Coles reported earnings growth at a Group level, with earnings before interest and tax (EBIT) (pre AASB 16 and significant items) increasing by 4.7% to $1,387 million. It is important to note that revenue and earnings had both established a strongly upward trajectory prior to the influence of COVID-19, which began to further accelerate sales growth during the third quarter. It is also significant that the Company successfully managed the increased demand and operational challenges of COVID-19. Performance was also strong against strategic and non-financial metrics, which broadly included people, safety, customer, Smarter Selling and transformation projects that will underpin the long-term sustainability of our business. In evaluating the achievement against the balanced scorecard, the Board maintains the absolute discretion to ensure that remuneration outcomes are appropriate in the context of the Company’s performance, our customer and team member experience and shareholder expectations. For FY20, the Board considered the STI outcomes in the context of the unprecedented events the year presented. Section 4.4 covers the achievements in more detail and includes a summary of the Board’s approach to determining the final STI payable for Executive KMP, considering the full year achievements in the context of the unique circumstances of FY20. The resulting impact was STI outcomes for the Executive KMP that ranged between 91.7% to 100% of the maximum STI opportunity. The Board believes this is a reasonable reflection of the significant achievements delivered by management against the commitments made to shareholders for FY20. Under the remuneration framework, 50% of the Managing Director and CEO’s STI award will be deferred into equity for two years, and 25% of the Other Executive Dear Shareholder, On behalf of the Board, I am pleased to present the FY20 Remuneration Report for Coles. The Remuneration Report provides information on the remuneration arrangements for our Key Management Personnel (KMP) which include the Managing KMP STI awards will be deferred into equity for one year. An unprecedented time Director and Chief Executive Officer (Managing Director and CEO), Other Executive KMP and Non-executive Directors of As an essential service, Coles played a significant role in supporting the community and our own team members through the Company. A year of progress Heading into FY20, Coles launched its refreshed strategy, ‘Winning in our Second Century’. The new strategy outlined the Company’s vision to ‘become the most trusted retailer in Australia and grow long-term shareholder value’. The Coles management team led by Managing Director and CEO, Steven Cain, has delivered against many of the commitments made to shareholders across FY20. In addition, Coles delivered a total shareholder return (TSR) of 31.7% placing it in COVID-19 in FY20. The comprehensive response included a number of initiatives that contributed to the final EBIT result for FY20: • A safe in-store environment for team members and customers through increased cleaning throughout the store, store signage to help customers keep a safe distance, safety screens at checkouts, and increased security where required; • Helped the most vulnerable members of our community to access essential food and groceries through the introduction of Community Hour, Coles Online Priority Service and Coles Online Remote Delivery Service; the top quartile of performance across both the ASX 50 and ASX 100. It is particularly commendable that these results • Increased total headcount by more than 5,000 during the year, including additional casual team members through were achieved amid some of the most challenging conditions in living memory, requiring the business to pivot at pace in COVID-19; response to bushfires, floods and COVID-19. Some of the achievements in the first year of delivering on the new strategy include: Inspire Customers: Coles continued to inspire our customers in FY20 and delivered trusted value through the ‘Helping lower the cost of…’ campaign. Although periodic disruptions to availability as a result of COVID-19 prevented the Company from fully meeting the FY20 customer satisfaction target for STI purposes, it is notable that customer satisfaction improved in all segments in Q4. Own Brand achieved more than $10 billion of sales, contributing 31.2% of Supermarkets sales in Q4, increasing by 9.7% for the year as more than 1,850 products were launched. Coles also introduced a dedicated convenience foods section across almost 150 supermarkets, with more than 240 new lines including the new Coles Kitchen range from our recently acquired Jewel manufacturing facility in Sydney, supporting Coles’ ambition to become a destination for convenience and health. Smarter Selling: Cost savings in excess of $250 million were achieved through Smarter Selling initiatives. This was due to enhanced logistics solutions for stores and distribution centres, improved labour productivity through integration of operations and supply chain teams, and measures to reduce loss in store. Win Together: Team member safety significantly improved across FY20 with the Total Recordable Injury Frequency Rate improving by 18.3%. To help team members manage their own wellbeing in the face of the many challenges the year presented, we proactively provided team members with resources to look after their mental and physical health, as well as that of their families. This focus on team members was reflected in the increased engagement score, improving by seven percentage points for the full year, alongside record participation. Coles continued to support our communities with the SecondBite Winter Appeal; $5.2 million raised for FightMND; and more than $6 million contributed to rural firefighters and bushfire relief. Outcomes for FY20 This was the first year of operation under the new Coles remuneration framework for the Executive KMP as outlined in the 2019 Annual Report. Under the framework each of the Executive KMP was aligned to the new short-term incentive (STI) design structure using individual balanced scorecards consisting of financial, strategic and non-financial metrics as outlined in section 4.4. • Additional food donations to the value of $7.9 million to SecondBite and Foodbank; • One-off thank-you payment to store and supply chain team members; and • Double discount on shopping and subsidised flu vaccinations offered to all team members. Looking ahead In considering performance metrics to apply for the FY21 STI, the Board has approved two key changes. Firstly, the introduction of a specific Online sales metric for Executive KMP in place of the Cash Realisation metric. The exception to this will be the CFO, who will retain the Cash Realisation metric. This shift demonstrates the importance of growth in the online channel to achieving our strategic goals. Secondly, the Customer metric will be adapted from a blended approach to a single Net Promoter Score (NPS) metric. This simplifies the measurement and highlights the importance of going beyond merely satisfying our customers to recruiting them as advocates for our business. The Board, as advised by the People and Culture Committee, regularly reviews the executive remuneration framework to ensure it remains relevant, competitive and appropriate in the context of changing business and economic conditions. The Board believes the current remuneration framework for the Executive KMP continues to reflect Coles’ strategy and market positioning, and therefore has not proposed any further changes for FY21. Richard Freudenstein Chair of the People and Culture Committee 74 75 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Coles Group Limited 2020 Annual Report Introduction The Directors of Coles Group Limited (‘Coles’ or ‘the Company’) present the Remuneration Report for the Company and its controlled entities (collectively, ‘the Group’) for the financial year ended 28 June 2020 (‘FY20’). This report forms part of the Directors’ Report, has been prepared in accordance with section 300A of the Corporations Act 2001 (Cth) and is audited. 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 in the This is Coles’ first Remuneration Report covering an entire year as a newly listed public company, following our demerger from Wesfarmers Limited (‘Wesfarmers’) during FY19. Directors’ Report. This Remuneration Report covers the period from 1 July 2019 to 28 June 2020. Structure of this report The Remuneration Report is divided into the following sections: SECTION (1) Key Management Personnel (2) Remuneration governance (3) Remuneration policy and structure overview (4) FY20 Executive KMP remuneration outcomes (5) FY20 Non-executive Director remuneration (6) Ordinary Shareholdings SECTION 1: KEY MANAGEMENT PERSONNEL 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. This includes the Board of Directors and Executive KMP. 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 Group during FY20. Table 1 Non-executive Directors NAME James Graham AM David Cheesewright Jacqueline Chow Abi Cleland Richard Freudenstein Wendy Stops Zlatko Todorcevski POSITION HELD1 Chairman and Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director 1 All Non-executive Directors were in office during the whole financial year and up to the date of this report. Executive KMP NAME Steven Cain Leah Weckert Greg Davis Matthew Swindells2 POSITION HELD1 Managing Director and Chief Executive Officer Chief Financial Officer Chief Executive, Commercial & Express Chief Operations Officer 1 All Executive KMP were in office during the whole financial year and up to the date of this report. 2 Matthew Swindells became an Executive KMP on 1 July 2019, and the disclosures in this report are from that date onwards. Prior to this date, he held the non-KMP position of Chief Supply Chain Officer. 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 FY20 Mercer and PwC provided independent benchmarking and market analysis in relation to executive remuneration to the People and Culture Committee. No remuneration recommendations were made by external consultants. The Board maintains overall accountability for oversight of the Group’s remuneration policies. Specifically, the Board approves all remuneration and benefit 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. The Board The Board maintains absolute discretion to either positively or negatively adjust the remuneration outcomes for the Managing Director and CEO and executive-level direct reports. The Board will use its discretion based on the provision of supporting data to substantiate the requirement of an adjustment. Alternatively, they will use their own judgement and assessment of performance aligned to Coles’ values and LEaD behaviours, risk, compliance, reputational, safety and sustainability considerations and the quality of earnings delivered. External advisors 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. 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 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, the Managing Director and CEO, and executive-level direct reports to the Managing Director and CEO; the 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; and • delegating authority for the operation and administration of all Group incentive and equity plans to management (as appropriate). Management Management makes recommendations, to the People and Culture Committee on matters including (but not limited to): • 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; and • changes to the Group’s remuneration policies. 76 77 Coles Group Limited 2020 Annual Report 2.2 Corporate governance policies related to remuneration 3.2 Delivered through a simple, three-element structure To support a robust remuneration framework, Coles has a number of corporate governance policies related to remuneration, Executive KMP remuneration is delivered using both fixed and variable (at-risk) components as outlined below. 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 sets out the insider trading laws and restrictions with which KMP must comply, including obtaining approval prior to trading in Coles securities and not trading within blackout periods. The policy aims to protect the reputation of the Group and maintain confidence in trading in Coles securities. It also prohibits specific types of transactions being made which are not in accordance with market expectations or may otherwise give rise to reputational risk. 2.2.2 Minimum Shareholding Policy To build strong alignment between KMP and 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. The details of each Executive KMP shareholding are summarised in Tables 8.1 and 12. 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. 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. As at the date of this Remuneration Report, each Non-executive Director meets this requirement. SECTION 3: REMUNERATION POLICY AND STRUCTURE OVERVIEW 3.1 Remuneration policy for FY20 In FY20, we introduced our updated remuneration framework aligned to our ‘Winning in our Second Century’ strategy. As disclosed in the FY19 Remuneration Report, the FY20 framework is guided by our remuneration principles and designed to ensure remuneration at Coles is market-competitive, performance-based, creates long-term value for shareholders, and is fit-for-purpose. In contrast to legacy remuneration arrangements established immediately following demerger, the FY20 framework is more heavily focused on performance-based pay delivered through equity awards. When balanced with the performance conditions to be achieved, the People and Culture Committee believes that the framework is appropriately aligned to our strategy and the interests of our shareholders. Market competitive Performance-based 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. A strong link to performance-based pay to support the achievement of strategy aligned to 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. Specific performance measures and outcomes for FY20 are included in section 4. Fixed elements Total Fixed Compensation (TFC) Variable elements1 Short-term incentive (STI) Long-term incentive (LTI) How it is delivered Cash Cash Equity (Shares) Equity (Performance Rights) How it works • consists of base • paid as part cash, part deferred equity • delivered in performance rights, subject salary and superannuation • target position = Managing Director and CEO 50% is deferred into shares and restricted for 2 years to a 3 year Performance Period • opportunity levels: = Managing Director and CEO 175% is the 50th percentile of the ASX 10-40 comparator group (plus reference to local and international retailers, as appropriate) = Other Executive KMP 25% is deferred into of TFC shares and restricted for 1 year • opportunity levels (all Executive KMP): = 80% of TFC at Target = 120% of TFC at Maximum = Other Executive KMP 150% of TFC • measured against: = 50% Relative TSR (RTSR) (ASX 100 comparator group) • measured against an individual balanced = 50% cumulative Return on Capital scorecard consisting of: (ROC) = 60% financial measures • dividend equivalent payment made in = 40% strategic and non-financial measures • includes a mixture of group and functional strategic measures Incentivises strong individual and Company performance, based on strategically aligned deliverables, through variable, at-risk payments shares upon vesting Aligns reward with creation of sustainable, long-term shareholder value What it does Allows us to attract and retain key talent through competitive and fair fixed remuneration 1 Excludes transition arrangements put in place for the Managing Director and CEO as outlined in section 4.7 78 79 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report The graphic below demonstrates the award delivery time horizons from FY20. Performance period (1 year) C F T Salary paid during the year Performance period (1 year) Other Executive KMP – 75% paid in cash 1-year vesting period I T S Other Executive KMP – 25% deferred into Shares held in restriction for 1 year MD & CEO – 50% paid in cash 2-year vesting period MD & CEO – 50% deferred into Shares held in restriction for 2 years Performance period (3 years) I T L Performance Rights vest subject to performance hurdles being met Financial Year 1 Financial Year 2 Financial Year 3 Financial Year 4 3.3 FY20 target remuneration mix for Executive KMP The FY20 remuneration mix at target for the Executive KMP is outlined below: Chart 1 Managing Director and CEO Other Executive KMP 50% 28% 11% 11% TFC STI Cash STI Equity LTI 3.4 Executive KMP service agreements 30% 46% 18% 6% TFC STI Cash STI Equity LTI 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. Table 2 NAME Steven Cain Leah Weckert Greg Davis Matthew Swindells NOTICE PERIOD1 RESTRAINT OF TRADE 12 months 12 months 6 months 6 months 12 months 12 months 6 months 6 months 1 Executive KMP can be terminated without notice if they are 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. SECTION 4: FY20 EXECUTIVE KMP REMUNERATION OUTCOMES 4.1 Company performance This section of the Remuneration Report provides an overview of how the Company’s performance for FY20 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 Coles’ performance and relevant shareholder returns over FY20. As Coles listed on the ASX on 21 November 2018, it is not possible to address the statutory requirement that Coles provide a five-year discussion of the link between Company performance and remuneration. Details are included for FY19 as well as the first full year of results in FY20. This table will continue to be expanded in future years to provide comparative metrics for the financial years in which Coles is listed. Table 3 FINANCIAL SUMMARY Group Earnings Before Interest and Tax (EBIT) Group EBIT (pre AASB 16 and significant items) Group Sales1 Group Sales (adjusted retail basis)2 Return on capital (ROC) (pre-AASB 16 and significant items)3 Dividends paid per ordinary share (cents)4 Closing share price (as at end of financial year)5 Total shareholder return (TSR) (%)6 BASIS Statutory Statutory Retail Retail Statutory YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $1,762m $1,387m $37,408m $38,109m 35.2% 65.5 $16.79 31.7% $1,467m $1,343m $35,001m $35,741m 32.9% - $13.35 6.9% 1 Retail sales reflect the retail calendar period and exclude Fuel sales and Hotels sales. 2 Retail sales adjusted to include concession sales and remove flybuys point redemption costs. 3 ROC is Group EBIT (pre AASB 16 and significant items) divided by capital employed. Capital employed is calculated on a rolling average basis (seven months in FY19). 4 The dividends paid per ordinary share reflect the dividends shareholders received within each financial period. Dividends paid within each financial year does not reflect the dividends determined for the same financial year due to the dividend payment date. The Directors determined a dividend relating to FY19 of 35.5 cents per share (final dividend of 24.0 cents per share plus special dividend of 11.5 cents per share) which was paid on 26 September 2019. Similarly, the interim dividend of 30.0 cents per share was paid on 27 March 2020. The final dividend determined by Directors for FY20 was 27.5 cents per share to be paid on 29 September 2020 (FY21). The opening share price on listing on the ASX on 21 November 2018 was $12.49. TSR is calculated as the change in share price during the financial year, plus dividends reinvested on the respective ex-dividend dates. 5 6 4.2 Board oversight of remuneration outcomes The Board maintains absolute discretion to ensure that remuneration outcomes are appropriate in the context of the Company’s performance, our customer experience and shareholder expectations. The Board has discretion in evaluating the achievement against performance measures, including to adjust for unusual factors. The Board recognises that COVID-19 has created a challenging environment that needs to be considered when determining remuneration outcomes. As part of its assessment, the Board considered if there were windfall gains or losses and determined that the calculated remuneration outcomes appropriately aligned to shareholder outcomes and the Board’s assessment of management’s performance. The steps undertaken by the Board to inform this decision with respect to STI outcomes for FY20 are further outlined in section 4.4. 4.3 Total fixed compensation (TFC) For FY20, TFC was designed to be competitive to attract, motivate and retain the right talent. As disclosed in the FY19 Remuneration Report, the TFC for Executive KMP was compared to the ASX 10-40 benchmark group, as well as both local and international retailers. TFC was targeted at the 50th percentile of this peer group for comparable roles. 80 81 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report At the start of FY20, the Board conducted a detailed review of Executive KMP TFC and total remuneration packages Further details regarding each financial performance measure in Table 4 is provided as follows: against the new comparator group. This was informed by a detailed benchmarking exercise conducted by Mercer. The timing of this review coincided with the restructure of the Executive Leadership Team, aligned to the launch of the new company strategy. In light of the review outcomes, the Board determined that it was appropriate to apply a TFC increase to each of the Executive KMP, with the exception of the Managing Director and CEO, who did not receive an increase. The increase for Other Executive KMP was effective from 1 July 2019 and is reflected in the summary of total remuneration received by Executive KMP in Table 7 of this report. In making this decision the Board considered the following: Group EBIT (pre AASB 16 and significant items) increased by 4.7% driven by strong trading performance and cost management initiatives in Supermarkets, and the realisation of cost savings from the Smarter Selling program. This was partly offset by lower earnings in Express, particularly in the last quarter of the year from government-imposed stay-at- home measures in response to COVID-19. Group Sales (adjusted retail basis) increased by 6.6% driven by growth in Supermarkets from successful value and collectible campaigns, tailored range reviews and Own Brand sales growth. Liquor sales increased from growth in Exclusive Liquor Brands and benefits from First Choice Liquor Market conversions. Both segments experienced trading uplifts in the latter • no prior increases - there had been no increase in TFC for any of the Executive KMP at the time of listing on the ASX (in part of the year from the COVID-19 driven increase in at-home consumption, as did Express convenience store sales which November 2018); offset lower foot traffic in-store following the introduction of stay-at-home measures across the country. • size and complexity of role, and the individual’s experience, skills and performance - since demerger in 2018, the Executive KMP have continued to deliver performance consistent with, and in some cases, exceeding Board expectations, resulting in strong returns for shareholders; and Group Cash Realisation reflects both a strong trading performance and disciplined working capital management with inventory reducing faster than trade payables towards the end of the financial year. Cash realisation is calculated as operating cash flow excluding interest and tax, divided by earnings before interest, tax, depreciation and amortisation • alignment to our remuneration principles - the increase in TFC reflects our ‘market competitive’ principle, ensuring that (EBITDA) (excluding significant items). we continue to attract, motivate and retain high calibre executives in both the local and global talent market. Table 5 A review of fixed remuneration will be conducted in FY21 in line with our remuneration principles. Any approved changes will be disclosed in our 2021 Remuneration Report. 