Invacare
Annual Report 2014

Plain-text annual report

I N V O C A R E L I M I T E D A N N U A L R E P O R T 2 0 1 4 0C Remembrance ANNUAL REPORT 2014 Contents 01 Performance highlights 02 Chairman’s message 04 Chief Executive Officer’s review 08 Key strategies 10 Our digital business strategy 14 The InvoCare Way 16 Management team 17 Financial Report 18 Directors’ Report 33 Corporate Governance Statement 38 Remuneration Report 51 Auditor’s Independence Declaration 102 Directors’ Declaration 103 Independent Auditor’s Report 105 Shareholder Information 106 InvoCare Locations 108 Glossary IBC Corporate Information A “Personal Details” guide has been included in the back of this document to assist our stakeholders. Our key objective is to provide families with excellent service to enable them to remember their loved ones in the way they wish to celebrate the life of the individual, by providing caring and compassionate service to the highest standard. 2014 was the 100th anniversary of the beginning of World War I, and shortly most people across Australia and New Zealand will pause to remember the initial Gallipoli landings. It is fitting that InvoCare pay tribute to those who have been lost in war, regardless of nationality. A major focus in 2015 will be the inculcation of our core values of Collaboration, Accountability, Responsiveness and Excellence into all our teams – no matter where they are based. 3 Singapore Funeral locations Memorial parks 19 Western Australia 44 5 Queensland 16 South Australia 81 9 New South Wales and Australian Capital Territory 47 Victoria 1 Tasmania Our network across Australia, New Zealand, Singapore and USA is committed to enabling communities to remember their loved ones while providing a personalised touch. 0E InvoCare’s more than 60 contemporary-style brands of funeral homes maintain the service approach respected by families over many generations. The service is personal and professional, gently guiding families through the arrangement process. USA 2 With at least one major brand in each Australian state and a number of smaller heritage brands serving local communities, there are 158 InvoCare contemporary-style and heritage funeral homes in Australia and New Zealand. Key Funeral Brands New South Wales and Australian Capital Territory 25 5 New Zealand White Lady Funerals is a dedicated team of women offering a unique service for our client families with a woman’s understanding. The life of the loved one is honoured with special nurturing, sensitivity, warmth and care. There are 56 White Lady locations throughout Australia. Flexible and less traditional, Simplicity Funerals offers practical, dignified, respectful and affordable funeral services. Steadily expanding, there are 58 Simplicity Funerals locations throughout Australia, New Zealand and Singapore, and a growing number of mobile arrangers servicing areas lacking Simplicity representation. Singapore Casket Company has been offering caring and professional services to client families, of all denominations, since 1920. Its current facilities include nine air-conditioned parlours offering a bright, clean and tranquil environment for the comfort of families. Cemeteries and Crematoria North America InvoCare operates 14 cemeteries and crematoria in Australia. The multicultural nature of Australia is recognised with burial, cremation and memorial options, including Asian sections designed by Feng Shui advisers, and the availability of architecturally designed crypts, vaults and family mausoleums preferred by many European communities. InvoCares received its licence to operate in February 2015 and has seven Memorial Concierges operating in five major zones (north and south Los Angeles, Orange County and north and south San Diego) in southern California. It is supported by a crematoria operation, Macera Crematory, acquired in November 2014. Contemporary and Heritage Funerals Our network across Australia, New Zealand, Singapore and USA is committed to enabling communities to remember their loved ones while providing a personalised touch. We’ll know what to do. A full list of brands and locations is set out on pages 106-107. 0F we listen, we care, we serveChinese Memorial GardenLung Po Shan0 100 200 300 400 500 0 20 40 60 80 100 120 Revenue from external Operating EBITDA 0 0 100 100 200 200 300 300 400 400 500 500 0 0 20 20 40 40 60 60 80 80 100 100 120 120 Performance highlights Revenue from external Revenue from external Operating EBITDA Operating EBITDA 12 12 368.6 368.6 12 12 93.0 93.0 385.3 385.3 The continued focus on key strategies in 2014 has seen 13 13 95.1 95.1 14 14 an 11.5% increase in net profit after tax, following an estimated increase in the number of deaths of 3.2% in InvoCare’s key markets. 413.0 413.0 13 13 14 14 500 500 400 400 300 300 200 200 100 100 40 40 20 20 60 60 80 80 0 0 0 0 101.1 101.1 100 100 120 120 12 13 14 12 13 14 368.6 385.3 413.0 42.5 42.5 46.2 12 13 14 12 13 14 93.0 95.1 101.1 Revenue from external Revenue from external Revenue from external customers ($ million) Operating EBITDA Operating EBITDA Operating EBITDA ($ million) 12 12 13 13 0 0 14 14 368.6 368.6 385.3 385.3 10 10 20 20 30 30 40 40 413.0 413.0 50 50 12 12 13 13 0 0 14 14 93.0 93.0 95.1 95.1 5 5 10 10 15 15 20 20 25 25 35 35 30 30 101.1 101.1 40 40 0 0 10 10 20 20 30 30 40 40 50 50 60 60 0 10 20 30 40 50 0 5 10 15 20 25 30 35 40 Operating earnings Operating earnings Operating earnings after tax ($ million) Ordinary dividends Ordinary dividends Ordinary dividends per share (cents per share) Profit after tax Profit after tax 12 12 13 13 0 14 14 42.5 42.5 42.5 42.5 10 20 30 40 50 46.2 46.2 60 12 12 13 13 14 14 34.0 34.0 34.5 34.5 36.5 36.5 12 12 13 13 14 14 44.5 44.5 48.9 48.9 54.5 54.5 Operating earnings Ordinary dividends Profit after tax attributable Profit after tax to members ($ million) 0 0 10 10 20 20 30 30 40 40 50 50 0 0 5 5 10 10 15 15 20 20 25 25 30 30 35 35 40 40 0 0 10 10 20 20 30 30 40 40 50 50 60 60 34.0 34.5 36.5 Operating earnings Operating earnings 12 44.5 Ordinary dividends Ordinary dividends Profit after tax Profit after tax 13 12 12 14 13 13 14 14 48.9 42.5 42.5 54.5 42.5 42.5 46.2 46.2 12 12 13 13 14 14 Standing Tall John Rhind Funeral Directors recently acquired two fibreglass giraffes as part of its support for the Christchurch Stands Tall event, which was part fundraising for some worthwhile charities and also a community event to celebrate the resilience of Christchurch’s residents who have withstood two massive earthquakes and multiple aftershocks in recent years (killing 181 people). Left: Giraffe by Christchurch street artist Pops Art. 34.0 34.0 34.5 34.5 36.5 36.5 12 12 13 13 14 14 44.5 44.5 48.9 48.9 54.5 54.5 The Flanders Poppy Papaver rhoeas, commonly known as the Common Poppy or Flanders Poppy, has become a symbol of remembrance for those who lost their lives in war. Given the significant anniversaries that occur about this time, it has been represented as a symbol of remembrance. InvoCare Annual Report 2014 01 Chairman’s message A robust financial result for 2014 Following growth in the number of deaths in its markets, plus contributions from acquired businesses, InvoCare has delivered a robust financial result for 2014. The continued focus on the core strategic growth pillars embodied in InvoCare’s operational strategy enabled the Company to continue to grow in 2014. Operating earnings after tax grew by 8.7% to $46.2 million for the year due to an estimated 3.2% growth in the number of deaths in InvoCare’s key markets. The Company also benefited from the strong performance of recently acquired businesses. Statutory profit after tax, which includes asset sale gains and the non-cash impact of movements in prepaid contracts funds under management and associated liabilities, increased 11.5% to $54.5 million. A significant reason for this was a substantial improvement in the net gain from prepaid contracts. Pleasingly, all geographic regions contributed positively and in line with expectations. In light of strong operating EBITDA to cash conversion ratio at 106%, the Board declared a fully franked final dividend of 20.75 cents per share. Total dividends for the year amounted to 36.5 cents per share, an increase of 5.8% on 2013. The 2014 dividends represent a payout ratio of 87% (2012: 89%) of operating earnings after tax. Total shareholder returns (price movement plus cash dividends) since the initial public offering in late 2003 now stands at more than 21% compound annual growth. A presence in the US has been established in southern California built around a low cost model focusing on service excellence delivered by mobile arrangers and partnerships with key suppliers. This initiative is led by an experienced senior funeral executive and has operations in Los Angeles, Orange County and San Diego. The attention to staff development and training was a major achievement in 2014 along with the articulation of vision and value statements which all InvoCare employees can embrace in the continued quest to deliver outstanding services to client families. These values focus on collaboration, accountability, responsiveness and excellence built around innovation, vocation and care. On behalf of the Board and all shareholders I would like to thank Andrew Smith for his contributions over the last nine years and welcome Martin Earp who will assume the role of CEO on 1 May 2015. All the management and staff of InvoCare deserve a special thank you for delivering solid financial results during 2014. The Board, during its visits to various operational locations, continues to be impressed by the professionalism, dedication and sense of vocation of InvoCare’s personnel. I look forward to InvoCare’s continued successful growth and the ongoing success of its core business operations in Australia, New Zealand and Singapore as well as the growth of its recently established US operations as this market is entered for the first time. Richard Fisher Chairman 02 A robust financial result for 2014 Operating earnings Ó $46.2m 5.8% Operating earnings after tax grew by 8.7% to $46.2 million for the year. Increase of total dividends for the year to 36.5 cents per share. Cash conversion ratio 106% Strong operating EBITDA to cash conversion ratio. Five year Financials $’000 2014 2013 2012 2011 2010 Revenue from external customers 413,011 385,352 368,652 321,113 267,449 Operating EBITDA 101,082 95,072 93,026 81,802 Operating EBITDA margin 24.5% 24.7% 25.2% 25.5% 70,411 26.3% Operating earnings after tax* 46,192 42,498 42,479 36,406 32,928 Operating earnings per share (cents) 42.2 38.9 38.8 34.5 32.4 Profit after tax attributable to members 54,515 48,869 44,479 27,012 27,366 Earnings per share (cents) Dividend paid in respect of the financial year (cents) 49.8 36.5 44.7 34.5 40.6 34.0 25.6 29.75 26.9 28.25 Ungeared, tax free operating cash flow 106,784 104,311 88,542 75,411 69,059 Proportion of EBITDA converted to cash 106% 110% 95% 92% 98% Actual capital expenditure 26,665 19,264 18,412 16,723 14,266 Net debt 218,862 215,057 217,136 209,114 147,538 Operating EBITDA/Net interest (times) Net debt/EBITDA (times) Funeral homes (number) Cemeteries and crematoria (number) Employees (full-time equivalents) Prepaid contract sales/prepaid redemptions 8.0 2.2 243 14 1,532 8% 6.8 2.3 237 14 1,470 15% 6.7 2.3 232 14 1,470 16% 6.7 2.5 226 14 1,430 22% 7.1 2.1 177 12 1,112 20% * Operating earnings after tax excludes the net gain/(loss) on undelivered prepaid contracts, gain/(loss) on sale, disposal or impairment of non-current assets and non-controlling interests. InvoCare Annual Report 2014 03 Chief Executive Officer’s review A continued focus brings results InvoCare has delivered another solid result with net profit after tax attributable to members up 11.5% to $54.5 million. The number of deaths across all markets is estimated to have grown by 3.2%. Market share has remained relatively stable, arresting the declines experienced in 2013. Andrew Smith Chief Executive Officer 04 A continued focus brings results Ó 3.2% Growth in number of deaths across all markets. Net profit Net gains Sales revenue $54.5m Net profit after tax attributable to members up by 11.5%. $7.6m Net gains from undelivered prepaid contracts up by $6.5 million to $7.6 million after tax 7.2% Growth in sales revenue to $413 million. Sales revenue rose 7.2% to $413 million assisted in part by the full year impacts of the acquisitions made in 2013. Comparable sales revenues grew by 6.3% due to volume increases and increases in average case values. The result includes: • Operating earnings after tax up by 8.7% to $46.2 million; • Sales of $5.4 million from acquired businesses up by $3.4 million; • Group EBITDA up by 6.3% to $101.1 million; • Net gains from undelivered prepaid contracts up by $6.5 million to $7.6 million after tax; • Continued strong cash generation at 106% of EBITDA; and • Final dividend increased by 1.25 cents per share to 20.75 cents per share. The year has seen a significant focus on efforts to maintain and improve market share with investments in community support programmes and sponsorships on levels never before seen. In addition, there was a significant focus on enhancing service excellence through improved staff training and engagement. This training had a particular focus on enhancing the quality of the initial contact with client families. Marketing expenditure was increased to enhance brand name recognition, and the ongoing investment in modernising our digital facilities continued. These initiatives were most effective in our major metropolitan markets. In regional markets the skills and reputations of individual operators are vital elements of success. However, in some key areas changes to personnel over the last couple of years, and under-investment in marketing, has meant that market share growth in regional markets requires management attention in 2015. In another important development a total of six Australian and two New Zealand mobile arrangers are operating under the Simplicity brand, delivering personalised service to client families in convenient locations of the families’ choosing. Acquisitions The acquisitions completed in the Auckland market were integrated into InvoCare’s Auckland operations during the year and continued to produce very credible results for the New Zealand operation. Late in the year a small acquisition was completed in Melton, Victoria which added an outer western suburbs location to the network in Victoria. In a full year this operation is expected to add approximately $1.2 million in sales revenue. Overview of the year Comparable Australian funerals case volumes were up by 2.9% during the year with a very solid increase of 5.7% in the second half as the number of deaths rose to a more normalised level. Average revenue per funeral before disbursements and prepaid funerals rose by 3.4%. Despite favourable customer survey results InvoCare estimates that its market share has remained relatively static since December 2013. Customer survey responses showed that 98% of client families would recommend an InvoCare location; and the number saying pricing was in line with, or better than, expected has improved. Brand recognition, particularly for our key national brands, continues to be very strong – with unprompted brand recognition for White Lady remaining well above 50%. Case volumes in the Australian Cemeteries and Crematoria division were up by 3.8% for the year with a strong second half performance (up 7% on the prior period). Market share increased, driven in particular by a strong performance by New South Wales. Gross sales (i.e. prior to accounting for undelivered merchandise) rose by 5.1% to $85.2 million. Disappointingly, following an ACCC investigation into two client complaints, InvoCare was fined and entered into an enforceable undertaking with the ACCC. Considerable effort has been expended in both staff training and enhanced procedures to ensure no repetition of these unfortunate incidents. InvoCare Annual Report 2014 05 Capital expenditure $26.7m Capital expenditure totalled $26.7 million Ó 0.4% Increase in Australian funeral case numbers delivered from previously prepaid contracts Customer survey 98% of client families would recommend an InvoCare location Chief Executive Officer’s review continued During the year an electronic funeral arrangement solution using iPads was successfully rolled out across New South Wales, the Australian Capital Territory and Queensland, with the balance of the Australian states to be completed during 2015. A similar application has been rolled out for prepaid contracts and is also in the final stages of development in New Zealand. To date, over 10,000 funeral arrangements have been completed using this solution. During the year capital expenditure totalled $26.7 million with more than 50% of the expenditure directed towards the enhancement and improvement of the facilities available for client families. One major project underway is the installation of new audio visual technologies in major chapels to allow client families to live stream services for those family members unable to attend in person. No major property divestments occurred during the course of 2014. New Zealand funeral sales revenue rose 16.5% to $48.8 million with comparable locations rising by 8.3%. Case volumes rose 6.4% on a comparable basis and 14.7% in total. Case averages (excluding disbursements) rose 1.1% in line with expectations. A major focus of the New Zealand management team was the development of the first national brand in New Zealand, under the Simplicity brand name which is positioned in the affordable and practical segment. Singapore funeral sales rose 0.5% on an increase in case volumes of 1.3% compared to the prior period. Case averages declined slightly driven by mix, with a strong growth in the lower case average Simplicity Casket business and lower package sales mix in the Singapore Casket business. EBITDA to sales raised to 48.5% – an overall improvement of 0.6%. Prepaid contract investment earnings, which benefitted from the sale of an investment property, exceeded the growth in service delivery obligations. The number of new contract sales exceeded redemptions by 8.3% meaning the pool of future revenue streams has continued to increase during 2014. A total of 14.6% of Australian funeral case numbers are delivered from previously prepaid contracts, which is an increase of 0.4% on the previous year. 06 Left: The new water feature at Northern Suburbs Memorial Gardens and Crematorium provides a tranquil place for quiet contemplation very close to the centre of Sydney. Below left: A Simplicity mobile arranger with her liveried vehicle. Below: Built in 1879, the Simplicity Funerals Morphett Vale location has been used as a police station, community centre and school before becoming a funeral home in 1992. During 2014 the venue was proud to host a school reunion for former pupils and staff of the Morphett Vale Primary School which closed at this location in 1979. Outlook The ongoing investment in digital initiatives will continue into 2015 with the aim of improving the service offerings for our client families and enhancing the professionalism of our staff to ensure the highest level of care is delivered to families at a most difficult time. Further major property improvements are planned for 2015 including the last of the rectification works of earthquake damage sustained by InvoCare facilities in Christchurch, New Zealand. In New Zealand we remain on track to complete the acquisition of two memorial parks in the Christchurch region during the second quarter. This will be InvoCare’s first investment in Cemeteries and Crematoria in that country. InvoCare USA, Inc. began operations in February 2015 from a base in southern California servicing the San Diego, Orange County and Los Angeles regions. The operation, led by a seasoned executive from one of the major US funeral companies, is a low cost and low risk business model based around mobile arrangers providing a range of services typically provided in Australia, New Zealand and Singapore but generally not offered by funeral homes in the US market. In addition, a business to business cremation operation was acquired in November 2014 to facilitate the provision of cremation services in the relevant market. Commitment to the community InvoCare continues to support a wide variety of community and service organisations. One highlight during the year was the sacrifice of hair by many staff members in support of the Leukaemia Foundation’s World’s Greatest Shave and another major event hosted by many locations was the Biggest Morning Tea which supports Cancer Australia. Support was provided to The Salvation Army, Legacy, the Jane McGrath Foundation and Lions, among many others; and many of InvoCare’s staff were heavily involved in their local community service clubs such as Rotary. Following a long tradition of assisting families affected by international disasters, InvoCare provided support to the families affected by the Malaysian Airlines MH17 disaster. Team InvoCare Training programmes continue to be delivered to InvoCare’s staff to ensure they are equipped to provide the best possible service. Following the completion of a major staff survey in the previous year a major revamp of the recognition and rewards programme was completed and rolled out through the year. InvoCare, recognising that its people are the key to the consistent delivery of superior service to its client families, made the delivery of training to enhance the first contact experience for client families a key priority during the year. The implementation of iPad-based systems was underpinned by significant investment in training to ensure the workforce were ready and able to take the digital journey. Members of our staff also continue to be shareholders, with more than 25% of InvoCare employees participating in the Company’s Deferred Employee Share Plan, Exempt Employee Share Plan, or through direct ownership of shares in the Company. The future As many of you know, my term as CEO finishes at the end of April 2015. I would like to particularly thank my fellow directors, direct reports and all of the people at InvoCare for the support, guidance and friendships I have received and made over the last nine years with InvoCare. Without this collaboration the Company would not have seen its successful growth profile. Martin Earp (who becomes CEO on 1 May 2015) will, I am sure, be very successful in building on the excellent foundations that have been put in place since InvoCare’s listing in 2003 – and I take this opportunity to welcome Martin and wish him every success. InvoCare Annual Report 2014 07 Key strategies lead to positive growth In 2014 InvoCare maintained its focus on the core strategies to drive growth and profitability. Actual and projected calendar and fiscal year deaths – Australia 325 300 275 250 225 200 175 150 125 100 ) 0 0 0 ’ ( r e b m u N 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Actual national rolling annual deaths per ABS Trend plus/minus 5% ABS projected deaths 2012 Series B Estimated national rolling annual deaths per ABS Demographics The aging baby boomer generation will see a gradual increase in the number of deaths in InvoCare’s key markets creating possibilities for the business. As experienced in 2013 factors beyond InvoCare’s control, such as weather conditions and the severity of the flu season, will impact the number of deaths within specific periods. Changing attitudes to funerals, with more people wanting an involved and celebratory experience, will ensure InvoCare key brands such as White Lady Funerals will continue to prosper. Brand Awareness InvoCare aims to sustain and improve brand awareness by running integrated TV, radio, press and billboard campaigns. White Lady Funerals once again achieved aided brand awareness scores above 90% in InvoCare’s research. All other brands researched, including Guardian, Chipper, Purslowe, George Hartnett, Le Pine and Metropolitan, achieved aided brand awareness scores better than or around the same levels as the previous years. Marketing expenditure was increased significantly in 2014 which aided brand awareness based on the brand recognition research. Community Engagement Investments in community support programmes and sponsorship, often supplemented by the many hours our people devote to community and social organisations, were at the highest levels ever. Support was provided to The Salvation Army, Legacy, the Jane McGrath Foundation and Lions among many others. Following a long tradition of assisting families affected by international disasters InvoCare provided support to the families affected by the Malaysian Airlines MH17 disaster. Facilities Building on InvoCare’s robust business model we continue to seek new locations and acquisitions within the footprint of established shared service functions. During 2014 a total of four additional physical locations and a total of six Simplicity mobile arrangers were added to the network. After the end of the year InvoCare USA gained its licence to operate and now has seven Memorial Concierge locations operating in southern California. As InvoCare has continued to grow, more geographically dispersed locations have been acquired or examined. New or replacement sites are selected in high visibility locations as a cost effective means to promote brand awareness. We also continue to expend substantial sums maintaining our many heritage listed assets, especially in our locations where many generations of individual families are memorialised. 08 Left: A White Lady Approaching the West Chapel at Northern Suburbs Memorial Gardens and Crematorium. 0 0 50 100 150 200 250 300 500 1000 1500 2000 50 100 150 200 250 300 Total locations Total Total locations 12 locations 13 246 251 0 50 100 150 200 250 300 500 1000 0 12 14 13 0 Total locations 100 50 150 200 250 300 14 0 500 Employees 1000 257 1500 2000 1500 257 251 246 500 1000 1500 2000 Employees Employees 12 2000 0 0 13 12 14 13 14 1,470 1,470 1,470 1,532 1,470 1,532 15 15 16 16 15 15 104.3 106.7 88.5 104.3 106.7 13 0 12 14 13 20 20 20 60 80 100 120 40 8 14 0 Ungeared, tax free operating 20 60 80 40 8 100 120 Ungeared, tax free operating 88.5 12 13 14 12 13 14 20 20 0 0 13 12 14 13 14 104.3 88.5 106.7 104.3 106.7 12 Employees Employees (full-time equivalents) 13 1,470 1,470 14 12 13 0 14 0 5 5 1,532 1,470 1,470 25 1,532 10 15 20 30 0 5 10 20 40 60 80 100 120 10 15 20 25 30 Capital expenditure Actual expenditures ($ million) 0 Prepaid contract sales 10 5 20 40 60 80 100 120 Ungeared, tax free operating Actual expenditures 12 18.4 Prepaid contract sales 12 Ungeared, tax free operating 88.5 12 13 0 12 14 13 5 19.3 18.4 10 19.3 14 Prepaid contract sales/ Prepaid contract sales 5 0 prepaid redemptions (%) 10 12 Prepaid contract sales 13 0 14 12 13 20 40 8 60 80 26.7 15 26.7 15 16 15 100 16 15 120 Ungeared, tax free operating Ungeared, tax free operating 14 8 cash flow ($ million) 12 13 14 88.5 104.3 106.7 InvoCare Annual Report 2014 09 0 50 100 150 Total locations 0 5 10 15 Actual expenditures 12 Total locations 0 300 250 200 Our people the key to customer service The professionalism of our staff is constantly 13 being enhanced by investment in training and other learning opportunities presented 14 12 by InvoCare’s learning and development team. Our business is underpinned by the 13 personal service from our people supported 14 by highly efficient back end processes to ensure client families receive the most professional service possible. Core training modules continued to be delivered during 12 2014. Following the major staff survey undertaken in 2013 we have focused on 13 recognition and rewards. Unlike most of 14 our competitors, who are often family owned, we are able to offer our staff career advancement in the industry, as well as an opportunity to own shares in the Company. 246 251 257 Employees 2000 1000 246 251 1500 257 246 Future Income Streams The number and value of prepaid contracts continues to grow, providing our clients with the peace of knowing 500 that when the time comes their families are protected from unexpected burdens. We work with our investment managers to ensure that investment strategies are put in place that will continue to ensure good returns are delivered from our pre- need contracts. InvoCare also continues to expand the range of memorialisation options available to our client families ensuring valuable future revenue streams as these products are delivered. 1,470 1,470 251 257 1,532 0 5 5 0 15 10 25 10 15 Actual expenditures Digital We aim to use digital solutions to enhance the client families’ experience of InvoCare and to ensure we deliver these services in a cost effective way. During 2014 iPad applications were implemented for funeral 12 18.4 arrangements and prepaid contract Actual expenditures processes, following significant investments in this technology. This process was augmented by a substantial investment in training to ensure that our workforce is empowered to take the digital journey. 