4.4 Short-term incentive (STI) The FY20 Coles STI is designed to reward Executive KMP for the achievement of key short-term performance measures. A balanced scorecard approach was introduced for all Executive KMP in FY20. This provides a simple and transparent approach to highlighting performance priorities, measuring performance outcomes against each weighted metric, and provides clarity regarding the connection between the performance assessment and reward outcomes. The FY20 STI payable for the Executive KMP was assessed against individual balanced scorecards (as demonstrated in Tables 4 and 5) consisting of Financial, Strategic and Non-financial metrics. The scorecards also include a mixture of group and functional strategic metrics. Scorecard metrics are reviewed by the Board on an annual basis to ensure alignment with the Company’s strategy. The scorecards also include a Quality and Behaviours overlay which considers: • how the Executive KMP achieved performance aligned to the Coles values and LEaD behaviours; • • risk, compliance and reputational matters; and the quality of earnings delivered. Table 4 FY20 Financial Performance Measures (All Executive KMP) The Executive KMP have a maximum STI opportunity equivalent to 150% of target (80% of TFC at target and 120% of TFC at maximum). The FY20 Group Financial performance measures contribute up to 110% of the target STI opportunity for all Executive KMP (60% at target) as outlined in Table 4. FY20 Strategic and Non-Financial Measures for the Managing Director and CEO The strategic and non-financial measures contribute up to 40% of the target STI opportunity for the Managing Director and CEO. AREA WEIGHTING OUTCOME PERFORMANCE TARGET/MAX ACTUAL STI Strategy – Smarter Selling 10% 10% Cost savings in excess of $250 million were achieved through Smarter Selling initiatives which exceeded the annual target set for FY20. This was due to enhanced logistics solutions for stores and distribution centres, improved labour productivity through integration of operations and supply chains teams and measures to reduce loss in store. Safety - TFIFR 10% 10% Team member safety significantly improved across FY20 People – mysay engagement score Customer – Tell Coles w/NPS gateway Value with the Total Recordable Injury Frequency Rate improving by 18.3%. 10% 10% Team member engagement improved by seven percentage points for the full year, alongside record participation. 10% 8.75% Availability demands as a result of COVID-19 impacted the full achievement of the FY20 Tell Coles metric. However, the NPS gateway was exceeded. The Value target was met for FY20, and this was a reflection of the success of the ‘Helping lower the cost of…’ campaign. OVERALL PERFORMANCE 40% 38.75% TARGET MAXIMUM ACTUAL STI FY20 Strategic and Non-Financial Measures for the Other Executive KMP (aggregated summary) FY20 TARGET FY20 ACTUAL ACHIEVEMENT WEIGHTING WEIGHTING OUTCOME MEASURE Group EBIT Group Sales $1,343m $1,387m Above Stretch $36,636m $38,109m Above Stretch Group Cash Realisation 107% 111% Above Target OVERALL PERFORMANCE 35% 15% 10% 60% 70% 30% 10% 110% 70% 30% 10% 110% The Other Executive KMP have the same financial measures and outcomes as detailed in Table 4. The strategic and non-financial measures contribute up to 40% of the target STI opportunity for the Other Executive KMP and comprise measures that are largely aligned to the Managing Director and CEO. Each have variances consistent with the respective portfolios they lead at Coles. Achievements against the strategic and non-financial measures for each of the Other Executive KMP ranged from partially achieved to full achievement. 82 83 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 4.4.1 FY20 STI Award Outcomes At the conclusion of FY20, the Board assessed the performance against the balanced scorecard of the Managing Director and CEO and each of the Other Executive KMP to determine any STI award outcome payable based on this assessment. In its assessment, the Board considered the performance of the Group, including the periods both pre-COVID-19 and since COVID-19. The Board was mindful of the need to avoid unintended windfall gains or losses while rewarding Executive KMP for strong performance and delivering value to shareholders. The Board formed the view that the STI outcomes for the Executive KMP were a fair reflection of performance throughout the full year. The Board therefore did not adjust the FY20 STI outcomes for any impacts related to COVID-19. The following reflects the rationale considered by the Board in making this decision: • Our shareholders have continued to see solid returns from their investment relative to the broader market across the full year. Our share price has grown, and we have maintained a strong dividend with a total shareholder return over the financial year of 31.7% reflecting top quartile performance compared to the ASX 50 and ASX 100 respectively. • Prior to the impact of COVID-19 on demand, the Group was on track to deliver above-target EBIT and sales performance and all other metrics for the Executive KMP were largely on track to either meet or exceed expectations. This performance is directly linked to the turnaround of the organisation driven by the delivery of strategic objectives defined in the ‘Winning in our Second Century’ strategy. • The focus on inspiring our customers and our team members continued to be at the heart of all decisions made during COVID-19. We have seen the positive impact of this with Coles posting the biggest improvement on the Roy Morgan Risk Monitor list of trusted retailers in Australia and significant improvements in our team member engagement score, which is heavily influenced by our team members on the frontline out in stores. • The STI targets set at the beginning of the year were established within the context of changing consumer habits. While COVID-19 had a significant impact on sales, from late Q3 and through Q4 of FY20, our cost base was also elevated. This was the result of additional investments made to ensure the safety of our customers and team members. • The entire Coles business has responded at pace to the shift in strategic priorities. Changes and initiatives have been implemented to effectively manage business disruption. As Coles is an essential service, we were actively involved in the government response to COVID-19. At times, this required decisions being taken for the benefit of the broader Australian community. This included temporarily suspending our Online business, introducing purchasing limits and implementing significant measures in store to keep customers and team members safe. Although these changes were Table 6 FY20 Executive KMP STI Outcomes Details of the Executive KMP STI opportunity and actual payments received for FY20 are provided in Table 6. STI OPPORTUNITY (% OF TFC)1 STI AWARDED NAME Steven Cain Leah Weckert Greg Davis Matthew Swindells TARGET MAXIMUM $ % OF TFC CASH2 EQUITY3 80% 80% 80% 80% 120% 120% 120% 120% $2,499,000 $1,140,000 $962,500 $945,600 119.0% $1,249,500 $1,249,500 120.0% 110.0% 118.2% $855,000 $721,875 $709,200 $285,000 $240,625 $236,400 STI FORFEITED4 (%) 0.8% - 8.3% 1.5% 1 2 3 The minimum STI opportunity was nil. The FY20 cash component of the STI will be paid on or about 15 September 2020. The FY20 equity component of the STI will be granted in STI Shares following the Coles 2020 Annual General Meeting (AGM), using a 10 day Volume Weighted Average Price (VWAP) for the period up to and including 28 June 2020, of $16.47. Equity for the Managing Director and CEO will not be granted until shareholder approval is obtained at the Coles 2020 AGM. 4 As a percentage of STI Maximum Opportunity. Terms of the FY20 Short-term incentive (STI) What was the Performance Period? 1 July 2019 – 28 June 2020 What were the performance metrics? For the Managing Director and CEO, and for Other Executive KMP, the STI award was calculated using a balanced scorecard as detailed in section 4.4. This included EBIT, Sales, Cash Realisation, Safety, People, Customer and other transformation or strategically aligned metrics. Why were the performance conditions chosen? The financial measures of EBIT, Sales and Cash Realisation align with the Company’s strategy and the commitments made to shareholders in launching this strategy ahead of FY20. In particular, EBIT focuses on delivering strong earnings through the business cycle and ensuring strong returns for Coles’ shareholders. Including a sales metric as well as EBIT ensures a strong focus upon our capability to deliver sustainable returns for shareholders in the long-term. made at short notice, they remain aligned to our vision to become the most trusted retailer in Australia and grow long- Strategic and non-financial metrics align to all three pillars of the Coles strategy to ‘Inspire Customers’, ‘Win Together’, term shareholder value. The Board also considered the appropriate application of the Quality and Behaviours overlay to determine the final Executive KMP STI outcomes for FY20 as detailed in Table 6. A key change in FY20 was the introduction of STI deferral into equity. This change further aligns Executive KMP and shareholder interests, and facilitates additional forfeiture provisions for a significant period, reflecting good governance. As a result, the Managing Director and CEO’s STI will be delivered 50% in cash, with the remaining 50% deferred into equity for two years (subject to shareholder approval at the Coles 2020 AGM). For the Other Executive KMP, the STI will be delivered 75% in cash with the remaining 25% deferred into equity for one year. and streamline our business through ‘Smarter Selling’. How were the conditions assessed? Performance against the balanced scorecard metrics were assessed by the Board based on the Company’s annual audited results, financial statements and other data provided to the Board. This method was adopted as the Board believes it is the most appropriate way to assess the true performance of the Company and the Executive KMP’s contribution to determine remuneration outcomes. What portion of the STI component was deferred into equity? As detailed in Table 6, once the individual scorecard calculation has been completed, the total STI award is determined. The equity deferred amount is then determined by reference to 50% of the total STI award for the Managing Director and CEO, and 25% of the total STI award for the Other Executive KMP. This amount is then used to determine the number of shares (‘STI Shares’) that will be granted and subject to deferral. This is calculated using the 10 day VWAP up to and including the final day in the performance period (i.e. 28 June 2020). The shares are granted following the payment of the cash component of the STI award and are unable to be traded during the restricted period: one year for the Other Executive KMP and two years for the Managing Director and CEO. Once the restricted period ends, the restriction is lifted and the Executive KMP may trade these shares in accordance with Coles’ Securities Dealing Policy. 84 85 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report When will the FY20 STI award be paid? The cash component of the STI award will be paid in September 2020. The ROC 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. The STI equity component will be allocated following the Coles 2020 AGM, where shareholder approval will be sought for 4.5.2 RTSR component the grant to the Managing Director and CEO. 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. What happens if an Executive KMP leaves the organisation before STI equity vests? During the restricted period, if an Executive KMP leaves the organisation in the event of resignation or dismissal for cause or significant underperformance, all shares will be forfeited, unless the Board determines otherwise. The number of Performance Rights in the RTSR component that vest, if any, will be based on Coles’ RTSR ranking within the S&P ASX 100 Comparator Group over the Performance Period, as set out in the following vesting schedule: COLES RTSR RANK IN THE COMPARATOR GROUP % OF PERFORMANCE RIGHTS THAT VEST 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% In any other circumstances (including by reason of redundancy, permanent disability, death or ill health) the shares will Equal to the 75th percentile or above 100% continue on foot until the usual vesting date, unless the Board determines otherwise. Can the Board amend the STI program? Following testing, any Performance Rights that do not vest will lapse. There is no re-testing of awards. The Board retains discretion to suspend or terminate the program at any time or amend all or any elements of the 4.5.3 FY20 LTI outcomes program up until the date of payment. 4.5 Long-term incentive (LTI) Performance Rights granted under the FY20 LTI will be tested following the end of FY22 (the end of the Performance Period). Details of the number of Performance Rights granted under the FY20 LTI are included in section 4.8. Details of equity awards granted to Executive KMP in prior years (including applicable performance conditions and vesting dates) are contained The FY20 LTI is designed to reward Executive KMP for the achievement of long-term sustainable returns for shareholders. in the FY19 Remuneration Report. As outlined in section 3, for FY20 the LTI component of Executive KMP remuneration was delivered in Performance Rights. Terms of the FY20 Long-term incentive (LTI) The Performance Period for the FY20 LTI runs from 1 July 2019 to 26 June 2022 (retail calendar year end for FY22). Performance Rights will vest subject to the satisfaction of the following performance conditions measured over the Performance Period: How is the LTI award delivered? The LTI award was delivered in Performance Rights. Each Performance Right entitles the Executive KMP to one ordinary share in the Company on vesting. The Board retains a discretion to make a cash equivalent payment in lieu of an • 50% of Performance Rights are subject to a cumulative return on capital (‘ROC’) hurdle (‘ROC component’); and allocation of shares. • 50% of Performance Rights are subject to a relative total shareholder return (‘RTSR’) performance hurdle. Coles’ RTSR will Performance Rights vest subject to achievement of relevant performance conditions and were allocated to Executive be compared to companies in the S&P ASX 100 (‘Comparator Group’) as at 30 June 2019. These performance conditions were chosen because they provide a direct link between Executive KMP reward and sustained shareholder returns to promote further alignment with shareholders. 4.5.1 ROC component Vesting of the Performance Rights in the ROC component is subject to achievement of at least 95% of the cumulative ROC target over the Performance Period. Cumulative ROC measures the Company’s average annual return on capital over the Performance Period against targets set by the Board. Cumulative ROC is calculated based on the Company’s audited financial information. The Board will assess cumulative ROC after the end of the Performance Period. In assessing achievement against the cumulative ROC performance condition, the Board may have regard to any matters that it considers relevant and retains discretion to review outcomes to ensure that the results are appropriate. The number of Performance Rights in the ROC component that vest, if any, will then be based on the Group’s cumulative ROC performance determined over the Performance Period by reference to the following vesting schedule: GROUP CUMULATIVE ROC OVER THE PERFORMANCE PERIOD % OF PERFORMANCE RIGHTS THAT VEST Equal to or below 95% of the cumulative ROC target is achieved 0% Between 95% and 105% of the cumulative ROC target is KMP at no cost to the Executive KMP, and no amount is payable on vesting. When were Performance Rights allocated? The Performance Rights for all Executive KMP under the FY20 Long Term Incentive plan were granted on 29 November 2019 following the 2019 Coles AGM (at which the grant made to the Managing Director and CEO was approved). How are Performance Rights allocated? The number of Performance Rights allocated to the Executive KMP was determined by dividing each Executive KMP’s LTI opportunity by the VWAP of Coles shares trading on the ASX over the 10 trading days up to and including 30 June 2019, rounded up to the nearest whole number. What is the Performance Period? The Performance Period is 1 July 2019 to 26 June 2022 (the last trading day of the FY22 retail calendar year). What are the performance conditions? Performance Rights are subject to the following performance conditions: • 50% of the LTI award is subject to a ROC hurdle; and • 50% of the LTI award is subject to a RTSR hurdle. Further information on the performance conditions is provided earlier in section 4.5. How are the performance conditions assessed? RTSR performance is independently assessed at the end of the Performance Period against the constituents of the S&P ASX 100 Comparator Group. ROC is calculated using Coles’ audited financial results. These assessment methods are designed to safeguard the integrity of the performance assessment process and ensure achieved Straight-line pro rata vesting between 0% – 100% the accuracy of underlying information. Equal to 105% or above of the cumulative ROC target is achieved 100% 86 87 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report When does testing and vesting occur? Testing of performance against performance conditions will occur after the end of the Performance Period (being 26 4.7 Transition awards Prior to the demerger of Coles, Wesfarmers put in place a small number of transition arrangements for certain Coles executives. These arrangements were disclosed in the Demerger Scheme Booklet, are temporary and have not been replicated post demerger. The transition arrangements that were paid across financial years including FY20 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 was structured into three tranches, with the final tranche paid in FY20: 1. $900,000 paid by Coles on 4 December 2018; 2. $1,500,000 paid by Coles on 28 December 2018; and 3. $1,500,000 paid by Coles on 27 December 2019. These payments were subject to service conditions. The payments made on 28 December 2018 and 27 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 each payment. 4.8 Summary of remuneration received by Executive KMP (statutory remuneration) Table 7 details the nature and amount of each element of remuneration of the Executive KMP. The increase in the total compensation value for FY20 compared to FY19 largely reflects the inclusion of Mr Swindells as Executive KMP in FY20, and the pro-rating of remuneration in FY19. Pro-rating for FY19 was aligned to the dates from which each individual was considered KMP, as well as the timing of Coles ceasing to be a wholly-owned subsidiary of Wesfarmers. There were no transactions or loans between Executive KMP and the Company or any of its subsidiaries during FY20. June 2022). Following testing, the Board will determine the number of Performance Rights to vest, which is expected to occur in late August 2022. Details regarding the vesting of the Performance Rights will be included in the FY22 Remuneration Report. 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 Rights that do not vest will lapse. No retesting of the performance conditions is permitted. What happens if an Executive KMP ceases employment? In the event of resignation or dismissal for cause or significant underperformance, all unvested Performance Rights will lapse, 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 Rights (based on the proportion of the Performance Period that has been served) 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 Performance Rights have voting rights? No. Prior to vesting, Performance Rights do not entitle Executive KMP to voting rights. Are dividends paid on Performance Rights? Executive KMP do not have an entitlement to dividends prior to vesting. After testing against the performance conditions, Executive KMP will receive a dividend equivalent amount related to the vested Performance Rights only. The dividend equivalent amount will be delivered in additional shares, equal in value to the value of dividends that would have been paid on the vested rights had the Executive KMP been the owner of Coles shares during the period from the Performance Rights grant date to the vesting date. Particularly, there is no dividend payable on any Performance Rights that do not vest. The Board retains a discretion to settle the dividend equivalent amount in cash. How can the Board apply discretion to clawback outcomes? The Board has broad clawback powers to determine that any Performance Rights may lapse, any shares allocated on vesting are 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 (for example 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 Rights 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 Rights will vest on a pro rata basis (based on the proportion of the Performance Period that has elapsed). What restrictions are there on dealing in the Performance Rights? Executive KMP must not sell, transfer, encumber, hedge or otherwise deal with Performance Rights. Executive KMP will be free to deal with the shares allocated on vesting of the Performance Rights, subject to the requirements of Coles’ Securities Dealing Policy. 88 89 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report L A T O T N O I T A S - N E P M O C 9 7 0 , 5 6 9 , 6 $ 2 1 3 , 6 9 3 , 5 $ 1 3 3 , 2 7 8 , 2 $ 7 4 0 , 2 7 2 , 2 $ 2 2 5 , 0 5 6 , 2 $ 8 3 2 , 4 4 8 , 1 $ 7 7 2 , 5 5 3 , 2 $ 9 0 2 , 3 4 8 , 4 1 $ 6 7 9 5 , 2 1 5 , 9 $ - M R O F R E P - R E P U S F O E U L A V - T S O P 2 S T N E M Y A P D E S A B - E R A H S T N E M Y O L P M E M R E T - G N O L M R E T - T R O H S S E R A H S 5 4 5 , 3 6 9 $ 0 1 1 , 9 1 3 $ 1 4 9 , 6 3 6 $ 3 9 6 , 3 4 4 $ 3 0 7 , 2 1 6 $ 2 4 1 , 4 6 3 $ 2 2 5 , 7 8 4 $ E C N A S T H G R I - 3 3 4 , 8 4 4 $ - 5 3 0 , 3 1 4 $ - 2 3 6 , 7 7 3 $ 6 8 4 , 6 5 1 , 1 $ 5 4 9 , 6 2 1 , 1 $ - 1 1 7 , 0 0 7 , 2 $ 6 8 5 , 5 9 3 , 2 $ N O I T A U N N A I E C V R E S G N O L S T I F E N E B E V A E L I T S H S A C R E H T O 1 S T I F E N E B Y R A L A S E S A B R A E Y E M A N 3 0 0 , 1 2 $ 5 6 6 , 5 2 $ 3 0 0 , 1 2 $ 7 9 1 , 6 1 $ 3 0 0 , 1 2 $ 8 4 1 , 2 1 $ 3 0 0 , 1 2 $ 2 1 0 , 4 8 $ 0 1 0 , 4 5 $ 2 2 1 , 3 $ 4 8 2 , 0 1 $ 1 9 1 , 9 $ 8 8 9 , 6 $ 0 3 9 , 9 2 $ 6 3 1 , 8 $ 2 2 1 , 3 $ 5 6 3 , 5 4 $ 8 0 4 , 5 2 $ 0 0 5 , 9 4 2 , 1 $ 6 7 7 , 1 0 5 , 1 $ 7 4 6 , 9 6 0 , 2 $ 4 1 3 , 2 2 8 $ 0 0 0 , 5 5 8 $ 0 4 2 , 8 0 4 $ 5 7 8 , 1 2 7 $ 0 8 8 , 2 6 3 $ 0 0 2 , 9 0 7 $ 0 1 0 , 3 0 4 , 2 $ 9 2 9 , 5 1 8 , 1 $ 3 2 3 , 1 $ 5 5 2 , 0 1 7 $ 5 6 7 , 1 $ 7 6 6 , 1 3 6 $ 4 7 0 , 1 $ 0 4 4 , 0 0 9 $ 4 7 6 , 6 8 6 $ 1 1 2 , 0 5 8 $ 5 6 2 , 5 6 4 $ 4 2 7 , 5 5 7 $ 5 7 5 , 5 3 5 , 3 $ 7 3 9 , 5 0 5 , 1 $ 2 2 0 , 6 7 5 , 4 $ 4 3 4 , 3 9 5 , 1 $ 2 3 9 , 4 4 7 , 3 $ 8 6 8 , 7 6 9 , 2 $ 0 2 0 2 9 1 0 2 0 2 0 2 3 9 1 0 2 0 2 0 2 4 9 1 0 2 0 2 0 2 P M K e v i t u c e x E t n e r r u C i n a C n e v e t S 5 s l l i e d n w S w e h t t a M 0 2 0 2 L A T O T 6 9 1 0 2 L A T O T t r e k c e W h a e L s i v a D g e G r l 7 e b a T r i e h t , s t n a r g e h t r o f s l i a t e d r e h t r u f r o f 5 . 4 n o i t c e s o t r e f e R . d o i r e p e c n a m o r f r e p s ’ t n a r g e h t r e v o y l l a n o i t r r o p o p d e s i n g o c e r s i s t n a r g e h t f o e u a v l r i a f g n i t n u o c c a e h t s d r a d n a t S g n i t n u o c c A e h t h t i w e c n a d o c c a r o t r o i r p s l l e d n w S i r M d n a s i v a D r M , t r e k c e W s M o t d e t a c o l l a s d r a w a e r a h s s r e m a r f s e W y c a g e l s e d u c n l i o s l a t I . s e r a h S I T S d n a s e r a h S e c n a m o r f r e P , s e r a h S d e t c i r t s e R f o s t n a r g e h t f o e u a v r i l a f g n i t n u o c c a n I . d o i r e p e c n a m o r f r e p t n a v e e l r e h t r e v o d e s n e p x e g n e b e i r a d n a s e e y o p m e s r l e m a r f s e W s a d e v e c e i r s l l e d n w S i r M d n a s i v a D r M , t r e k c e W s M h c h w i , s n a p e l r a h s s r e m a r f s e W o t t n a u s r u p r e g r e m e d e h t e h t t n e s e r p e r s t n u o m a e h T . d e t n e s e r p d o i r e p l i a c n a n i f e h t n i P M K e v i t u c e x E e h t f o r u o v a f n i d e t s e v t e y t o n e r a t a h t s d r a w a d e s a b - e r a h s t n e s e r p e r s t n e m y a p d e s a b - e r a h s r o l f n m u o c s i h t n i s e r u g i f e h T . 7 . 4 n o i t c e s r e d n u d e t o n s d r a w a g n d u c n l i i ) x a t s t i f e n e b e g n i r f l e b a c i l p p a y n a g n d u c n i ( i l t n e m y o p m e h t i l w d e t i a c o s s a s t s o c e d u c n l i s t i f e n e b r e h t O 1 2 90 e h t r e d n u s e r a h S e c n a m o r f r e P d n a d e t c i r t s e R d e n a i t e r e H . ) d e t i e f r o f e r e w s e r a h S e c n a m o r f r e P 8 3 2 , 5 ( d e t s e v s e r a h S e c n a m o r f r e P 9 1 8 , 2 d n a , l l u f n i d e t s e v s e r a h S d e t c i r t s e R P A S E W 5 1 0 2 ’ s i v a D r M 9 1 Y F g n i r u D l . s n a p 7 1 0 2 d n a 6 1 0 2 e h t r e d n u s e r a h S e c n a m o r f r e P d n a d e t c i r t s e R d e n a i t e r e H . ) d e t i e f r o f e r e w s e r a h S e c n a m o r f r e P 8 3 0 , 5 ( d e t s e v s e r a h S e c n a m o r f r e P 9 8 5 , 2 d n a , l l u f n i d e t s e v s e r a h S d e t c i r t s e R P A S E W 6 1 0 2 ’ s i v a D r M 0 2 Y F g n i r u D : s e r a h s s r e m a r f s e W g n w o i l l o f e h t l d e h e h s r e g r e m e d f o e m i t e h t t a d n a , ) P A S E W l ( n a P n o i t i s i u q c A e r a h S e e y o p m E l s r e m a r f s e W 7 1 0 2 d n a 6 1 0 2 , 5 1 0 2 e h t n i d e t i a p c i t r a p t r e k c e W s M . s e r a h s e h t o t d e l t i t n e e b t o n l l i w P M K e v i t u c e x E e h t , t e m t o n e r a s n o i t i d n o c e c n a m o r f r e p e h t f I . s d o i r e p e c n a m o r f r e p d n a s n o i t i d n o c e c n a m o r f r e p . 7 7 8 , 5 7 8 $ s a w 9 1 Y F r o f t r e k c e W s M y b d e v e c e i r y r l a a s e s a b l a t o T . 8 1 0 2 r e b m e t p e S 7 1 m o r f P M K s e o C l s a d e v e c e i r n o i t r a e n u m e r s t n e s e r p e R 3 . 0 2 0 2 r e b m e c e D n i ) s e r a h S e c n a m o r f r e P e h t r o f g n i t s e t d n a ( g n i t s e v o t j t c e b u s , P A S E W 7 1 0 2 e h t r e d n u s e r a h S e c n a m o r f r e P 2 6 9 , 6 d n a s e r a h S d e t c i r t s e R 2 6 9 , 6 d n a ; 9 1 0 2 r e b m e v o N n i g n i t s e v o t j t c e b u s , P A S E W 6 1 0 2 e h t r e d n u d e h s e l r a h S d e t c i r t s e R 5 9 8 , 0 1 8 1 0 2 r e b m e v o N n i g n i t s e v o t j t c e b u s , P A S E W 5 1 0 2 e h t r e d n u d e h s e l r a h S d e t c i r t s e R 1 1 5 , 1 1 • • • d n a ; 9 1 0 2 r e b m e v o N n i ) s e r a h S e c n a m o r f r e P e h t r o f g n i t s e t d n a ( g n i t s e v o t j t c e b u s , P A S E W 6 1 0 2 e h t r e d n u s e r a h S e c n a m o r f r e P 7 2 6 , 7 d n a s e r a h S d e t c i r t s e R 7 2 6 , 7 . 0 2 0 2 r e b m e c e D n i ) s e r a h S e c n a m o r f r e P e h t r o f g n i t s e t d n a ( g n i t s e v o t j t c e b u s , P A S E W 7 1 0 2 e h t r e d n u s e r a h S e c n a m o r f r e P 2 6 9 , 6 d n a s e r a h S d e t c i r t s e R 2 6 9 , 6 8 1 0 2 r e b m e v o N n i ) s e r a h S e c n a m o r f r e P e h t r o f g n i t s e t d n a ( g n i t s e v o t j t c e b u s , P A S E W 5 1 0 2 e h t r e d n u s e r a h S e c n a m o r f r e P 7 5 0 , 8 d n a s e r a h S d e t c i r t s e R 7 5 0 , 8 • • • : i g n w o l l o f e h t l d e h e h r e g r e m e d f o e m i t e h t t a d n a ) P A S E W l ( n a P n o i t i s i u q c A e r a h S e e y o p m E l s r e m a r f s e W 7 1 0 2 d n a 6 1 0 2 , 5 1 0 2 e h t n i d e t i a p c i t r a p s i v a D r M . 4 5 3 , 3 8 7 $ s a w 9 1 Y F r o f s i v a D r M y b d e v e c e i r y r l a a s e s a b l a t o T . 8 1 0 2 r e b m e v o N 8 2 m o r f P M K s e o C l s a d e v e c e i r n o i t r a e n u m e r s t n e s e r p e R 4 l . s n a p 7 1 0 2 d n a 6 1 0 2 e h t r e d n u s e r a h S d e t c i r t s e R d e n a i t e r e h s d n a , l l u f n i d e t s e v P A S E W 5 1 0 2 s ’ t r e k c e W s M 9 1 Y F g n i r u D . l n a p 7 1 0 2 e h t r e d n u s e r a h S d e t c i r t s e R d e n a i t e r e h s d n a , l l u f n i d e t s e v P A S E W 6 1 0 2 s ’ t r e k c e W s M 0 2 Y F g n i r u D . 9 1 0 2 y u J l 1 n o d e c n e m m o c h c h w i , P M K e v i t u c e x E n a s a w e h d o i r e p e h t r o f l d e s o c s i d s i n o i t r a e n u m e r ’ s l l e d n w S i r M 5 l . s n a p 7 1 0 2 , P A S E W 7 1 0 2 e h t r e d n u s e r a h S e c n a m o r f r e P 2 6 9 , 6 d n a s e r a h S d e t c , i r t s e R 2 6 9 6 d e h e h l r e g r e m e d f o e m i t e h t t a d n a ) P A S E W l ( n a P n o i t i s i u q c A e r a h S e e y o p m E l s r e m a r f s e W 7 1 0 2 e h t n i d e t i a p c i t r a p s l l e d n w S i r M . 0 2 0 2 r e b m e c e D n i ) s e r a h S e c n a m o r f r e P e h t r o f g n i t s e t d n a ( g n i t s e v o t j t c e b u s . 0 2 Y F r o 9 1 Y F n i l s n a p e s e h t r e d n u g n i t s e v y n a d e v e c e i r t o n s a h e h o s , r e g r e m e d t a P A S E W 6 1 0 2 r o 5 1 0 2 e h t r i l e d n u g n d o h a e v a h t o n d d s l l i e d n w S i r M r o F l . 7 e b a T m o r f l d e d u c x e n e e b s a h e h 9 1 Y F n i P M K a e b o t d e s a e c n a k r u D r M s A . ) d o i r e p r e g r e m e d - e r p e h t g n i r u d ( 8 1 0 2 r e b m e t p e S 7 1 l i t n u 8 1 0 2 y u J l 1 m o r f 9 1 Y F n i l s e o C f o r o t c e r i D a s a w n a k r u D n h o J r M 6 . t r o p e R n o i t r a e n u m e R 9 1 Y F e h t n i d e l i a t e d s a 9 3 6 , , 8 1 5 1 $ s a w 9 1 Y F r o f n o i t a s n e p m o c l a t o t s ’ n a k r u D r M , s e s o p r u p e v i t a r a p m o c 4.9 Summary of Executive KMP shareholding and Performance Rights Tables 8.1 and 8.2 show the movements of Coles Performance Rights, Restricted Shares and Performance Shares, held beneficially, by each Executive KMP during FY20. Details of ordinary shares are provided in Table 12. No shares were acquired as remuneration during the year. Table 8.1 Restricted and Performance Shares MOVEMENTS DURING THE FINANCIAL PERIOD VESTED/ ADDITIONAL INFORMATION ACCOUNTING BALANCE OF RELEASED FORFEITED CLOSING FAIR VALUE SHARES HELD AT 1 JULY 20192 DURING THE DURING THE YEAR YEAR BALANCE AT 28 JUNE 20202 OF GRANT YET TO VEST ($)1 85,057 85,057 61,272 36,453 61,580 32,402 40,251 26,327 - - (10,895)3 - (15,254)3 - - - - - - - - - - - 85,057 85,057 50,3773 36,453 46,3263 32,402 40,2513 26,327 $881,191 $696,617 $377,653 $298,550 $335,685 $265,372 $272,748 $215,621 NAME SHARE TYPE Steven Cain Restricted Shares Leah Weckert Restricted Shares Performance Shares Performance Shares Greg Davis Restricted Shares Performance Shares Matthew Swindells Restricted Shares Performance Shares 1 The fair value of Restricted Shares and Performance Shares is an estimate of the total maximum value of grants in future financial years. Restricted Shares and Performance Shares are subject to the satisfaction of conditions and therefore the minimum total value of the awards for future financial years is nil. The accounting fair value does not include those detailed in footnote 3 (shares acquired through demerger as a result of WESAP holdings). 2 The Restricted Shares and Performance Shares totals include shares allocated under the FY19 LTI award. Restricted Shares are time based only. Performance Shares vest based on the achievement of performance conditions aligned to RTSR and cumulative EBIT with a ROC gateway. Full details regarding this award are detailed in the FY19 Remuneration Report. 3 The Restricted Shares total for the Other Executive KMP includes Coles shares acquired through demerger as a result of their holding of WESAP shares, as detailed in Table 7. These shares are only subject to a holding lock while the Other Executive KMP remain employed by Coles, or until the date the WESAP award that these Coles shares were allocated as a result of, vest (whichever is the earlier). During the year Ms Weckert had 10,895 of these shares released, and Mr Davis had 15,254 released. On release, the holding lock is removed. The Other Executive KMP each continue to hold 13,924 shares linked to the 2017 WESAP award as at the end of FY20. Table 8.2 Performance Rights MOVEMENTS DURING THE FINANCIAL PERIOD ADDITIONAL INFORMATION BALANCE OF RIGHTS RIGHTS VESTED/ CLOSING ACCOUNTING FAIR RIGHTS HELD ALLOCATED AS LAPSED DURING BALANCE AT AT 1 JULY 2019 REMUNERATION THE YEAR 28 JUNE 2020 VALUE OF GRANT YET TO VEST ($)1 - - - - 275,901 106,982 98,537 90,091 - - - - 275,901 106,982 98,537 90,091 $3,469,457 $1,345,299 $1,239,105 $1,132,896 NAME Steven Cain Leah Weckert Greg Davis Matthew Swindells 1 The fair value of Performance Rights is an estimate of the total maximum value of grants in future financial years. The fair value per Performance Right at the grant date of 29 November 2019 was $10.52 for the TSR component and $14.63 for the ROC component. Performance Rights are subject to the satisfaction of conditions, and therefore the minimum total value of the awards for future financial years is nil. 91 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report SECTION 5: FY20 NON-EXECUTIVE DIRECTOR REMUNERATION 5.1 Non-executive Director remuneration framework 5.3 FY20 Non-executive Director remuneration Table 10 outlines the remuneration for the Non-executive Directors of Coles during FY20. There were no loans between Non- executive Directors and the Company or any of its subsidiaries during FY20. Non-executive Director remuneration is designed to ensure that the Company can attract and retain suitably qualified and experienced Non-executive Directors. Table 10 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. 5.2 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. There were no increases to Board and Committee fees in FY20. Table 9 sets out the Board and committee fees in Australian dollars (inclusive of superannuation) for FY20. BASE AND COMMITTEE FEES (EXCLUDING SUPERANNUATION) FINANCIAL YEAR1 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 $673,997 $416,344 $244,007 $149,111 $225,997 $140,329 $234,543 $140,329 $264,499 $157,401 $231,248 $140,329 $253,997 $157,401 $2,128,288 $1,301,244 NAME James Graham David Cheesewright2 Jacqueline Chow Abi Cleland3 Richard Freudenstein3 Wendy Stops3 Zlatko Todorcevski TOTAL 2020 TOTAL 2019 OTHER BENEFITS4 $1,273 $131 - - $1,088 $187 $91 - - - $1,191 $109 $372 $60 $4,015 $487 SUPERANNUATION TOTAL BENEFITS COMPENSATION $21,003 $15,399 $2,993 $4,328 $21,003 $13,110 $12,457 $13,110 $10,501 $13,432 $15,752 $13,110 $21,003 $13,432 $104,712 $85,921 $696,273 $431,874 $ 247,000 $153,439 $248,088 $153,626 $247,091 $153,439 $ 275,000 $170,833 $248,191 $153,548 $275,372 $170,893 $ 2,237,015 $1,387,652 Table 9 BOARD AND COMMITTEE FEES Board Audit and Risk Committee People and Culture Committee Nomination Committee 1 The Chairman of the Board does not receive Committee fees in addition to his Board fee. CHAIR $695,0001 $55,000 $55,000 No fee MEMBER $220,000 $27,000 $27,000 No fee 1 2 Details provided for FY19 cover the period from 19 November 2018 (the date from which each of the Non-executive Directors were appointed) to 30 June 2019. Due to Mr Cheesewright residing outside of Australia, superannuation obligations are only payable for any time worked in Australia. 3 Approval was obtained from the ATO by individual Non-executive Directors to be exempt from making superannuation contributions due to superannuation obligations being met by other employers. 4 Other benefits include costs associated with directorships (including any applicable fringe benefits tax). 5.4 Other transactions and balances During FY20, Mr Freudenstein sold livestock to Coles via a livestock agent for an aggregate amount of $65,832. The transaction occurred on an arm’s length basis with normal commercial terms. 92 93 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Coles Group Limited 2020 Annual Report Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia GPO Box 67 Melbourne VIC 3001 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 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au SECTION 6: ORDINARY SHAREHOLDINGS 6.1 Non-executive Director Ordinary Shareholdings Table 11 shows the shareholdings and movements in shares held directly, or indirectly, by each Non-executive Director, including their related parties during FY20. Table 11 BALANCE OF SHARES HELD SHARES SHARES CLOSING BALANCE AS AT Auditor’s Independence Declaration to the Directors of Coles Group Limited 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 28 June 2020, I declare to the best of my knowledge and belief, there have been: As lead auditor for the audit of the financial report of Coles Group Limited for the financial year ended a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in 28 June 2020, I declare to the best of my knowledge and belief, there have been: relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in AT 1 JULY 2019 ACQUIRED DISPOSED 28 JUNE 2020 relation to the audit; and NAME James Graham David Cheesewright Jacqueline Chow Abi Cleland Richard Freudenstein Wendy Stops Zlatko Todorcevski TOTAL 460,188 - 20,000 1,816 19,000 11,910 19,201 532,115 40,000 20,000 - 18,000 - 8,090 - 86,090 - - - - - - - - 500,188 20,000 20,000 19,816 19,000 20,000 19,201 618,205 6.2 Executive KMP Ordinary Shareholdings Table 12 shows the shareholdings and movements in shares held directly, or indirectly, by each Executive KMP, including their related parties during FY20. Table 12 NAME Steven Cain Leah Weckert Greg Davis Matthew Swindells TOTAL BALANCE OF SHARES HELD CLOSING BALANCE AS SHARES SHARES AT 28 JUNE AT 1 JULY 2019 ACQUIRED DISPOSED 50,000 11,511 40,0421 605 102,158 - 10,8952 15,2912 - 26,186 - - 13 - 13 2020 50,000 22,406 55,320 605 128,331 1 Mr Davis’ opening balance of Coles Ordinary Shares is 40,042. This differs to the closing balance disclosed in the FY19 Remuneration Report of 23,445, which represented Ordinary Shares held directly by Mr Davis and did not include 16,597 Ordinary Shares held by Mr Davis’ related parties. 2 Shares acquired by Ms Weckert are shares released from holding lock as referred to in Table 8.1. Shares acquired by Mr Davis include shares released from holding lock as detailed in Table 8.1. This declaration is in respect of Coles Group Limited and the entities it controlled during the financial b) no contraventions of any applicable code of professional conduct in relation to the audit. year. This declaration is in respect of Coles Group Limited and the entities it controlled during the financial year. Ernst & Young Ernst & Young Fiona Campbell Partner 18 August 2020 Fiona Campbell Partner 18 August 2020 94 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 95 Financial Report Consolidated Financial Statements Notes to the Consolidated Financial Statements Statement of Profit or Loss Basis of preparation and accounting policies Statement of Other Comprehensive Income Significant items Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Section 1: Performance 1.1 Segment reporting 1.2 Earnings per share 1.3 Sales revenue 1.4 Administration expenses 1.5 Financing costs 1.6 Income tax Section 2: Assets and liabilities 2.1 Cash and cash equivalents 2.2 Trade and other receivables 2.3 Other assets 2.4 Inventories 2.5 Property, plant and equipment 2.6 Intangible assets 2.7 Leases 2.8 Trade and other payables 2.9 Provisions Section 3: Capital 3.1 Interest-bearing liabilities 3.2 Contributed equity and reserves 3.3 Dividends paid and proposed Section 4: Financial risk 4.1 Impairment of non-financial assets 4.2 Financial risk management 4.3 Financial instruments Section 5: Group structure 5.1 Equity accounted investments 5.2 Assets held for sale 5.3 Discontinued operations 5.4 Subsidiaries 5.5 Parent entity information Section 6: Unrecognised items 6.1 Commitments 6.2 Contingent liabilities Section 7: Other disclosures 7.1 Related party disclosures 7.2 Share-based payments 7.3 Auditor’s remuneration 7.4 Acquisitions 7.5 New accounting standards and interpretations 7.6 Events after the reporting period Directors’ Declaration Independent Auditor’s Report 96 97 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Statement of Profit or Loss for the year ended 28 June 2020 Statement of Other Comprehensive Income for the year ended 28 June 2020 Continuing operations Sales revenue Other operating revenue Total operating revenue Cost of sales Gross profit Other income Administration expenses Other expenses Share of net (loss) / 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 parent: Basic and diluted EPS (cents) EPS attributable to equity holders of the parent from continuing operations: Basic and diluted EPS (cents) The accompanying notes form part of the consolidated financial statements. CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 NOTES $M $M 1.3 1.4 5.1 1.5 1.6 5.3 1.2 37,408 376 37,784 (28,043) 9,741 108 (8,081) - (6) 1,762 (443) 1,319 (341) 978 - 978 978 73.3 73.3 38,176 288 38,464 (29,253) 9,211 428 (8,031) (146) 5 1,467 (42) 1,425 (347) 1,078 357 1,435 1,435 107.6 80.8 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 loss 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 The accompanying notes form part of the consolidated financial statements. NOTES 1.6 CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M 978 (17) 5 (12) 966 966 $M 1,435 (2) 1 (1) 1,434 1,077 98 99 99 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Statement of Financial Position as at 28 June 2020 Statement of Changes in Equity for the year ended 28 June 2020 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Income tax receivable Assets held for sale Other assets Total current assets Non-current assets Property, plant and equipment Right-of-use assets Intangible assets Deferred tax assets Equity accounted investments Other assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Provisions Lease liabilities Other Total current liabilities Non-current liabilities Interest-bearing liabilities Provisions Lease liabilities Other Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity CONSOLIDATED 28 JUNE 2020 30 JUNE 2019 NOTES $M $M 2.1 2.2 2.4 5.2 2.3 2.5 2.7 2.6 1.6 5.1 2.3 2.8 2.9 2.7 3.1 2.9 2.7 3.2 992 434 2,166 42 75 70 940 360 1,965 - 94 47 3,779 3,406 4,127 7,660 1,597 849 217 120 14,570 18,349 3,737 861 885 198 5,681 1,354 472 8,198 29 10,053 15,734 2,615 1,611 43 961 2,615 4,119 - 1,541 365 212 134 6,371 9,777 3,380 743 - 168 4,291 1,460 598 - 71 2,129 6,420 3,357 1,628 42 1,687 3,357 ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT SHARE-BASED CASH FLOW CONTRIBUTED PAYMENTS HEDGE RETAINED EQUITY RESERVE RESERVE EARNINGS At 1 July 2019 Effect of adoption of AASB 16 Leases At 1 July 2019 (adjusted) Net profit for the year Other comprehensive income Total comprehensive income for the year Share-based payments expense Purchase of shares under Equity Incentive Plan Dividends paid Balance as at 28 June 2020 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 Distributions to Wesfarmers Balance as at 30 June 2019 $M 1,628 - 1,628 - - - - (17) - 1,611 2,193 - - - (538) - (27) - 1,628 $M 43 - 43 - - - 13 - - 56 39 - - - - 4 - - 43 The accompanying notes form part of the consolidated financial statements. $M (1) - (1) - (12) (12) - - - (13) - - (1) (1) - - - - (1) $M 1,687 (831) 856 978 - 978 - - (873) 961 1,018 1,435 - 1,435 - - - (766) 1,687 TOTAL $M 3,357 (831) 2,526 978 (12) 966 13 (17) (873) 2,615 3,250 1,435 (1) 1,434 (538) 4 (27) (766) 3,357 The accompanying notes form part of the consolidated financial statements. 