13 We aim to ensure that the ambience of our locations continues to meet client expectations and that the most modern facilities, such as audio visual systems and web casting, are available for those who choose them. Capital Management InvoCare’s capital management initiatives are designed to ensure that an appropriate 30 20 mix of debt and equity is maintained to maximise returns to shareholders while ensuring adequate funds are available to support growth and expansion. The 30 20 Company is in a healthy financial position and its strong operating cash flows provide necessary funds to pay at least 75% of operating earnings after tax to shareholders as dividends, meet debt servicing 19.3 obligations, invest in property, plant and equipment, as well as fund smaller, new 20 business acquisitions. The Company’s Dividend Reinvestment Plan has been supported by up to approximately 25% of shareholders. In the event opportunities become limited for investing in the growth of the business, the Company will consider making alternative returns to shareholders. Prepaid contract sales 10 18.4 26.7 15 19.3 26.7 14 12 16 12 14 13 30 25 20 25 0 5 18.4 19.3 26.7 13 14 8 15 12 13 14 12 13 14 Our digital business strategy InvoCare’s Digital Business Strategy is about delivering a digitally-enabled customer, employee and partner experience to create value. For our customers our strategy is about delivering a ‘Digital Celebration of Life’ experience. Customer Journey End of Life Considerations Building Relationships and Trust Servicing Customers and Arranging the Service Celebrating and Memorialising Lives Ongoing Customer Care and Engagement Research (Increasingly online/Digital Channel- supported) Initial Contact/ Conversation and Quoting At/Pre-Need Arrangement including Contract Acceptance Preparing for and Delivering the Service Post-Service Support, Follow-Up and Continuous Engagement Online (Websites including Search) and Social Media Electronic Business and Customer Relationship Management Digital Business Strategy Front and Back Office The ‘Digital Celebration of Life’ accompanies our customers throughout their journey interacting with our business, from contacting us and arranging a funeral, to celebrating and memorialising the lives of their loved ones, all the way through to after-service care and engagement. 10 Our key achievements 2014 Customer Journey and Digital Celebration of Life InvoApp InvoAV HeavenAddress InvoCare has launched ‘InvoApp’, a customer service App that empowers frontline staff to digitally-arrange funerals (from customer contact management to contract acceptance) with less time spent on administration. This awards more quality time to better prepare for the funeral, and to celebrate and memorialise lives in ways that are more in tune with our customers’ needs. Over 10,000 funeral services have been arranged with InvoApp thus far. InvoCare has started to introduce a new Internet-enabled digital audio visual system that features an industry- first innovation: ‘InvoCloud’. Using InvoCloud, digital content to celebrate lives is easier to produce, prepare and share before, during and after a funeral service (including funeral recordings and web streaming). Supported with InvoCloud, funeral services benefit from life celebrations that are digitally- memorialised for future generations. InvoCare has completed the rollout of HeavenAddress Resting Place at its Castlebrook, Northern Suburbs, Pinegrove and Mount Thompson Memorial Parks. Resting Place enables customers to search for the physical memorials of their loved ones online, with digital (Google-powered) maps to locate the memorial – with the ability to link it with a digital HeavenAddress memorial (www.heavenaddress.com). The benefits for our business • Grow and protect our market share in an increasingly more digital marketplace. • Better service the digitally-savvy customers of the present and importantly the future. • Strategically leverage digital to expand our business (enable greater scale, faster growth). • Build a more efficient, productive and competitive business. • Harness digital to empower our people and foster a culture of innovation. InvoCare Annual Report 2014 11 Every year InvoCare locations provide support to various organisations to enable them to commemorate those that served in all theatres of war. Each of our cemetery and crematoria locations set aside dedicated areas for the interment of those who have served their country. 12 Opposite: A Remembrance Day ceremony at Lake Macquarie Memorial Park organised in conjunction with the Toronto RSL sub-branch involving cadets from the Newcastle region. Above: Dignitaries at the opening of the RSL Memorial Area at Forest Lawn Memorial Park on ANZAC Day in 2014. Right: The tranquil setting of the RSL Memorial Area at Forest Lawn Memorial Park. Below Right: Cadets in front of the RSL Memorial at Lake Macquarie Memorial Park. InvoCare Annual Report 2014 13 The InvoCare Way With the growth of the InvoCare business in Australia, and its expansion into New Zealand, Asia and most recently into the US, it has become increasingly important that everyone who works within the InvoCare group has a consistent and shared understanding of the Company’s vision, mission, philosophy and, most importantly, the Values, which underpin the way that every employee behaves. Shared, consistent values will significantly impact business performance, and will help InvoCare reach its potential. ‘Let’s do Tea’ – ‘The InvoCare Way’ launched across the InvoCare business In mid 2014 work started on the development of The InvoCare Way, which is the umbrella term used in the Company for Vision, Mission, Philosophy and Values. Built from within the InvoCare name, the key components of ‘The InvoCare Way’ were developed: Innovation Can be found within our Vision: Our Vision: To be known around the world as the people who excel at honouring, celebrating and memorialising a loved one. The InvoCare Way To be known around the world as the people who excel at honouring, celebrating and memorialising a loved one. OurO MWe’re here to support our clients, their families and friends, at Missi n a pivotal time in their lives. We do this by being compassionate, exceeding expectations and delivering outstanding service. OurV Values Innovation We continuously look to innovate. To take new approaches, to fi nd new opportunities, to use new technologies. But always to help client families to farewell a loved one. Vocation Our people are passionate about the service they provide to client families and the local community – their work is their vocation. Care We take great pride in what we do but caring is at our heart. We are a team of compassionate people. By always being genuine in this care, we build trust with our customers, suppliers and our communities. Vocation Can be found within our Mission and Philosophy: Our Mission: We’re here to support our clients, their families and friends, at a pivotal time in their lives. We do this by being compassionate, exceeding expectations and delivering outstanding service. Care Is at the foundation of our Values: Our Values: Collaboration, Accountability Responsibility, Excellence. 14 CARE is at the core of InvoCare. It brings together our four key values. Collaboration CARE is at the core of InvoCare. It brings together our four key values. The Theeeeeeeee We respect one another and achieve more by working together as a team across the InvoCare group Collaboration We respect one another and achieve more by working together as a team across the InvoCare group InvoCare Invooooooooo The Theeeeeeeee Wayyyyyyyyy Way InvoCare Invooooooooo Wayyyyyyyyy Way Accountability We always act with integrity, through honesty, fairness and accountability Accountability We always act with integrity, through honesty, fairness and accountability Responsiveness Responsiveness We put our clients and community (cid:240)(cid:85)(cid:86)(cid:87), by listening, anticipating, supporting and actioning, to exceed their expectations We put our clients and community (cid:240)(cid:85)(cid:86)(cid:87), by listening, anticipating, supporting and actioning, to exceed their expectations TTTTTToTooo To be known around the world as the people who excel at honouring, celebrating and memorialising a loved one. aaaatttt To be known around the world as the people who excel TTTTTToTooo aaaatttt at honouring, celebrating and memorialising a loved one. urMWe’re here to support our clients, their families and friends, at Missi n urMWe’re here to support our clients, their families and friends, at Missi n a pivotal time in their lives. We do this by being compassionate, exceeding expectations and delivering outstanding service. aaaa p WWWWWWWWWe WWWWWWWWWe eeeexxxx a pivotal time in their lives. We do this by being compassionate, aaaa p exceeding expectations and delivering outstanding service. eeeexxxx Excellence Excellence We continuously improve the way we do business We continuously improve the way we do business (cid:91)(cid:79)(cid:89)(cid:86)(cid:92)(cid:78)(cid:79)(cid:3)(cid:80)(cid:85)(cid:85)(cid:86)(cid:93)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:19)(cid:3)(cid:74)(cid:89)(cid:76)(cid:72)(cid:91)(cid:80)(cid:93)(cid:80)(cid:91)(cid:96)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:197)(cid:76)(cid:95)(cid:80)(cid:73)(cid:80)(cid:83)(cid:80)(cid:91)(cid:96) (cid:91)(cid:79)(cid:89)(cid:86)(cid:92)(cid:78)(cid:79)(cid:3)(cid:80)(cid:85)(cid:85)(cid:86)(cid:93)(cid:72)(cid:91)(cid:80)(cid:86)(cid:85)(cid:19)(cid:3)(cid:74)(cid:89)(cid:76)(cid:72)(cid:91)(cid:80)(cid:93)(cid:80)(cid:91)(cid:96)(cid:3)(cid:72)(cid:85)(cid:75)(cid:3)(cid:197)(cid:76)(cid:95)(cid:80)(cid:73)(cid:80)(cid:83)(cid:80)(cid:91)(cid:96) Innovation Innovatioooooooo Vocation Innovatioooooooo Innovation We continuously look to innovate. We continuously lookkkkk ttto (cid:59)(cid:86)(cid:3)(cid:91)(cid:72)(cid:82)(cid:76)(cid:3)(cid:85)(cid:76)(cid:94)(cid:3)(cid:72)(cid:87)(cid:87)(cid:89)(cid:86)(cid:72)(cid:74)(cid:74)(cid:74)(cid:74)(cid:74)(cid:79)(cid:79)(cid:79)(cid:79) (cid:59)(cid:86)(cid:3)(cid:91)(cid:72)(cid:82)(cid:76)(cid:3)(cid:85)(cid:76)(cid:94)(cid:3)(cid:72)(cid:87)(cid:87)(cid:89)(cid:86)(cid:72)(cid:74)(cid:79)(cid:76)(cid:90)(cid:19)(cid:3)(cid:91)(cid:86)(cid:3)(cid:196)(cid:85)(cid:75)(cid:3) Vocation Our people are passionate about the service they provide Care We continuously look to innovate. We continuously lookkkkk ttto new opportunities, tttooooo new opportunities, to use new Our people are passionate to client families and the local (cid:59)(cid:86)(cid:3)(cid:91)(cid:72)(cid:82)(cid:76)(cid:3)(cid:85)(cid:76)(cid:94)(cid:3)(cid:72)(cid:87)(cid:87)(cid:89)(cid:86)(cid:72)(cid:74)(cid:74)(cid:74)(cid:74)(cid:74)(cid:79)(cid:79)(cid:79)(cid:79) (cid:59)(cid:86)(cid:3)(cid:91)(cid:72)(cid:82)(cid:76)(cid:3)(cid:85)(cid:76)(cid:94)(cid:3)(cid:72)(cid:87)(cid:87)(cid:89)(cid:86)(cid:72)(cid:74)(cid:79)(cid:76)(cid:90)(cid:19)(cid:3)(cid:91)(cid:86)(cid:3)(cid:196)(cid:85)(cid:75)(cid:3) technologies. But aalwwwwww technologies. But always to new opportunities, tttooooo new opportunities, to use new help client families ttttoooooo help client families to farewell technologies. But aalwwwwww technologies. But always to help client families ttttoooooo help client families to farewell a loved one. a loved one. their vocation. about the service they provide to client families and the local community – their work is community – their work is their vocation. a loved one. a loved one. Care We take great pride in what we do but caring is at our heart. We are a team of compassionate people. By always being genuine in this care, we build trust with our customers, suppliers and We take great pride in what we do but caring is at our heart. We are a team of compassionate people. By always being genuine in this care, we build trust with our customers, suppliers and our communities. our communities. CARE is at the core of InvoCare. It brings together our four key values. Collaboration We respect one another and achieve more by working together as a team across the InvoCare group Accountability We always act with integrity, through honesty, fairness and accountability Responsiveness We put our clients and community fi rst, by listening, anticipating, supporting and actioning, to exceed their expectations Excellence We continuously improve the way we do business through innovation, creativity and fl exibility more stories which illustrate the values, and sharing and rewarding the values in action. To support the launch, every employee will receive a mug with the CARE values on it, and will be invited to have a ‘cup of tea’ from the tea box in each location, using tea bags with the particular values detailed on them. Throughout 2015, ‘The InvoCare Way’ will be cascaded throughout the business, and will be integrated into a number of key people development and management tools. InvoCare Annual Report 2014 15 Collaboration Responsiveness Collaboration The key to a successful implementation is to make sure that the values are used in everyday life by employees, and define how they behave. The values are infused into every aspect of life at InvoCare. So it is this theme of Infusing Values that is used to engage everyone at InvoCare throughout 2015. It is centred around an activity which is at the heart of what happens within the InvoCare business. Having a conversation over a cup of tea. Responsiveness Accountability Accountability Excellence Excellence This image is very relevant to the InvoCare business, as it can be shared between work colleagues, it is enjoyable – and it is a normal part of conducting a funeral arrangement or funeral. It is a simple idea that will hold ‘The InvoCare Way’ together. Videos have been developed, using the image of sharing a cup of tea – interwoven with real stories from the InvoCare business which illustrate how CARE values are already evident within the business. A key part of the launch process will be gathering Graeme Rhind Chief Operating Officer, New Zealand Experience 38 years Phillip Friery Chief Financial Officer and Company Secretary Experience 20 years Wee Leng Goh Chief Executive Officer Singapore Experience 7 years Greg Bisset Chief Operating Officer, Australia Experience 7 years Andrew Smith Chief Executive Officer Experience 9 years Andi Luiskandl Chief Information Officer Experience 3 years Management team The management team at InvoCare has more than 80 years’ combined relevant industry experience and many team members have held senior executive roles in other industries. Each operational area is supported by a network of general and regional managers and other specialist staff. All operations are supported by specialist back office management in the areas of Marketing & Communications, Prepaid Funeral Administration, Human Resources, Digital Business, Property & Facilities, Finance, Internal Audit, and Risk Management. We welcome Martin Earp Martin Earp joined InvoCare on 30 March 2015 and will assume the role of CEO and Managing Director on 1 May 2015, replacing Andrew Smith. Martin was most recently responsible for the strategic direction and leadership of Campus Living Villages. He has extensive experience in both providing leadership to operational businesses and working in project development teams. He has worked for Transfield Holdings for over twelve years in a number of operational roles including CEO of the Australian Biodiesel Group (ASX listed company), General Manager Airtrain (where he also served as a Director for eight years) and Business Development Manager for Airport Rail Link. Prior to this he spent almost 10 years with a London based consultancy advising on large infrastructure and investment deals. Martin holds an MBA from the Australian Graduate School of Management and an MSc and BSc (Hons) in Traffic Engineering and Transport Planning. 16 Financial Report InvoCare Limited and Controlled Entities Annual Financial Report for the financial year ended 31 December 2014 The financial report covers the consolidated financial statements for the consolidated entity consisting of InvoCare Limited and its subsidiaries. The financial report is presented in Australian currency. InvoCare Limited (ABN 42 096 437 393) is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 4, 153 Walker Street North Sydney NSW 2060 A description of the nature of the consolidated entity’s operations and its principal activities is included in the Directors’ Report. The financial report was authorised for issue by the directors on 17 February 2015. The Company has power to amend and reissue the financial report. Through the use of the internet, InvoCare ensures corporate reporting is timely, complete, and available globally at minimum cost to the Company. All press releases, financial reports and other information are available on the Company’s website: www. invocare.com.au Income Tax Contents Directors’ Report Corporate Governance Statement Remuneration Report Auditor’s Independence Declaration Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements Note 1 Summary of Significant Accounting Policies Note 2 Financial Risk Management Note 3 Segment Information Note 4 Revenue from Continuing Operations Note 5 Expenses Note 6 Note 7 Key Management Personnel Disclosures Note 8 Share-based Payments Note 9 Remuneration of Auditors Note 10 Dividends Note 11 Earnings per Share Note 12 Cash and Cash Equivalents Note 13 Trade and Other Receivables Note 14 Inventories Note 15 Prepaid Contracts Note 16 Interests in Other Entities: Subsidiaries Note 17 Interests in Other Entities: Associates Note 18 Property, Plant and Equipment Note 19 Intangible Assets Note 20 Derivative Financial Instruments Note 21 Trade and Other Payables Note 22 Borrowings Note 23 Provisions for Employee Benefits Note 24 Current Liabilities expected to be settled in twelve months Note 25 Contributed Equity Note 26 Reserves and Retained Profits Note 27 Non-controlling Interests Note 28 Capital and Leasing Commitments Note 29 Business Combinations Note 30 Contingent Liabilities and Contingent Assets Note 31 Cash Flow Information Note 32 Deed of Cross Guarantee Note 33 Events after the Balance Sheet Date Note 34 Related Party Transactions Note 35 Parent Entity Financial Information Note 36 Economic Dependence Note 37 Critical Accounting Estimates and Judgements Note 38 Company Details Note 39 Authorisation of the Financial Report Directors’ Declaration Independent Auditor’s Report 18 33 38 51 52 53 54 55 56 57 57 63 70 71 72 73 75 76 79 80 80 81 81 81 82 83 85 86 88 89 89 89 90 90 91 92 93 94 94 96 96 97 99 99 99 100 101 101 101 102 103 InvoCare Annual Report 2014 17 Directors’ Report The directors submit their report on the consolidated entity consisting of InvoCare Limited (the “Company”) and the entities it controlled for the year ended 31 December 2014. InvoCare Limited and its controlled entities together are referred to as “InvoCare”, the “Group” or the “consolidated entity” in this Directors’ Report. Directors The following persons were directors of InvoCare Limited during the whole of the financial year and until the date of this report: Richard Fisher (Chairman) Andrew Smith (Chief Executive Officer) Christine Clifton Roger Penman Aliza Knox Richard Davis Gary Stead was appointed as an independent Non-executive Director on 1 September 2014 and is a Director at the date of this report. Following a sudden and serious health issue suffered by Roger Penman on 1 January 2015, he has been granted leave of absence until 30 June 2015 or such earlier date as the Board is advised that he is fit to return to normal duties. On 17 December 2014, it was announced that Martin Earp will replace Andrew Smith as Managing Director and Chief Executive Officer with effect from 1 May 2015. Principal activities The Group is the leading provider of services in the funeral industry in Australia, New Zealand and Singapore with smaller operations in Hong Kong and most recently the USA. Other than disclosed in this report there were no significant changes in the nature of these activities during the year. Significant changes in the state of affairs There have been no significant changes in the state of the Group’s affairs during the financial year. Operating results The operating earnings after tax for the year was $46,192,000 (2013: $42,498,000) as reconciled on page 19. The consolidated after tax profit of the Group attributable to shareholders was $54,515,000 (2013: $48,869,000). More detailed information is included in the operating and financial review set out in the report. Dividends The Directors have recommended a final, fully franked dividend of 20.75 cents per share payable on 2 April 2015. Total full year dividends are 36.5 cents, being 2 cents or 5.8% higher than 2013. The full year dividend payout ratio is 87% (2013: 89%) of operating earnings after tax. Dividends to ordinary shareholders of the Company have been paid or recommended as follows: 2014 $’000 2013 $’000 Interim ordinary dividend of 15.75 cents (2013: 15 cents) per fully paid share paid on 3 October 2014 17,329 16,505 Final ordinary dividend of 20.75 cents (2013: 19.5 cents) per fully paid share has been recommended by directors on 17 February 2015 to be paid on 2 April 2015 Total ordinary dividends of 36.5 cents (2013: 34.5 cents) 22,831 40,160 21,456 37,961 All dividends are fully franked at the company tax rate of 30%. The Dividend Reinvestment Plan (“DRP”) was available for the 2014 interim dividend and $15,881,000 (2013: $13,305,000) was paid in cash and $1,448,000 (2013: $3,200,000) through the issue of 131,414 (2013: 288,312) shares purchased on market at $11.02 (2013: $11.09) per share via the DRP. The shortfall in the DRP take-up was not underwritten in 2014 and shares were not issued at a discount. The DRP will apply to the final 2014 dividend which is not being underwritten and no discount to the market price will apply. 18 Operating and Financial Review Result highlights: Total sales to external customers Other revenue Operating expenses(i) Operating EBITDA(i) Operating margin Depreciation and amortisation Finance costs Interest income Business acquisitions costs Share of loss of associates Operating earnings before tax(i) Income tax on operating earnings(i) Effective tax rate Operating earnings after tax(i) Operating earnings per share(i) Net gain on undelivered prepaid contracts after tax(i) Asset sales gain or (loss) after tax(i) Impairment gain after tax(i) Non-controlling interest Net profit after tax attributable to ordinary equity holders of InvoCare Basic earnings per share Interim ordinary dividend per share Final ordinary dividend per share Total ordinary dividend per share (i) Non-IFRS financial information. Change $’m % 2014 $’m 413.0 7.2 (319.1) 101.1 24.5% (19.2) (15.5) 0.7 (1.2) (0.5) 65.4 (19.2) 29.4% 46.2 2013 $’m 385.4 6.8 (297.1) 95.1 24.7% (17.8) (16.8) 0.7 (0.5) (0.3) 60.3 (17.8) 29.5% 42.5 27.6 0.4 (22.0) 6.0 (1.4) 1.3 – (0.7) (0.2) 5.1 (1.4) 3.7 42.2 cents 38.9 cents 3.3 cents 7.6 0.3 0.4 (0.1) 54.5 1.1 3.2 2.2 (0.1) 48.9 6.5 (2.9) (1.8) – 5.6 49.8 cents 44.7 cents 5.1 cents 15.75 cents 15.00 cents 0.75 cents 20.75 cents 19.50 cents 1.25 cents 36.50 cents 34.50 cents 2.00 cents 7.2% 5.9% 7.4% 6.3% (0.2%) 7.9% (7.7%) – 140.0% 66.7% 8.5% 7.9% (0.2%) 8.7% 8.5% 11.5% 11.4% 5.0% 6.4% 5.8% Operating EBITDA and operating earnings are financial measures which are not prescribed by Australian equivalents to International Financial Reporting Standards (“AIFRS”) and represent the earnings under AIFRS adjusted for specific non-cash and significant items. The table above summarises the key reconciling items between net profit after tax attributable to InvoCare shareholders and operating EBITDA and operating earnings before and after tax. The operating EBITDA and operating earnings before and after tax information included in the table below has not been subject to any specific audit or review procedures by our auditor but has been extracted from the accompanying financial report. InvoCare Annual Report 2014 19 Business model InvoCare’s business model is based upon earnings growth from the following pillars: – Annual sales revenue growth from: – Ageing population trends with an approximate 1% annual increase in deaths; – Consistent annual 3-4% pricing increments; – Market share improvements, including new funeral locations, generating 1% revenue growth; – Prepaid contracts providing families emotional and financial peace of mind as well as securing future market share for InvoCare; – Business acquisitions, which have contributed more than half of InvoCare’s compound annual sales growth since listing; and – Operating leverage improvement, through delivery of revenue growth pillars and cost control so that annual EBITDA growth is greater than annual sales growth. Not all the pillars contributed positively to 2014 results as depicted in the following table. More detail is provided throughout this report. Favourable demographics Pricing/average contract values Market share improvements Prepaid contracts New locations Business acquisitions Operating leverage ✓ ✓ ↔ ✓ ✓ ✓ ✗ Results overview 2014 was a solid year for InvoCare with operating earnings after tax up by 8.7% or $3.7 million to $46.2 million (2013: $42.5 million). Reported profit after tax also had a large improvement, up 11.6% or $5.6 million to $54.5 million (2013: $48.9 million). The results were underpinned by an increase in the number of deaths which appears to have recovered from the declines experienced in 2013. Overall death numbers in InvoCare’s markets have been estimated to have increased by 3.2% over the year. Most of this improvement came in the second half with comparable funeral case volumes growing 6.1% compared to the near flat growth experienced in the first half. InvoCare believes from its market intelligence that the declines in comparable business funeral market share experienced in 2013 have been arrested with market share at the end of 2014 similar to that at the end of 2013. Although not achieving comparable funeral business market share growth in the year, share growth was achieved in cemeteries and crematoria operations. Sales revenues were up 7.2% or $27.7 million to $413.0 million (2013: $385.3 million) supported by improved volumes and average funeral contract values, which were up 4.2% on the prior corresponding period (“PCP”). The higher average contract values reflect the impact of price increases applied in December 2013 and favourable foreign currency movements due to the weakening Australian dollar. The sales result also included the full year impact of New Zealand acquisitions completed during 2013 and a small contribution from an acquisition in Australia completed in December 2014. Together these new businesses contributed $5.4 million to sales, or $3.4 million of the sales increase, as well as a small growth in the Group’s overall funeral market share. Group EBITDA was up $6.0 million or 6.3% to $101.1 million (2013: $95.1 million). As a percentage of sales, EBITDA margins declined from 24.7% in 2013 to 24.5% in 2014. Most of this decline occurred in the second half where margins fell from 26.7% in 2013 to 26.0%. By comparison, first half margins improved 0.3% from 22.5% in 2013 to 22.8%. The 2013 second half margins were positively impacted by an interim price increase not repeated in 2014. In addition the unsustainable cost constraints put in place in the second half of 2013 to combat the low volume environment were eased in 2014 following a recovery in case volumes. Statutory reported profit benefited from a $6.5 million after tax improvement in the net gains on undelivered prepaid contracts to $7.6 million after tax. This was partially offset by declines in after tax asset sale gains, to $0.4 million (2013: $3.2 million), and net impairment reversals of $0.4 million (2013: $2.2 million). Cash flows remained strong for the year. Ungeared, tax free operating cash flow was 106% of EBITDA (2013: 110%), underpinning the ability to pay a fully franked final dividend of 20.75 cents per share, which is 1.25 cents up on last year. This is in addition to the 15.75 cent interim dividend paid in October, taking total dividends declared for the year to 36.5 cents (2013: 34.5 cents). 20 Directors’ Report continuedSales, EBITDA, margins and major profit & loss line items The following table summarises sales revenue, EBITDA and margins by country segments. 1H14 $’m 1H13 $’m Var % 2H14 $’m 2H13 $’m Var % FY14 $’m FY13 $’m Var % Sales Revenue Australia New Zealand Singapore Comparable business Acquisitions Total EBITDA Australia New Zealand Singapore Comparable business Acquisitions Total Margin on sales Australia New Zealand Singapore Comparable business Acquisitions Total 169.4 17.5 6.7 193.6 2.4 196.1 37.8 3.4 3.2 44.4 0.4 44.7 22.3% 19.5% 47.5% 22.9% 14.9% 22.8% 161.8 14.8 6.5 183.1 0.5 183.6 35.9 2.2 3.1 41.2 0.1 41.3 22.2% 15.0% 47.4% 22.5% 16.9% 22.5% 4.7% 18.4% 2.4% 5.7% 6.8% 5.3% 53.4% 2.6% 7.7% 8.3% 0.1% 4.5% 0.1% 0.4% 0.3% 186.7 176.4 20.1 7.1 214.0 3.0 217.0 47.9 4.3 3.5 55.7 0.7 56.3 25.6% 21.2% 49.5% 26.0% 23.0% 26.0% 17.3 6.4 200.2 1.5 201.7 46.4 4.0 3.1 53.5 0.3 53.8 26.3% 22.9% 48.6% 26.7% 17.2% 26.7% 5.8% 16.0% 10.6% 6.9% 7.6% 3.1% 7.4% 12.7% 4.0% 4.8% (0.7%) (1.7%) 0.9% (0.7%) (0.7%) 356.1 338.2 37.6 13.8 407.6 5.4 413.0 85.7 7.7 6.7 100.0 1.1 101.1 24.1% 20.4% 48.5% 24.5% 19.3% 24.5% 32.1 13.0 383.3 2.0 385.3 82.3 6.2 6.2 94.7 0.3 95.1 24.3% 19.3% 48.0% 24.7% 17.1% 24.7% 5.3% 17.1% 6.5% 6.3% 7.2% 4.1% 23.9% 7.6% 5.6% 6.3% (0.2%) 1.1% 0.5% (0.2%) (0.2%) The following table shows the EBITDA performance of the business by halves, discussed in the following sections of the report. 1H14 $’m 1H13 $’m Var % 2H14 $’m 2H13 $’m Var % FY14 $’m FY13 $’m Var % Total – all lines of business Sales Revenue Other revenue Expenses: Cost of goods sold Personnel Advertising & promotions Occupancy & facility expenses Motor vehicle expenses Other expenses Operating expenses Operating EBITDA Operating margin % 196.1 183.6 3.5 3.4 6.8% 2.9% 217.0 201.7 3.7 3.4 7.6% 8.8% 413.0 385.3 7.2 6.9 7.2% 4.3% (57.2) (63.6) (7.6) (53.9) (60.0) (6.1%) (6.0%) (6.8) (11.8%) (64.4) (65.7) (7.3) (59.3) (59.5) (6.4) (8.6%) (10.4%) (14.1%) (13.1) (12.7) (4.1) (9.1) (4.0) (8.4) (154.8) (145.8) 44.7 41.3 22.8% 22.5% (3.1%) (2.5%) (8.3%) (6.2%) 8.2% 0.3% (14.0) (13.3) (4.7) (8.1) (4.3) (8.5) (164.3) (151.3) 56.3 53.8 26.0% 26.7% (5.3%) (9.3%) 4.7% (8.6%) 4.6% (0.7%) (121.6) (129.4) (14.9) (27.1) (8.8) (17.2) (319.1) 101.1 24.5% (113.2) (119.4) (7.4%) (8.4%) (13.2) (12.9%) (26.0) (8.3) (16.8) (297.1) 95.1 24.7% (4.2%) (6.0%) (2.4%) (7.4%) 6.3% (0.2%) Note: The data in the tables above has been calculated in thousands and presented in millions and as a consequence some additions cannot be computed from the above tables as presented. InvoCare Annual Report 2014 21 Number of deaths The number of deaths continues to be a very significant driver of InvoCare’s performance. The ageing of the population in InvoCare’s markets and the long-term trend of increasing numbers of deaths are major pillars of growth for the Group. However, short-term fluctuations in the numbers of deaths do occur such that in any year the number can be up to 5% above or below the trend line, as shown in the following graphs for both Australia and New Zealand. The Australian graph incorporates the most recent long-term death projections released in November 2013 by the Australian Bureau of Statistics. Actual and projected calendar and fiscal year deaths – Australia 325 300 275 250 225 200 175 150 125 100 ) 0 0 0 ’ ( r e b m u N 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Actual national rolling annual deaths per ABS Trend plus/minus 5% ABS projected deaths 2012 Series B Estimated national rolling annual deaths per ABS Projections for New Zealand have been sourced from the latest data supplied by Statistics New Zealand and have a similar profile to that expected in Australia in future years. 