100 101 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Statement of Cash Flows for the year ended 28 June 2020 Notes to the Consolidated Financial Statements Cash flows from operating activities Receipts from customers Receipt from Viva Energy Payments to suppliers and employees Interest paid Interest component of lease payments Interest received Income tax paid Net cash flows from operating activities Cash flows used in investing activities Purchase of property, plant and equipment and intangibles Proceeds from sale of property, plant and equipment Proceeds from sale of controlled entities Net investments in joint venture and associate Acquisition of subsidiaries or businesses, net of cash acquired Net cash flows used in investing activities Cash flows used in financing activities Proceeds from borrowings Repayment of borrowings Proceeds from borrowings with related parties Repayment of borrowings with related parties Payment of principal component of lease payments Distributions to Wesfarmers Redemption of redeemable preference shares Dividends paid Capital return Purchase of shares under Equity Incentive Plan Net cash flows used in financing activities Net increase in cash and cash equivalents Cash at the beginning of the financial period Cash at the end of the financial period The accompanying notes form part of the consolidated financial statements. CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 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 28 June 2020 (collectively, ‘the Group’) was authorised for issue in accordance with a resolution of the Directors on 18 August 2020. NOTES $M $M Reporting entity 39,971 - 41,126 137 (36,486) (38,665) 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 1.1 Segment Reporting. (37) (399) 7 (504) 2,552 (833) 211 - (11) (25) (658) 5,120 (5,226) - - (846) - - (873) - (17) (1,842) 52 940 992 (33) - 4 (294) 2,275 (1,104) 288 544 (6) (2) (280) 10,260 (8,800) 170 (3,678) - (320) 1,322 - (538) (27) (1,611) 384 556 940 2.1 5.1 2.1 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 (Cth). 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 the notes to the consolidated financial statements (‘the Notes’). The accounting policies adopted are consistent with those of the previous financial year except for the adoption of AASB 16 Leases (‘AASB 16’) from 1 July 2019 as described in Note 2.7 Leases. 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 Group has incorporated specific judgements, estimates and assumptions relating to the expected impact of the COVID-19 pandemic in determining the amounts recognised in the financial statements based on conditions existing at reporting date, recognising uncertainty still exists in relation to its timeframe, the measures to control it and its economic impact. 102 103 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Basis of preparation and accounting policies (continued) Basis of consolidation The key areas involving judgement or significant estimates and assumptions are set out below: NOTE JUDGEMENTS Note 5.1 Equity accounted investments Control and significant influence Note 2.7 Leases NOTE Note 2.4 Inventories Note 2.4 Inventories Determining the lease term ESTIMATES AND ASSUMPTIONS Net realisable value Commercial income Note 4.1 Impairment of non-financial assets Assessment of recoverable amount Note 2.9 Provisions Note 2.9 Provisions Note 2.9 Provisions Employee benefits Self-insurance Restructuring Note 7.2 Share-based payments Valuation of share-based payments Note 2.7 Leases Incremental borrowing rate 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. The Notes The Notes include information which is required to understand the consolidated financial statements and is material and relevant to the operations, 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 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 The Notes are organised into the following sections: 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. Foreign currency 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 million 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. Significant items 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 Statement of Profit or Loss. 1. PERFORMANCE: this section provides information on the performance of the Group, including segment results, earnings per share and income tax. Tax consolidation 2. ASSETS AND LIABILITIES: this section details the assets used in the Group’s operations and the liabilities incurred as a result. 3. CAPITAL: this section provides information relating to the Group’s capital structure and financing. 4. FINANCIAL 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 details the Group’s approach to managing these risks. 5. GROUP STRUCTURE: this section provides information relating to subsidiaries and other material investments of the Group. 6. 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. 7. 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. The Company and its 100% owned Australian resident subsidiaries formed an income tax consolidated group with effect from 31 December 2018. As disclosed in the Group’s FY19 Financial Report, the tax cost base of revenue and capital assets were reset in accordance with Australian taxation legislation and calculated by reference to independent market valuations. In performing these valuations, certain judgements and assumptions were made such as future earnings and discount rates which were subject to review at a future date. Independent market valuations and tax cost base resetting calculations were progressed during the current year resulting in a $31 million net credit to income tax expense (2019: $50 million). Incorporated joint venture with Australian Venue Co. As disclosed in the Group’s FY19 Financial Report, the Company entered into an incorporated joint venture AVC for the operation of Spirit Hotels (the ‘Hotel business’) and the retail liquor stores linked to Spirit Hotels venues (collectively the ‘Retail Liquor business’). As part of the transaction, a group subsidiary company, Liquorland (Qld) Pty Ltd 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 the Hotel business. The Company sold the H-shares to AVC, while retaining the R-shares. The income tax impacts arising from the sale of the H-shares were progressed in the current year resulting in a $12 million net credit to income tax expense. 104 105 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 1. Performance 1.2 Earnings per share (EPS) This section provides information on the performance of the Group, including segment results, earnings per share and income tax. 1.1 Segment reporting The Group has identified its operating segments based on internal reporting to the Managing Director and Chief Executive EPS attributable to equity holders of the Company from continuing operations Basic and diluted EPS (cents) Profit for the period from continuing operations ($M) Weighted average number of ordinary shares for basic and diluted EPS (shares, million) YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 73.3 978 1,334 80.8 1,078 1,334 Officer (the chief operating decision maker). The Managing Director and Chief Executive Officer regularly reviews the Calculation methodology 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. The Group’s reportable segments are set out below: REPORTABLE SEGMENT DESCRIPTION Supermarkets Fresh food, groceries and general merchandise retailing (includes Coles Online and Coles Liquor Express Financial Services) Liquor retailing, including online delivery services Convenience store operations and commission agent for retail fuel sales 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 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 on issue during the year. 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. 1.3 Sales revenue Sale of goods and administration functions. Financing costs and income tax are managed on a Group basis and are not allocated to The Group operates a network of supermarkets, retail liquor stores and convenience stores, as well as online platforms. operating segments. EBIT is the key measure by which management monitors the performance of the segments. 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 The Group does not have operations in other geographic areas or economic exposure to any individual customer that is upon delivery, or when collected by the customer. in excess of 10% of sales revenue. Year ended 28 June 2020 Sales revenue Segment EBIT Financing costs Profit before income tax Income tax expense Profit for the year Share of net loss of equity accounted investments included in EBIT Year ended 30 June 2019 Sales revenue Segment EBIT Significant items Financing costs Profit before income tax for continuing operations Income tax expense for continuing operations Profit for the year for continuing operations Share of net profit of equity accounted investments included in EBIT SUPERMARKETS LIQUOR EXPRESS OTHER CONSOLIDATED $M $M $M $M $M discounts and goods and services tax (GST). 1.4 Administration expenses Revenue comprises the fair value of consideration received or receivable for the sale of goods and is recorded net of 32,993 3,308 1,618 138 1,107 33 - (27) 30,993 1,191 3,205 133 3,978 46 - (27) 37,408 1,762 (443) 1,319 (341) 978 (6) 38,176 1,343 124 (42) 1,425 (347) 1,078 5 Employee benefits expense Occupancy and overheads Depreciation and amortisation Marketing expenses Impairment (reversal) / expense Other store expenses Other administration expenses Total administration expenses CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M 4,768 597 1,495 216 (41) 659 387 $M 4,533 1,635 640 213 42 651 317 8,081 8,031 106 107 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 1.4 Administration expenses (continued) Employee benefits expense includes the following: Remuneration, bonuses and on-costs Superannuation expense Share-based payments expense Total employee benefits expense Employee benefits expense CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M 4,387 355 26 4,768 $M 4,155 346 32 4,533 The components of income tax expense recognised in the consolidated Statement of Other Comprehensive Income (OCI) are set out below: Deferred tax related to items recognised in OCI during the year: Net loss on revaluation of cash flow hedges Deferred income tax charged to OCI CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M 5 5 $M 1 1 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 Group’s accounting policy for liabilities associated with employee benefits is set out in Note 2.9 Provisions. The policy relating to share-based payments is set out in Note 7.2 Share-based payments. • the expected tax payable on taxable income for the • recognised using the liability method year • based on temporary differences between the carrying Share-based payments expense includes both awards granted by the Company that will be settled in equity of the • calculated using tax rates enacted or substantively amounts of assets and liabilities for financial reporting Company and awards granted by Wesfarmers (pre demerger) to employees of the Group that will be settled in equity of enacted at the reporting date purposes and the amounts for taxation purposes 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. 1.5 Financing costs Interest expense Imputed interest on lease liabilities Discount rate adjustment Other finance related costs Total financing costs Financing costs CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M 32 399 3 9 443 $M 30 - 7 5 42 Financing costs consist of interest and other costs incurred in connection with the borrowing of funds, imputed interest on lease liabilities as well as the discount rate adjustments associated with non-current provisions (excluding employee benefits). Financing costs directly attributable to the acquisition, construction or production of an asset, that necessarily takes more than 12 months to get ready for its intended use or sale, are capitalised as part of the cost of the asset. All other financing costs are expensed in the period in which they are incurred. 1.6 Income tax The major components of income tax expense in the consolidated Statement of Profit or Loss are set out below: 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 YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M 461 (5) (79) (36) 341 $M 429 8 (86) (4) 347 • inclusive of any adjustment to income tax payable or • calculated using the tax rates that are expected to recoverable in respect of previous years 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 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 30.0% (30 June 2019: 30.0%) 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 purposes Significant item - tax consolidation Significant item - incorporated joint venture with Australian Venue Co. At the effective income tax rate of 25.9% (30 June 2019: 25.8%) Income tax expense reported in the consolidated Statement of Profit or Loss Income tax attributable to discontinued operations CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M 1,319 - 1,319 396 2 2 5 (21) (31) (12) 341 341 - 341 $M 1,425 509 1,934 580 4 (1) 15 - (50) (49) 499 347 152 499 Tax consolidation The Company and its 100% owned Australian resident subsidiaries formed an income tax consolidated group 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 tax sharing agreement which operates to manage joint and several liability for group tax liabilities amongst group members as well as enable 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 parent company in their accounts and are settled as soon as practicable after lodgement of the consolidated tax return and payment of the tax liability. 108 109 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 1.6 Income tax (continued) Tax assets and liabilities Deferred income tax balances recognised in the consolidated Statement of Financial Position CONSOLIDATED EFFECT OF CHARGED 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. OPENING ADOPTION TO PROFIT CREDITED CLOSING BALANCE OF AASB 16 OR LOSS TO OCI ACQUISITIONS BALANCE 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. $M $M 1 - - - - 9 - - $M 56 249 34 45 139 2,725 6 19 The Group has unrecognised deferred tax assets largely relating to deductible temporary differences arising from its investment in Loyalty Pacific Pty Ltd (operator of the flybuys loyalty program) and QVC. A deferred tax asset has not been recognised for this item because the Group has determined that at the reporting date, 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 $112 million (2019: $55 million). An uncertain tax treatment is any tax treatment applied by the Group where there is uncertainty over whether it will be accepted by the relevant tax authority. If it is not probable that the treatment will be accepted, the effect of the uncertainty is reflected in the period in which that determination is made (for example, by recognising an additional tax liability). The Group measures the impact of the uncertainty using the method that best predicts the resolution of the 10 3,273 uncertainty: either the most likely amount method or the expected value method. The judgements and estimates made to recognise and measure the effect of uncertain tax treatments are reassessed whenever circumstances change or when there is new information that affects those judgements. The Group determined, based on its tax compliance, that it is probable that its tax treatments applied at 28 June 2020 will be accepted by the taxation authorities. Goods and services tax (GST) 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. 28 June 2020 Provisions Employee benefits Trade and other payables Inventories Property, plant and equipment Lease Liabilities Cash flow hedges Other individually insignificant balances Deferred tax assets Accelerated depreciation for tax purposes Intangible assets Right-of-use assets Other individually insignificant balances Deferred tax liabilities Net deferred tax assets 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 $M 92 215 15 41 127 - 1 22 513 88 7 - 53 148 365 $M (34) - - - - 2,681 - (18) 2,629 - - 2,280 (7) 2,273 356 $M (3) 34 19 4 12 35 - 15 116 8 (24) 8 2 (6) 122 - - - - - - 5 - 5 - - - - - 5 - - 9 - 9 1 96 (17) 2,297 48 2,424 849 CONSOLIDATED OPENING BALANCE CHARGED TO PROFIT OR LOSS CREDITED ACQUISITIONS/ TO OCI (DISPOSALS) CLOSING BALANCE $M 80 277 12 65 241 - 49 724 59 70 55 184 540 $M 48 7 (3) (2) (2) - 2 50 30 (57) (3) (30) 80 $M - - - - - 1 - 1 - - - - 1 $M (36) (69) 6 (22) (112) - (29) (262) (1) (6) 1 (6) (256) $M 92 215 15 41 127 1 22 513 88 7 53 148 365 110 111 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 2. Assets and liabilities This section details the assets used in the Group’s operations and the liabilities incurred as a result. 2.2 Trade and other receivables Trade and other receivables are comprised of the following: 2.1 Cash and cash equivalents Cash and cash equivalents are comprised of the following: Cash on hand and in transit Cash at bank and on deposit Total cash and cash equivalents CONSOLIDATED 28 JUNE 2020 30 JUNE 2019 $M 540 452 992 $M 530 410 940 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 to net cash flows from operating activities Profit for the period Adjustments for: Depreciation and amortisation (Impairment reversals) / impairment and write-off of non-current assets Net gain on sale of controlled entities Net loss on disposal of non-current assets Share of loss / (profit) of equity accounted investments Share-based payments expense Other Changes in assets and liabilities net of the effects of acquisitions and disposals of businesses and impacts of AASB 16: (Increase) / decrease in inventories Increase in trade and other receivables Increase in prepayments Increase in other assets Increase in deferred tax assets (Increase) / decrease in income tax receivable Increase / (decrease) in trade and other payables Increase in provisions Increase / (decrease) in other liabilities Net cash flows from operating activities CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M 978 1,495 (41) - 39 6 13 - (201) (78) (20) (4) (121) (42) 339 138 51 $M 1,078 640 42 (133) 5 (5) 4 (4) 137 (45) (1) (11) (91) 143 (9) 586 (61) 2,552 2,275 Trade receivables1 Other receivables Allowance for expected credit losses Total trade and other receivables CONSOLIDATED 28 JUNE 2020 30 JUNE 2019 $M 314 130 444 (10) 434 $M 226 142 368 (8) 360 1 Includes commercial income due from suppliers of $140 million (2019: $102 million). Trade receivables and other receivables are classified as financial assets held at amortised cost. Trade receivables Trade receivables are initially recognised at the amount due 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’. 2.3 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 28 JUNE 2020 30 JUNE 2019 $M 69 1 70 21 99 120 $M 46 1 47 24 110 134 112 113 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 2.4 Inventories Inventories comprise goods held for resale and 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 the legal right and the intention to offset, in which case only the net amount receivable or payable is presented. Refer to Note 4.3 Financial instruments for details of amounts offset in the consolidated Statement of Financial Position. M $ D N A L 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. M $ L A T O T 0 6 3 , 8 ) 3 3 2 , 4 ( 7 2 1 , 4 ) 6 4 ( 8 7 7 ) 3 4 5 ( 3 4 ) 4 2 2 ( 9 1 1 , 4 5 4 6 7 2 1 , 4 5 4 9 , 7 ) 6 2 8 , 3 ( 9 1 1 , 4 3 2 2 , 5 6 7 0 , 1 4 1 ) 4 9 ( ) 2 4 ( ) 7 0 6 ( ) 1 5 4 , 1 ( 4 9 4 9 1 1 , 4 M $ M $ M $ D L O H E S A E L & T N A L P S T N E M E V O R P M I T N E M P U Q E I I S G N D L U B I ) 0 8 5 ( 4 7 4 4 5 0 , 1 - 6 9 9 4 4 ) 1 7 ( - - 4 7 4 0 8 8 6 9 ) 9 1 5 ( 9 4 4 4 8 8 9 5 4 ) 1 ( ) 8 6 ( - ) 3 3 ( 7 5 9 4 4 3 5 6 , 6 ) 4 4 6 , 3 ( 9 0 0 , 3 5 1 6 7 4 9 , 2 ) 6 ( ) 9 6 4 ( ) 1 ( ) 7 7 ( 3 8 4 9 0 0 , 3 5 4 2 , 6 ) 8 9 2 , 3 ( 7 4 9 , 2 0 1 4 6 8 ) 4 ( ) 4 1 ( ) 3 3 5 ( 1 0 8 , 3 ) 7 7 1 , 1 ( 5 4 3 7 4 9 , 2 ) 9 ( 0 4 2 1 3 2 7 5 1 5 2 ) 3 1 ( ) 3 ( - ) 1 6 ( 2 8 1 3 2 ) 9 ( 0 6 2 1 5 2 - 4 6 5 3 3 ) 6 ( - ) 0 1 ( ) 2 3 1 ( 2 9 1 5 2 - 3 1 4 3 1 4 0 1 2 7 4 ) 7 2 ( - 4 4 ) 6 8 ( 3 1 4 - - 2 7 4 2 7 4 8 2 6 - 0 6 - ) 9 6 ( ) 8 3 ( ) 9 0 1 ( - 2 7 4 e s a e l f o m e T r s r a e y 0 2 – 3 s r a e y 0 4 – 0 2 l e b a c i l p p a t o N 2.5 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. t n e m r i i a p m d n a n o i t 114 ) e g n a r ( e f i l l u f e s U 0 2 0 2 e n u J 8 2 t A t s o C i r a c e p e d d e t a u m u c c A l t n u o m a g n y r r i a c t e N r a e y l i a c n a n i f e h t f i o g n n n g e b i t a t n u o m a g n y r r i a C s n o i t i d d A r a e y l i a c n a n i f e h t f i o g n n n g e b i t a t n u o m a g n y r r i a C s n o i t i d d A r a e y l i a c n a n i f e h t f o d n e t a t n u o m a g n y r r i a C 1 s f f o - e t i r w d n a s l a s o p s i D t n e m r i a p m I l e a s r o f l d e h s t e s s a o t r e f s n a r T l s e s s a c n e e w t e b s r e f s n a r T n o i t i a c e p e D r e v o b a d e d u c n l i r s s e g o p n r i k r o w n o i t c u r t s n o C t n u o m a g n y r r i a c t e N t n e m r i i a p m d n a n o i t i r a c e p e d d e t a u m u c c A l r a e y l i a c n a n i f e h t f o d n e t a t n u o m a g n y r r i a C 1 s f f o - e t i r w d n a s l a s o p s i D l a s r e v e r t n e m r i a p m I l e a s r o f l d e h s t e s s a o t r e f s n a r T n o i t i a c e p e D r e v o b a d e d u c n l i r s s e g o p n r i k r o w n o i t c u r t s n o C 9 1 0 2 e n u J 0 3 t A t s o C 115 ) s s o l t e n n o i l l i m 5 $ : 9 1 0 2 ( n o i l l i m 9 3 $ s a w r a e y e h t g n i r u d i t n e m p u q e d n a t n a p l , y t r e p o p r f o l a s o p s i d n o s s o l t e N 1 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 2.6 Intangible assets The Group’s intangible assets comprise licences, software and goodwill. Licences and software 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. 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. Goodwill 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. Refer to Note 4.1 Impairment of non-financial assets for further details on impairment testing. M $ L A T O T ) 9 1 9 ( 6 1 5 , 2 7 9 5 , 1 ) 2 ( ) 1 9 ( 9 4 1 1 4 5 , 1 6 8 1 7 9 5 , 1 ) 0 3 8 ( 1 7 3 , 2 1 4 5 , 1 8 8 ) 4 1 ( ) 5 7 3 ( ) 4 2 1 ( 6 6 9 , 1 2 8 1 4 5 , 1 3 - 3 - 3 - - 3 - - - - - - - - - - - ) 1 ( 8 2 7 2 1 - - 6 2 - 7 2 ) 1 ( 7 2 6 2 - - 6 5 1 ) 0 3 1 ( - - 6 2 ) 8 1 9 ( 4 1 4 2 3 3 , 1 2 6 3 5 4 1 ) 2 ( ) 1 9 ( 4 1 4 6 8 1 ) 9 2 8 ( 1 9 1 , 1 2 6 3 7 1 5 7 8 ) 4 1 ( ) 4 0 1 ( ) 4 2 1 ( 2 8 2 6 3 - - - - - - - - - - - - - - 0 0 1 ) 0 0 1 ( - - - - 3 5 1 , 1 3 5 1 , 1 3 5 1 , 1 - - - - 3 5 1 , 1 - 3 5 1 , 1 3 5 1 , 1 3 9 1 , 1 1 - - ) 1 4 ( - 3 5 1 , 1 M $ R E H T O s r a e y 2 S E C N E C L I E R A W T F O S S D N A R B L L I W D O O G M $ e t i n fi e d n I M $ s r a e y 5 M $ M $ e t i n fi e d n I l e b a c i l p p a t o N t n e m r i a p m i d n a n o i t a s i t r o m a d e t l a u m u c c A t n u o m a g n y r r i a c t e N ) e g n a r ( e f i l l u f e s U 0 2 0 2 e n u J 8 2 t A t s o C 116 r a e y l i a c n a n i f e h t f i o g n n n g e b i t a t n u o m a g n y r r i a C n o i t a s i t r o m A t n e m r i a p m I s n o i t i d d A r a e y l i a c n a n i f e h t f i o g n n n g e b i t a t n u o m a g n y r r i a C s n o i t i d d A r a e y l i a c n a n i f e h t f o d n e t a t n u o m a g n y r r i a C l s e s s a c n e e w t e b s r e f s n a r T s f f o - e t i r w d n a s l a s o p s i D n o i t a s i t r o m A e v o b a d e d u c n l i r s s e g o p n r i k r o w t n e m p o e v e D l e v o b a d e d u c n l i r s s e g o p n r i k r o w t n e m p o e v e D l 9 1 0 2 e n u J 0 3 t A t s o C r a e y l i a c n a n i f e h t f o d n e t a t n u o m a g n y r r i a C t n e m r i a p m i d n a n o i t a s i t r o m a d e t l a u m u c c A t n u o m a g n y r r i a c t e N 117 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 2.7 Leases Extension options The Group has lease agreements for properties and various items of machinery, vehicles and other equipment used in its operations. Set out below are the carrying amounts of recognised right-of-use assets and movements during the period: As at 1 July 2019 Additions1 Depreciation expense At 28 June 2020 CONSOLIDATED NON- PROPERTY PROPERTY LEASES LEASES $M 7,339 1,024 (822) 7,541 $M 142 16 (39) 119 TOTAL $M 7,481 1,040 (861) 7,660 1 Includes reasonably certain options, remeasurements and new leases, net of leases terminated. Set out below are the carrying amounts of recognised lease liabilities and movements during the period: As at 1 July 2019 Additions1 Accretion of interest Payments At 28 June 2020 Current Non-current 1 Includes reasonably certain options, remeasurements and new leases, net of leases terminated. The maturity analysis of lease liabilities is disclosed in Note 4.2 Financial risk management. Variable lease payments based on sales CONSOLIDATED $M 8,856 1,073 399 (1,245) 9,083 885 8,198 Extension options are included in the majority of property leases across the Group. Where practicable, the Group seeks to include extension options when negotiating leases to provide flexibility and align with business needs. Leases may contain multiple extension options and are exercisable only by the Group and not by the lessors. Extension options are only reflected in the lease liability when it is reasonably certain they will be exercised. When assessing if an option is reasonably certain to be exercised, a number of factors are considered including the option expiry date, whether formal approval to extend the lease has been obtained, store trading performance and the strategic importance of the site. Where a lease contains multiple extension options, only the next option is considered in the assessment. Option periods range from one to 15 years. Details of the Group’s extension options as at 28 June 2020 are set out below: Leases with extension options Leases without extension options Total leases Of the leases with extension options: Leases with an extension option included in the lease liability Leases with an extension option not included in the lease liability Total leases with extension options 1 50% of these leases contain one or more future extension options not included in the lease liability. The following amounts have been recognised in the Statement of Profit or Loss: Depreciation of right-of-use assets Interest expense on lease liabilities Expenses relating to short-term leases (included in administration expenses) Variable lease payments (included in administration expenses) Total amount recognised in the Statement of Profit or Loss 73% 27% 100% 32%1 68% 100% CONSOLIDATED 28 JUNE 2020 $M 861 399 7 48 1,315 Some of the Group’s retail property lease agreements contain variable payment terms that are linked to sales. These lease The Group recognised a total gain of $14 million relating to six sale and leaseback transactions during the year. payments are based on a percentage of sales recorded by a particular store. The specific percentage rent adjustment mechanism varies by individual lease agreement. Variable payment terms are used for a variety of reasons, including minimising the fixed costs base for newly established stores. Variable lease payments are recognised in profit or loss in the period in which the condition that triggers those payments occurs and are generally payable for future periods in the lease term. The following provides information on the Group’s variable lease payments, including the magnitude in relation to fixed payments: The Group had total cash outflows for leases of $1,245 million during the year. The future cash outflows relating to leases that have not yet commenced are disclosed in Note 6.1 Commitments. Policy applicable from 1 July 2019 The Group assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. CONSOLIDATED Group as lessee 28 June 2020 Leases with lease payments based on sales FIXED VARIABLE TOTAL PAYMENTS PAYMENTS PAYMENTS $M 511 $M 39 $M 550 The Group applies a single recognition and measurement approach for all leases, except for short-term leases (leases with a term of 12 months or less) and leases of low-value assets. The Group recognises lease liabilities to make future lease payments and right-of-use assets representing the right to use the underlying assets. A right-of-use asset and a corresponding lease liability are recognised at the date at which the leased asset is available for use by the Group. Each lease payment is apportioned between the liability and financing costs. Financing costs are recognised in the Statement of Profit or Loss over the lease term so as to produce a constant periodic rate of interest on the remaining liability. The right-of-use asset is depreciated on a straight-line basis over the shorter of the asset’s useful life and the lease term (which includes options that are considered ‘reasonably certain’). Payments associated with short-term leases and leases of low-value assets are recognised on a straight-line basis in the Statement of Profit or Loss. Cash payments for the principal portion of the lease liability are presented within financing activities in the Statement of Cash Flows, while payments relating to short-term leases, low-value assets and variable lease components not included in the measurement of the lease liability are presented within cash flows from operating activities. 118 119 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 2.7 Leases (continued) Group as lessor Lease liabilities are initially measured at net present value and comprise the following: • fixed payments (including in-substance fixed payments), less any lease incentives • variable lease payments based on an index or rate, using the index or rate at the commencement date • the exercise price of a purchase option if the lessee is reasonably certain to exercise that option • payment of termination penalties if the lessee is reasonably certain to terminate the lease and incur penalties. If the interest rate implicit in the lease cannot be readily determined, the lease payments are discounted using the lessee’s incremental borrowing rate at the lease commencement date. Right-of-use assets are measured at cost and comprise the following: • the initial measurement of the lease liability • any lease payments made at or before the commencement date, less any lease incentives received • any initial direct costs • any restoration costs. Right-of-use assets are also subject to impairment testing. Refer to the accounting policies in Note 4.1 Impairment of non- financial assets. Key estimate: Incremental borrowing rate If the Group cannot readily determine the interest rate implicit in the lease, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Group would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The IBR requires estimation when no observable rates are available or when adjustments need to be made to reflect the terms and conditions of the lease. The Group estimates the IBR using observable market inputs when available and is required to make certain estimates specific to the Group (such as credit risk). Key judgement: Determining the lease term Extension options are included in the majority of property leases across the Group. In determining the lease term, all facts and circumstances that create an economic incentive to exercise an extension option are considered. Extension options are only included in the lease term if the lease is reasonably certain to be exercised. The assessment is reviewed if a significant event or change in circumstance occurs which affects this assessment and is within the control of the lessee. Changes in the assessment of the lease term are accounted for as a reassessment of the lease liability at the date of the change. The Group leases out some of its freehold properties and sub-leases some of its right-of-use assets. The Group has classified these leases as operating leases because they do not transfer all of the risks and rewards incidental to ownership of the assets. The undiscounted lease payments to be received are set out below: Within one year Between one and two years Between two and three years Between three and four years Between four and five years More than five years Total CONSOLIDATED 28 JUNE 2020 30 JUNE 2019 $M 20 16 15 10 5 8 74 $M 15 13 11 10 5 1 55 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. Variable lease income not dependent on an index or rate is recognised as revenue in the period in which it is earned. The Group recognised income of $17 million for the year with respect to subleasing of its right-of-use assets. 2.8 Trade and other payables Trade and other payables are comprised of the following: Trade payables Other payables Total trade and other payables CONSOLIDATED 28 JUNE 2020 30 JUNE 2019 $M 2,898 839 3,737 $M 2,662 718 3,380 Trade payables are non-interest-bearing and are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method. 2.9 Provisions Current Employee benefits Restructuring provision Lease provision Self-insurance liabilities Other Total current provisions Non-current Employee benefits Restructuring provision Lease provision Self-insurance liabilities Total non-current provisions CONSOLIDATED 28 JUNE 2020 30 JUNE 2019 $M 746 6 - 100 9 861 89 127 - 256 472 $M 601 18 7 108 9 743 87 150 105 256 598 120 121 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 2.9 Provisions (continued) Movements in restructuring, leases, self-insurance and other provisions At 30 June 2019 Effect of adoption of AASB 16 Leases At 1 July 2019 Arising during the year Utilised Unused amounts reversed Unwind / changes in discount rate At 28 June 2020 Current Non-current RESTRUCTURING LEASE INSURANCE SELF- $M 168 (34) 134 19 (22) - 2 133 6 127 $M 112 (112) - - - - - - - - $M 365 - 365 117 (112) (24) 10 356 100 256 OTHER $M 9 - 9 6 (6) - - 9 9 - TOTAL $M 654 (146) 508 142 (140) (24) 12 498 115 383 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. PROVISION Employee benefits KEY ESTIMATES Employee benefits provisions are based on a number of estimates including, but not Provisions for employee entitlements to annual leave, long service leave and employee incentives (where the Group do not have an limited to: unconditional right to defer payment for at least twelve months after • expected future wages and salaries the reporting date) are recognised within the current provision for employee benefits, and 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 where the Group have an unconditional right to defer payment for at least twelve months after the reporting date are recognised within the non-current provision for employee • attrition (applicable to long service leave provisions only) • discount rates • expected salary related payments, interest and on-costs following a review of the pay arrangements for award- covered salaried team members benefits. Restructuring Restructuring provisions are recognised when restructuring has either commenced or has raised a valid expectation in those affected, 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 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 The Group is self-insured for workers compensation and general liability risks. The Group seeks external actuarial advice in determining self- limited to: insurance provisions. Provisions are discounted and are based on • discount rates claims reported and an estimate of claims incurred but not reported. • future inflation These estimates are reviewed bi-annually, and any reassessment of • average claim size these estimates will impact self-insurance expense. • claims development • risk margin 122 123 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 3. Capital Share-based payments reserve This section provides information relating to the Group’s capital structure and financing. 3.3 Dividends paid and proposed The Group’s capital management strategy aims to ensure the Group has continued access to funding for current and 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. future business activities by maintaining a mix of equity and debt financing, while maximising returns to shareholders. Dividends are recognised as a liability in the Statement of Financial Position in the period in which they are determined by The share-based payments reserve reflects the fair value of awards recognised as an expense in the Statement of Profit or Loss. 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: • repaying or raising debt in line with ongoing business requirements and growth opportunities aligned with the Group’s strategic objectives • amount of ordinary dividends paid to shareholders • raising and returning capital. 3.1 Interest-bearing liabilities Non-current Bank debt Capital market debt Total non-current interest-bearing liabilities CONSOLIDATED 28 JUNE 2020 30 JUNE 2019 $M $M 758 596 1,354 1,460 - 1,460 On 6 November 2019, Coles issued $600 million unsecured fixed rate Australian dollar medium term notes (Notes), comprising the Board. Determined and paid during the period Paid final dividend (30% franked) Paid special dividend (30% franked) Paid interim dividend (30% franked) Proposed and unrecognised at reporting date1 Final dividend proposed and unrecognised at reporting date (30% franked) Special dividend proposed unrecognised at reporting date (30% franked) CENTS PER SHARE TOTAL $M 28 JUNE 30 JUNE 28 JUNE 30 JUNE 2020 2019 2020 2019 24.0 11.5 30.0 65.5 27.5 - 27.5 nil nil nil - 24.0 11.5 35.5 320 154 399 873 367 - 367 nil nil nil - 320 154 474 1 Estimated final dividend payable, subject to variations in the number of shares up to the record date. During the year, the Company established a Dividend Reinvestment Plan (DRP) under which eligible holders of ordinary shares are able to reinvest all or part of their dividend payments into additional fully paid Coles Group Limited shares. $300 million of seven-year Notes and $300 million of 10-year Notes. The seven-year Notes were priced with a coupon of Franking account 2.20% and the 10-year Notes were priced with a coupon of 2.65%. Total franking credits available for subsequent financial years based on a tax rate of 30% (2019: 30%) YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M 408 $M 277 In addition to the capital market debt, the Group is funded through a number of revolving multi-option and term loan facilities. These bilateral bank loan facilities in aggregate total $3,300 million (‘Coles facilities’). The Coles facilities have the following maturities: $750 million in November 2021, $1,290 million in November 2022, $1,110 million in November 2023 and $150 million in November 2025. At 28 June 2020, $610 million of the facilities maturing in November 2023 were drawn and the November 2025 facility was 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. 3.2 Contributed equity and reserves At 30 June 2019 Acquisition of shares on-market under Equity Incentive Plan At 28 June 2020 Ordinary shares ORDINARY SHARES No. (millions) 1,334 - 1,334 $M 1,628 (17) 1,611 Ordinary shares on issue 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. 124 125 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 4. Financial 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 details the Group’s approach to managing these risks. 4.1 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: • 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). A discounted cash flow model is used to determine the recoverable amount under both FVLCOD and VIU. FVLCOD is based on a market participant approach and is estimated using assumptions that a market participant would use when pricing the asset or CGU. VIU is determined by discounting the future cash flows expected to be generated from the continuing use of an asset or CGU. Key estimate: Assessment of recoverable amount FVLCOD valuations are considered Level 3 in the fair value hierarchy due to the use of unobservable inputs in the calculation. The assumptions represent management’s assessment of future trends in the industry and have been based on historical data from both external and internal sources. VIU calculation represent management’s best estimate of the economic conditions that will exist over the remaining useful life of the asset or CGU in its current condition. Both FVLCOD and VIU calculations use judgements and estimates. In particular, significant judgements and estimates are made in relation to the following: Forecast future cash flows Forecast future cash flows 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. Internal forecasts have considered the potential future impacts of the COVID-19 pandemic on income and expenses. 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. In addition, consideration has been given to the potential financial impacts of climate change related risks on the carrying value of goodwill through a qualitative review of the Group’s climate change risk assessment. This review did not identify any material financial reporting impacts. When calculating the FVLCOD of an asset or CGU, future forecast cash flows also incorporates reasonably available market participant assumptions such as enhancement capital expenditure. 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 asset or 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. For the year ended 28 June 2020, a net impairment reversal for non-financial assets of $41 million was recognised, of which $44 million ($52 million reversal offset by $8 million impairment expense) relates to the Group’s property portfolio. The impairment reversal arose from the disposal of a number of the Group’s properties during the year to the extent that an impairment loss had previously been recognised with respect to the properties disposed. 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 2019, net impairment of non-financial assets of $42 million was recognised for the Group, of which $38 million ($88 million offset by $50 million reversal) relates to the Group’s property portfolio. This has been included in ‘administration expenses’ in the Statement of Profit or Loss and within ‘other’ for segment reporting purposes. Recognised impairment An impairment loss is recognised in the Statement of Profit or Loss if the carrying amount of an asset or a CGU exceeds its recoverable amount. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amount of other assets in the CGU. 126 127 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 4.1 Impairment of non-financial assets (continued) Reversal of impairment In the normal course of business, the Group is exposed to various risks as set out below: RISK EXPOSURE MANAGEMENT Where there is an indication that previously recognised impairment losses may no longer exist or may have decreased, the asset is re-tested for impairment. The impairment loss is reversed only to the extent that the carrying amount of the asset does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, had no impairment loss been recognised. Impairments recognised for goodwill are not reversed. Goodwill impairment testing For the purpose of impairment testing, goodwill is allocated to CGUs or groups of CGUs according to the level at which management monitors goodwill. The FVLCOD valuation methodology was applied to determine the recoverable amount of CGUs. The following table presents a summary of the goodwill allocation and the key assumptions used in determining the recoverable amount of each CGU: Goodwill allocation ($M) Indefinite life intangible assets ($M) Post-tax discount rate (%) Growth rate (%) 28 JUNE 2020 SUPERMARKETS LIQUOR EXPRESS 983 - 8.1 3.0 125 27 8.1 3.0 45 - 8.4 2.0 For the year ended 30 June 2019, goodwill and indefinite life intangibles were allocated to CGUs on a consistent basis. A post-tax discount rate of 8.3% and a growth rate of 3.0% for Supermarkets and Liquor were applied, along with a post-tax discount rate of 8.6% and a growth rate of 2.0% for Express. The growth rates applied for FY20 are consistent with those applied in FY19 and in line with long-term average industry growth rates for each CGU. Sensitivity analysis is performed to determine the point at which the recoverable amount is equal to the carrying amount for each CGU. For the Group’s CGUs, based on current economic conditions and CGU performance, no reasonably possible change in a key assumption used in the determination of the recoverable value is expected to result in a material impairment. 4.2 Financial risk management 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. 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 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. The Policy allows the use of various derivatives to hedge financial risks and provides guidance in relation to volume and tenor of these instruments. Market risks Interest rate risk The Group’s exposure to The Group manages interest rate risk by having access interest rate risk relates to both fixed and variable debt facilities. In line with the primarily to interest-bearing Policy, this risk is further managed by hedging a portion of liabilities where interest is the variable rate debt exposures with derivative financial charged at variable rates. instruments to convert floating rate debt obligations to fixed rate obligations. Foreign exchange risk The Group has exposure To manage foreign currency transaction risk, the to foreign exchange risk Group hedges material foreign currency denominated principally arising from purchases of inventory expenditure at the time of the commitment and hedges a proportion of foreign currency denominated forecast and capital equipment exposures (mainly relating to the purchase of inventory) denominated in foreign through the use of forward foreign exchange contracts. currencies. Liquidity risk The Group is exposed to Liquidity risk is measured under both normal market liquidity and funding risk operating conditions and under a crisis situation which from operations and external curtails cash flows for an extended period. This approach borrowings. is designed to ensure that the Group’s funding framework Liquidity risk is the risk that unforeseen events cause is sufficiently flexible to ensure liquidity under a wide range of market conditions. pressure on, or curtail, the The Group regularly reviews its short, medium and long-term Group’s cash flows. funding requirements. The Policy requires that sufficient Funding risk is the risk that sufficient funds will not be available to meet the Group’s financial commitments in a timely manner. 