22 Directors’ Report continuedNumber (’000)22.527.532.537.542.547.552.557.52050204520402035203020252020201520102005200019951990Actual rolling annual deaths per Statistics NZNZ projected deaths 2011 (base)-2061Trend plus/minus 5%Actual and projected calendar and fiscal year deaths – New Zealand The table below1 illustrates the trends in InvoCare’s funeral case volumes over the last 24 months. Australia New Zealand Singapore Total comparable business Total Group (incl. acqns) 2014 Vs 2013 2013 Vs 2012 Half 1 Half 2 Full Year Half 1 Half 2 Full Year (0.1%) 1.8% 1.3% 0.1% 1.4% 5.7% 10.6% 1.3% 6.1% 6.8% 2.9% 6.4% 1.3% 3.2% 4.2% (0.3%) (2.7%) (2.9%) (0.7%) 2.0% (5.1%) (7.4%) 2.6% (5.1%) (2.0%) (2.8%) (5.2%) (0.3%) (3.0%) (0.1%) During 2014, funeral case volumes in comparable businesses increased by 3.2% against the prior year. Most of this improvement occurred in the second half where year on year volumes improved 6.1% compared to 0.1% in the first half. The strong growth in the second half more than recovered the 5.1% decline experienced in the PCP. InvoCare’s market intelligence indicates that the comparable business volume growth in 2014 was driven by an increase in the number of deaths which showed an estimated 3.2% increase across all InvoCare’s geographical markets, reversing the cyclical downturns experienced in 2013. InvoCare estimates it has maintained its funeral market share since December 2013 in its comparable business. The New Zealand acquisitions have contributed to a small growth in the Group’s overall funeral market share. The Australian cemeteries and crematoria businesses operating in New South Wales and Queensland experienced a 3.8% increase in cremation and burial service volumes. The number of deaths in those markets was less than this increase. Accordingly, cemeteries and crematoria market share has grown, partly attributable to service initiatives which attracted more case volumes. Commentary on the period since 31 December 2014 is set out in the Outlook section on page 29. Sales Key components of the comparable sales movements are summarised below: – Australian funeral sales increased 5.3% or $14.4 million to $285.9 million (2013: $271.5 million). – – – Average revenue per funeral contract, excluding disbursements and delivered prepaid impacts, increased 3.4% (2013: 5.1%) and contributed an estimated $7.4 million to sales growth. This increase included both price and mix impacts. The price component included normal price increases applied in December 2013. The increase in 2014 was less than 2013 due to additional price increases taken in the second half of 2013 which were not repeated in 2014. The number of funeral services performed was up on the previous year by 2.9%. Most of this growth came in the second half with the number of services up 5.7% compared to a 0.1% decline in the first half. InvoCare’s market intelligence indicates that market share initiatives introduced from mid-2013 have been successful with the Australian funeral market share being maintained at the end of 2014 against the PCP. These initiatives included: • Reinforcing customer service excellence; • Enhancing employee engagement; • Additional targeted investment in advertising and promotion; • Continued investment in digital facilities and omni-channel; • Community involvement; • The roll out of mobile arrangers in six localities in Australia; and • Co-branding some key locations. – The number of new prepaid funeral contracts sold for comparable Australian business declined by 1.1% on the previous year and exceeded the number of prepaid services performed by 8.3% (2013: 15.3%). Prepaid funerals performed in the year remained consistent at 14.6% (2013: 14.5%) of comparable at need funerals. – Australian cemeteries and crematoria sales were up 6.1% or $4.7 million to $81.3 million (2013: $76.6 million). This included deferred revenue adjustments of $4.0 million which were $0.6 million lower than the prior year (2013: $4.6 million). List prices were raised by an average of 4.9% during the first quarter, which along with case volume increases of 3.8%, contributed to the sales result. 1 Comparable businesses in the table comprise a different mix in 2014 from 2013. The 2013 percentages are as presented in the FY2013 results presentation. InvoCare Annual Report 2014 23  – Comparable New Zealand sales (in NZD) were up 8.3% or $3.1 million to $40.9 million (2013: $37.8 million). This comprised increased case volumes which were up 6.4% on PCP and higher funeral case averages which increased 1.1% following planned price increases. In AUD New Zealand sales were up 17.1% to $37.6 million (2013: $32.1 million) which included favourable FX movements of $2.8 million. Including acquisitions, New Zealand sales (in NZD) were up 16.5% or $6.6 million to $46.8 million. – – Singapore funeral sales (in SGD) increased by 0.5% to $15.8 million (2013: $15.7 million). Case volumes improved 1.3% on PCP but were offset by average contract values which were down 0.6% due to a shift in product mix towards lower value packages and increased competition. In AUD Singapore sales increased 6.5% to $13.8 million (2013: $13.0 million) which included favourable FX movements of $0.8 million. Intra-group elimination of cemeteries and crematoria sales to InvoCare owned funeral homes amounted to $11.1 million (2013: $10.0 million). – Other revenue Other revenue increased by 4.9% to $7.2 million (2013: $6.9 million). Other revenue mainly comprises administration fees upon initial sale of prepaid funeral contracts and trailing commissions on prepaid funds. Operating expenses and EBITDA Operating EBITDA2 increased by 6.3% or $6.0 million to $101.1 million (2013: $95.1 million). The margin on sales dropped 0.2% to 24.5%. On a comparable basis, Operating EBITDA increased by $5.3 million or 5.6% to $100.0 million (2013: $94.7 million) with margins also dropping 0.2% to 24.5%. Favourable FX movements benefited Operating EBITDA by $1.0 million, as the NZD and SGD strengthened against the AUD, particularly in the first half. Operating expenses (excluding depreciation, amortisation, acquisition related and finance costs) increased $22.0 million or 7.4% to $319.1 million. On a comparable basis excluding the impact of acquisitions, the increase was 6.5% or $19.3 million. Backing out foreign exchange movement impacts ($3.0 million) to reflect constant exchange rates, total operating expenses increased by 6.3%. A summary of the comparable business operating EBITDA by major income statement line item by halves is presented in the following table. 1H14 $’m 1H13 $’m Var % 2H14 $’m 2H13 $’m Var % FY14 $’m FY13 $’m Var % Total – all lines of business Sales Revenue Other revenue Expenses: Cost of goods sold Personnel Advertising & promotions Occupancy & facility expenses Motor vehicle expenses Other expenses Operating expenses Operating EBITDA Operating margin % 193.6 183.1 3.5 3.4 5.7% 2.9% 214.0 200.2 3.7 3.4 6.9% 8.8% 407.6 383.3 7.2 6.8 6.3% 5.9% (56.2) (63.0) (7.5) (53.7) (59.8) (4.7%) (5.4%) (6.8) (10.3%) (63.4) (65.0) (7.2) (58.7) (59.1) (6.4) (8.0%) (10.0%) (12.5%) (13.0) (12.6) (4.1) (9.0) (4.0) (8.4) (152.7) (145.3) 44.4 41.2 22.9% 22.5% (3.2%) (2.5%) (7.1%) (5.1%) 7.8% 0.4% (13.8) (13.2) (4.7) (7.9) (4.3) (8.4) (162.0) (150.1) 55.7 53.5 26.0% 26.7% (4.5%) (9.3%) 6.0% (7.9%) 4.1% (0.7%) (112.5) (118.9) (6.3%) (7.7%) (13.2) (11.4%) (119.6) (128.0) (14.7) (26.8) (8.7) (16.9) (25.9) (8.3) (16.7) (314.7) (295.4) 100.0 24.5% 94.7 24.7% (3.5%) (4.8%) (1.2%) (6.5%) 5.6% (0.2%) Note: The data in the tables above has been calculated in thousands and presented in millions and as a consequence some additions cannot be computed from the tables as presented. Cost of goods sold increased as a % of sales from 29.4% in 2013 to 29.3% in 2014 due to a shift in sales mix of cemeteries and crematoria products. The ratio of personnel costs to sales revenue was 31.4% which was up from 31.0% in 2013. Base labour rates have generally been contained to 3.5% increases, consistent with the awards and enterprise agreements in place for the majority of the workforce. Personnel costs were also impacted by one-off costs of approximately $0.9 million accrued in 2014 associated with the end of Mr Andrew Smith’s contract, as well as the recruitment costs of the new CEO, Mr Martin Earp and higher short-term incentives following improved 2014 performance. These higher costs were in part mitigated by the reversal of long-term incentive costs for the forfeiture of 2010 grants which will not vest. 2 Operating EBITDA is non-IFRS financial information. 24 Directors’ Report continuedThe ratio of personnel cost to sales in the second half of 2014 was 30.4% which was up on the 29.5% recorded in PCP. The lower ratio achieved in PCP reflects the initiatives taken at the time to realign the workforce with the lower volume environment. This included critically assessing fixed and casual staffing levels and reviewing vacancies created by departing employees. With improved volumes in 2014 personnel costs were allowed to settle at more sustainable levels and in line with historical trends. By comparison the first half personnel ratio was flat at 32.5% of sales (2013: 32.6%). Advertising and marketing expenditure increased by $1.5 million or 11.6% to $14.7 million (2013: $13.2 million). This included additional expenditure on main media and digital channels in both Australia and New Zealand to address the 2013 market share declines. The increase also brought spending back in line with more sustainable levels which had been curtailed in 2013 due to case volume pressures. In terms of digital business initiatives, work is continuing on various fronts. These include: – continued roll out of electronic processing capabilities across states, including at need and preneed funeral arrangements using tablet technologies; rollout of enhanced websites and social media, including mobile devices; rollout of enhanced digital audio visual solutions across InvoCare’s chapels; continued focus on obtaining greater leverage from the HeavenAddress online memorial and tribute solution; development of a new digital print solution to allow staff and clients to produce high quality online order of service and life presentations; and upgrade of the ageing back office system and review of related processes to support the expanding business. – – – – – Comparable Australian operating EBITDA margin on sales declined marginally from 24.3% in 2013 to 24.1% in 2014. The decline was driven by the cemeteries and crematoria which were impacted by a shift in sales mix towards lower margin memorial sales. Additional costs associated with digital projects and an easing of headcount and marketing cost restrictions put in place in 2013 also impacted margins in the second half. New Zealand comparative EBITDA margins (in local currency) increased from 19.2% in 2013 to 20.4% in 2014. The improvement reflected the impact of higher case volumes which were up 6.4% on 2013. Year on year margin improvement was more pronounced in the first half when costs remained tightly controlled pending an improvement in case volumes which corrected in the second half. Despite higher volumes, second half margins of 21.3% were down on 2013 of 22.9% as the tight controls that had been held on marketing and labour costs were eased to more sustainable levels. Singapore EBITDA margins (in local currency) improved from 47.9% to 48.5%. The improvement was driven by a combination of case volumes which were up 1.3% and tight control of operating costs. Depreciation and amortisation expenses Depreciation and amortisation expenses were up $1.4 million in 2014 to $19.2 million (2013: $17.8 million). This increase included $0.1 million associated with a full year of the 2013 New Zealand acquisitions. The remainder of the increase was associated with increased capital spend on property refurbishments, new locations and continued investment in digital technologies. Finance costs Finance costs declined by $1.3 million to $15.5 million (2013: $16.8 million). The decrease relates mainly to the refinancing of the Group’s borrowings at the end of 2013 and the rollover of some fixed rate swap contracts in September 2014. These combined initiatives delivered a lower effective interest rate for the year. More information about the Group’s debt facilities is set out under the Capital Management section. Acquisition related costs Acquisition costs of $1.2 million were up $0.7 million on the prior year (2013: $0.5 million). This included start-up expenses of $0.8 million associated with InvoCare USA, Inc. details of which are summarised later in this report. Other expenses included costs associated with the acquisition of Crawford & Sons funeral business in Melbourne, two cremation memorial parks in Christchurch, New Zealand, and other opportunities both closed or currently under investigation. Share of associate After contributing $5 million equity in January 2013, InvoCare has a 35% investment in HeavenAddress which provides online memorial solutions. The company is in the early stages of its development and InvoCare has recognised a $0.5 million share of the operating losses in accordance with equity accounting standards, as well as an impairment in the carrying value more fully explained under the heading “Impairments”. Undelivered prepaid contract gains Net gains on undelivered prepaid contracts were $10.9 million, an improvement of $9.3 million on 2013. The current year gain comprised $24.8 million increase in the fair value of funds under management offset by $13.9 million growth in the future liability to deliver prepaid services (see table (a) below). The fair value uplift of $24.8 million in funds under management was $4.2 million up on 2013 and represented an effective earnings rate of 6.4% (2013: 5.7%). During the year the preneed liability was increased to progressively recognise the impact of planned in year price increases. This resulted in liability growth of $13.9 million which was down on last year’s $19.0 million. The liability growth was lower in 2014 as there was only one price increase taken compared to 2013 which included an interim price increase as well as the annual price increase in December. InvoCare Annual Report 2014 25 (a) Income statement impact of undelivered prepaid contracts Gain/(loss) on prepaid contract funds under management Change in provision for prepaid contract liabilities Net gain/(loss) on undelivered prepaid contracts (b) Movements in prepaid contract funds under management Balance at the beginning of the year Sale of new prepaid contracts Initial recognition of contracts paid by instalment Redemption of prepaid contract funds following service delivery Increase due to business combinations Increase in fair value of contract funds under management Balance at the end of the year (c) Movements in prepaid contract liabilities Balance at the beginning of the year Sale of new prepaid contracts Initial recognition of contracts paid by instalment Decrease following delivery of services Increase due to business combinations Increase due to reassessment of delivery costs Balance at the end of the year 2014 $’m 24.8 (13.9) 10.9 2014 $’m 373.6 33.4 3.2 (35.4) 1.4 24.8 401.0 2014 $’m 376.5 34.0 3.2 (35.2) 1.4 13.9 393.8 2013 $’m 20.6 (19.0) 1.6 2013 $’m 350.9 32.0 2.9 (32.8) – 20.6 373.6 2013 $’m 355.1 32.0 2.9 (32.5) – 19.0 376.5 Approximately 79% of InvoCare’s prepaid funds under management are with the Over Fifty Guardian Friendly Society. This fund now holds approximately 73% of its assets in cash and fixed interest compared to 60% at 31 December 2013. The increase in cash and fixed interest was attributable to a property sale which was completed in late 2014. Proceeds of this sale are currently being reinvested which may see a further shift in asset mix towards equities or property if the right opportunities are found. Movements in the total asset mix of all funds under management over the last 12 months are illustrated in the following table: Equities Property Cash and fixed interest 31 Dec 2014 % 30 June 2014 % 31 Dec 2013 % 10 16 74 11 22 67 13 23 64 Asset sale gains and losses After tax gains on the sale of assets of $0.4 million relates primarily to the disposal of owned motor vehicles in the normal course of business. In the previous year, the sale of surplus property assets resulted in after tax gains of $3.2 million. Impairments Under IFRS, InvoCare is required to regularly review the carrying value of its business assets. Due to continued improvement in financial performance, the prior impairment on certain cemetery assets was partially reversed during the year resulting in an after tax gain of $1.8 million. Offsetting the above impairment reversal was an impairment of $1.4 million (after tax) made against the Group’s associate. The decision to impair this investment was made after considering the business performance to date, its future cash projections and the risks associated with a start-up operation. The investment will continue to be monitored and the impairment revisited at future dates based on actual performance. The above two items resulted in a net after tax impairment gain of $0.4 million (2013: $2.2 million). 26 Directors’ Report continuedIncome tax expense Income tax expense on reported profit was $22.6 million (2013: $19.0 million), representing an effective rate of 29.3% (2013: 28.0%). Income tax expense on operating earnings3 increased by $1.4 million to $19.2 million (2013: $17.8 million) and the effective rate was 29.4% (2013: 29.5%). The main contributors to the effective rates being different to Australia’s corporate 30% tax rate are set out in the following table: Prima facie tax at 30% (2013: 30%) on profit from ordinary activities Plus/(minus): Previously unrecognised capital losses offsetting capital gains and unrecognised capital losses Eliminations of translation gains/(losses) on intercompany balances in foreign currencies Reassessment of depreciation rates applicable to New Zealand assets Acquisition costs not deductible Share of net profit of an associate Other items (net) Difference in overseas tax rates Under/(over) provision in prior years Income tax expense Cash flow highlights Net cash provided by operating activities Asset sale proceeds Asset purchases Purchase of subsidiaries and businesses Purchase of interest in associates Net cash used in investing activities Dividends paid to InvoCare shareholders Deferred Employee Share Plan purchases Net (decrease)/increase in borrowings Other movements Net cash used in financing activities Net increase in cash during year Cash at start of year Exchange rate effects Cash at end of the year 2014 $’m 23.2 (0.2) 0.1 – 0.3 0.1 0.1 (0.9) (0.1) 22.6 2014 $’m 71.8 1.0 (26.7) (6.7) – (32.4) (38.8) (1.2) 2.3 (0.2) (37.9) 1.5 8.9 0.1 10.5 2013 $’m 20.4 (0.7) 0.4 (0.6) 0.1 0.1 0.4 (0.8) (0.2) 19.0 2013 $’m 72.2 8.0 (19.3) (8.1) (5.0) (24.4) (37.4) (0.8) (6.8) (0.1) (45.1) 2.7 6.1 0.1 8.9 Continued focus on working capital management resulted in a 106% operating EBITDA conversion to cash for the period, which was slightly down on the 110% achieved for 2013 as shown in the table below. Operating EBITDA Cash provided by operating activities Add finance costs Add income tax paid Less interest received Ungeared, tax free operating cash flow Proportion of operating EBITDA converted to cash 3 Operating earnings is non-IFRS financial information. 2014 $’m 101.1 71.8 15.0 20.2 (0.2) 106.8 106% 2013 $’m 95.1 72.2 16.3 15.9 (0.1) 104.3 110% InvoCare Annual Report 2014 27 Cash flows provided by operating activities showed a slight decline on last year by $0.4 million to $71.8 million. Part of this decline was driven by higher income tax instalments paid in 2014 compared to 2013. Capital expenditure (including the acquisition of a strategic property in Perth) related to: Property, refurbishments and facility upgrades Motor vehicles Digital business Other assets Total capital expenditure 2014 $’m 12.5 6.4 4.7 3.1 26.7 2013 $’m 8.0 6.5 2.1 2.7 19.3 Purchases of subsidiary and businesses included the deposit paid on the proposed purchase of two memorial parks in Christchurch, New Zealand, the acquisition of the Macera cremation business in Southern California, USA, and the purchase of the Charles Crawford and Sons funeral business in Melbourne. Dividends paid in the year were 35.25 cents per share, totalling $38.8 million. The amount included $5.6 million for the on-market purchase of shares for the dividend reinvestment plan. Shares amounting to $1.2 million (2013: $0.8 million) were acquired during the year by the InvoCare Deferred Employee Share Plan Trust in connection with long-term, share-based incentives for senior management. Capital management At 31 December 2014, the Group had drawn down $230 million borrowings (from total $255 million debt facilities) compared to $239 million at 30 June 2014 and $225 million at 31 December 2013. Net debt at 31 December 2014 was $220 million which compared to the balance at 30 June 2014 of $223 million and 31 December 2013 of $216 million. During the year there was no change to the $255 million bi-lateral, multi-currency, revolver facilities which comprise three-year tranches of $85 million, maturing in September 2016, and five-year tranches of $170 million, maturing in December 2018. The three-year tranches are provided in equal proportions by Australia and New Zealand Banking Group Limited (“ANZ”) and Commonwealth Banking Group Limited (“CBA”). The five-year tranches are provided in equal proportions by ANZ, CBA, Westpac Banking Corporation (“Westpac”) and HSBC Bank Australia Limited (“HSBC”) or their New Zealand affiliates. The current facilities’ drawings comprise AUD164.0 million, SGD33.0 million and NZD37.0 million. The foreign currency drawings naturally hedge investments in foreign Singapore and New Zealand markets. Financial covenant ratios on the borrowing facilities are a Leverage Ratio (being Net Debt to EBITDA adjusted for acquisitions) which must be no greater than 3.5 and an Interest Cover Ratio (being EBITDA to net interest) which must be greater than 3.0. Both these ratios continue to be comfortably met at 31 December 2014, being 2.2 and 7.5 respectively. To maintain certainty over cash flows, the Group’s policy is to maintain at least 75% of hedging cover for the next 12 months of forecast borrowings and 50% beyond twelve months up to a maximum of five years. At balance date, 76% of debt principal was covered by floating to fixed interest rate swaps. The table below shows the current swap profile, including the fixed rate payable in return for receipt of floating rates (e.g. BBSW in the case of AUD denominated borrowings). As a consequence of hedging, InvoCare has not enjoyed the benefit of the recent reductions in market rates on its hedged debt. Swap Principal AUD 30.0m AUD 60.0m AUD 60.0m NZD 27.0m NZD 27.0m Start Date Jun-2011 Sep-2013 Sep-2014 Sep-2011 Sep-2015 Termination Date Sep-2015 Sep-2016 Sep-2017 Sep-2015 Sep-2018 Fixed Rate Payable 5.33% 4.77% 4.00% 3.82% 4.49% The overall average effective interest rate is currently 5.7% (2013: 6.1%), inclusive of fixed rates on hedged debt, floating rates on unhedged debt, margins (based on tranche tenor and leverage – currently averaging around 166bps), undrawn commitment fees and amortisation of establishment fees. Headroom on the debt facilities of $25.0 million; and cash of $10.5 million, provide $35.5 million in available funds at 31 December 2014. This amount together with operating cash flows will provide further capacity to fund near-term growth opportunities. 28 Directors’ Report continuedInvoCare USA, Inc. The United States of America has been identified as a new market for InvoCare to enter in its pursuit of growth opportunities. The country has an improving economy, a similar demographic profile to Australia and relatively low sovereign and country risk compared to other foreign markets. The country’s funeral industry is the largest in the developed world and, beyond the industry consolidators, the competitive landscape remains highly fragmented. An experienced senior executive from the funeral industry in that country was engaged to develop a strategy and plan for a low cost, low risk initial pilot entry into the country. Southern California was selected as the initial market to establish a small InvoCare presence. The annual number of deaths in that market is around 100,000, similar to InvoCare’s Australian funeral markets. A small cremation business was acquired in late 2014 and greenfield funeral service operations have been established in Los Angeles, Orange County and San Diego. During the expected three-year start-up and proving stage of this development, the new operation is anticipated to be loss making, with negative EBITDA of up to USD2 million per annum and similar annual net operating losses. Annual sales are not expected to exceed USD10 million until the third year. The expected investment over this initial period is approximately USD8 million. There is significant potential upside in the subsequent years should the venture succeed with future annual returns on that Southern Californian investment forecast to grow and exceed InvoCare’s current return on invested capital. Through establishing a successful maiden presence in the United States of America, InvoCare will improve its existing knowledge of the market and be better positioned to capitalise on further longer-term growth opportunities, whether by additional greenfield expansion or by selective and more significant existing business acquisitions. Outlook Group funeral case volumes in January 2015 are up 3.9% (comparable 3.4%). Funeral case contract averages improved in line with December price rises and operations are in line with expectations. InvoCare USA, Inc. will commence operations in February 2015 and is expected to generate operating losses of approximately $2.0 million during the year ended 31 December 2015. In July 2014 the New Zealand Commerce Commission granted InvoCare permission to proceed with the acquisition of two memorial parks in Christchurch. Since that time InvoCare has continued negotiations with the vendor and the New Zealand Overseas Investment Office to satisfy the remaining foreign investment requirements. These acquisitions are expected to be completed by the end of the first quarter of 2015 and will deliver annual sales and EBITDA of approximately NZD1.7 million and NZD0.5 million respectively. In December 2014 InvoCare completed the purchase of Charles Crawford & Sons, an established funeral business located near Melbourne. This business will contribute sales of approximately $1.1 million in 2015. InvoCare continues to review other expansion opportunities both in Australia and abroad. There has been discussion with a number of potential vendors. There is no certainty about the success or timing of any acquisitions, nor of any movement into new markets. Prepaid funeral fund returns in 2014 benefited from a one-off property transaction which will not necessarily be repeated in 2015. In addition, the declining interest rate environment means the returns achievable on cash and fixed interest investments will become more challenging. Despite this, overall returns are expected to continue to exceed the increase in contract liabilities. This outlook assumes the current asset mix stays largely unchanged, targeted investment returns are achieved and the equity and property markets remain stable. The Group’s capital expenditure in 2015 is expected to be at similar levels to 2014. The main investments include the upgrading of funeral homes and operations centres, continuing investment in chapel facilities, further investment in digital technologies and cyclical replacement of motor vehicles. InvoCare will continue its practice of reviewing the performance of its property assets and, if required, may dispose underperforming assets. There has been no change to InvoCare’s capital management plans. Sufficient funds are expected to be available from debt facilities and free cash flows for capital expenditure and smaller “bolt on” acquisitions. If a more substantial opportunity arises, alternative funding sources, such as an equity raising, would be considered. Although maturing in September 2016, InvoCare will need to renew its $85 million bi-lateral debt facility in December 2015 in order to maintain non-current classification at year end. No other debt facilities are due to mature in 2015. It remains the policy of the Board to distribute at least 75% of operating earnings after tax4 as dividends, as well as increase the quantum of those dividends year on year. Following the strong operating performance and sustained operating EBITDA to cash conversion, a final dividend of 20.75 cents per share has been recommended for the year ended 31 December 2014 payable on 2 April 2015. This represents a 6.4% or 1.25 cents increase on the 2013 final dividend of 19.5 cents. InvoCare remains committed to its core pillars for continued growth in 2015. Areas of focus in 2015 include: – Investing in our facilities and developing a corporate culture that will enhance the experience of our client families; – – Continued investment in advertising, marketing and digital business to drive brand awareness, customer satisfaction, market share improvement and business efficiencies; Focus on organisational business practices and processes to deliver improved operational performance; – Development of the InvoCare USA operations; – Complete integration of the Christchurch memorial park acquisitions; and – Seeking sustained returns on funds under management. Significant events after the balance date There have been no significant events occurring after balance date which have significantly affected or may significantly affect either InvoCare’s operations or the results of those operations or InvoCare’s state of affairs in future financial years. Environmental regulation and performance InvoCare is committed to the protection of the environment, the health and safety of its employees, customers and the general public, as well as compliance with all applicable environmental laws, rules and regulations in the jurisdictions in which the consolidated entity operates its business. The consolidated entity is subject to environmental regulation in respect of its operations, including some regulations covering the disposal of mortuary and pathological waste and the storage of hazardous materials. InvoCare has appropriate risk management systems in place at its locations. There have been no claims during the year and the directors believe InvoCare has complied with all relevant environmental regulations and holds all relevant licences. 4 Operating EBITDA and operating earnings after tax is non-IFRS financial information. InvoCare Annual Report 2014 29 Left to right: Aliza Knox; Richard Davis; Richard Fisher; Andrew Smith; Gary Stead; Tina Clifton, Roger Penman. Information on directors Mr Richard Fisher AM MEc LLB Chairman of the Board Member of Audit Committee Chairman of Nomination Committee Member of Remuneration Committee Age 65 years Appointed October 2003 Richard Fisher has been a director of InvoCare Limited since 24 October 2003 and was appointed Chairman on 22 October 2013. He is General Counsel to The University of Sydney and is an Adjunct Professor in both its Graduate School of Government and Faculty of Law. Richard is the immediate past Chairman of Partners at Blake Dawson and specialised in corporate law during his 25 years as a partner of that firm. He was appointed as a director of Sydney Water effective 1 January 2012. Richard is a former part-time Commissioner at the Australian Law Reform Commission, former Member of the Library Council of NSW and was an International Consultant for the Asian Development Bank. Richard holds a Master of Economics from the University of New England and a Bachelor of Laws from the University of Sydney. Interest in shares: 11,956 ordinary shares in InvoCare Limited Mr Andrew Smith BCom MBA CA Chief Executive Officer Age 44 years Appointed January 2009 Andrew joined InvoCare in January 2006 as Chief Financial Officer and was promoted to Chief Operating Officer in March 2007. On 1 January 2009, Andrew was promoted to Chief Executive Officer and Managing Director. He will be retiring on 30 April 2015. Prior to joining InvoCare Andrew held the position of Chief Financial Officer with Brazin Limited and previously OrotonGroup Limited. Andrew was also Financial Controller for Sales and Marketing at 30 a major international fast moving consumer goods company, an Internal Audit Manager for a global insurance company and an Audit Senior at KPMG. Andrew was appointed as a director of Over Fifty Guardian Friendly Society Limited on 24 March 2009. He holds a Bachelor of Commerce from the University of Queensland, a Master of Business Administration from the University of New England and is a member of the Institute of Chartered Accountants Australia and New Zealand. Interest in shares: 255,485 ordinary shares in InvoCare Limited Dr Christine (Tina) Clifton MB BS (Hons) BHA Non-executive Director Chairman of Risk Committee Member of Audit Committee Member of Nomination Committee Age 59 years Appointed October 2003 Tina Clifton has been a director of InvoCare Limited since 24 October 2003. She is a registered medical practitioner, and formerly a Councillor of the University of New South Wales, a director of various public and private companies largely in the healthcare sector, including HCF, Health Care Australia, Ambri Ltd, the Garvan Institute of Medical Research, the Victor Chang Cardiac Research Institute, and St Vincents Hospitals. Prior to 2001, Tina held various positions in the public and private healthcare sectors, including Chief Executive Officer of the Sisters of Charity Health Service in New South Wales and deputy Chief Executive Officer of the Northern Sydney Area Health Service. From 1980 to 1988 Tina was a general practitioner. She has also been President of the Doctors Health Advisory Service and involved in NSW mental health services Official Visitors’ programme. Tina holds degrees in medicine and health administration from the University of New South Wales and obtained a specialist qualification in medical administration (FRACMA). Interest in shares: 112,961 ordinary shares in InvoCare Limited Directors’ Report continuedMr Roger Penman BEc FCA FTIA Non-executive Director Chairman of Audit Committee Chairman of Remuneration Committee Member of Nomination Committee Age 60 years Appointed January 2005 Roger Penman was appointed as a director of InvoCare Limited on 1 January 2005 and joined both the Audit Committee, as its Chairman, and the Remuneration Committee in February 2005. He became Chairman of the Remuneration Committee in December 2009. Due to a sudden unexpected health issue in early January 2015, Roger has been granted leave of absence until 30 June 2015, or such earlier date that he is fit to return to normal duties. Roger is a Partner in the Taxation Services division at Crowe Horwath Sydney, joining the firm in 1986. He has had over 30 years of high-level specialist tax consulting and general business experience, including mergers, acquisitions, initial public offerings and group restructures. Roger holds a Bachelor of Economics from the Australian National University, is a Fellow of the Institute of Chartered Accountants Australia and New Zealand, a Fellow of the Taxation Institute of Australia, a member of the Australian Institute of Company Directors and a member of the Crowe Horwath International Tax Committee. Interest in shares: 16,947 ordinary shares in InvoCare Limited Ms Aliza Knox BA MBA Non-executive Director Member of Nomination Committee Member of Risk Committee Age 54 years Appointed October 2011 Aliza Knox was appointed as a director of InvoCare Limited on 1 October 2011 and became a member of the Risk Committee later that month. Aliza is a digital media and financial service executive with more than two decades of broad international marketing and management experience. Aliza joined Twitter in Asia Pacific as Managing Director Online Sales in November 2012. She was formerly Managing Director of the Online Sales Group for Google Asia Pacific and then the Managing Director Commerce for Google Asia Pacific, with responsibility for China, India, South East Asia, Japan, Australia and all other countries in the region. Her previous roles have included Senior Vice President at global payments technology company Visa International, with responsibility for commercial solutions and global product platforms, Senior Vice President at investing services and solutions provider Charles Schwab & Company, with responsibility for international wireless and Asian expansion, and Partner at Boston Consulting Group as head of its Asian Financial Services Practice. She is also a non-executive director of Singpost and GfK, as well as an advisor to several organisations and a government committee in Singapore. Aliza holds a Bachelor of Arts, summa cum laude, (Applied Math and Economics) from Brown University (USA) and Masters of Business Administration with Honours (Marketing) from New York University Graduate School of Administration (USA). Interest in shares: 5,339 ordinary shares in InvoCare Limited Mr Richard Davis BEc Non-executive Director Member of Risk Committee Member of Remuneration Committee Member of Nomination Committee Member and Acting Chairman of Audit Committee (from 22 January 2015) Age 59 years Appointed February 2012 Richard Davis was appointed a non-executive director of InvoCare Limited on 21 February 2012. Richard previously retired as InvoCare’s Chief Executive Officer and Managing Director on 31 December 2008 after 20 years with InvoCare. For the majority of that time, he held the position of Chief Executive Officer and successfully initiated and managed the growth of the business through a number of ownership changes and over 20 acquisitions, including Singapore Casket Company (Private) Limited, the Company’s first international acquisition. Richard has been a non-executive director of Australian Vintage Limited since 5 May 2009 and is also Chairman of the Audit Committee of that company. During the year he was appointed as a director and Chairman of Monash IVF Group Limited leading up to its successful ASX listing. Prior to joining the funeral industry, Richard worked in venture capital and as an accounting partner of Bird Cameron. Richard holds a Bachelor of Economics from the University of Sydney. Other Public Company Directorships held in the last three years: Australian Vintage Limited (appointed non-executive director in May 2009) Monash IVF Group Limited (appointed non-executive director and chairman in June 2014) Interest in shares: 581,607 ordinary shares in InvoCare Limited Mr Gary Stead BCom LLB MBA Non-executive Director Member of Risk Committee (from 22 October 2014) Member of Audit Committee (from 22 October 2014) Member and Acting Chairman of Remuneration Committee (from 22 January 2015) Member of Nomination Committee (from 1 September 2014) Age 57 years Appointed September 2014 Gary Stead was appointed a non-executive director of InvoCare Limited on 1 September 2014. Gary has spent 30 years in the financial services sector, including 20 years in investment banking and the past 10 years in investment management. He is currently Managing Director of Olympus Capital Asia Credit and prior to that, Chief Executive of Fortress Investment Group Australia, where he established its Australian operations in 2004. For 13 years he held various senior roles at Merrill Lynch, including Managing Director and head of mergers and acquisitions in Australia, Asia Pacific and Japan, co-head of investment banking and a member of the Management Committee in Merrill Lynch Japan Securities, and Vice Chairman, investment banking in Australia following earlier roles at both Schroders in Australia and Salomon Brothers in New York. Gary started his working career as a solicitor with Mallesons Stephen Jaques. Gary holds commerce and law degrees from the University of New South Wales and an MBA from Wharton Graduate School of Business at the University of Pennsylvania. Interest in shares: Nil ordinary shares in InvoCare Limited InvoCare Annual Report 2014 31 Company Secretary Mr Phillip Friery BBus CA Phillip Friery was appointed Company Secretary in January 2007 and Chief Financial Officer in March 2007. Prior to joining the Group in 1994 as Accounting Manager, Phillip spent approximately 19 years with Coopers & Lybrand (before its merger with Price Waterhouse) in external audit, technical advisory and financial management consulting roles. Phillip joined the board of Over Fifty Guardian Friendly Society Limited on 24 March 2009. He holds a Bachelor of Business from the New South Wales Institute of Technology (now University of Technology Sydney) and is a member of the Institute of Chartered Accountants Australia and New Zealand. Interest in shares: 84,233 ordinary shares in InvoCare Limited Meetings of directors Details of the meetings attended by each director during the year ended 31 December 2014 are set below. In addition to the formal meetings of directors there were numerous informal meetings of the non-executive directors during the year. Those meetings were concerned, for the most part, with CEO succession planning and the appointment of both a new CEO and an additional director. In the case of the Chairman, for example, he attended some 60 such meetings as well as visiting numerous operational locations across Australia, New Zealand and Singapore. Gary Stead was appointed director on 1 September 2014 and to each of the Audit Committee and Risk Committee on 22 October 2014. The composition of the Board and Board Committees is a minimum of three directors. Board Committees consist entirely of independent non-executive directors. The CEO may attend all Board Committee meetings by invitation. Other Key Management Personnel attend Board and Committee meetings by invitation. As a consequence of Roger Penman’s ill health and his leave of absence, the following took effect from 22 January 2015 and until further reviewed by the Board: – Gary Stead was appointed to the Remuneration Committee and will act as its Chairman; and – Richard Davis was appointed to the Audit Committee and will act as its Chairman. Non-executive Directors Richard Fisher Christine Clifton Roger Penman Aliza Knox Richard Davis Gary Stead Executive Director Andrew Smith Board A B 12 11 11 11 12 3 12 12 12 12 12 12 3 12 Audit Committee Risk Committee Remuneration Committee Nomination Committee A 4 4 4 3* 4* 1 4* B 4 4 4 – – 1 – A 3* 3 1* 2 3 1* 3* B – 3 – 3 3 – – A 2 – 2 – 2 – 2* B 2 – 2 – 2 – – A 8 8 8 8 8 5 – B 8 8 8 8 8 5 – A = number of meetings attended. B = number of meetings held during the time the director held office or was a member of the committee during the year. * = includes meetings attended as an invited guest of the committee where the director was not a member of the relevant committee. 32 Directors’ Report continuedCorporate Governance Statement The Directors’ Report continues with the Corporate Governance Statement. InvoCare Limited (the “Company”) and the Board of Directors (the “Board”) are committed to achieving and demonstrating the highest standards of corporate governance. The Company and its controlled entities together are referred to as “InvoCare” or the “Group” in this statement. This statement outlines the main corporate governance practices in place throughout the financial year, which comply with the ASX Corporate Governance Council’s principles and recommendations as issued in March 2014. The Other Key Management Personnel (“Other KMP”) comprise: – Greg Bisset, Chief Operating Officer Australia (“COO Australia”); – Graeme Rhind, Chief Operating Officer New Zealand (“COO New Zealand”); – Wee Leng Goh, Chief Executive Officer of Singapore Casket Company (“CEO Singapore”); – Phillip Friery, Chief Financial Officer (“CFO”); and – Andi Luiskandl, Chief Information Officer (“CIO”). For further information on the corporate governance policies adopted by InvoCare Limited, refer to the Company’s website: www.invocare.com.au Principle 1 – Lay Solid Foundations for Management and Oversight Functions of the Board and senior executives The Board of InvoCare Limited is responsible for guiding and monitoring the Group on behalf of the shareholders by whom they are elected and to whom they are accountable. The Board seeks to identify the expectations of the shareholders, as well as other regulatory and ethical expectations and obligations. In addition, the Board is responsible for identifying areas of significant business risk and ensuring arrangements are in place to adequately manage those risks. The responsibility for the operation and administration of the Group, including day-to-day management of the Group’s affairs and the implementation of the corporate strategy and policy initiatives, is delegated by the Board to the CEO, Other KMPs, and other management. Delegations are set out in the Group’s delegations policy and are reviewed regularly. Delegations, within defined authority limits, relate to various operational functions, including areas such as expenditure and commitments, employee matters (e.g. recruitment, termination, remuneration, discipline, training, development, health and safety), pricing, branding, investor and media communications. The Board ensures that the senior executives and the management team are appropriately qualified and experienced to discharge their responsibilities and has in place procedures to assess the performance of the CEO and the senior executives. In deciding which functions and activities the Board reserves to itself, it is guided by the overarching principle that the Board is charged with strategic responsibility, along with a management oversight function, and that the executive management have an implementation function. In fulfilling these functions, the directors seek to enhance shareholder value and protect the interests of stakeholders. The Board Charter is available on the Company’s website: www.invocare.com.au Board and senior executive appointments Prior to the appointment of a new director thorough background checks are undertaken to ensure that the individual has the appropriate background to become a director of the Company. Information about these checks is included in the Notice of Meeting when the director filling a casual vacancy stands for election. All Board members have formal letters of appointment which clearly articulate the roles, responsibilities, expectations and remuneration of directors. The level of seniority of the role of senior executives determines whether a formally drafted contract of employment or a less complex letter of appointment is used to confirm employment. Regardless of type, all employment agreements clearly articulate duties and responsibilities and also rights and expectations. Company Secretary The Company Secretary works closely with the Chairman of the Board and various committees to ensure that all directors receive the information they require to fully discharge their duties which includes facilitating external advice to directors where appropriate. Some aspects of these functions are undertaken by other senior staff specialists where appropriate and these interactions are free of executive management oversight to ensure that directors are fully informed. Diversity InvoCare currently serves a diverse range of communities across Australia, New Zealand, Singapore and the USA and believes it is very important to ensure that a diverse range of people, specifically suited to the community being served, are available for families in their time of need. This includes actively encouraging women at all levels of the organisation. Women currently comprise 29% of the Board, 17% of other key management personnel, 29% of operational general managers in Australia and 50% of support general managers. Sixty-one per cent of total staff are women. InvoCare’s aspirational target is to exceed 30% of women in all the senior management positions outlined above. The Australian Group is a relevant employer under the terms of the Workplace Gender Equality Act and submitted its first report during 2014. The benchmarking reports have only recently become available and as a consequence the Board has yet to consider the measurable specific targets based on the Gender Equality Indicators to be set for future years. The Diversity Policy is available on the Company’s website: www.invocare.com.au Directors’ performance evaluation The Board, through its Nomination Committee, undertakes an annual performance review of the full Board, its Committees and of the Chairman. The Chairman performs individual appraisals of each director. The evaluation process, which was completed late in 2014, involves an assessment of Board and committee performance by each director completing a confidential questionnaire. The questionnaire covers such matters as the role of the Board, the composition and structure of the Board and committees, operation of the Board, Group behaviours and protocols and performance of the Board and committees, and invites comments from each director. The results of the questionnaire are aggregated and discussed by the Board as a basis for collegiate consideration of Board performance and opportunities for enhancement. InvoCare Annual Report 2014 33 At the date of this report, the composition of the Board Committees is as follows: Director Audit Risk Nomination Remuneration Richard Fisher Tina Clifton ✓ ✓ Roger Penman Chairman Aliza Knox Richard Davis Gary Stead Acting Chairman ✓ Chairman Chairman ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Chairman ✓ Acting Chairman During Roger Penman’s leave of absence due to illness, Richard Davis is interim Chairman of the Audit Committee and Gary Stead is interim Chairman of the Remuneration Committee. Nomination Committee The Nomination Committee critically reviews on an annual basis the corporate governance procedures of the Group and the composition and effectiveness of the Board. The Committee currently consists of the six independent non- executive directors of the Board. The Committee is chaired by Richard Fisher. The Committee believes that the Board has a healthy mix of skills to ensure the ongoing development and growth of the Group. In addition to its role in proposing candidates for director appointment for consideration by the Board, the Nomination Committee reviews and advises the Board in relation to Chief Executive Officer succession planning, Board succession planning and Board and committees’ performance appraisals. InvoCare may utilise the professional advice of external consultants to find the best person for the position of Director of the Company. These advisors seek applicants according to the Board’s skills requirements. The Board also acknowledges the benefits of a diverse Board and requires the advisors to present candidates with equal numbers of suitably qualified men and women and with some diversity in cultural background and age. The Board then selects the most suitable candidate(s) for the consideration of the shareholders. The Board is looking to achieve an appropriate mix of skills and diversity amongst directors. The Committee Charter is available on the Company’s website: www.invocare.com.au Corporate Governance Statement continued The individual appraisals between each director and the Chairman provide an opportunity for consideration of individual contributions, development plans and issues specific to the director. The evaluation process provides the Board an opportunity to make an informed assessment of the skills of each individual director, reflect on how those skills are meeting the needs of the Company and consider Board succession planning. During the year, this resulted in the appointment of Gary Stead, as a Non-executive director, and the selection of Martin Earp as the new CEO. Senior executive evaluation After the conclusion of each financial year the CEO evaluates and documents the performance of the Other KMPs. The results of the achievement of targeted key performance indicators are reviewed by the Remuneration Committee. Also at this time, key performance indicator targets for the ensuing year are established. The Remuneration Committee and the Board also review and determine the Other KMPs’ remuneration for the ensuing year. The Remuneration Committee evaluates the performance of the CEO against annual key performance indicators and reports to the Board its recommendations on performance appraisal and remuneration. In addition to a review of monthly financial results, at least quarterly the Board monitors the key performance indicators and strategic plan for the Group which provides the opportunity to more regularly evaluate the performance of senior executives outside the annual review process. When appointed, all new senior executives receive an induction appropriate to their experience, which is designed to ensure they can quickly and effectively participate in decision making. The programme is also designed to ensure that the executive gains a good working knowledge of both the industry and the Group covering the financial position, strategies and operations. This induction programme also focuses on the internal policies and procedures with a particular emphasis on the respective roles of the Board and its committees and those functions delegated to management. Principle 2 – Structure the Board to Add Value Board composition The Board currently comprises seven directors, being six non- executive directors (including the Chairman) and one executive director, being the CEO. Any director appointed to fill a casual vacancy, except for the CEO, must stand for election by shareholders at the next Annual General Meeting. In addition, one- third of the non-executive directors, and any other director who has held office for three years or more since last being elected, must retire from office and, if eligible, may stand for re-election. The CEO is exempt from retirement by rotation and is not counted in determining the number of directors to retire by rotation. The composition of the Board and Board Committees is a minimum of three directors. Board Committees consist entirely of independent non-executive directors. The CEO may attend all Board Committee meetings by invitation. The other KMPs attend Board and Committee meetings by invitation. 34 Directors’ Report continuedBoard skills matrix When considering the appointment of a new director the Board through the Nomination Committee considers the desirable skills mix for the Board and focuses its search on potential candidates who complement the existing skill set of the Board. The current matrix is summarised in the following table. Prior to each Board meeting, the Board is provided with management reports and information in a form, timeframe and quality that enables them to discharge their duties. If a board member considers this information to be insufficient to support informed decision making, then they are entitled to request additional information prior to, or at, Board or committee meetings. Business Manage- ment/ Industry ✓ ✓ ✓ ✓ ✓ ✓ ✓ Director/ Skill Set Richard Fisher Tina Clifton Roger Penman Aliza Knox Richard Davis Gary Stead Andrew Smith Legal ✓ ✓ Account- ing/ Finance Marketing/ Digital Health Interna- tional Business ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Board independence The majority of the Board must be independent directors, one of whom is the Chairman. A director is deemed to be “independent” if independent of management and free of any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the exercise of unfettered and independent judgement. The Board has assessed, using the criteria set out in the ASX Corporate Governance Principles and Recommendations, the independence of non-executive directors in light of their interests and relationships and considers them all to be independent. The Company will provide immediate notification to the market where the independence status of a director changes. The skills, experience and expertise relevant to the position of each director and their term of office are set out starting on page 30 of the Directors’ Report. Directors’ access to independent professional advice and Company information To assist in the effective discharge of their duties, directors may, in consultation with the Chairman, seek independent legal or financial advice on their duties and responsibilities at the expense of the Company and, in due course, make all Board members aware of both instructions to advisors and the advice obtained. All directors have the right of access to all relevant Company information and to seek information from the Company Secretary and other senior executives. They also have a right to other records of the Company subject to these not being sought for personal purposes. Directors’ induction When appointed to the Board, all new directors receive an induction appropriate to their experience, which is designed to quickly allow them to participate fully and productively in Board decision making. The induction programme covers the Group’s structure and goals, financial, strategic, operational and risk management positions, the rights and duties of a director and the role and operation of the Board Committees. The Nomination Committee is responsible for reviewing the effectiveness of the director induction programme. New directors are given an orientation regarding the business, including corporate governance policies, all other corporate policies and procedures, Committee structures and responsibilities and reporting procedures. Directors’ continuing education Directors are expected to undertake continuing education both as regards the normal discharge of their formal director duties, as well as ongoing developments within the Group and its operating environment. Directors typically attend courses and seminars relevant to the effective discharge of their duties. Principle 3 – Act Ethically and Responsibly Code of Conduct The Board, in recognition of the importance of ethical and responsible decision making, has adopted a Code of Conduct for all employees and directors which outlines the standards of ethical behaviour which are essential to maintain the trust of all stakeholders and the wider community. This code also mandates the avoidance of conflicts of interest and requires high standards of personal integrity, objectivity and honesty in the dealings of all directors, executives and staff, providing detailed guidelines to ensure the highest standards are maintained. InvoCare recognises that its clients may be vulnerable due to a recent bereavement and it requires all employees to be aware of their ethical and legal responsibilities. Accordingly, InvoCare requires all employees to behave according to this code, to maintain its reputation as a good corporate citizen. Such behaviours extend to areas such as confidentiality, Privacy Act obligations, communications with the media, work health and safety and drugs and alcohol. This code is provided to all directors and employees as part of their induction process and compliance is reviewed on a regular basis. It is subject to ongoing review and assessment to ensure it continues to be relevant to contemporary conditions. The code is available on the Company’s website: www.invocare.com.au All directors and former directors are entitled