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. Credit risk The Group is exposed to credit The majority of the Group’s sales are on a cash basis, and risk from its financing activities, the Group’s exposure to credit risk from customer sales is including deposits with therefore minimal. financial institutions and other financial instruments. The Group’s trade and other receivables relate largely to commercial income due from suppliers and other With respect to credit risk receivables from creditworthy third parties. arising from cash and cash equivalents, trade and other receivables and certain derivative instruments, the Group’s exposure arises from default of the counterparty. 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 Credit risk for the Group ratings (where available) or historical information about also arises from various counterparty default. financial guarantees in which members of the Group act as guarantor. 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 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 6.2 Contingent liabilities for further details. 128 129 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 4.2 Financial risk management (continued) Foreign exchange risk The Group is primarily exposed to foreign exchange risk in relation to the United States dollar (USD), the Euro (EUR) and the British Pound (GBP). The Group considers its exposure to USD, EUR and GBP 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: WEIGHTED AVERAGE NOTIONAL VALUE CARRYING VALUE HEDGE RATE 28 JUNE 2020 30 JUNE 2019 28 JUNE 2020 30 JUNE 2019 28 JUNE 2020 30 JUNE 2019 $M 72 411 46 $M 63 420 11 $M - (20) (1) $M 1 (13) - 0.69 0.58 0.54 0.71 0.58 0.55 BUY / SELL USD / AUD EUR / AUD GBP / AUD At the reporting date, the Group has the following exposures to USD, EUR and GBP: USD $M EUR €M GBP £M 28 JUNE 2020 30 JUNE 2019 28 JUNE 2020 30 JUNE 2019 28 JUNE 2020 30 JUNE 2019 Financial assets Cash and cash equivalents Forward exchange contracts Financial liabilities Trade and other payables Net exposure 4 49 (63) (10) 2 45 (39) 8 - 2371 (21) 216 - 2421 (16) 226 - 25 (5) 20 - 6 (2) 4 1 EUR forward exchange contracts of $191 million (2019: $213 million) relate to capital commitments. The remaining contracts hedge current and future trade payables denominated in EUR. Foreign exchange rate sensitivity At the reporting date, had the Australian dollar moved against the USD, EUR and GBP (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: RATE CHANGE AUD / USD AUD / EUR AUD / GBP +10% -10% +10% -10% +10% -10% POST-TAX PROFIT INCREASE POST-TAX OCI INCREASE (DECREASE): (DECREASE): 28 JUNE 2020 30 JUNE 2019 28 JUNE 2020 30 JUNE 2019 $M 2 (2) - - - - $M - - (1) 1 - - $M (1) 1 (22) 27 (2) 3 $M (1) 1 (23) 28 - - Interest rate risk 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: 28 JUNE 2020 30 JUNE 2019 WEIGHTED AVERAGE WEIGHTED AVERAGE EXPOSURE INTEREST RATE EXPOSURE INTEREST RATE $M 452 (760) 250 (58) % 0.6 (1.3) (1.6) $M 410 (1,460) 400 (650) % 1.6 (2.4) (0.4) 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 A 100 basis point increase 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 increased by 100 basis points, with all other variables held constant, the impact would be: POST-TAX PROFIT INCREASE POST-TAX OCI INCREASE (DECREASE): (DECREASE): 28 JUNE 2020 30 JUNE 2019 28 JUNE 2020 30 JUNE 2019 $M - $M (5) $M 6 $M 8 Impacts of reasonably possible movements: +1.0% (100 basis points) Liquidity risk 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: Financing facilities available: Bank overdrafts Revolving multi-option facilities Term loan facilities Financing facilities utilised: Revolving multi-option facilities Guarantees issued1 Term loan facilities Financing not utilised: Bank overdrafts Revolving multi-option facilities1 CONSOLIDATED 28 JUNE 2020 30 JUNE 2019 $M $M 13 2,640 660 3,313 100 358 660 1,118 13 2,182 2,195 13 2,640 1,360 4,013 100 342 1,360 1,802 13 2,198 2,211 1 As at 28 June 2020, bank guarantees totalling $358 million (2019: $342 million) have been issued on behalf of the Company 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 6.2 Contingent liabilities for further details. The Group holds $992 million cash and cash equivalents at the reporting date (30 June 2019: $940 million). 130 131 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 4.2 Financial risk management (continued) Assets pledged as security 4.3 Financial instruments Financial assets and liabilities measured at fair value A controlled entity has issued a floating charge over assets, capped at $80 million (30 June 2019: $80 million), as security for The following table sets out the fair value measurement hierarchy of the Group’s derivative financial instruments: payment obligations for fuel sales collected on behalf of Viva in accordance with the New Alliance Agreement. The assets are, therefore, excluded from financial covenants in all debt documentation. Maturity analysis 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 maturities of the Group’s financial liabilities and their carrying amounts are as follows: CONSOLIDATED TOTAL CONTRACTUAL CARRYING < 12 MONTHS 1-2 YEARS 2-5 YEARS > 5 YEARS CASH FLOWS AMOUNT $M $M 28 June 2020 Trade and other payables Bank debt (principal and interest) Capital market debt (principal and interest) Lease liabilities Interest rate swaps Forward exchange contracts $M $M 3,737 21 15 - 19 15 1,250 1,219 4 6 2 8 $M - 633 44 3,325 7 7 $M - 151 646 5,592 - - 720 11,386 13 21 598 9,083 11 21 Total 5,033 1,263 4,016 6,389 16,701 14,210 30 June 2019 Trade and other payables Bank debt (principal and interest) Interest rate swaps Forward exchange contracts Total 3,378 44 1 1 3,424 - 44 1 3 48 - 1,400 3 9 1,412 - 156 1 - 157 3,378 3,378 1,644 1,462 6 13 7 12 5,041 4,859 For variable rate instruments, the amount disclosed is determined by reference to the interest rate at the last re-pricing 3,737 3,737 the asset or liability, assuming that market participants act in their economic interest. The Group uses valuation techniques The fair value of an asset or liability is measured using the assumptions that market participants would use when pricing that are appropriate in the circumstances and for which sufficient data is available to measure fair value, maximising the 824 760 use of relevant observable inputs and minimising the use of unobservable inputs. Cash flow hedges Forward exchange contracts Interest rates swaps Power Purchase Agreement LEVEL 2 FAIR VALUE HIERARCHY 28 JUNE 2020 30 JUNE 2019 ASSET $M 1 - - LIABILITY $M (22) (11) (3) ASSET $M 1 - - LIABILITY $M (14) (6) - 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. 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 LEVEL 2 LEVEL 3 Fair value is calculated using quoted prices in active markets for identical assets or liabilities 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) Fair value is estimated using inputs for the asset or liability that are not based on observable market data (unobservable inputs) All of the Group’s financial instruments carried at fair value were valued using market observable inputs (Level 2). For financial instruments that are carried at fair value on a recurring basis, the Group determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. date. Contractual cash flows are undiscounted and as such will not necessarily agree with their carrying amounts. There were no transfers between Level 1 and Level 2 during the period. The Group does not hold any material Level 3 Changes in liabilities arising from financing activities Bank debt Capital market debt Lease liabilities Derivatives Total liabilities from financial activities 1 JULY 2019 CASH FLOWS FAIR VALUE RECOGNISED 28 JUNE 2020 CHANGES IN LEASES NOTE 3.1 3.1 2.7 4.3 $M 1,460 - 8,856 19 10,335 $M (702) 596 (846) - (952) $M - - - 13 13 $M - - 1,073 - 1,073 $M 758 596 9,083 32 10,469 financial instruments. 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. Carrying amounts versus fair values The carrying amounts and fair values of the Group’s financial assets and financial liabilities recognised in the financial statements are materially the same. 132 133 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 4.3 Financial instruments (continued) Offsetting of financial instruments 5. Group structure The Group presents its derivative assets and liabilities on a gross basis, with the exception of derivative financial instruments which it intends to settle on a net basis and 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. This section provides information relating to subsidiaries and other material investments of the Group. 5.1 Equity accounted investments NAME OF COMPANY PRINCIPAL ACTIVITY INCORPORATION TYPE 28 JUNE 2020 30 JUNE 2019 PLACE OF OWNERSHIP INTEREST The following table sets out the Group’s financial assets and financial liabilities which have been offset in the consolidated loyalty program Statement of Financial Position at the reporting date: CONSOLIDATED Co. Pty Ltd Queensland retail liquor business Queensland Venue Operator of Spirit Hotels and Australia Associate 50% Loyalty Pacific Pty Ltd Operator of the flybuys Australia Joint Venture 50% 50% 50% GROSS FINANCIAL GROSS FINANCIAL IN THE STATEMENT OF ASSETS / (LIABILITIES) (LIABILITIES) / ASSETS SET OFF FINANCIAL POSITION NET FINANCIAL ASSETS / (LIABILITIES) PRESENTED $M 560 (3,863) 500 (3,520) $M (126) 126 (140) 140 $M 434 (3,737) 360 (3,380) 28 June 2020 Trade and other receivables Trade and other payables 30 June 2019 Trade and other receivables Trade and other payables 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 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 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 • interest rate fluctuations over the hedging period where the Group has variable rate method in the Statement of Financial Position. debt obligations. Recognition date The date the hedging instrument is entered into Measurement 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. Loyalty Pacific Pty Ltd A reconciliation of the carrying amount of the Group’s investment in Loyalty Pacific Pty Ltd is set out below: Beginning of the period Additions (Loss) / profit for the period End of the period CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M 11 11 (6) 16 $M - 6 5 11 134 135 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 5.1 Equity accounted investments (continued) Queensland Venue Co. Pty Ltd During the year ended 30 June 2019, the Company entered into an incorporated joint venture with AVC for the operation of Spirit Hotels (the ‘Hotel business’) and the retail liquor stores linked to Spirit Hotels venues (collectively the ‘Retail Liquor business’). 5.3 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; As part of the transaction, a group subsidiary company, Liquorland (Qld) Pty Ltd was converted into an incorporated joint or venture company, QVC. To facilitate the transaction, QVC restructured its share capital by issuing two classes of shares: • is a subsidiary acquired exclusively with a view to resale. 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 the Hotel business. The Company sold the H-shares to AVC, while retaining the R-shares. The transaction was implemented through a number of agreements, including the Share Sale Agreement, Shareholders’ Deed, the Retail Liquor Business Operations Agreement (RLBOA) and the Supply Agreement. The net results of discontinued operations are presented separately in the Statement of Profit or Loss. As presented in the Group’s FY19 financial report, the following entities were material wholly-owned subsidiaries during the prior financial year until 19 November 2018 when the Company transferred control of these entities to Wesfarmers as part of the corporate restructure prior to the Group’s demerger from Wesfarmers: Under the Shareholders’ Deed the Company holds all R-shares in QVC and operates the Retail Liquor business through its • Kmart Australia Limited and controlled entities (‘Kmart’) wholly owned subsidiary, Liquorland (Australia) Pty. Ltd. (LLA), subject to the terms of the RLBOA. Through its ownership of • Target Australia Pty Ltd and controlled entities (‘Target’) 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. The Company initially recognised its interest in QVC at fair value, and subsequently • Officeworks Ltd and controlled entities (‘Officeworks’) measured using the equity method. The profit for Kmart, Target and Officeworks which was presented as discontinued operations in the prior year is set out 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. A reconciliation of the carrying amount of the Group’s investment in QVC is set out below: below: Revenue Expenses Profit before income tax Income tax expense Beginning of the period Additions Profit for the period End of the period 5.2 Assets held for sale CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M 201 - - 201 $M - 201 - 201 At 28 June 2020, four of the Group’s properties with a total carrying value of $47 million and $28 million of plant and equipment have been classified as held for sale (2019: $94 million). 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. YEAR ENDED 28 JUNE 2020 $M YEAR ENDED 30 JUNE 20191 $M - - - - - 4,341 (3,832) 509 (152) 357 Profit for the period from discontinued operations 1 Financial performance reflects period up to date of disposal, being 19 November 2018 Assets and liabilities of the Kmart, Target and Officeworks discontinued operations at the date of transfer to Wesfarmers are set out below: 19 NOVEMBER 2018 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 $M 138 77 1,707 997 236 280 3,435 2,205 875 3,080 355 136 137 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 5.3 Discontinued operations (continued) 5.4 Subsidiaries Cash flows for the Kmart, Target and Officeworks discontinued operations during the prior year are set out below: The ultimate parent of the Group is Coles Group Limited, a company incorporated in Australia. Subsidiaries are fully Net cash flows from operating activities Net cash flows from 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 EPS from the Kmart, Target and Officeworks discontinued operations is set out below: Basic and diluted EPS (cents) 1 EPS reflects period up to 19 November 2018 Gain / loss on disposal Gain or loss on disposal is the difference between: YEAR ENDED 28 JUNE 2020 $M - - - - YEAR ENDED 30 JUNE 20191 $M 322 219 (532) 9 YEAR ENDED 28 JUNE 2020 YEAR ENDED 30 JUNE 20191 - 27 a) the carrying amount of the net assets plus any attributable goodwill and amounts accumulated in OCI (for example, foreign translation adjustments and available-for-sale reserves); and b) the proceeds of sale. No gain or loss was recorded for the disposal of Kmart, Target and Officeworks. consolidated from the date of acquisition, being the date Coles Group Limited obtains control, and continue to be consolidated until the date control ceases. Control exists where the Group 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 of the Group. All entities were incorporated in Australia and 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%) Coles Export Australia Pty Ltd (formerly Tooronga Holdings Pty Ltd)* Coles Financial Services Pty Ltd Coles FS Holding Company Pty Ltd Coles Retail Services Pty Ltd Coles Supermarkets Australia Pty Ltd* Coles WFS Pty Ltd (formerly Wesfarmers Finance 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* (formerly Wesfarmers Finance Holding Company Pty Ltd) Coles Group Deposit Services Pty Ltd Newmart Pty Ltd Coles Group Finance Limited* Procurement Online Pty Ltd Coles Group Properties Holdings Ltd* Retail Ready Operations Australia Pty. Ltd* Coles Group Property Developments Ltd* Richmond Plaza Shopping Centre Pty Ltd Coles Group Superannuation Fund Pty Ltd Tickoth Pty Ltd Coles Group Supply Chain Pty Ltd* Coles Group Treasury Pty Ltd (formerly Coles Group Payments Pty Ltd)* Coles Online Pty Ltd* Coles Property Management Pty Ltd WFPL Funding Co Pty Ltd WFPL No 2 Pty Ltd WFPL Security SPV Pty Ltd WFPL SPV Pty Ltd Entities formed/incorporated or acquired during the financial year Coles Export Asia Limited (incorporated in Hong Kong) Coles Trading (Shanghai) Co. Limited (incorporated in China) Entities deregistered during the financial year Tyremaster Pty Ltd Waratah Cove Pty Ltd Now.com.au Pty Ltd Coles Group Finance (USA) Pty Ltd * These entities are parties to the Deed of Cross Guarantee and members of the Closed Group as at 28 June 2020 Deed of cross guarantee Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 (‘ASIC Instrument’) the wholly-owned subsidiaries listed above (*) are relieved from the Corporations Act 2001(Cth) 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 above have entered into a Deed of Cross Guarantee (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 and 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 28 June 2020 are set out below: 138 139 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 5.4 Subsidiaries (continued) Deed of cross guarantee (continued) Statement of Comprehensive Income and retained earnings Continuing Operations Sales revenue Other operating revenue Total operating revenue Cost of sales Gross profit Other income Administration expenses Other expenses Share of net (loss) / 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 Effect of adoption of AASB 16 Leases Profit for the year Dividends paid Retained earnings at the end of the year CLOSED GROUP YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M $M 37,408 376 37,784 (28,048) 9,736 114 (8,076) - (6) 1,768 (443) 1,325 (337) 988 (17) 5 (12) 976 1,756 (831) 988 (873) 1,040 37,262 186 37,448 (28,591) 8,857 417 (8,199) (146) 5 934 (42) 892 (291) 601 (2) 1 (1) 600 1,497 - 601 (342) 1,756 Statement of financial position Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Income tax receivable Assets held for sale Other assets Total current assets Non-current assets Property, plant and equipment Right-of-use assets Intangible assets Deferred tax assets Investment in subsidiaries Investment in joint venture Other assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Provisions Lease liabilities Other Total current liabilities Non-current liabilities Interest-bearing liabilities Provisions Lease liabilities Other Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity CLOSED GROUP 28 JUNE 2020 30 JUNE 2019 $M $M 992 434 2,161 43 75 69 940 359 1,964 - 91 47 3,774 3,401 4,091 7,655 1,594 847 238 217 120 14,762 18,536 3,858 858 884 198 5,798 1,354 472 8,193 25 10,044 15,842 2,694 1,611 43 1,040 2,694 4,103 - 1,541 365 238 212 134 6,593 9,994 3,528 743 - 168 4,439 1,460 599 - 70 2,129 6,568 3,426 1,628 42 1,756 3,426 140 141 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 5.5 Parent entity information Summary financial information for the Company is set out below: 6. Unrecognised items Profit for the period Other comprehensive income Total comprehensive income for the period 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 YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M 3,267 - 3,267 $M 1,266 - 1,266 28 JUNE 2020 30 JUNE 2019 $M $M 3,840 5,090 8,930 1,059 2,669 3,728 1,611 36 3,555 5,202 1,903 5,071 6,974 741 3,405 4,146 1,628 39 1,161 2,828 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. 6.1 Commitments 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 Between one and five years Total capital commitments for expenditure for continuing operations CONSOLIDATED 28 JUNE 2020 30 JUNE 2019 $M 264 378 642 $M 140 514 654 The commitment amounts disclosed above represent the maximum amounts that the Group is obliged to pay. At 28 June 2020, the Group also has commitments relating to lease agreements that have not yet commenced. The future lease payments (undiscounted) for non-cancellable periods are $22 million within one year, $584 million between one and five years and $2,432 million thereafter. The commitments relate to lease agreements associated with new stores, the Supply Chain Modernisation program and online fulfilment centres. 6.2 Contingent liabilities As at 28 June 2020, the Company has no guarantees in relation to the debts of its subsidiaries (2019: $nil). 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 As at 28 June 2020, the Company has no contingent liabilities (2019: $nil). As at 28 June 2020, the Company has bank Financial Position but are disclosed. guarantees totalling $324 million (2019: $310 million). As at 28 June 2020, the Company has contractual commitments for the acquisition of property, plant and equipment totalling $512 million (2019: $590 million). As at 28 June 2020, the Group has bank guarantees totalling $358 million (2019: $342 million). 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 2.9 Provisions. In May 2020, Coles was notified that a class action proceeding had been filed in the Federal Court of Australia in relation to payment of Coles managers employed in supermarkets. Coles is defending the proceeding. The court proceeding is at an early stage, and therefore the potential outcome and total costs associated with this matter are uncertain as at the date of this report. From time to time, entities within the Group are party to various legal actions as well as inquiries from regulators and government bodies that have arisen in the ordinary course of business. Consideration has been given to such matters and it is expected that the resolution of these contingencies will not have a material impact on the financial position of the Group, or are not at a stage to support a reasonable evaluation of the likely outcome. Key estimate: 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. 