to inspect and copy the books of the Company for the purposes of legal proceedings, including situations where the director is a party to proceedings, where the director proposes in good faith to bring proceedings and where a director has reason to believe proceedings will be brought against him or her. In the case of former directors, this right of access continues for a period of seven years after the person ceases to be a director. Principle 4 – Safeguard Integrity in Corporate Reporting Audit Committee The Audit Committee provides assistance to the Board in fulfilling its corporate governance, financial risk management and oversight responsibilities in relation to the Group’s financial reporting, internal control structure, interest rate and foreign currency risks and the internal and external audit functions. InvoCare Annual Report 2014 35 Directors’ Report continued Corporate Governance Statement continued It is the responsibility of the Committee to maintain free and open communication between the Committee, the external auditor, the internal auditor and management of the Group. Both the internal and external auditors have a direct line of communication to the Chairman of the Audit Committee. The Audit Committee comprises four independent non-executive directors and is chaired by Roger Penman. Mr Penman is an FCA and brings a wealth of financial and taxation experience to the Committee. Other members are Christine Clifton, Richard Fisher and Gary Stead. The number of meetings held during the year and the individual attendances at those meetings is set out on page 32 of the Directors’ Report. The external auditor met with the Audit Committee during the year without management being present. The Committee Charter is available on the Company’s website: www.invocare.com.au Assurance Prior to finalising the release of half-year and full-year results and reports, the Board receives assurance from the CEO and CFO in accordance with s295A of the Corporations Act 2001 and Recommendation 4.2 of the ASX Corporate Governance Principles and Recommendations. These assurances also provide the Board with information in relation to internal control and other areas of risk management. These officers receive similar assurance from the key financial and operational staff reporting to them in relation to these matters. Principle 6 – Respect the Rights of Shareholders The Board of Directors aims to ensure that the shareholders are informed of all major developments affecting the Group’s state of affairs. The Company uses its website to complement the official release of material information to the ASX. Shareholders may elect to receive email alerts when Company announcements are made. Notice of Annual General Meeting, half-year and annual results announcements and financial reports, investor presentations, press releases and other ASX announcements can be found on the Company’s website: www.invocare.com.au Additionally, all shareholders have the right to access details of the holdings, provide email address contacts and make certain elections via the Company’s share registry Link Market Services Limited by accessing the web site www.linkmarketservices.com.au. Shareholders have the option of receiving all or a selection of communication electronically. The Company encourages full participation of shareholders at the Annual General Meeting. The Chairman of the meeting encourages shareholders to ask reasonable questions at the Annual General Meeting. The Board makes itself available to all shareholders both before and after the Annual General Meeting. The next Annual General Meeting is scheduled to be held at 11.00am on Friday, 22 May 2015 at the offices of PricewaterhouseCoopers, 201 Sussex Street, Sydney. Shareholders are also able to direct any questions relating to the Company’s securities to the share registry, Link Market Services Limited. Auditor attendance at the Annual General Meeting The Company’s external auditor attends the Annual General Meeting and is available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s report. Principle 7 – Recognise and Manage Risk The Board, through the Risk Committee and Audit Committee, reviews and oversees the Group’s risk management systems. Principle 5 – Make Timely and Balanced Disclosure The Company has appropriate mechanisms in place to ensure all investors are provided with timely, complete and accurate information affecting the Group’s financial position, performance, ownership and governance. The Chairman, CEO, CFO or Company Secretary are responsible, as appropriate, for communication with shareholders and the Australian Securities Exchange (“ASX”). This includes responsibility for ensuring compliance with the continuous disclosure requirements in the ASX listing rules and overseeing and co- ordinating information disclosure to the ASX, analysts, brokers, shareholders, the media and the public. Continuous disclosure obligations are well understood and upheld by the Board and senior executives. Formal and informal discussion and consideration of these obligations occurs as and when the need arises. The Group’s shareholder communication strategy is designed to ensure that all relevant information, especially market sensitive information, is made available to all shareholders and other stakeholders as soon as possible. InvoCare’s website is structured to ensure information is easily located and logically grouped. Those shareholders who have made the appropriate election receive email notification of all announcements. The Continuous Disclosure Policy and Shareholder Communication Strategy are available on the Company’s website: www.invocare.com.au 36 Risk Committee The Risk Committee determines the Group’s risk profile and is responsible for overseeing and approving risk management strategy and policies, internal compliance and internal control. The Risk Committee does not have responsibility for strategic (Board responsibility) or financial risk management, which is the focus of InvoCare’s Audit Committee. The Board has reviewed the Group’s risk management framework during the year and confirmed that it remains sound. The Company’s approach to managing risk draws from the International Standard ISO 31000 and the Committee of Sponsoring Organisations of the Treadway Commission’s integrated framework for Enterprise Risk Management. The Group does not have any material exposure to economic, environmental and social sustainability risks. Each senior executive, with input and assistance from their direct reports, identifies key risks for their areas of responsibility and function which are in turn aggregated into an overall corporate risk register. Each risk is assessed and assigned an inherent risk rating. The risk register is continuously reviewed and maintained as new risks are identified or incidents occur, or mitigating controls change. Extracts of the risk register are provided to the Risk Committee at each of its meetings, together with specific commentary or information on significant changes to the risks or the ratings. Specific major risks or incidents are reported, as and when they occur, to the CEO and Other KMPs who are responsible for escalating these to the Risk Committee and Board, where necessary, if the event occurs outside the regular cycle of Committee meetings. The Committee is informed of the effectiveness of actions to mitigate the impact of risk events. In addition, the Committee considers developments or improvements in risk management and controls, including the adequacy of insurance programmes. Separate records and registers are maintained for other more common or recurring risks; for example, arising from customer complaints and occupational health and safety issues. These are managed and reported to the Committee by relevant in-house specialists, including the Group Integration and Risk Manager and General Manager of Human Resources. In this context, the Committee monitors complaints handling and also has a strong focus on ensuring suitable work practices and employee learning and development programmes are developed and delivered. The Risk Committee comprises four independent non-executive directors and is currently chaired by Christine Clifton. The other members are Aliza Knox, Richard Davis and Gary Stead. The number of meetings held during the year and the individual attendances at those meetings is set out on page 32 of the Directors’ Report. The Risk Committee Charter is available on the Company’s website: www.invocare.com.au Internal control The Group maintains a register of delegated authorities which are designed to ensure that all transactions are approved at the appropriate level of management and by individuals who have no conflicts of interest in relation to the transaction. An internal audit function is established and conducts a series of risk-based and routine reviews in accordance with three-year strategic, and more detailed annual, internal audit plans. These plans are based on the existing risk environment and the level of inherent risk, i.e. the level of risk before the application of controls, in order to effectively identify and prioritise internal audit projects. Within a three-year period all key business systems and processes are regularly reviewed, either using in-house or external resources, to ensure that adequate levels of checks and balances exist to safeguard the assets of the Company and ensure that all transactions are correctly and promptly recorded. Internal audit has developed a self-assessment questionnaire which is distributed to operational management. This questionnaire serves to build higher awareness and understanding of business risks and how to manage and control them. In addition, internal audit reviews all systems improvements and enhancements prior to live implementation to ensure an adequate level of internal control and accountability is maintained. Exception reports have been developed that assist in continuous monitoring of major processes. An informal process exists by which employees of InvoCare may, in confidence, raise concerns about possible improprieties in financial reporting or other matters. Internal audit would usually be involved in independent investigations of such matters and follow-up actions. The Group Internal Audit Manager and Integration and Risk Manager meet privately with the chairs of the Audit and Risk Committees without management present on a regular basis. Principle 8 – Remunerate Fairly and Responsibly Remuneration Committee InvoCare’s remuneration policy ensures that remuneration packages properly reflect the person’s duties and responsibilities, and that remuneration is competitive in attracting, retaining and motivating people of the highest calibre. The Remuneration Committee reviews and makes recommendations to the Board on senior executive remuneration and appointment and on overall staff remuneration and compensation policies. When making recommendations, the Committee aims to design policies that attract and retain the executives needed to run InvoCare successfully and to motivate executives to pursue appropriate growth strategies while marrying performance with remuneration. The Remuneration Committee comprises four independent non- executive directors with Roger Penman as Chair and Richard Fisher, Richard Davis and Gary Stead as members. The number of meetings held during the year and the individual attendances at those meetings is set out on page 32 of the Directors’ Report. The Remuneration Committee Charter is available on the Company’s website: www.invocare.com.au Remuneration structure Remuneration for senior executives typically comprises a package of fixed and performance-based components. The Committee may, from time to time, seek advice from special remuneration consulting groups so as to ensure that the Board remains informed of market trends and practices. Non-executive directors are remunerated by way of directors’ fees, which may be sacrificed by payment into superannuation plans or by allocation of ordinary shares. They do not participate in schemes designed for the remuneration of executives, and do not receive retirement benefits, bonus payments or incentive shares. Executive remuneration and other terms of employment are reviewed annually by the Committee, having regard to personal and corporate performance, contribution to long-term growth, relevant comparative information and independent expert advice. As well as a base salary, remuneration packages include superannuation, performance-related bonuses, access by invitation to the Deferred Employee Share Plan and fringe benefits. The Remuneration Report which begins on page 38 provides detailed information about the current remuneration practices and the levels of remuneration. Share Trading Policy The Company’s share trading policy is designed to minimise the risk that InvoCare, its directors and its employees will breach the insider trading provisions of the Corporations Act or compromise confidence in InvoCare’s practices in relation to securities trading. The policy prohibits directors and employees from trading in InvoCare securities when they are in possession of information not generally available to the investment community, and otherwise confines the opportunity for directors and employees to trade in InvoCare securities to certain limited periods. The policy specifically bans the use of techniques or products to limit the economic risk associated with holding the Company’s securities. This policy applies to all senior staff, particularly those, such as finance team members, who have access to information which is not generally available. In addition, it applies to all the associates of these individuals. The policy prohibits trading in the Company’s shares except within narrow and specific windows when the Group believes the market is fully informed. There are limited procedural exceptions to the policy and in certain circumstances the Chairman has the ability to approve trading outside the policy prescriptions. The share trading policy is available on the Company’s website: www.invocare.com.au The Directors’ Report continues with the Remuneration Report. InvoCare Annual Report 2014 37 Remuneration Report The Remuneration Report summarises the key compensation policies and practices for the year ended 31 December 2014, highlights the link between remuneration and corporate performance and provides detailed information on the compensation for non-executive and executive directors and other key management personnel. The Remuneration Report is set out under the following main headings: A. Directors and key management personnel disclosed in this report B. Remuneration governance C. Use of remuneration consultants D. Executive remuneration policy and framework E. Relationship between remuneration and InvoCare’s performance F. Non-executive director remuneration policy G. Voting at InvoCare’s 2014 Annual General Meeting H. Details of remuneration I. Service agreements J. Details of share-based compensation The information provided in this Remuneration Report has been audited as required by section 308(3C) of the Corporations Act 2001. A. Directors and key management personnel For the purposes of this report, the key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group or a major operation within the Group and are as follows: Non-executive directors Richard Fisher (Chairman) Christine Clifton Roger Penman Aliza Knox Richard Davis Gary Stead (appointed 1 September 2014) Other key management personnel Andrew Smith (Managing Director and Chief Executive Officer) Phillip Friery (Chief Financial Officer) Greg Bisset (Chief Operating Officer Australia) Andi Luiskandl (Chief Information Officer) Wee Leng Goh (Chief Executive Officer Singapore) Graeme Rhind (Chief Operating Officer New Zealand) On 17 December 2014, it was announced that Martin Earp will replace Andrew Smith as Managing Director and Chief Executive Officer with effect from 1 May 2015. Information relating to Martin Earp’s remuneration is disclosed in the relevant sections of this report. Following a sudden and serious health issue suffered by Roger Penman on 1 January 2015, he has been granted leave of absence until 30 June 2015 or such earlier date as the Board is advised that he is fit to return to normal duties. 38 B. Remuneration Governance The Board has an established Remuneration Committee which critically reviews the Group’s remuneration policy and, under its charter, has the following primary functions: – review and make recommendations to the Board regarding the remuneration and appointment of senior executive officers and non-executive directors; review and make recommendations to the Board regarding policies for remuneration and compensation programmes of the Group focusing on appropriate remuneration policies designed to meet the needs of the Group and enhance corporate and individual performance; review and make recommendations to the Board regarding administration of remuneration and compensation programmes; review and make recommendations for approval by the Board regarding all reports on executive remuneration required by law or regulation proposed to be included in the annual report; review and make recommendations to the Board regarding all equity based remuneration or compensation plans; and report to the Board regularly on each of the above matters. – – – – – During 2014, the Remuneration Committee considered the emerging market remuneration practices and legislative developments. Both the previous and this latest Remuneration Report provide commentary about any changes to remuneration arrangements and outline the Directors’ rationale for the practices adopted. The Remuneration Committee makes recommendations to the Board in relation to the remuneration of the CEO. The CEO recommends the remuneration of all other key management personnel. The Remuneration Committee reviews the recommendation before submission to and approval by the Board of Directors. The key management personnel determine the remuneration of other senior management, within both the Remuneration Committee remuneration policy framework and a defined budget approved by the Board. C. Use of remuneration consultants The Remuneration Committee conducted its remuneration review with assistance detailed below from independent remuneration consultant Mr Ian Crichton of Crichton and Associates (“C+A”), a specialist consultancy and advisory business dedicated to all aspects of director and executive compensation and equity incentive strategies. C+A was appointed in December 2014, in writing, by the Chairman of the Remuneration Committee, to undertake a remuneration benchmark assessment and analysis in respect of Director and selected key management personnel remuneration. Reports were provided to the Chairman of the Remuneration Committee during December 2014 and January 2015. The information provided was used, in part, to assist the Board in determining changes to Director and key management personnel remuneration for the 2015 financial year. C+A received a fee of $13,565 (excluding GST and out of pocket expenses) for this work. C+A did not make any “remuneration recommendations” as defined in the Corporations Act 2001 in the 2014 financial year. Directors’ Report continuedD. Executive remuneration policy and framework Policy The guiding principle underlying InvoCare’s executive remuneration philosophy is to ensure rewards are fair and reasonable, having regard to both internal and external relativities, and appropriately balanced between fixed and variable components and that all variable components are commensurate with performance and results delivered. InvoCare’s remuneration policy is that: – – – – – for each role, the balance between fixed and variable components should reflect market conditions; individual objectives should reflect the need for sustainable outcomes; all variable pay should be tightly linked to measurable personal and business performance; total compensation should be market competitive and be reviewed annually, with no component guaranteed to increase; and the Chief Executive Officer’s and senior executives’ total remuneration be targeted at the 50th percentile of comparable positions in comparable size companies (taking into account sales revenue, number of employees, net profit after tax and market capitalisation) which is achieved when individual and overall Group performance targets are met. Remuneration structure InvoCare’s compensation structure aims to provide a balance of fixed and variable remuneration components. Variable components are tied to the performance of the Group and of the individual and are entirely at risk. The compensation of the Chief Executive Officer and other key management personnel is comprised of payments and/or allocations under the following categories: – base salary and benefits, including annual leave, superannuation and other incidental benefits; short-term incentives (“STI”) in the form of annual cash bonuses; and long-term incentives (“LTI”) in the form of share-based bonuses. – – The target remuneration mix for the CEO and other key management personnel, as depicted in the following graph (and averaged for the other key management personnel), is set to place a considerable portion of executive remuneration at risk so as to align remuneration with both Group performance and the individual’s personal influence and contribution to the Group performance. CEO – 2014 51% 28% 21% CEO – 2013 52% 27% 21% Other key management personnel – 2014 Other key management personnel – 2013 59% 61% 24% 17% 23% 16% 20% ■ Base plus superannuation ■ STI potential ■ LTI potential 60% 40% 0% 80% 100% No director or other key management personnel has, at 31 December 2014 or during or since the end of the financial year, had any loans to or from the Group or any options over unissued ordinary shares of InvoCare Limited. Base salary and benefits Executives are offered a market competitive base cash salary, together with annual leave and post-employment superannuation benefits in accordance with relevant jurisdictional statutory requirements and other non-monetary or incidental benefits. An executive may elect to structure the base salary and benefits as a combination of cash and other benefits. The cash salary is reviewed on a regular basis against market data for comparable positions provided by independent remuneration consultants and selected survey data. Adjustments to base salary are based on increases in role scope or responsibility, pay position relative to market and relative performance in the role. No guaranteed base pay increases are included in any executive’s service agreements. Non-monetary benefits may include provision of fully maintained cars and car parking spaces. Other incidental benefits may include payment of total and permanent disablement, death and salary continuance insurance premiums and nominal discounts for funerals of immediate family members. In Australia, entitlements accrue for employee’s long service and, subject to relevant statutory requirements and qualifying periods, the entitlement may be taken as leave or is payable to the employees upon termination of employment. Termination benefits are provided in the respective individual contracts of employment and are normally limited to statutory entitlements, such as accrued but untaken leave, and payments in lieu of notice, which generally range between one month and up to a maximum of six months. Details for key management personnel service agreements are set out on page 47 under the heading “I. Service Agreements”. Short-term incentives STIs are awarded for achievement of pre-determined financial and non-financial objectives. For key management personnel, the target criteria and possible bonus levels are defined each year by the Remuneration Committee and Board. For other executives, the key management personnel determine the objectives and reward levels, subject to ratification by the Remuneration Committee, within the constraints of a Board approved budget. Each executive has a target STI opportunity depending on the accountabilities of the role and impact on Group performance. The STI opportunity is up to a maximum of 56.3% of base salary plus superannuation for the CEO and up to a maximum of 52% for the other key management personnel. The target criteria for key management personnel are heavily weighted to overall financial performance, being up to 47% of the potential STI opportunity, but are also tailored to the relevant circumstances of each executive. In summary, the criteria used to determine short-term bonuses for key management personnel are aligned with InvoCare’s strategic and business objectives and include: – Group, specific country or specific business EBITDA growth targets, with EBITDA being a key financial measure of the success of operations; – Absolute case volume and Group, specific country or specific market share growth, which are cornerstones of the past and future growth of the business, including through opening new locations in existing markets, entering new markets or acquiring businesses; Innovation in customer service delivery and business operations, including introducing new products and services, modifying operating models and further developing or strengthening brand positioning; – InvoCare Annual Report 2014 39 Remuneration Report continued – Develop and implement digital business strategies, embracing and harnessing new or existing technologies (e.g. social media) to enhance customer service and business efficiencies; and – Continue to grow the prepaid funeral business and, where possible, influence independent fund managers to adopt appropriate asset allocations and achieve investment returns in excess of price rises and investment management costs. Other levels of staff also received short-term objective based compensation based on measurable and pre-determined targets. In addition to complementing the targets applying to more senior executives, these objectives include key performance indicators such as case average pricing, sales of prepaid contracts, the management of labour costs, client survey results and debtors’ days outstanding. Most bonuses are payable in cash in the first quarter of each year after the completion of the audit of the results for the previous year ended 31 December. In some jurisdictions quarterly market share incentives are paid upon achievement of targets. The Remuneration Committee considers that STI bonuses are awarded for achievement of key performance criteria for a particular financial year and that no part of the bonus should be deferred for payment in a later year. The Committee is of the view that the share-based LTI, described in more detail below, encourage executives to remain employed with the Group and ensure alignment with shareholder interests. Based upon achievements in 2014, the Remuneration Committee determined the CEO and other key management personnel achieved an average 77% of their target STI opportunity. The following factors were among those considered by the Remuneration Committee in making its assessment on the remainder of the STI opportunity: – Financial performance was improved on the previous year, with achievement of Group EBITDA targets, stabilisation of market share after losses during 2013, better investment performance of prepaid funeral funds and lower debt financing costs after successful conclusion to refinancing negotiations in late 2013; – Negotiations with potential business vendors continued during the year with the successful completion and integration of a small funeral business in Australia and the taking of further steps to secure ownership of two crematorium operations in New Zealand; and – Roll out of digital strategy across the business. Long-term incentives Recognising the importance of an appropriate long-term incentive for rewarding and retaining senior management, during 2007 a share-based compensation scheme, the InvoCare Deferred Employee Share Plan (“DESP”), was introduced under which the Board may offer selected senior managers incentive shares (“LTI shares”). In the case of Singapore and New Zealand based senior executives who may not be able to participate in Australian share offers, share appreciation rights (“LTI rights”) may be offered which mirror the same outcomes for the employee as LTI shares. The long-term incentive for the Chief Operating Officer InvoCare USA, details of which are set out below, differs to arrangements for executives in Australia, Singapore and New Zealand more fully described in the immediately following paragraphs. 40 In determining the amount of an offer to an individual manager, consideration is given to factors, including market benchmarks, skill and experience, expected and actual performance over time and promotion and succession potential. No consideration is payable by the employee for the offer of LTI shares or LTI rights, but they are subject to continuous service and, for senior management, performance conditions. The LTI shares are purchased on-market and hence the DESP is operated on a completely non-dilutive basis. LTI rights are valued by reference to the market value of InvoCare shares at the time of the offer. The value of LTI shares or LTI rights offered is up to a maximum of 41.8% of base salary plus superannuation for the CEO (based upon his 2014 remuneration) and up to a maximum 35.0% for the other key management personnel. Vesting of the LTI shares and LTI rights will be in three equal tranches in February of each of the second, third and fourth subsequent years after the year of offer. Unless otherwise determined by the Board in its sole discretion, unvested LTI shares and LTI rights will be forfeited on death and disability, retirement or resignation or other employment termination. The LTI shares are held in trust until vesting and the employees will be entitled to any dividends paid in respect of unvested, unforfeited shares. Similarly, notional dividend amounts will be paid to holders of unvested, unforfeited LTI rights coinciding with the payment of InvoCare dividends. The Remuneration Committee considers the payment of dividends on unvested shares or rights reinforces the value of the long-term reward. The practice helps align the managers’ interests with those of InvoCare shareholders through appreciation of the importance of dividend benefits and provides further incentive for managers to remain with InvoCare until vesting conditions are met. Upon vesting of LTI shares, the employee has the discretion to leave the LTI shares in trust, withdraw or sell any number of them. In accordance with InvoCare’s Share Trading Policy, senior managers are not permitted to enter into transactions in products associated with their shareholding in the Company which operate to limit the economic risk of their shareholding (e.g. hedging or cap and collar arrangements), which includes limiting the economic risk of holdings of unvested entitlements associated with LTI shares. Upon vesting of LTI rights, the employee will be paid in cash an amount equivalent to the number of vested LTI rights multiplied by the value of those rights derived by reference to the market value of InvoCare shares. Performance conditions apply to senior managers who have an important strategic role impacting InvoCare’s financial performance and relate to compound growth per annum in normalised earnings per share over the vesting period. “Normalised earnings” means reported profit as adjusted: – to remove the impacts of any gains or losses arising from the sale, disposal or impairment of non-current assets; and to maintain consistency in accounting policies across the respective vesting periods for each grant. – Compound growth per annum of normalised earnings per share was selected at the time of establishment of the DESP as the most suitable and reliable measure of organisational performance based on independent advice from C+A and analysis by the Board. As part of its normal review of remuneration policy, the Remuneration Committee re-affirmed the appropriateness of the earnings per share absolute measure, including by comparison to Directors’ Report continuedthe commonly used Total Shareholder Return (“TSR”) relative metric. The reasons for this conclusion include: – InvoCare is a stable, unique business without a true comparator peer or group to benchmark performance against; relative TSR incentives tend to favour executives in companies with higher levels of inherent share price volatility than InvoCare, which has lower volatility in both share price and earnings than other ASX listed entities or market indices; InvoCare has relatively small market capitalisation and its growth may appear constrained relative to an index or selected peer group; The vagaries of equity markets are not controllable by InvoCare’s Board or its executives and introducing TSR would detract from the clear and proven organisational performance culture which already exists within InvoCare; and – – – – Earnings per share growth is aligned with InvoCare’s strategic objectives and more closely reflects management performance and success in incrementally creating value through good decision making and sustained and improving performance over time. For 2014 offers, the 2013 base comparison year earnings per share was set at 39.7 cents per share to exclude the net gains from asset sales and impairments in 2013. For 2015 offers, the 2014 base comparison year earnings per share has been set at 49.1 cents per share which excludes the net gains from asset sales and impairments in 2014. LTI shares or LTI rights granted in 2015, 2014, 2012, 2011 and 2010 vest as set out below: Normalised reported earnings per share (“EPS”) compound growth per annum from 1 January in the year of offer Proportion of each one-third tranche of LTI shares that will vest 10% or more 9% or more but less than 10% 8% or more but less than 9% 7% or more but less than 8% Less than 7% 100% 77% plus 2.3% for each 0.1% growth in EPS over 9% 53% plus 2.4% for each 0.1% growth in EPS over 8% 30% plus 2.3% for each 0.1% growth in EPS over 7% Nil LTI shares or LTI rights granted in 2013 vest as set out below: Normalised reported earnings per share (“EPS”) compound growth per annum from 1 January in the year of offer Proportion of each one-third tranche of LTI shares that will vest 12% or more 11% or more but less than 12% 10% or more but less than 11% 9% or more but less than 10% 8% or more but less than 9% 7% or more but less than 8% Less than 7% 100% 80% plus 2.0% for each 0.1% EPS over 11% 65% plus 1.5% for each 0.1% EPS over 10% 55% plus 1.0% for each 0.1% EPS over 9% 50% plus 0.5% for each 0.1% EPS over 8% 30% plus 2.0% for each 0.1% EPS over 7% Nil The performance conditions for LTI shares and LTI rights were selected following analysis of: – – historic and forecast EPS growth in the ASX/S&P 200 Index; and InvoCare’s own earnings forecasts derived from its annual five-year plans. If the compound EPS growth performance conditions are not met at the vesting date, the LTI shares or LTI rights remain available until February in the fifth year after grant and may vest based on the compound annual growth from the base date for the grant to 31 December of the previous year. Unvested shares at the fifth anniversary of the grant are forfeited. The Remuneration Committee continues to support as fair and reasonable the consideration that the LTI plan provides for a cumulative EPS test over the vesting period. Each grant is split into three tranches with vesting ranging over two and up to a maximum of five years after each grant. This is to allow for the impact that the number of deaths, which is outside the control of management, has on InvoCare’s annual result, in particular given the fixed cost nature of the business. To receive 100% of the LTI shares or LTI rights, the senior executive or manager must remain employed during the vesting period and InvoCare’s compound EPS growth must equal or exceed the maximum target growth percentage. The employee remains exposed over this timeframe to the consequences of the Group’s results, their own individual performance impacting that result and the market movements in InvoCare’s share price. InvoCare Annual Report 2014 41 Remuneration Report continued The following table summarises the performance to date for the grants made since 2010 which impact remuneration in the current or a future financial year. LTI share grant year Target annual compound normalised EPS growth from 1 January of grant year Normalised EPS on 1 January of grant year 2010 7% to 10% 32.3 cents 2011 7% to 10% 33.9 cents 2012 7% to 10% 34.4 cents 2013 7% to 12% 38.7 cents 2014 7% to 10% 39.7 cents 2015 7% to 10% 49.1 cents Performance condition testing date and vesting outcome February 2012 – not satisfied, first 1/3rd not vested February 2013 – not satisfied, first and second 1/3rd not vested February 2014 – not satisfied, all tranches not vested February 2015 – not satisfied, all unvested shares forfeited February 2013 – not satisfied, first 1/3rd not vested February 2014 – not satisfied, first and second 1/3rd not vested February 2015 – not satisfied, all tranches not vested February 2016 – to be determined February 2014 – 39% of the first 1/3rd tranche vested February 2015 – 100% vesting of second and unvested first tranches February 2016 – to be determined February 2017 (if required) February 2015 – 100% of first 1/3rd tranche vested February 2016 – to be determined February 2017 – to be determined February 2018 (if required) February 2016 – to be determined February 2017 – to be determined February 2018 – to be determined February 2019 (if required) February 2017 – to be determined February 2018 – to be determined February 2019 – to be determined February 2020 (if required) Future offers of LTI shares and LTI rights may be made at the discretion of the Board and the service and performance conditions for any future offers may vary from previous LTI share and LTI rights offers. Further details of LTI shares and LTI rights are set out on page 49 under the heading “J. Share-based Compensation”. 42 Directors’ Report continuedE. Relationship between remuneration and InvoCare’s performance The overall level of executive reward takes into account the performance of the Group over a number of years, with at risk remuneration linked to that performance. The remuneration approach, elements and mix has delivered shareholder value since listing as depicted by key performance indicators for the Group in the tables below. 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 Reported profit after tax ($m) – note 1 Basic earnings per share (cents) Normal dividends ($m) – note 2 Normal dividends per share (cents) Total return per share ($) – note 3 Total shareholder return (%) – note 3 Share price ($) – 31 December Shares on issue (m) Market capitalisation ($m) – note 4 Enterprise value ($m) – note 5 $54.5 $48.9m $44.5m $27.0m $27.4m $48.1m $28.0m $27.6m $24.0m $20.1m 49.8¢ 44.7¢ 40.6¢ 25.6¢ 26.9¢ 47.7¢ 28.0¢ 27.6¢ 24.7¢ 21.0¢ $40.1m $37.9m $37.4m $32.5m $28.9m $25.7m $23.6m $22.5m $19.2m $16.0m 36.5¢ 34.5¢ 34.0¢ 29.75¢ 28.25¢ 25.25¢ 23.5¢ 22.5¢ 19.5¢ 16.5¢ $1.41 $2.60 $1.39 $0.71 $1.37 $1.28 ($1.63) $1.66 $1.56 $1.11 13% 30% 18% 10% 22% 25% (23%) 30% 37% 33% $12.10 $11.04 110m 110m $8.78 110m $7.70 110m $7.28 102m $6.18 102m $5.15 101m $7.01 100m $5.57 99m $4.19 97m $1,331m $1,215m $966m $847m $746m $629m $519m $703m $552m $406m $1,550m $1,430m $1,183m $1,055m $894m $778m $671m $849m $698m $542m 1. From 2009, the Group changed its accounting policy for prepaid contracts following review by the Australian Securities & Investments Commission which introduced volatility into reported results associated with mark to market valuations of prepaid funds under management recognised on balance sheet for the first time. With a sizeable asset allocation to equities in those prepaid funds, the 2009 and 2010 fair value movements were quite significant as a consequence of the global financial crisis and equity returns in 2011 were subdued. Investment asset allocation tilts away from equities have reduced the return volatility. 2. A special dividend of 10.5 cents per share totalling $10.2 million was paid in 2005 in addition to the normal dividends for that year. 3. Total return per share is the share price movement plus in year cash dividends paid. The total shareholder return percentage is the total return per share divided by the share price at the beginning of the year. 4. Market capitalisation at 31 December, being number of shares on issue multiplied by share price at that date. 5. Enterprise value is market capitalisation plus net debt. InvoCare’s TSR compared to the S&P/ASX 200 Index for financial years ended 31 December since 2005 is set out below. InvoCare Limited Percentile rank S&P/ASX 200 Index 75th percentile Median 25th percentile 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 13.1% 29.8% 56.4% 60.1% 18.4% 37.3% 10.2% 78.5% 23.3% 72.9% 25.2% (23.5%) 30.6% 34.9% 77.1% 68.1% 38.0% 66.0% 33.6% 68.6% 28.6% 43.1% 42.8% 5.7% 27.4% 125.9% (24.2%) 36.6% 49.9% 8.6% 24.5% 25.8% (10.0%) (16.9%) 2.4% 9.0% (25.1%) 5.2% (7.1%) 46.8% (45.8%) 12.9% 12.4% (63.3%) (6.0%) 28.1% 11.7% 40.6% 18.9% 0.4% Source: Bloomberg as at 28 January 2015 Note: Based on net dividends reinvested and a base currency of Australian dollars. Index members based on membership as at the date of the Bloomberg data, not historical membership. InvoCare Annual Report 2014 43 Remuneration Report continued InvoCare’s Total Shareholder Return (“TSR”) for the financial years ended 31 December over the past nine years compared to a range of similar international businesses is set out below. 2014 2013 2012 2011 2010 2009 2008 2007 2006 InvoCare Limited Percentile rank Service Corporation International Dignity plc 13.1% 29.8% 33.6% 39.5% 27.3% 33.4% 33.5% 33.3% 18.4% 42.5% 32.6% 35.2% 10.2% 67.0% 31.6% 16.1% 23.3% 49.3% 25.2% (23.5%) 30.6% 28.1% 57.0% 71.1% 2.6% 70.3% (64.0%) 38.6% 20.2% 3.2% (16.2%) 12.3% 38.0% 99.1% 26.9% 38.3% Lung Yen Life Services Corp 16.5% (7.1%) 8.8% (16.0%) 419.2% 320.7% (62.0%) (32.6%) (29.1%) Stonemor Partners LP Stewart Enterprises Inc-CL Carriage Services Inc Funespana SA Tear Corporation San Holdings Inc Mean Median Source: Bloomberg as at 28 January 2015 11.2% 34.4% (2.3%) (15.4%) n.a n.a 36.5% (12.7%) 7.9% 65.7% 114.7% (2.9%) (10.8%) 17.1% 2.7% 92.1% 82.8% (32.6%) 22.1% 8.7% 68.5% 33.5% 23.5% 20.2% 50.3% 92.3% (33.1%) (13.3%) 33.8% 75.9% (65.7%) 44.5% 17.6% 95.9% (77.2%) 73.1% 12.4% 62.6% 11.3% (43.0%) 6.1% (22.8%) 1.8% (3.1%) n.a. 32.4% 18.2% (8.2%) 6.8% (10.9%) (16.3%) 1.5% (2.3%) (16.3%) 20.0% 33.4% 19.3% 33.3% 32.1% 32.6% (0.3%) 2.7% 69.7% 23.5% 79.7% (33.3%) 6.1% 70.3% (33.1%) (2.3%) 8.7% 9.7% Note: Based on net dividends reinvested and a base currency of Australian dollars. Stewart Enterprises Inc was acquired by Service Corp International on 24 December 2013, but has been included to maintain historical data. F. Non-executive director remuneration policy Non-executive directors Policy The Board’s primary focus is on the long-term strategic direction and overall performance of the Group. Accordingly, non-executive director remuneration is not linked to short-term results. Fees paid to non-executive directors are determined with the assistance of independent external advisors, C+A. attract and retain competent and suitably qualified non-executive directors; The remuneration policy is designed to: – – motivate non-executive directors to achieve InvoCare’s long-term strategic objectives; and align the interests of non-executive directors with the long-term interests of shareholders. – Fee pool and other fees Non-executive directors’ base fees for services as directors are determined within an aggregate directors’ fee pool limit, which is periodically approved by shareholders. At the date of this report, the pool limit is $1,000,000, being the amount approved by shareholders at the Annual General Meeting held on 11 May 2012. This remuneration is divided among the non-executive directors in such proportion as the Board determines. During the 2014 financial year, annual fees for non-executive directors were $220,000 for the Chairman of the Board and $120,000 for each of the other non-executive directors. An additional $10,000 was paid to the Chairman of the Audit Committee. Using market information from an external review of non-executive director compensation commissioned by the Board Remuneration Committee, the Board has determined 2015 fees will be increased by 5% and be $231,000 for the Chairman and $126,000 for each of the other non-executive directors. There was no increase in these fees in 2014. The Chairman of the Audit Committee will receive an additional $10,500 for the additional work associated with the Audit Committee. The aggregate of these fees is $871,500 which is below the current pool limit. The Directors propose to ask shareholders to consider increasing the pool limit at the next Annual General Meeting on 22 May 2015 to $1,250,000. An increase in the fee pool limit will permit additional directors to be appointed, if warranted, by the needs of the Company as well as to respond to market increases. 44 Directors’ Report continued The base fees exclude any remuneration determined by the directors where a director performs additional or special duties for the Company. If a director performs additional or special duties for the Company, they may be remunerated as determined by the directors and that remuneration can be in addition to the limit mentioned above. No fees for additional or special duties were paid to non-executive directors holding office during the years ended 31 December 2014 and 31 December 2013. Directors are entitled to be reimbursed for all reasonable costs and expenses incurred by them in the performance of their duties as directors. Equity participation Non-executive directors may receive options as part of their remuneration, subject only to shareholder approval. No options are held by any non-executive director at the date of this report. Non-executive directors may participate in the Company’s Deferred Employee Share Plan on a fee sacrifice basis. No shares have been issued or allocated to non-executive directors under the Deferred Employee Share Plan. During 2009, the Board resolved that with effect from 1 January 2009, non-executive directors of InvoCare Limited be required to acquire a minimum equity interest in the Company equivalent in value to 50% of their annual director’s fee applying at the time of their appointment as a director of the Company and that directors be allowed up to three years to accumulate the required shareholding. At the date of this report, all non-executive directors except Mr Gary Stead have equity interests in the Company higher than required. Mr Stead was appointed to the Board on 1 September 2014 and as a result has until 31 August 2017 to acquire the required shareholding. Directors’ equity holdings are set out under the heading “Information on directors” on pages 30 to 31 of the Directors’ Report and in Note 7: “Key Management Personnel Disclosures” on page 75 of the notes to the financial statements. Retiring allowances No retiring allowances are paid to non-executive directors. Superannuation Where relevant, fees paid to non-executive directors are inclusive of any superannuation guarantee charge and, at the discretion of each non-executive director, may be paid into superannuation funds. G. Voting at InvoCare’s 2014 Annual General Meeting The Remuneration Report for the year ended 31 December 2013 received a vote of more than 90% in favour at the Annual General Meeting held on 23 May 2014. At that AGM, a shareholder raised a question about the calculation methods and measures used in the Company’s long-term incentive scheme. The Chairman commented that the Board was aware of market commentary about long-term incentive schemes and that its approach was calibrated to create maximum shareholder value. The Chairman of the Remuneration Committee also commented that remuneration practices are reviewed twice yearly, advice is obtained from an external remuneration consultant, earnings per share is believed to be an appropriate benchmark and, although there may be some objections to the detail, the objectives of all parties are the same. The Company did not receive any other feedback at the AGM regarding its remuneration practices. InvoCare Annual Report 2014 45 Remuneration Report continued H. Details of Remuneration Details of the remuneration of the directors and the executive key management personnel of the Group are set out in the following table. Short-term employment benefits Post- employment benefits Other long-term benefits Share-based payments benefits Cash Salary or Fee (note 1) $ Short-term cash bonus (note 2) $ Non- monetary benefits (note 3) $ Super- annuation (note 4) $ Long Service Leave (note 5) $ LTI Shares at risk (note 6) $ LTI Shares forfeited (note 7) $ Year Total Statutory Re- muneration (note 8) $ Executives’ Actual Re- muneration (note 9) $ Non-executive directors Richard Fisher (appointed chairman 22 October 2013) Christine Clifton Roger Penman Aliza Knox Richard Davis Ian Ferrier (resigned 22 October 2013) Benjamin Chow (resigned 16 August 2013) Gary Stead (appointed 01 September 2014) Executive director Andrew Smith (note 12) 2014 201,143 2013 125,221 2014 109,714 2013 109,966 2014 130,000 2013 120,000 2014 120,000 2013 120,000 2014 109,714 2013 109,966 2014 – 2013 168,196 2014 2013 2014 2013 – 73,353 36,529 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 18,857 11,445 10,286 10,034 – – – – 10,286 10,034 – 15,138 – 6,648 3,471 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 220,000 136,667 120,000 120,000 130,000 120,000 120,000 120,000 120,000 120,000 – 183,333 – 80,000 40,000 – 2014 715,562 330,012 35,359 23,162 38,427 680,089 (182,874) 1,639,736 1,246,852 2013 720,246 122,227 39,945 21,989 20,149 264,881 (55,872) 1,133,565 1,168,354 Other key management personnel Phillip Friery 2014 366,500 145,164 33,118 19,199 6,234 99,952 (122,546) 547,621 662,276 2013 366,253 64,517 30,402 19,000 10,504 97,893 (7,966) 580,603 546,983 Greg Bisset 2014 350,962 141,644 26,545 26,791 7,440 130,373 (84,117) 599,639 642,482 2013 352,654 64,378 42,535 24,505 5,767 120,837 (9,323) 601,353 542,346 Andi Luiskandl 2014 226,313 28,648 19,614 21,120 2,059 53,191 2013 248,715 37,089 20,222 23,146 1,284 36,605 – – 350,946 309,639 367,061 333,044 Wee Leng Goh (note 10) 2014 229,934 35,820 5,207 11,897 2013 195,359 26,921 7,323 11,103 Graeme Rhind (note 11) 2014 199,319 88,542 12,266 2013 176,630 24,966 14,656 8,806 9,602 – – – – 87,629 (41,712) 328,775 301,218 76,012 59,028 28,731 – – – 316,718 249,425 367,961 321,117 254,585 228,574 Notes to Remuneration Table: 1. The total cost of fees and salary, including annual leave taken and provided and, at the discretion of the director or employee, any salary or fee sacrificed benefits, for example into superannuation. 2. The amount to be settled in cash relating to performance of the Group and the individual for the financial year from 1 January to 31 December. The proportions of STI bonuses awarded and forfeited are set out in the following table. 3. The cost to the Company, including any fringe benefits tax, for the provision of fully maintained cars, and other items. 4. Company contributions to superannuation. 5. Long service leave accruals in accordance with relevant Australian Accounting Standards. 46 Directors’ Report continued6. The amount amortised as an expense in the financial year in accordance with Australian Accounting Standards which require the value of long-term share-based incentive grants to be amortised as an expense over the relevant future vesting periods. The amounts shown relate to unvested share and rights grants made in the current and past financial years. Except for Mr Smith (see note 12) subject to meeting the vesting conditions of the grants, the shares or rights will vest, or be forfeited, in future financial years. 7. The reversal in the current financial year, in accordance with Australian Accounting Standards, previous years’ amortisation expense for long-term incentive shares granted in earlier years but which were forfeited in the current financial year because vesting conditions were not met. 8. Total statutory remuneration is calculated and disclosed in accordance with the Corporations Act and Australian Accounting Standards. 9. For information purposes and comparison with the total statutory remuneration, this column shows the executives’ remuneration which actually crystallised during the year, including salary, superannuation, annual leave paid and accrued, short-term incentives payable in respect of the financial year, the market value at vesting date of long-term incentive shares granted in previous years which vested during the year and other benefits. The approximate market values of previous grants which were forfeited during the year were $367,888 for Andrew Smith, $246,525 for Phillip Friery, $169,219 for Greg Bisset and $65,957 for Wee Leng Goh. 10. Wee Leng Goh, Chief Executive Officer of Singapore Casket Company, received total remuneration of SG$375,852 (2013:SG$383,236), which has been converted to Australian dollars at the average exchange rate for the year of 0.8747 (2013: 0.826). 11. Graeme Rhind, Chief Operating Officer of New Zealand, received total remuneration of NZ$397,586 (2013:NZ$297,272), which has been converted to Australian dollars at the average exchange rate for the year of 0.9199 (2013: 0.848). 12. Estimated termination benefits for Mr Andrew Smith as outlined under the Chief Executive Officer section below have been recognised in the 2014 financial report. The above table records the proportion of the LTI expense related to Mr Smith’s service up until 31 December 2014. The remainder of the LTI expense and other termination benefits will be disclosed in the Remuneration Report for the year ending 31 December 2015. The percentage of the available STI cash bonus that was payable for the financial year and the percentage that was forfeited because the person or the consolidated entity did not meet the service and performance criteria is set out below: Name Andrew Smith Phillip Friery Greg Bisset Andi Luiskandl Wee Leng Goh Graeme Rhind Average Cash STI bonus Payable % Forfeited % 79% 78% 76% 40% 72% 100% 77% 21% 22% 24% 60% 28% 0% 23% I. Service Agreements Chief Executive Officer Remuneration and other terms of employment for the retiring Chief Executive Officer, Andrew Smith, have been formalised in a service agreement, which has been updated from time to time during his employment. The current agreement, which commenced on 1 January 2012 and comes to its natural end on 30 April 2015, provides for provision of salary, superannuation, short-term performance related cash bonuses, long-term performance related share-based bonuses and other benefits. The total remuneration package is reviewed annually and the latest review effective from 1 January 2015 and ending 30 April 2015 provides for Andrew Smith’s remuneration as follows: – annual base salary and superannuation, unchanged from 2014 being $745,000, resulting in $248,333 for the four months to 30 April 2015; short-term incentive bonus of up to 56.3% (2014: 56.3%) of base salary and superannuation, being a maximum of $139,836 for the four months to 30 April 2015; LTI shares of $311,559 (2014: $311,559), being unchanged from 2014 at 41.8% of annual base salary and superannuation; and other benefits such as fully maintained motor vehicle and membership of relevant professional or commercial bodies. – – – The incoming Chief Executive Officer, Martin Earp, has entered into a service agreement, substantively consistent with Andrew Smith’s, commencing on 30 March 2015 for a three-year fixed term ending on 30 March 2018, subject to agreement to extend the term. He will assume the role of Chief Executive Officer on 1 May 2015. His starting remuneration package, which will be reviewed annually commencing 31 December 2015, comprises: – – annual base salary and superannuation of $763,000, being $572,250 for the period 30 March 2015 to 31 December 2015; short-term incentive bonus of up to 56.3% of base salary and superannuation, being a maximum of $322,177 for the nine months to 31 December 2015; LTI shares to the value of 41.8% of annual base salary and superannuation, with the first grant prorated for the period of employment in 2015 (that is LTI shares of $239,200); and other benefits such as fully maintained motor vehicle and membership of relevant professional or commercial bodies. – – The Remuneration Committee and Board have the discretion to provide additional performance incentives. Under the CEO service agreements, where less than 100% of a short-term incentive bonus is achieved in a financial year, the employee may recover any shortfall in a subsequent financial year if the effective compound per annum achievement rate in a subsequent financial year exceeds the original rate not achieved. InvoCare Annual Report 2014 47  – Remuneration Report continued Termination benefits for Andrew Smith The Company is required, in accordance with the terms of Andrew Smith’s service agreement, to pay the following amounts, or provide the following benefits, to Mr Smith on termination of his service agreement upon reaching its due termination date on 30 April 2015: a cash payment for any accrued but unpaid fixed remuneration, – including superannuation, in respect of his employment by the Company up until 30 April 2015; a cash payment for accrued but untaken annual leave entitlements up to 30 April 2015, estimated to be $61,831 (or 21.9 days); a cash payment for accrued but untaken long service leave entitlements up to 30 April 2015, estimated to be $115,368 (or 40.8 days); a cash payment of a pro-rata amount of his STI award bonus for the year ending 31 December 2015, the maximum amount of which will be $139,836 with the actual amount determined based upon achievements against defined performance targets (“2015 STI”); and allow the automatic vesting of Mr Smith’s unvested LTI shares that have previously been granted to him under his service agreement and in accordance with InvoCare’s Deferred Employee Share Plan (“LTI Automatic Share Vesting”). – – – The money value of Andrew Smith’s unvested LTI shares has been calculated as approximately $1.4 million, based on 109,000 shares at $13.00 per share. The actual value of benefit received by Mr Smith may differ from that valuation and will be based upon the market value of shares at 30 April 2015. Under the termination benefits provisions of the Corporations Act 2001 (Cth), shareholders must approve the payment or provision of any 2015 STI or LTI Automatic Share Vesting termination benefits exceeding Andrew Smith’s average annual fixed remuneration over the preceding three years. The Company intends to automatically vest unvested shares to the value of $770,000 (being the three- year average of Mr Smith’s fixed remuneration rounded down to the nearest $10,000) upon his termination on 30 April 2015 and seek shareholder approval on 22 May 2015 for the payment or provision of the balance of his contractual termination benefits above $770,000. Termination arrangements for Martin Earp The termination arrangements for incoming CEO, Martin Earp, are substantively consistent with those of Andrew Smith and are set out in the following paragraphs. Termination by the Company, other than in the case of misconduct or redundancy, may be effected with six months’ notice or by payment of six months’ total remuneration package, including a pro-rata short-term bonus for the year of termination based upon any bonus paid relating to the previous financial year. In addition, unvested LTI shares will immediately vest. In the case of misconduct, the Company may terminate the employee immediately and without notice. Any unvested LTI shares will be forfeited and there will be no payment of pro-rata short-term incentive bonus amounts for the year of termination. If the Company terminates the employee due to redundancy, the employee will be entitled to payment of an amount equal to the annual total remuneration package plus a pro-rata short-term