142 143 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 7. Other disclosures The transitional services provided by the Group to the Wesfarmers Group included: • information technology services This section provides other disclosures required by Australian Accounting Standards that are considered • payroll services and business process outsourcing relevant to understanding the Group’s financial performance or position. • finance services and systems support 7.1 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 owing to Loyalty Pacific Pty Ltd Queensland Venue Co. Pty Ltd Sales to QVC Amounts paid to QVC Amounts receivable from QVC Other related parties Wesfarmers Limited and its controlled entities1 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 YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $M $M 134 228 201 3 56 32 2 13 2 37 n/a1 146 269 169 1 9 40 3 15 2 57 6 1 Includes transactions up until 31 March 2020 being the date that Wesfarmers Limited and its controlled entities ceased to be a related party of the Group. Parent entity 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 • 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 were in place up until 31 March 2020, the Group or its related party settled the liabilities on each other’s behalf and subsequently recovered 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. Transactions with key management personnel The transactions with Key Management Personnel (KMP) for the year ended 28 June 2020 include compensation of the Company’s Executive Director. Non-executive Director compensation is detailed in the Remuneration Report. Compensation of KMP of the Group: Short-term employee benefits Post-employment benefits Other long-term benefits Share-based payments Total compensation paid to key management personnel CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $ $ 9,617,535 9,446,947 84,012 45,365 59,143 33,043 5,096,297 1,492,103 14,843,209 11,031,236 The increase in the total compensation value for FY20 compared to FY19 largely reflects changes in KMP composition and the pro-rating of remuneration in FY19. Pro-rating for FY19 was aligned to the dates from which each individual was considered KMP, as well as the timing of the Company ceasing to be a wholly-owned subsidiary of Wesfarmers. Other transactions with KMP Intercompany transactions, assets and liabilities between entities within the Group have been eliminated in the consolidated During the year ended 28 June 2020, Mr Freudenstein, a Non-executive Director, sold livestock to Coles via a livestock agent for an aggregate amount of $65,832. The transaction occurred on an arm’s length basis with normal commercial financial statements. Transactions with entities transferred from the Group to Wesfarmers have been treated as related terms. 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 28 June 2020, including: • sale of goods to members of flybuys • purchase of points from Loyalty Pacific Pty Ltd • reimbursement of costs incurred 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 28 June 2020, the Group has not recognised a provision for expected credit losses relating to amounts owed by related parties (2019: $nil). 7.2 Share-based payments Various transactions occurred between the Group and QVC during the year ended 28 June 2020, including: The Group continues to operate the Coles Group Limited Equity Incentive Plan (‘the Plan’) to assist in the motivation, • • service fees paid sales of inventory to QVC 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. Amounts disclosed relate to transactions up until 31 March 2020 being the date that Wesfarmers Limited and its controlled entities ceased to be a related party of the Group. retention and reward of employees. The Plan provides flexibility for the Group to offer rights, options and/or 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. 144 145 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 7.2 Share-based payments (continued) 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 must be made. This includes, but is not limited to, share price volatility, discount rate and dividend yield. 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. 7.3 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 or other entity in the Group Assurance related Non-audit services: Tax compliance services Total auditor’s remuneration CONSOLIDATED YEAR ENDED YEAR ENDED 28 JUNE 2020 30 JUNE 2019 $000 $000 2,631 695 135 3,461 3,6501 3851, 2 140 4,175 1 Includes audit services associated with the Group’s demerger from Wesfarmers. These fees have been reclassified from assurance related services to audit related services in accordance with the ASIC guidance released following the Parliamentary Joint Committee on Corporations and Financial Services’ Inquiry into the Regulation of Auditing in Australia. 2 Certain FY19 services were in progress at the time of disclosure. These amounts have now been updated following completion of these services in FY20. 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 for our external auditor to perform. The total fees for non-audit services of $135,000 represent 3.9% (2019: 3.4%) of the total fees paid or payable to EY and related practices for the year ended 28 June 2020. 7.4 Acquisitions In May 2020, Coles Group Limited acquired certain assets and assumed certain liabilities of Jewel Fine Foods (Jewel). The assets acquired included leasehold improvements and plant and equipment. As part of the transaction, property leases were assigned to the Company and right-of-use assets and corresponding lease liabilities have been recognised in the Statement of Financial Position. Under the provisional accounting performed by the Group, the purchase consideration paid materially equalled the fair value of assets acquired and liabilities assumed. 7.5 New accounting standards and interpretations The Group applied AASB 16 Leases (‘AASB 16’) for the first time in this reporting period. The nature and effect of the changes as a result of the adoption of AASB 16 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 16 Leases The Group adopted AASB 16 from 1 July 2019 using the modified retrospective approach, under which the reclassifications and adjustments arising from the new standard have been recognised in the opening Statement of Financial Position at 1 July 2019. The comparative information for the 30 June 2019 reporting period has not been restated as permitted under the transitional provisions in the standard. On adoption of AASB 16, the Group recognised lease liabilities in relation to leases previously classified as operating leases under the principles of AASB 117 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing rate at 1 July 2019. The weighted average incremental borrowing rate applied to the lease liabilities at 1 July 2019 was 4.68%. A reconciliation of operating lease commitments disclosed at 30 June 2019 to lease liabilities recognised under AASB 16 at transition date is provided below: Operating lease commitments disclosed as at 30 June 2019 Less: application of discounting Add: adjustment previously made to remove base rent escalations that were considered contingent at lease inception Discounted lease commitments using the lessee’s incremental borrowing rate at the date of transition to AASB 16 Less: short-term leases not accounted for under AASB 16 in accordance with the practical expedient Add: extension options reasonably certain to be exercised Less: separation of non-lease components Total lease liabilities recognised under AASB 16 at 1 July 2019 1 JULY 2019 $M 10,577 (2,320) 399 8,656 (5) 723 (518) 8,856 The associated right-of-use assets for property leases have been measured either on a retrospective basis as if AASB 16 had always applied, or equal to the lease liability. Non-property right-of-use assets have been measured at the amount equal to the lease liability. Right-of-use assets recognised at transition have been adjusted by the amount of any prepaid or accrued lease payments relating to leases recognised in the Statement of Financial Position at 30 June 2019. The recognised right-of-use assets relate to the following: Property Leases Non-property Leases Total right-of-use assets 1 JULY 2019 $M 7,339 142 7,481 The application of AASB 16 impacted the following items in the Statement of Financial Position on 1 July 2019: • • • recognition of right-of-use assets: $7,481 million recognition of lease liabilities: $8,856 million increase in deferred tax assets: $356 million • elimination of lease related provisions and accruals recognised under previous lease accounting: $188 million The net impact to retained earnings on 1 July 2019 was a decrease of $831 million. The impact of the adoption of AASB 16 on the Group’s Statement of Profit or Loss is set out below: EBIT Financing costs Profit before tax Income tax expense Profit after income tax PRE-AASB 16 AASB 16 STATUTORY 28 JUNE 2020 IMPACT 28 JUNE 2020 $M 1,387 (44) 1,343 (348) 995 $M 375 (399) (24) 7 (17) $M 1,762 (443) 1,319 (341) 978 146 147 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report 7.5 New accounting standards and interpretations (continued) Practical expedients applied In applying AASB 16 for the first time, the Group has applied the following practical expedients permitted by the standard: Directors’ Declaration the use of a single discount rate to a portfolio of leases with reasonably similar characteristics reliance on previous onerous lease assessments the accounting for operating leases with a remaining lease term of less than 12 months as at 1 July 2019 as short-term 1. The directors of Coles Group Limited (the Company) declare that, in the directors’ opinion: • • • • • leases the exclusion of initial direct costs from the measurement of the right-of-use asset at the date of initial application the use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease. The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Group has relied on its previous assessment under AASB 117 and Interpretation 4 Determining whether an arrangement contains a lease. New and revised Australian Accounting Standards and Interpretations on issue but not yet effective There are no standards that are not yet effective that would be expected to have a material impact on the Group in the current or future reporting periods. 7.6 Events after the reporting period On 18 August 2020, the Directors determined a final dividend of 27.5 cents per fully paid ordinary share to be paid on 29 September 2020, fully franked at the corporate tax rate of 30%. The aggregate amount of the final dividend to be paid out of profits, but not recognised as a liability at 28 June 2020, is expected to be $367 million. Subsequent to the reporting date, the Group has monitored business performance and relevant external factors including the ongoing government response to the COVID-19 pandemic. No adjustments to the key judgements, estimates or assumptions impacting the consolidated financial statements at the reporting date have been identified. (a) the financial statements and the Notes 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 the Basis of Preparation and Accounting Policies in the Notes 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 28 June 2020. 4. As at the date of this declaration, there are reasonable grounds to believe that the members of the closed group identified in Note 5.4 Subsidiaries 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 5.4 Subsidiaries. Signed in accordance with a resolution of the directors. James Graham AM Chairman 18 August 2020 Steven Cain Managing Director and Chief Executive Officer 18 August 2020 148 149 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Coles Group Limited 2020 Annual Report Ernst & Young 8 Exhibition Street Melbourne VIC 3000 Australia Ernst & Young GPO Box 67 Melbourne VIC 3001 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 Tel: +61 3 9288 8000 Fax: +61 3 8650 7777 ey.com/au 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 Independent Auditor's Report to the Members of Coles Group Limited Report on the Audit of the Financial Report Report on the Audit of the Financial Report Opinion 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 We have audited the Financial Report of Coles Group Limited (the Company) and its subsidiaries 28 June 2020, the Consolidated Statement of Profit or Loss, Consolidated Statement of Other (collectively, the Group), which comprises the Consolidated Statement of Financial Position as at Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of 28 June 2020, the Consolidated Statement of Profit or Loss, Consolidated Statement of Other Cash Flows for the year then ended, notes to the consolidated financial statements, including a Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of summary of significant accounting policies, and the Directors' Declaration. 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: In our opinion, the accompanying Financial Report of the Group is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the consolidated financial position of the Group as at 28 June 2020 and of its consolidated financial performance for the year ended on that date; and (a) giving a true and fair view of the consolidated financial position of the Group as at 28 June 2020 and of its consolidated financial performance for the year ended on that date; and (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion 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 We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under Report section of our report. We are independent of the Group in accordance with the auditor those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial independence requirements of the Corporations Act 2001 and the ethical requirements of the Report section of our report. We are independent of the Group in accordance with the auditor Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional independence requirements of the Corporations Act 2001 and the ethical requirements of the Accountants (including Independence Standards) (the Code) that are relevant to our audit of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Financial Report in Australia. We have also fulfilled our other ethical responsibilities in accordance Accountants (including Independence Standards) (the Code) that are relevant to our audit of the with the Code. Financial Report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 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 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 Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report as a whole, and in forming our opinion thereon, but we do not our audit of the Financial Report of the current year. These matters were addressed in the context of provide a separate opinion on these matters. For each matter below, our description of how our audit our audit of the Financial Report as a whole, and in forming our opinion thereon, but we do not addressed the matter is provided in that context. 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 We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the included the performance of procedures designed to respond to our assessment of the risks of Financial Report section of our report, including in relation to these matters. Accordingly, our audit material misstatement of the Financial Report. The results of our audit procedures, including the included the performance of procedures designed to respond to our assessment of the risks of procedures performed to address the matters below, provide the basis for our audit opinion on the material misstatement of the Financial Report. The results of our audit procedures, including the accompanying Financial Report. procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying Financial Report. How our audit addressed the key audit matter Independent Auditor's Report to the Members of Coles Group Limited 1. Commercial income Report on the Audit of the Financial Report Why significant Opinion Commercial income (also referred to in the We have audited the Financial Report of Coles Group Limited (the Company) and its subsidiaries retail industry as “Supplier rebates”) comprises (collectively, the Group), which comprises the Consolidated Statement of Financial Position as at discounts and rebates received by the Group 28 June 2020, the Consolidated Statement of Profit or Loss, Consolidated Statement of Other from its suppliers. Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of The value and timing of commercial income Cash Flows for the year then ended, notes to the consolidated financial statements, including a recognised through the Consolidated Statement summary of significant accounting policies, and the Directors' Declaration. of Profit or Loss requires judgement and the consideration of a number of factors including: In our opinion, the accompanying Financial Report of the Group is in accordance with the Corporations Act 2001, including: The terms of each individual rebate ► agreement ► We assessed the design and effectiveness of relevant controls in place relating to the recognition and measurement of amounts related to these arrangements; ► We gained an understanding of the nature of each material type of commercial income and assessed the significant agreements in place; Our audit procedures in respect of commercial income included the following: (a) giving a true and fair view of the consolidated financial position of the Group as at 28 June 2020 ► and of its consolidated financial performance for the year ended on that date; and (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. 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 Basis for Opinion ► 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 The application of Australian Accounting Standards and the Group’s related processes and controls to these arrangements. agreements and assessed whether We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under appropriate agreements or other those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial documentation supported the recognition Report section of our report. We are independent of the Group in accordance with the auditor ► and measurement of the rebates in the 28 independence requirements of the Corporations Act 2001 and the ethical requirements of the June 2020 Financial Report, including an Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional assessment of amounts recorded before Accountants (including Independence Standards) (the Code) that are relevant to our audit of the and after the balance date; and Financial Report in Australia. We have also fulfilled our other ethical responsibilities in accordance Disclosures relating to the measurement and with the Code. ► We inquired of the Group including business recognition of commercial income can be found in Note 2.4 Inventories. category managers, supply chain managers We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis and procurement management as to the for our opinion. existence of any non-standard agreements or side arrangements. 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. 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 150 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 151 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 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 How our audit addressed the key audit matter Independent Auditor's Report to the Members of Coles Group Limited 2. Impairment of non-current assets including intangible assets Report on the Audit of the Financial Report Why significant Opinion The determination of the recoverable amounts We have audited the Financial Report of Coles Group Limited (the Company) and its subsidiaries of non-current assets including property, plant (collectively, the Group), which comprises the Consolidated Statement of Financial Position as at and equipment, right of use assets, goodwill and 28 June 2020, the Consolidated Statement of Profit or Loss, Consolidated Statement of Other other intangible assets required significant Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of judgement by the Group. Cash Flows for the year then ended, notes to the consolidated financial statements, including a Impairment assessments are complex and summary of significant accounting policies, and the Directors' Declaration. involve significant management judgement. The assessment completed by the Group includes In our opinion, the accompanying Financial Report of the Group is in accordance with the Corporations numerous assumptions and estimates that will Act 2001, including: be impacted by future performance and market conditions. This includes the potential future (a) giving a true and fair view of the consolidated financial position of the Group as at 28 June 2020 impacts of the COVID-19 pandemic on income and expenses. Our audit procedures included an evaluation of the following assumptions utilised in the Group’s assessment: Forecast cash flows, which were based on the Group’s Board approved internal five- year forecasts; and of its consolidated financial performance for the year ended on that date; and ► Comparative industry valuation multiples; ► Determination of cash generating units; Long term inflation and growth rates; ► Discount rates; and ► ► (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Key assumptions, judgements and estimates applied in the Group’s impairment assessment Basis for Opinion are set out in Note 4.1. ► Other market evidence. In performing our procedures, we considered whether the Group’s forecasts considered the potential future impacts of the COVID-19 pandemic on income and expenses. Based upon the disclosed sensitivity analysis, We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under changes to the key assumptions applied in the those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial impairment test are not expected to give rise to We assessed whether the Group’s impairment Report section of our report. We are independent of the Group in accordance with the auditor an impairment of the carrying value of the models were in accordance with Australian independence requirements of the Corporations Act 2001 and the ethical requirements of the Group’s cash generating units. Accounting Standards, as well as the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional mathematical accuracy of the calculations. Accountants (including Independence Standards) (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 also considered the adequacy of the Financial Report disclosures regarding the impairment testing approach, key assumptions We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis and sensitivity analysis. 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. Independent Auditor's Report to the Members of Coles Group Limited 3. IT environment Report on the Audit of the Financial Report Why significant Opinion We performed procedures to understand the IT A significant part of the Group’s financial We have audited the Financial Report of Coles Group Limited (the Company) and its subsidiaries processes are heavily reliant on IT systems with environment, including procedures to identify (collectively, the Group), which comprises the Consolidated Statement of Financial Position as at automated processes and controls over the the Group’s manual and automated controls 28 June 2020, the Consolidated Statement of Profit or Loss, Consolidated Statement of Other capturing, valuing and recording of relevant to Financial Reporting. Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of transactions. Cash Flows for the year then ended, notes to the consolidated financial statements, including a This was a key audit matter because of the: summary of significant accounting policies, and the Directors' Declaration. How our audit addressed the key audit matter ► In our opinion, the accompanying Financial Report of the Group is in accordance with the Corporations Act 2001, including: complex IT environment supporting diverse business processes, with varying levels of integration between them; 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. ► mix of manual and automated controls; (a) giving a true and fair view of the consolidated financial position of the Group as at 28 June 2020 ► multiple internal and outsourced support and of its consolidated financial performance for the year ended on that date; and arrangements; and (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. ► continuing enhancements to the Group’s IT systems which are significant to our audit. Basis for Opinion 4. AASB 16 Leases 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 Why significant How our audit addressed the key audit matter 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 The Group adopted AASB 16 Leases (“AASB We assessed the Group’s process for Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional 16”) from 1 July 2019. The adoption of this determining the impact of the new standard. Accountants (including Independence Standards) (the Code) that are relevant to our audit of the accounting standard is inherently complex due Financial Report in Australia. We have also fulfilled our other ethical responsibilities in accordance to the need to apply its requirements to: with the Code. ► We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. the volume of operating leases held by the ► Group; and Key Audit Matters We assessed the analysis of the financial impact of the new standard and the accounting policies, estimates and judgements made in respect of the Group’s right of use assets and lease liabilities, as well as related depreciation and interest expense recognised through the Consolidated Statement of Profit or Loss. existing commitments, including embedded lease agreements; We selected a sample of lease agreements to determine the appropriateness of the judgements applied including: the judgements applied by management ► Key audit matters are those matters that, in our professional judgement, were of most significance in when determining how to apply key our audit of the Financial Report of the current year. These matters were addressed in the context of requirements of this standard such as the our audit of the Financial Report as a whole, and in forming our opinion thereon, but we do not impact of lease extension options and the provide a separate opinion on these matters. For each matter below, our description of how our audit calculation of incremental borrowing rates. addressed the matter is provided in that context. Key assumptions, judgements and estimates applied to the Group’s leases are set out in We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the the identification of non-lease components; Notes 2.7 and 7.5. Financial Report section of our report, including in relation to these matters. Accordingly, our audit the treatment of adjustments to lease included the performance of procedures designed to respond to our assessment of the risks of payments (both fixed and variable rate material misstatement of the Financial Report. The results of our audit procedures, including the adjustments); procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying Financial Report. the treatment of sub-lease arrangements; the treatment of lease extension options; the impact of contract variations; ► ► ► ► ► 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 152 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 153 ► the incremental borrowing rate determined by the Group; Coles Group Limited 2020 Annual Report 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 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 Why significant Report on the Audit of the Financial Report How our audit addressed the key audit matter Opinion ► the application of practical expedients available under AASB 16; and 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 28 June 2020, 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. 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. ► whether there were any material contracts containing a lease. In our opinion, the accompanying Financial Report of the Group is in accordance with the Corporations Act 2001, including: We involved our capital and debt advisory specialists to assess the Group’s incremental borrowing rates. (a) giving a true and fair view of the consolidated financial position of the Group as at 28 June 2020 and of its consolidated financial performance for the year ended on that date; and We assessed the calculation of the adjustment to opening retained earnings calculated by the Group. (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. We assessed the adequacy of disclosures included in the Financial Report. Basis for Opinion 5. Inventory existence 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 Why significant How our audit addressed the key audit matter 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 At 28 June 2020, the Group held inventories of Our audit procedures included the following: Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional $2,166 million. Being one of the most Accountants (including Independence Standards) (the Code) that are relevant to our audit of the Selected a sample of stores so as to significant balances on the Consolidated Financial Report in Australia. We have also fulfilled our other ethical responsibilities in accordance observe and assess the Group’s stocktake Statement of Financial Position, the Group’s with the Code. processes throughout the year. This inventory verification process is extensive and included observing a number of stocktakes occurs routinely throughout the financial year. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis virtually through video conferencing for our opinion. This inventory is held at geographically diverse technology due to the Government’s locations around Australia at various stores and recommendations to work from home as a Key Audit Matters distribution centres. result of the COVID-19 pandemic; ► ► For the stocktakes we observed, we The Group’s key estimates in respect of Key audit matters are those matters that, in our professional judgement, were of most significance in inventories is disclosed in Note 2.4 of the assessed whether the required adjustment our audit of the Financial Report of the current year. These matters were addressed in the context of to inventory determined by the stocktake Financial Report. our audit of the Financial Report as a whole, and in forming our opinion thereon, but we do not was accurate and processed correctly; 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. ► Observed and assessed the daily stocktake process at a sample of distribution centres We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the near period end; Financial Report section of our report, including in relation to these matters. Accordingly, our audit ► Assessed whether daily counts occurred at included the performance of procedures designed to respond to our assessment of the risks of distribution centres during the year; and 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 For a select number of distribution centres accompanying Financial Report. managed by third parties, we obtained stock confirmation letters. ► Independent Auditor's Report to the Members of Coles Group Limited Information Other than the Financial Report and Auditor’s Report Thereon Report on the Audit of the Financial Report The directors are responsible for the other information. The other information comprises the Opinion information included in the Company’s 2020 Annual Report, but does not include the Financial Report and our auditor’s report thereon. We obtained the Operating and Financial Review, Board of Directors We have audited the Financial Report of Coles Group Limited (the Company) and its subsidiaries section and Directors’ Report that are to be included in the Annual Report, prior to the date of this (collectively, the Group), which comprises the Consolidated Statement of Financial Position as at auditor’s report, and we expect to obtain the remaining sections of the Annual report after the date of 28 June 2020, the Consolidated Statement of Profit or Loss, Consolidated Statement of Other this auditor’s report. 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 Our opinion on the Financial Report does not cover the other information and accordingly we do not summary of significant accounting policies, and the Directors' Declaration. express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In our opinion, the accompanying Financial Report of the Group is in accordance with the Corporations Act 2001, including: 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 (a) giving a true and fair view of the consolidated financial position of the Group as at 28 June 2020 Report or our knowledge obtained in the audit or otherwise appears to be materially misstated. and of its consolidated financial performance for the year ended on that date; and If, based on the work we have performed on the other information obtained prior to the date of this (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. auditor’s report, 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. Basis for Opinion Responsibilities of the Directors for the Financial Report 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 The Directors of the Company are responsible for the preparation of the Financial Report that gives a Report section of our report. We are independent of the Group in accordance with the auditor true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 independence requirements of the Corporations Act 2001 and the ethical requirements of the and for such internal control as the Directors determine is necessary to enable the preparation of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Financial Report that gives a true and fair view and is free from material misstatement, whether due Accountants (including Independence Standards) (the Code) that are relevant to our audit of the to fraud or error. Financial Report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. 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 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis going concern basis of accounting unless the Directors either intend to liquidate the Group or to cease for our opinion. operations, or have no realistic alternative but to do so. Key Audit Matters Auditor's Responsibilities for the Audit of the Financial Report Key audit matters are those matters that, in our professional judgement, were of most significance in Our objectives are to obtain reasonable assurance about whether the Financial Report as a whole is our audit of the Financial Report of the current year. These matters were addressed in the context of free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that our audit of the Financial Report as a whole, and in forming our opinion thereon, but we do not includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an provide a separate opinion on these matters. For each matter below, our description of how our audit audit conducted in accordance with the Australian Auditing Standards will always detect a material addressed the matter is provided in that context. 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 We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the decisions of users taken on the basis of this Financial Report. 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 As part of an audit in accordance with the Australian Auditing Standards, we exercise professional material misstatement of the Financial Report. The results of our audit procedures, including the judgement and maintain professional scepticism throughout the audit. We also: procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying Financial Report. 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 154 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 155 Coles Group Limited 2020 Annual Report 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 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 Opinion Independent Auditor's Report to the Members of Coles Group Limited • Report on the Audit of the Financial Report 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. 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 • Obtain an understanding of internal control relevant to the audit in order to design audit 28 June 2020, the Consolidated Statement of Profit or Loss, Consolidated Statement of Other procedures that are appropriate in the circumstances, but not for the purpose of expressing an Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of opinion on the effectiveness of the Group’s internal control. Cash Flows for the year then ended, notes to the consolidated financial statements, including a summary of significant accounting policies, and the Directors' Declaration. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Directors. In our opinion, the accompanying Financial Report of the Group is in accordance with the Corporations Act 2001, including: • 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 (a) giving a true and fair view of the consolidated financial position of the Group as at 28 June 2020 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. (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. and of its consolidated financial performance for the year ended on that date; and Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under • Evaluate the overall presentation, structure and content of the Financial Report, including the those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial disclosures, and whether the Financial Report represents the underlying transactions and Report section of our report. We are independent of the Group in accordance with the auditor events in a manner that achieves fair presentation. 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 • Obtain sufficient appropriate audit evidence regarding the financial information of the entities Accountants (including Independence Standards) (the Code) that are relevant to our audit of the or business activities within the Group to express an opinion on the Financial Report. We are Financial Report in Australia. We have also fulfilled our other ethical responsibilities in accordance responsible for the direction, supervision and performance of the Group audit. We remain solely with the Code. responsible for our audit opinion. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis We communicate with the Directors regarding, among other matters, the planned scope and timing of for our opinion. the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Key Audit Matters We also provide the Directors with a statement that we have complied with relevant ethical Key audit matters are those matters that, in our professional judgement, were of most significance in requirements regarding independence, and to communicate with them all relationships and other our audit of the Financial Report of the current year. These matters were addressed in the context of matters that may reasonably be thought to bear on our independence, and where applicable, actions our audit of the Financial Report as a whole, and in forming our opinion thereon, but we do not taken to eliminate threats or safeguards applied. 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. 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 We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the matters. We describe these matters in our auditor’s report unless law or regulation precludes public Financial Report section of our report, including in relation to these matters. Accordingly, our audit disclosure about the matter or when, in extremely rare circumstances, we determine that a matter included the performance of procedures designed to respond to our assessment of the risks of should not be communicated in our report because the adverse consequences of doing so would material misstatement of the Financial Report. The results of our audit procedures, including the reasonably be expected to outweigh the public interest benefits of such communication. procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying Financial Report. Independent Auditor's Report to the Members of Coles Group Limited Report on the Audit of the Remuneration Report Report on the Audit of the Financial Report Opinion on the Remuneration Report Opinion We have audited the Remuneration Report included in the Directors’ report for the year ended We have audited the Financial Report of Coles Group Limited (the Company) and its subsidiaries 28 June 2020. (collectively, the Group), which comprises the Consolidated Statement of Financial Position as at 28 June 2020, the Consolidated Statement of Profit or Loss, Consolidated Statement of Other In our opinion, the Remuneration Report of Coles Group Limited for the year ended 28 June 2020, Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of complies with section 300A of the Corporations Act 2001. Cash Flows for the year then ended, notes to the consolidated financial statements, including a summary of significant accounting policies, and the Directors' Declaration. Responsibilities In our opinion, the accompanying Financial Report of the Group is in accordance with the Corporations The Directors of the Company are responsible for the preparation and presentation of the Act 2001, including: 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 (a) giving a true and fair view of the consolidated financial position of the Group as at 28 June 2020 accordance with Australian Auditing Standards. and of its consolidated financial performance for the year ended on that date; and (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion Ernst & Young 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 (including Independence Standards) (the Code) that are relevant to our audit of the Financial Report in Australia. We have also fulfilled our other ethical responsibilities in accordance Fiona Campbell with the Code. Partner Melbourne We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis 18 August 2020 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. 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 156 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 157 Coles Group Limited 2020 Annual Report Shareholder Information Shareholder Information Listing information 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 2020 The number of shares to which each substantial holder and the substantial holders’ associates have a relevant interest, as disclosed in substantial holding notices given to Coles, are as follows: Holder Vanguard Group Blackrock Group Twenty largest ordinary fully paid shareholders as at 26 August 2020 Coles Group Limited 1. HSBC Custody Nominees (Australia) Limited 2. J P Morgan Nominees Australia Pty Limited 3. Citicorp Nominees Pty Limited 4. Wesfarmers Retail Holdings Pty Ltd 5. National Nominees Limited 6. BNP Paribas Nominees Pty Ltd < Agency Lending DRP A/C> 7. BNP Paribas Noms Pty Ltd8. Citicorp Nominees Pty Limited 9. Australian Foundation Investment Company Limited 10. HSBC Custody Nominees (Australia) Limited- GSCO ECA 11. HSBC Custody Nominees (Australia) Limited 12. ARGO Investments Limited 13. Netwealth Investments Limited 14. Milton Corporation Limited 15. HSBC Custody Nominees (Australia) Limited 16. Australian Executor Trustees Limited 17. CPU Share Plans Pty Ltd 18. AMP Life Limited 19. BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd 20. Mr Peter Alexander Brown Distribution of shareholders and shareholdings as at 26 August 2020 Number of fully paid shares 66,784,433 83,226,846 Number of fully % of issued paid shares 350,905,773 208,029,606 102,343,788 65,362,556 47,703,846 28,552,492 17,285,476 11,951,758 6,722,500 6,551,616 6,375,955 5,040,027 3,786,781 2,877,375 2,312,794 2,271,455 2,138,253 1,939,779 1,589,206 1,552,825 capital 26.31 15.60 7.67 4.90 3.58 2.14 1.30 0.90 0.50 0.49 0.48 0.38 0.28 0.22 0.17 0.17 0.16 0.15 0.12 0.12 Size of holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Number of shareholders Number of shares % of issued capital 361,252 74,930 8,876 4,450 144 449,652 109,453,158 157,254,119 61,678,364 88,954,194 916,589,861 1,333,929,696 8.21 11.79 4.62 6.67 68.71 100 There were 27,346 shareholders holding less than a marketable parcel ($500). 158 159 i F n a n c a i l R e p o r t Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Coles Group Limited 2020 Annual Report Voting rights 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: (a) on a show of hands, one vote for each shareholder; and (b) on a poll, one vote for each fully paid share. Unquoted equity securities As at 26 August 2020, 1,051,774 performance rights with 10 holders were on issue pursuant to Coles’ equity incentive plan. On market share acquisitions During FY20, 1,648,620 Coles ordinary shares were purchased on market at an average price of $15.64 per share for the purposes of various 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. 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 Shareholder Calendar* Event Date Record date for final dividend 28 August 2020 Final dividend payment date 29 September 2020 Coles Group Limited Annual General Meeting 5 November 2020 Half-year end Year-end 3 January 2021 27 June 2021 * Timing of events is subject to change. Annual General Meeting The 2020 Annual General Meeting of Coles Group Limited will be held as a virtual meeting via an online platform on Thursday 5 November 2020, commencing at 10.30am (AEDT). Information on how shareholders and proxyholders can view and participate in the meeting can be found on the Company’s website and in the Notice of Meeting. Coles’ Notice of Annual General Meeting has been released on the ASX Market Announcements Platform. 160160 161 Coles Group Limited 2020 Annual ReportColes Group Limited 2020 Annual Report Coles Group Limited ABN 11 004 089 936 800-838 Toorak Road Hawthorn East VIC 3123