bonus for the year of termination based upon any bonus paid relating to the previous financial year. Any unvested LTI shares acquired on behalf of the employee at least one year prior to the termination by 48 redundancy will vest. Any unvested LTI shares acquired on behalf of the employee less than one year prior to the termination by redundancy will be forfeited. If the employee resigns, the employee must give six months’ notice or forfeit six months’ total remuneration for that notice period. Any unvested LTI shares will be forfeited and there will be no payment of pro-rata short-term incentive bonus amounts for the year of termination. If the term of the employee’s service agreement is not extended by the Company, but the employee is willing to extend, any unvested LTI shares will immediately vest. If the term is not extended, with the Company willing to extend but the employee not agreeing to extend, then unvested LTI shares will be forfeited. In any termination, the employee will be entitled to accrued statutory leave entitlements. The employee is not subject to any post-employment restraints. Further details of the share-based remuneration are set out in Section J – Share-based Compensation. Other key management personnel Remuneration and other terms of employment for each of the other key management personnel and other senior managers are formalised in service agreements or letters of appointment as varied from time to time, including through annual review of the base salary, short- and long-term incentives. Each contract is for an indefinite term. The employee’s total remuneration package is reviewed annually by the Remuneration Committee and Board and provides for remuneration to include: – – base salary and superannuation; short-term incentive bonus of up to 50% of base salary and superannuation with no retesting to recover any previous year shortfall; LTI shares or, in the case of overseas employees, share appreciation rights of up to 35% of base salary and superannuation; and other benefits such as fully maintained motor vehicle and membership of relevant professional or commercial bodies. – – Up to six months’ notice or payment in lieu of notice is generally required in the event of termination by the employer company. The company employer may terminate the employee immediately and without notice in the case of misconduct. If the employee resigns, the employee must generally give six months’ notice or forfeit six months’ total remuneration for that notice period. Termination benefits are limited to statutory leave entitlements, unless determined otherwise by the Remuneration Committee and Board. There is no payment of pro-rata short-term incentive bonus amounts for the year of termination. Unless the Board exercises its discretion to determine otherwise, upon employment termination for any reason unvested LTI shares will be forfeited. The Board may decide at its sole discretion that some or all of the shares will not lapse in the event of voluntary retirement on or after normal retirement age, bona fide redundancy, death or permanent disablement and or any other reason. Other executive key management personnel are generally subject to post-employment restrictions for up to twelve months after employment termination without consideration paid for the restraint. Directors’ Report continuedNon-executive directors On appointment to the Board, all non-executive directors receive a letter of appointment which summarises the Board policies and terms, including compensation, relevant to the office of director. J. Share-based Compensation Details of the LTI share and LTI rights grants, vesting and forfeits for the Chief Executive Officer and other key management personnel are set out below. Andrew Smith Phillip Friery Greg Bisset Andi Luiskandl Wee Leng Goh Graeme Rhind Maximum value yet to vest (note 3) Number forfeited during year (note 4) Value of forfeits (note 4) Aggregate forfeited % $0 $0 – – 30,404 $367,888 18% 100% Vested % 82% – Final year vesting may occur (note 1) Year of grant 2009 2010 2014 2015 2012 2013 2014 2009 2010 2017 2018 2019 2014 2015 2012 2013 2014 2009 2010 2017 2018 2019 2014 2015 2012 2013 2014 2012 2013 2014 2010 2017 2018 2019 2017 2018 2019 2015 Number of shares or rights granted Value at grant date (note 2) Number vested during year Total number vested 52,547 $275,000 3,493 43,258 30,404 $182,875 – – – – 27,799 $303,960 27,417 $311,559 – – – – 20,526 $100,000 5,669 18,891 2011 2016 27,288 $201,163 – $201,163 35,792 $284,325 4,677 4,677 13% $247,053 20,374 $122,540 2011 2016 17,454 $128,667 – – – – 8,098 $64,334 1,058 1,058 13% $55,898 9,617 $105,140 9,483 $107,768 – – – – 16,647 $81,100 4,374 15,097 13,985 $84,121 2011 2016 14,749 $108,728 – – – – – $303,960 – $311,559 92% – $0 $0 – $128,667 – $105,140 – $107,768 91% – $0 $0 – $108,728 16,088 $127,803 2,103 2,103 13% $111,105 12,212 $133,525 12,044 $136,863 – – – – – $133,525 – $136,863 5,539 $44,000 724 724 13% $38,239 5,848 $63,946 5,768 5,451 $65,545 $32,760 – – – – – – – – – – – – $63,946 $65,545 $66,684 – – – – – – – – – – – – – – 8% 20,374 $246,525 100% – – – – – – – – – – – – – – 9% 13,985 $169,219 100% – – – – – – – – – – – – – – – – – – – – – $0 5,451 $65,683 100% 2011 2016 5,536 $40,800 2012 2013 2014 2012 2013 2014 2017 2018 2019 2017 2018 2019 5,081 $39,432 723 723 14% $52,487 4,124 $45,075 4,607 $52,336 4,536 3,464 $35,199 $37,862 4,011 $45,565 – – – – – – $49,696 $55,538 593 593 13% $47,489 – – – – – – $41,743 $48,353 – – – – – – – – – – – – – – – – – – – – – 1. Under the terms of the respective year’s LTI grants, unvested shares or rights may vest in whole or in part in any year from 2014 up to the final year shown for each grant year. 2. The value at grant date is based upon the share price at the time of grant. In accordance with Australian Accounting Standards, the original grant value of LTI shares is the amount amortised as an expense over the relevant future vesting periods. In the case of LTI rights for overseas based Wee Leng Goh and Graeme Rhind, the amount expensed over the relevant future vesting periods takes account of value changes of the rights using the Black-Scholes/Merton valuation methodology. 3. The maximum value of the original grant yet to vest. LTI shares are valued at original grant value. LTI rights for overseas based Wee Leng Goh and Graeme Rhind are valued using the Black-Scholes/Merton valuation methodology. Performance conditions must be met before vesting and, if not, the minimum that will vest could be nil. 4. Upon final testing in February 2015, from the balance of unvested shares held in trust at the end of the year, shares from grants made in 2010 were forfeited due to EPS performance conditions unlikely to be achieved. The number of ordinary shares in the Company, or share appreciation rights, held during the year by each director of InvoCare Limited and other key management personnel are summarised in Note 7 on page 75. InvoCare Annual Report 2014 49 Auditor’s Independence Declaration The copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 51. Rounding of amounts The Company is of a kind referred to in Class Order 98/100 issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the Directors’ Report and Financial Report. Amounts in the Directors’ Report and Financial Report have been rounded off to the nearest thousand dollars (where rounding is applicable) in accordance with that Class Order. Signed in accordance with a resolution of the Board of Directors. Richard Fisher Director Andrew Smith Director Dated this 17th day of February 2015 Indemnifying officers or auditor During the financial year, InvoCare paid a premium to insure directors and officers of the consolidated entity. The insurance policy specifically prohibits disclosure of the nature and liability covered and the amount of the premium paid. No indemnity has been provided to the auditor of the Company in its capacity as auditor of the Company. Proceedings on behalf of the Company No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceedings. The Company was not a party to any such proceedings during the year. Non-audit services The directors are satisfied that the provision of non-audit services during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. The following fees for non-audit services were paid/payable to the external auditor (PricewaterhouseCoopers) during the year ended 31 December 2014: Australian Firm Assurance services Taxation services Other services Non-Australian Firms Taxation services Other services Total $ 28,733 53,856 38,696 32,321 2,857 156,463 50 Directors’ Report continuedAuditor’s Independence Declaration As lead auditor for the audit of InvoCare Limited for the year ended 31 December 2014, I declare that to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of InvoCare Limited and the entities it controlled during the period. Brett Entwistle Partner PricewaterhouseCoopers Sydney 17 February 2015 InvoCare Annual Report 2014 51 Consolidated Income Statement For the year ended 31 December 2014 Revenue from continuing operations Finished goods, consumables and funeral disbursements Employee benefits expense Employee related and on-cost expenses Advertising and public relations expenses Occupancy and facilities expenses Motor vehicle expenses Other expenses Depreciation, amortisation and impairment expenses Finance costs Interest income Net gain/(loss) on undelivered prepaid contracts Acquisition related costs Share of net loss of associate Net gain on disposal of non-current assets Profit before income tax Income tax expense Profit from continuing activities Profit for the year Profit is attributable to: Equity holders of InvoCare Limited Non-controlling interests Notes 4 5 5 15 6 2014 $’000 2013 $’000 420,204 (121,614) (105,258) (24,124) (14,912) (27,149) (8,819) (17,246) 101,082 (18,587) (15,483) 749 10,915 (1,215) (525) 334 77,270 (22,643) 54,627 54,627 54,515 112 54,627 392,186 (113,227) (97,395) (22,051) (13,242) (26,043) (8,307) (16,849) 95,072 (14,587) (16,820) 658 1,590 (537) (300) 2,972 68,048 (19,049) 48,999 48,999 48,869 130 48,999 Earnings per share for profit attributable to the ordinary equity holders of the Company Basic earnings per share (cents per share) Diluted earnings per share (cents per share) The above consolidated income statement should be read in conjunction with the accompanying notes. 11 11 49.8 49.8 44.7 44.7 52 Consolidated Statement of Comprehensive Income For the year ended 31 December 2014 Profit for the year Other comprehensive income Items that may be reclassified to profit or loss Changes in the fair value of cash flow hedges, net of tax Changes in foreign currency translation reserve, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year Total comprehensive income for the year is attributable to: Equity holders of InvoCare Limited Non-controlling interests Notes 2014 $’000 2013 $’000 54,627 48,999 26 26 (82) 1,537 1,455 56,082 55,970 112 56,082 2,575 4,330 6,905 55,904 55,774 130 55,904 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. InvoCare Annual Report 2014 53 Consolidated Balance Sheet As at 31 December 2014 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Prepaid contract funds under management Property held for sale Deferred selling costs Total current assets Non-current assets Trade and other receivables Other financial assets Property, plant and equipment Prepaid contract funds under management Intangible assets Derivative financial instruments Deferred selling costs Equity accounted investments Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Borrowings Derivative financial instruments Current tax liabilities Prepaid contract liabilities Deferred revenue Provisions Total current liabilities Non-current liabilities Trade and other payables Borrowings Derivative financial instruments Deferred tax liabilities Prepaid contract liabilities Deferred revenue Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained profits Parent entity interest Non-controlling interests Total equity The above consolidated balance sheet should be read in conjunction with the accompanying notes. 54 Notes 2014 $’000 2013 $’000 12 13 14 15 18 (c) 10,488 39,237 22,313 32,997 2,702 1,138 8,899 38,366 21,637 30,480 – 1,039 108,875 100,421 13 18 15 19 20 21 22 20 15 23 21 22 20 6 (d) 15 23 25 26 26 27 16,381 61 308,344 367,970 152,480 – 8,719 2,423 856,378 965,253 37,091 2 622 9,364 33,847 7,588 13,726 102,240 260 229,350 5,284 32,275 359,994 45,482 2,409 675,054 777,294 187,959 131,682 6,756 48,367 186,805 1,154 187,959 14,298 63 296,545 343,129 148,912 1 8,493 4,705 816,146 916,567 34,563 11 1,342 9,946 30,481 6,925 12,732 96,000 1,124 223,956 4,437 28,755 346,044 43,527 2,027 649,870 745,870 170,697 132,393 4,423 32,636 169,452 1,245 170,697 Consolidated Statement of Changes in Equity For the year ended 31 December 2014 Attributable to Owners of InvoCare Limited Contri- buted equity $’000 Reserves $’000 Retained earnings $’000 Non con- trolling interest $’000 Total Total equity $’000 Notes Balance at 1 January 2014 132,393 4,423 32,636 169,452 1,245 170,697 Total comprehensive income for the year Transactions with owners in their capacity as owners: Dividends paid Deferred employee share plan shares vesting during the year Acquisition of shares by the InvoCare Deferred Share Plan Trust Transfer of shares from the deferred plan to the InvoCare Exempt Share Plan Trust Employee shares – value of services Balance at 31 December 2014 Balance at 1 January 2013 Total comprehensive income for the year Transactions with owners in their capacity as owners: Dividends paid Deferred employee share plan shares vesting during the year Acquisition of shares by the InvoCare Deferred Share Plan Trust Transfer of shares from the deferred plan to the InvoCare Exempt Share Plan Trust Employee shares – value of services Balance at 31 December 2013 10 26 25 25 26 10 26 25 25 26 – – 1,455 54,515 55,970 112 56,082 – (38,784) (38,784) (203) (38,987) 457 (457) – – – – – (1,168) – 1,335 – – – – – (1,168) – 1,335 48,367 21,173 186,805 150,740 1,154 1,151 187,959 151,891 – – 1,335 6,756 (3,120) 6,905 48,869 55,774 130 55,904 – (37,406) (37,406) (36) (37,442) (1,168) – – 131,682 132,687 – – 388 (388) (842) 160 – – – 1,026 – – – – – (842) 160 1,026 – – – – – (842) 160 1,026 132,393 4,423 32,636 169,452 1,245 170,697 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. InvoCare Annual Report 2014 55 466,197 434,007 (367,317) (336,529) 7,904 106,784 132 (14,981) (20,182) 71,753 6,833 104,311 77 (16,316) (15,856) 72,216 1,003 8,025 (6,738) – (26,665) (32,400) (1,168) 42,250 (40,000) (38,784) (203) (37,905) 1,448 8,899 141 12 10,488 (8,178) (5,005) (19,264) (24,422) (842) 155,328 (162,162) (37,406) (36) (45,118) 2,676 6,081 142 8,899 Consolidated Statement of Cash Flows For the year ended 31 December 2014 Notes 2014 $’000 2013 $’000 Cash flows from operating activities Receipts from customers (including GST) Payments to suppliers and employees (including GST) Other revenue Interest received Finance costs Income tax paid Net cash inflow from operating activities 31 Cash flows from investing activities Proceeds from sale of property, plant and equipment Purchase of subsidiaries and other businesses including acquisition costs, net of cash acquired Purchase of interest in associates Purchase of property, plant, equipment and intangibles Net cash outflow from investing activities Cash flows from financing activities Payment for shares acquired by InvoCare Deferred Employee Share Plan Trust Proceeds from borrowings Repayment of borrowings Payment of dividends – InvoCare Limited shareholders Dividends paid to non-controlling interests in subsidiaries Net cash outflow from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 56 Notes to the Financial Statements For the year ended 31 December 2014 Note 1: Summary of Significant Accounting Policies The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of InvoCare Limited and its subsidiaries. (a) Basis of preparation This general purpose financial report has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. (i) Compliance with IFRS Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (“AIFRS”). Compliance with AIFRS ensures that the consolidated financial statements and notes of InvoCare Limited comply with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. (ii) Historical cost convention These financial statements have been prepared on an accruals basis under the historical cost convention, as modified by the revaluation to fair value of financial assets and liabilities (including derivative instruments). (iii) Critical accounting estimates The preparation of financial statements in conformity with AIFRS requires the use of certain critical accounting estimates. It also requires the exercise of judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed at Note 37. (iv) Comparatives Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosures. (b) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of InvoCare Limited (“Company’’ or “parent entity’’) as at 31 December 2014 and the results of all subsidiaries for the year then ended. InvoCare Limited and its subsidiaries are together referred to in this financial report as the Group or the consolidated entity. Subsidiaries are all entities (including structured entities) over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group (refer to Note 1(i)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income and balance sheet, respectively. (ii) Employee share trust The Group has formed a trust to administer the InvoCare Exempt Employee Share Plan and the InvoCare Deferred Employee Share Plan. This trust is consolidated, as the substance of the relationship is that the trust is controlled by the Group. Shares held by the InvoCare Deferred Employee Share Plan Trust are disclosed as treasury shares and deducted from contributed equity. (iii) Associates Associates are entities over which the Group has significant influence but not control or joint control, generally accompanying a shareholding between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting, after initially being recognised at cost. The Group’s share of its associates’ post-acquisition profits or losses and its share of post-acquisition movements in reserves is recognised in the statement of comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends received from associates are recognised as a reduction in the carrying amount of the investment. If the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured long- term receivables, the Group does not recognised further losses, unless it has incurred obligations or made payments on behalf of the associate. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of associates have been changed where necessary to ensure consistency with the policies adopted by the Group. (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. This reporting is based on the operational location of the business because different economic and cultural factors impact growth and profitability of the segment. InvoCare Annual Report 2014 57 Note 1: Summary of Significant Accounting Policies continued (d) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Australian dollars, which is InvoCare Limited’s functional and presentation currency. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when they are deferred in equity as qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. (iii) Group companies The results and financial positions of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: – assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; income and expenses for each income statement are translated at average exchange rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and all resulting exchange differences are recognised as a separate component of equity. – – On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are taken to shareholders’ equity. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, a proportionate share of such exchange differences will be recognised in the income statement, as part of the gain or loss on sale where applicable. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entities and translated at the closing rate. (e) Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, allowances, duties and taxes paid. Revenue is recognised when the funeral, burial, cremation or other services are performed or the goods supplied. Revenues relating to undelivered memorials and merchandise are deferred until delivered or made ready for use. Minor items such as plaques, ash containers and vases where actual deliveries are not individually tracked are released to revenue over 15 years. 58 The Group enters into prepaid contracts to provide funeral, burial and cremation services in the future and funds received are placed in trust and are not recognised as revenue until the service is performed. Refer to Note 1(n). Interest income is recognised using the effective interest method. Dividends are recognised as revenue when the right to receive payments is established. (f) Deferred selling costs Selling costs applicable to prepaid funeral service contracts, net of any administrative fees recovered, are expensed when incurred. Direct selling costs applicable to deferred revenue on undelivered memorials and merchandise are deferred until the revenue is recognised. (g) Income tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and unused tax losses. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised in equity. InvoCare Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, InvoCare Limited, and the controlled entities in the tax consolidated group, account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. Notes to the Financial Statements continuedFor the year ended 31 December 2014In addition to its own current and deferred tax amounts, InvoCare Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. Details about the tax funding agreement are disclosed in Notes 34(e) and 35(d). (h) Leases Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. Lease income from operating leases is recognised in income on a straight- line basis over the lease term. (i) Business combinations and acquisitions of assets The purchase method of accounting is used to account for all acquisitions of assets (including business combinations) regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Where equity instruments are issued in an acquisition, the value of the instruments is their published market price as at the date of exchange. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill (refer to Note 1(p)). If the cost of acquisition is less than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised directly in the statement of comprehensive income, but only after a reassessment of the identification and measurement of the net assets acquired. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of acquisition. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Any variations in the initial estimates of deferred consideration and the final amount payable are remeasured through the statement of comprehensive income. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. The indirect costs of completing business combinations are recorded in the statement of comprehensive income. (j) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversals of the impairment at each reporting date. (k) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value, and bank overdrafts. Any bank overdrafts are shown within borrowings in current liabilities on the balance sheet. (l) Receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for doubtful receivables. Trade receivables are usually due for settlement no more than 30 days from the date of recognition, except where extended payment terms (up to a maximum of 60 months) have been made available on cemetery or crematorium contracts for sale of interment or inurnment rights and associated memorials and other merchandise. Receivables arising from cemetery or crematorium contracts which are initially expected to be collected over a period exceeding 12 months are recognised as non-current receivables and measured as the net present value of estimated future cash receipts, discounted at an imputed effective interest rate. Upon initial recognition of the contract receivables, any undelivered portion of the contracts is included in deferred revenue until delivery. The carrying amount of the asset is reduced through the use of a provision for doubtful receivables account and the amount of the loss is recognised in the statement of comprehensive income within “other expenses”. When a trade receivable is uncollectable, it is written off against the provision account for trade receivables. Subsequent recoveries of amounts previously written off are credited against “sundry revenue” in the statement of comprehensive income. Details of the impaired receivables, provision account movements and other details are included in Notes 2 and 13. (m) Inventories Inventories are stated at the lower of cost and net realisable value. Cost comprises direct materials and, where appropriate, a proportion of variable and fixed overhead. Costs are assigned to individual items of inventory predominantly on the basis of weighted average cost. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. InvoCare Annual Report 2014 59 Note 1: Summary of Significant Accounting Policies continued (n) Prepaid contracts Prepaid contracts are tripartite agreements whereby the Group agrees to deliver a specified funeral, cremation or burial service at the time of need and the beneficiary invests the current price of the service to be delivered with a financial institution and conditionally assigns the benefit to the Group. The Group records the value of the invested funds as an asset and revalues the invested funds to fair value at the end of each reporting period. The Group initially recognises a liability at the current selling price of the service to be delivered and increases this liability to reflect the change in selling prices to reflect the best estimate of the expenditure required to settle the obligation at the end of each reporting period. When the service is delivered, the liability is derecognised. The initially recorded liability amount is included in revenue and the price increases recognised since initial recognition are recorded as a reduction in the cost of service delivery. (o) Property, plant and equipment Property, plant and equipment are carried at historical cost less depreciation or amortisation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Repairs, maintenance and minor renewals are charged to the income statement during the financial period in which they are incurred. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (Note 1(j)). Cemetery land is carried at cost less accumulated amortisation and impairment write-downs. The consolidated entity sells interment and inurnment rights while retaining title to the property. Cemetery land is amortised, as the right to each plot or space is sold, to write off the net cost of the land over the period in which it is utilised and an economic benefit has been received. Other freehold land is not depreciated or amortised. Depreciation of other assets is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, as follows: – Buildings – Plant and equipment 40 years 3-10 years The cost of improvements to or on leasehold properties is amortised over the unexpired period of the lease or the estimated useful life of the improvement to the consolidated entity, whichever is shorter. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. Gains and losses are included in the income statement. 60 (p) Intangible assets (i) Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill acquired in business combinations is not amortised. Instead, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses (Note 19). (ii) Trademarks and brand names Trademarks and brand names have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of trademarks and brand names over their estimated useful lives of 10 years. (q) Trade and other payables Trade and other payables represent liabilities for goods and services provided to the Group prior to the end of the financial year which had not been settled at balance date. The amounts are unsecured and are usually paid within 60 days of recognition. (r) Borrowings Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the income statement over the period of the borrowings using the effective interest rate method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Refer to Notes 2 and 22 for further information on borrowings. (s) Derivative financial instruments The Group uses derivative financial instruments such as cross currency and interest rate swaps to hedge its risks associated with exchange and interest rate fluctuations. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either: – hedges of the risks associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges); or hedges of a net investment in a foreign operation. – The Group documents at inception the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Group also documents its assessment of whether the derivatives that are used in hedging transactions have been, and will continue to be, highly effective in offsetting changes in fair values or cash flows or hedged items. Notes to the Financial Statements continuedFor the year ended 31 December 2014The fair value of interest rate swap contracts is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts is determined using forward exchange market rates at the balance sheet date. The fair values of derivative financial instruments used for hedging purposes are disclosed in Note 20. Movements in the hedging reserve in shareholders’ equity are shown in Note 26. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. (ii) Long service leave The liability for long service leave is recognised in the provision for employee benefits and is measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date, including appropriate on-costs. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Hedges that meet the strict criteria for hedge accounting are accounted for as follows: (i) Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the statement of comprehensive income within finance costs. Amounts accumulated in equity are recycled in the statement of comprehensive income within finance costs in the periods when the hedged item affects profit or loss (for instance when the forecast sale that is hedged takes place). When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement. (ii) Hedges of a net investment Hedges of a net investment in a foreign operation, including a hedge of a monetary item that is accounted for as part of the net investment, are accounted for in a similar way to cash flow hedges. Gains or losses on the hedging instrument relating to the effective portion of the hedge are recognised directly in equity while any gains or losses relating to the ineffective portion are recognised in the income statement. On disposal of the foreign operation, the cumulative value of any such gains or losses recognised directly in equity is transferred to the income statement. (t) Employee benefits (i) Wages and salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in other payables and provision for employee benefits in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled, including appropriate on-costs. Liabilities for non-accumulating sick leave are recognised when the leave is taken and measured at the rates paid or payable. (iii) Bonus plans The Group recognises a liability in other payables and an expense for bonus plans when there is no realistic alternative but to settle the liability and at least one of the following conditions is met: – there are formal terms in the plan for determining the amount of the benefit; the amounts to be paid are determined before the time of completion of the financial report; or past practices give clear evidence of a constructive obligation. – – (iv) Retirement benefits Employees of the Group are entitled to benefits on retirement, disability or death from the Group sponsored defined contribution superannuation plans. Fixed statutory contributions are made by the Group to these plans and are recognised as an expense as they become payable. The Group’s liability is limited to these contributions. (v) Share-based payments The Group provides benefits to certain employees, including key management personnel, in the form of share-based payments, whereby employees render services in exchange for shares, share appreciation rights or options over shares. Details of the employee share, share appreciation or option plans are set out in Note 8. The cost of equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date granted. The cost is recognised as an employee benefit expense in the income statement, with a corresponding increase in equity, over the period during which the performance and/or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become unconditionally entitled to the award (the vesting date). At each balance sheet date, the Group revises its estimate of the number of awards that are expected to vest. The employee benefit expense recognised each period takes into account the most recent estimate. The impact of the revision to original estimates, if any, is recognised in the statement of comprehensive income with a corresponding adjustment to equity. (u) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options for the acquisition of a business are included in the cost of the acquisition as part of the purchase consideration. InvoCare Annual Report 2014 61 (aa) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2014 reporting periods. The Group’s assessments of the impacts of these new standards and interpretations are set out below. (i) AASB 15 Revenue from Contracts with Customers AASB 15 Revenue from Contracts with Customers establishes principles for reporting useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The standard is not applicable until 1 January 2017 but is available for early adoption. The new standard may have relevance to the Group’s accounting practices surrounding the revenue recognition of some sale transactions in the Group’s cemeteries and crematoria. The exact nature and quantum of any impacts remains as yet un-determined and is currently being assessed. The standard is not expected to have a significant impact on other aspects of the Group’s revenue. (ii) AASB 9 Financial Instruments, AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9, AASB 2010-7 Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) and AASB 2012-6 Amendments to Australian Accounting Standards – Mandatory Effective Date of AASB 9 and Transition Disclosures (effective for annual reporting periods beginning on or after 1 January 2015) AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities. The standard is not applicable until 1 January 2015 but is available for early adoption. The new standard is likely to have no material impact on the Group. Note 1: Summary of Significant Accounting Policies continued (v) Dividends Provision is made for the amount of any dividend declared being appropriately authorised and no longer at the discretion of the Company on or before the end of the financial year but not distributed at balance date. (w) Earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year. Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. (x) Goods and Services Tax (“GST”) Revenues, expenses and assets are recognised net of the amount of the GST, except where the amount of the GST incurred is not recoverable from the taxing authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the balance sheet are shown inclusive of GST. Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from or payable to the taxing authority, is classified as operating cash flows. (y) Parent entity financial information The financial information for the parent entity, InvoCare Limited, disclosed in Note 35 has been prepared on the same basis as the consolidated financial statements, except investments in subsidiaries and associates which are accounted for at cost in the financial statements of InvoCare Limited. Dividends received from associates are recognised as a reduction in the carrying value of the investment in associates. (z) Rounding of amounts The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities and Investments Commission, relating to rounding of amounts in the financial report. Amounts in the financial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. 62 Notes to the Financial Statements continuedFor the year ended 31 December 2014Note 2: Financial Risk Management The Group’s activities expose it to a variety of financial risks: market risk (including currency risk, cash flow interest rate risk, price risk and fair value interest rate risk), credit risk and liquidity risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as interest rate swaps to hedge risk exposures. The Group uses different methods to measure different types of risks to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and price risk and ageing analysis for credit risk. Strategic risk management is carried out by the Board of Directors. The Risk Committee and Audit Committee, which operate under policies approved by the Board, are responsible for operational and financial risk management, respectively. These policies provide written principles for overall risk management, as well as policies covering specific areas such as interest rate risk and currency risk. The Group holds the following financial assets and liabilities: Financial assets Cash and cash equivalents Trade and other receivables* Prepaid contract funds under management Other financial assets Financial liabilities Trade and other payables Borrowings Derivative financial instruments * excluding prepayments and security deposits 2014 $’000 2013 $’000 10,488 47,183 8,899 47,003 400,967 373,609 61 63 458,699 429,574 37,351 229,352 5,906 272,609 35,687 223,967 5,778 265,432 (a) Market risk (i) Cash flow interest rate risk The Group’s main interest rate risk arises from long-term borrowings. All borrowings are initially at variable interest rates determined by a margin over the reference rate based on the Group’s leverage ratio. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. It is the policy of the Group to keep at least 75% of debt on fixed interest rates over the next twelve months by entering into interest rate swap contracts. The Group has entered into interest rate swap contracts under which it receives interest at variable rates and pays interest at fixed rates. The bank loans of the Group outstanding during the year had an effective average interest rate of 5.8% (2013: 6.4%) inclusive of swaps and margins but excluding establishment fees. At balance date, interest rate swaps for 76% (2013: 80%) of borrowings were in place. Of these interest rate swaps 15% (2013: 14%) were denominated in New Zealand dollar fixed interest instruments, with the balance denominated in Australian dollars. As at 31 December 2014 the weighted average fixed interest rate payable on the interest rate swaps is 4.43% (2013: 4.94%) and the weighted average variable rate receivable as at 31 December 2014 is 2.90% (2013: 2.64%). The following variable rate borrowings and interest rate swap contracts are outstanding: Bank loans Interest rate swaps (notional principal) Net exposure to cash flow interest rate risk 31 December 2014 31 December 2013 Weighted average interest rate 5.80% 4.43% Weighted average interest rate 6.39% 4.94% Balance $’000 232,658 175,808 56,850 Balance $’000 225,228 179,318 45,910 InvoCare Annual Report 2014 63 Note 2: Financial Risk Management continued (a) Market risk continued (i) Cash flow interest rate risk continued The notional principal amounts, including forward start interest rate swap contracts, and periods of expiry of the interest rate swap contracts are as follows: Less than one year One to two years Two to three years Three to four years 2014 $’000 55,808 60,000 60,000 28,675 2013 $’000 64,500 54,818 60,000 60,000 204,483 239,318 These contracts require settlement of net interest receivable or payable each 90 days. The settlement dates coincide with the dates on which interest is payable on the underlying debt. As a consequence, the Group is exposed to interest rate risks on that portion of total borrowings not swapped to fixed rates and to potential movements in the margin due to changes in the Group’s leverage ratio. An increase of 100 basis points in Australian and New Zealand rates (2013: 100 basis points) and 50 basis points in Singapore (2013: 50 basis points) in the interest rate would result in additional interest expense after tax of $449,000 (2013: $259,000). A decrease of 100 basis points in Australian and New Zealand rates (2013: 100 basis points) and 50 basis points in Singapore (2013: 50 basis points) in the interest rate would result in an after tax gain of $118,000 (2013: $119,000). Where possible, borrowings are made in the same country as the operation being funded to provide a natural hedge against currency volatility. Where this is not possible, other techniques, such as foreign currency bank accounts, are used to mitigate the profit and loss volatility due to currency movements. Due to the use of floating to fixed interest rate swaps, the Group has fixed interest commitments and the changes in the fair value of the future cash flows of these derivatives are recognised in equity to the extent that the derivative remains effective in accordance with AASB 139 Financial Instruments: Recognition and Measurement. The interest rate swap contracts were all judged to be effective at 31 December 2014 and the movements in the fair value of these instruments have been quarantined in equity. If interest rates decline by 100 basis points (2013: 100 basis points) a further $1,417,000 (2013: $1,404,000) net of tax would have been charged to equity and a 100 basis points increase in interest rates would have resulted in a credit to equity of $1,086,000 (2013: $1,264,000) net of tax. The overall impact on the Group has been summarised on page 69. The Group’s cash and cash equivalents held in Australia are interest bearing. At 31 December 2014 the weighted average interest rate was 0.91% (2013: 1.20%). If interest rates changed by 100 basis points (2013: 100 basis points) the Group’s after tax result would increase or decrease by $53,000 (2013: $38,000). (ii) Foreign exchange risk The Group rarely undertakes commercial transactions in currencies other than in the functional currency of the operating entity. Foreign exchange risks arise from recognised assets and liabilities that are denominated in a currency other than the Group’s functional currency, the Australian dollar. The major foreign exchange risk relates to the investments in controlled entities in New Zealand, Singapore, the USA and north Asia. This exposes the Group to foreign currency risk on the assets and liabilities. Borrowings have been made in New Zealand and Singapore dollars to provide a natural hedge against the risk of changes in exchange rates. Where natural hedges do not exist, currency swap instruments are used to hedge at least 75% of the net recognised assets and liabilities which are denominated in foreign currencies. The Group’s exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows: Borrowings Derivatives 2014 $’000 2013 $’000 New Zealand Dollars Singapore Dollars New Zealand Dollars Singapore Dollars 35,844 429 30,454 33,091 29,144 – 1 – The Group has no significant unhedged foreign exchange exposures at 31 December 2014. The Singapore dollar borrowing is undertaken in Australia and designated as the hedge of a net investment in a subsidiary. The New Zealand dollar borrowings are undertaken in New Zealand. 64 Notes to the Financial Statements continuedFor the year ended 31 December 2014(iii) Price risk The Group is the ultimate beneficiary of funds invested in various prepaid contract trusts, as described in Note 1(n). There are a significant number of trusts in existence with various investment profiles. Accordingly, the Group’s future revenue and margins are sensitive to the price risk relating to the investment returns of these funds under management. These funds are invested in a range of asset classes with different price risk variables including cash, fixed interest, Australian and international equities, hybrids and direct and indirect property. Based on the asset allocation as at 31 December 2014 and 31 December 2013 the following changes in investment returns are reasonably probable. Asset class Equities (plus or minus 10%) Property (plus or minus 3%) Cash and fixed interest (no price risk) 31 December 2014 31 December 2013 Increase Decrease Increase Decrease 4,010 1,925 – 5,935 (4,010) (1,925) – (5,935) 4,857 2,578 – 7,435 (4,857) (2,578) – (7,435) The returns of these funds are recognised in the income statement. An estimated 50% of the funds are expected to be realised over the next 10 years and 90% over about 25 years. In any one year approximately 14% of all Australian funeral services performed by InvoCare have been prepaid; a proportion that has been reasonably constant for many years and is not expected to significantly change in the short term. InvoCare monitors the asset allocations and investment performance at least quarterly and makes representations, where possible, to those in control of the trusts to mitigate price risks and enhance the returns which will ultimately impact InvoCare’s future results. As the funds are held in trust for relatively long periods, investment strategies take a long-term view for those trusts not restricted to more conservative, capital guaranteed assets. Historically, equities have provided the best long-term returns although the instability of the equity markets has caused a substantial shift in the investment bias towards more conservative property, cash and fixed interest investments. When considering investment strategies the life cycle of the fund is considered so that funds which are closer to the end of their expected life take a more conservative investment stance than those funds continuing to receive new funds. The asset allocation at year end of prepaid contract funds under management is as follows: Equities Property Cash and fixed interest 2014 % 10 16 74 2013 % 13 23 64 Approximately 79% of InvoCare’s prepaid funds under management are with Over Fifty Guardian Friendly Society. Other than disclosed above, the Group does not hold any investments in equities, which are not equity accounted, or commodities and is therefore not subject to price risk. (b) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of AA- are accepted. Credit risks in relation to customers are highly dispersed and without concentration on any particular region or sector. Funeral homes attempt to collect deposits at the time the service is commissioned both as a sign of good faith and in order to cover out-of-pocket expenses. Cemetery and crematorium products are generally not delivered prior to the receipt of all or substantially all of the amounts due. InvoCare Annual Report 2014 65 Note 2: Financial Risk Management continued (b) Credit risk continued (i) Impaired receivables The total amount of the provision for doubtful receivables was $2,230,000 (2013: $2,608,000). As at 31 December 2014, receivables with a nominal value of $3,261,000 (2013: $3,515,000) had been specifically identified internally or referred to the Group’s independent debt collection agent and hence were considered to be impaired. The amount of the provision for doubtful receivables was calculated by applying the historical debt collector’s recovery ratio to all debtors over 90 days overdue. The movement in the provision for impaired receivables is set out in Note 13 – Trade and Other Receivables. (ii) Receivables past due but not impaired As of 31 December 2014, trade receivables of $7,928,000 (2013: $7,341,000) were past due but had not been referred to external debt collection agents and hence were considered not to be impaired. These relate to customers where there is no current evidence of an inability or unwillingness to settle the amount due but where payment has been delayed. The Group’s own collection activity, which varies based on the nature and relative age of the debt, is routinely applied to all past due accounts. When these activities do not result in a successful outcome, the debt is referred to external debt collection agencies. The ageing of receivables past due but not impaired follows: One to three months overdue Over three months overdue 2014 $’000 4,479 3,449 2013 $’000 4,260 3,081 (iii) Other receivables These amounts generally arise from transactions outside the normal operating activities of the Group. Interest is generally not charged on the amounts involved although collateral is generally obtained for larger amounts receivable. (iv) Interest rate risks The Group has no exposure to interest rate risk in respect of receivables as they are non-interest bearing. (c) Liquidity risk Prudent liquidity management implies maintaining sufficient cash and marketable securities, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the relatively stable nature of the Group’s business, management aims to maintain a large portion of committed credit lines on a long-term basis. The Group’s borrowings are unsecured but subject to negative pledges and the Group has complied with these covenants throughout and at the end of the year. Details of the Group’s facilities are as follows: 66 Notes to the Financial Statements continuedFor the year ended 31 December 2014Finance facilities available Unrestricted access was available at balance date to the following lines of credit: Total facilities – – unsecured loan facility expiring in one to two years unsecured loan facility expiring in two to five years – working capital facility expiring within one year Used at balance date – unsecured loan facility – working capital facility Unused at balance date – unsecured loan facility – working capital facility 2014 $’000 2013 $’000 – 255,000 6,910 261,910 – 255,000 6,838 261,838 230,304 225,228 1,156 231,460 937 226,165 24,696 5,754 30,450 29,772 5,901 35,673 The tables below analyse the Group’s financial liabilities into the relevant maturity groupings based on their contractual terms. Trade and other payables and borrowings are non-derivative liabilities. 31 December 2014 Trade and other payables Borrowings Derivatives 31 December 2013 Trade and other payables Borrowings Derivatives Less than one year $’000 Two to three years $’000 More than three years $’000 37,091 – 622 178 70,304 4,864 82 160,000 420 Less than one year $’000 Two to three years $’000 More than three years $’000 34,563 – 1,342 969 77,400 3,833 155 147,828 603 Total $’000 37,351 230,304 5,906 Total $’000 35,687 225,228 5,778 The Group’s external debt financing is provided by four major banks in Australia and their New Zealand operations, where relevant, through bi-lateral revolver debt facilities totalling $255 million, $85 million expiring in September 2016 and $170 million expiring in December 2018. The facilities agreements’ covenant ratios are calculated on a rolling 12-month basis and have been met at 31 December 2014. The ratio of Net Debt to EBITDA (adjusted for acquisitions) must be no greater than 3.5 and the ratio of EBITDA to net interest must be greater than 3.0. InvoCare Annual Report 2014 67 Note 2: Financial Risk Management continued (d) Capital risk management The Group’s capital management objectives and strategies seek to maximise total shareholder returns, while maintaining a capital structure with acceptable debt and financial risk. The capital management goals can be broadly described as: – manage the amount of equity and the expectation of returns – including dividend distribution policy, dividend reinvestment and share buy-back policies; – maintain debt and gearing that is prudent, cost effective, supports operational needs and provides flexibility for growth and development; and avoid excessive exposure to interest rate fluctuations and debt refinancing risk. – The goals are actively managed by the use of quantifiable measures. These measures and relevant comments are as follows: – Maximising shareholder returns: Earnings per share (EPS) is a key measure and for 2014, basic EPS was 49.8 cents (2013: 44.7 cents). Operating EPS, which excludes gains and losses on the disposal or impairment of non-current assets and on undelivered prepaid contracts and non-controlling interests, was 43.1 cents (2013: 38.9 cents). Importantly, senior management of the Group have long- term incentives linked to EPS growth, thus aligning employee and shareholder interests. Total compound annual shareholder return, being the sum of cash dividends and share price growth, has exceeded 21% (2013: 22%) per annum since the Company listed in December 2003, except for 2008 when global equity market values declined, although InvoCare’s share price did not fall as significantly as the rest of the market. A shareholder investing $1.00 in the initial public offering (IPO) would have enjoyed a total return of $7.03 or 703% (2013: $6.27 or 627%) up to 31 December 2014. – Maintaining a minimum ordinary dividend payout ratio of at least 75% of operating earnings after tax. For each of the years since listing, the Group has distributed ordinary dividends in excess of this payout ratio. The aggregate of the interim and final 2014 dividends represents a payout ratio of 87% (2013: 89%) of operating earnings after tax. – Monitoring participation in the Dividend Reinvestment Plan: Up to 25% of the Company’s shareholders have participated in the DRP since it was first activated in October 2006. – Confirming compliance with the debt covenant ratios, as defined in the facility agreements, through bi-annual calculations. The Group has complied with its banking covenants as follows: – – Interest cover (EBITDA/Net Interest Expense) must be greater than 3.00:1. Leverage ratio (Net Debt/Adjusted EBITDA) must not be greater than 3.50:1. – Maintaining an optimal leverage ratio: The optimal capital structure, which has the lowest cost of capital, is indicatively at a leverage ratio (i.e. Net Debt/EBITDA) of between 3:1 and 5:1. The Group can sustain and service higher levels of debt than the amount at balance date. Where the capacity exists, debt financing will be used for small acquisitions and capital expenditure. In the absence of opportunities to invest in growing the business, the Group will consider applying excess debt capacity to make returns to shareholders. – Maintaining floating to fixed base interest rate swaps for at least 75% of debt principal. At 31 December 2014 the proportion of debt hedged was 76% (2013: 80%). The hedge contracts extend to the second half of 2018. – Managing refinancing risk: The Group’s borrowing facilities were renewed during 2013 and have been split into two tranches across four banks in order to reduce refinancing risk. The second tranche originally due to expire in September 2014 was refinanced in December 2013 along with the tranche due to expire in September 2015 and they now expire in December 2018. The tranche expiring in September 2016 is expected to be re-negotiated during 2015. 68 Notes to the Financial Statements continuedFor the year ended 31 December 2014(e) Summarised sensitivity analysis The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk and foreign exchange risk net of applicable income tax. 31 December 2014 Financial assets Cash and cash equivalents Accounts receivable Prepaid contract funds under management Other financial assets Financial liabilities Trade and other payables Borrowings Derivatives Total increase/(decrease) 31 December 2013 Financial assets Cash and cash equivalents Accounts receivable Prepaid contract funds under management Other financial assets Financial liabilities Trade and other payables Borrowings Derivatives Total increase/(decrease) Interest rate risk Foreign exchange risk – 100 basis points + 100 basis points – 10% + 10% Carrying amount $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 10,488 47,183 (53) – 400,967 (1,738) 61 37,351 229,352 5,906 – – (118) – (1,909) – – – – – – 1,417 1,417 53 – 1,738 – – 449 – 2,240 – – – – – – (1,086) (1,086) – – – – – – – – – – (108) 2,536 – (2,536) (108) – – – – – – 88 – 88 1 – – – – (2,344) 2,344 1 Interest rate risk Foreign exchange risk – 100 basis points + 100 basis points – 10% + 10% Carrying amount $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 8,899 47,003 (38) – 373,609 (1,444) 63 35,687 223,967 5,778 – – (119) – (1,601) – – – – – – 1,404 1,404 38 – 1,444 – – 259 – 1,741 – – – – – – (1,264) (1,264) – – – – – 1 – – – – (91) – (91) 3,133 (3,133) 1 – – – – – 74 – 74 3 – – – – (2,906) 2,906 3 The sensitivity analysis has been completed by applying the range values to the actual balances that existed at all points throughout the year. (f) Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The fair value of derivatives, which are recorded on the balance sheet, are measured using the cumulative dollar offset method. As of 1 January 2009, the Group adopted the amendment to AASB 7 Financial Instruments: Disclosures which requires the disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1); (b) inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3). The fair value of contingent consideration is calculated as the present value of the expected cash flows using a discount rate that reflects the incremental costs of borrowing used to fund the acquisition. If the discount rate was increased by 10% the contingent consideration would reduce by $7,000 (2013: $15,000). Similarly, a 10% decrease in the discount rate results in an increase in contingent consideration of $7,000 (2013: $15,000). InvoCare Annual Report 2014 69 Note 2: Financial Risk Management continued (f) Fair value estimation continued Level 1 Prepaid contract funds under management Level 2 Derivatives financial instruments Level 3 Contingent consideration 2014 $’000 2013 $’000 400,967 373,609 (5,906) (5,778) (1,912) (2,437) No financial instruments or derivatives are held for trading. The carrying value less impairment provisions for trade receivables and payables is a reasonable approximation of their fair values due to the short-term nature of trade receivables. Non-current trade receivables are discounted to their fair value in accordance with the accounting policy outlined in Note 1(l). Note 3: Segment Information (a) Description of segments The operating segments should be based on the management reporting regularly reviewed by the CEO. This reporting is based on the operational location of the business because different economic and cultural factors impact the growth and profitability of the segments. (b) Segment information provided to the Chief Executive Officer (“CEO”) The segment information provided to the CEO for reportable segments to 31 December 2014 and 31 December 2013 is outlined below. Revenue from external customers Other revenue (excluding interest income) Operating expenses Operating EBITDA Depreciation and amortisation Finance costs Interest income Share of net loss of associate Income tax expense Total goodwill Total assets Total liabilities Australian Operations Singapore Operations New Zealand Operations Other Operations Consolidated 2014 $’000 356,056 6,704 (277,023) 85,737 (16,560) (12,916) 701 (525) (20,887) 85,781 849,099 701,434 2014 $’000 13,820 307 (7,420) 6,707 (576) (634) – – (793) 13,495 40,838 32,993 2014 $’000 42,986 138 (34,437) 8,687 (2,027) (1,933) 48 – (961) 44,596 72,312 42,810 2014 $’000 149 44 (242) (49) (24) – – – 2014 $’000 413,011 7,193 (319,122) 101,082 (19,187) (15,483) 749 (525) (2) (22,643) 1,518 3,004 57 145,390 965,253 777,294 70 Notes to the Financial Statements continuedFor the year ended 31 December 2014Revenue from external customers Other revenue (excluding interest income) Operating expenses Operating EBITDA Depreciation and amortisation Finance costs Interest income Share of net loss of associate Income tax expense Total goodwill Total assets Total liabilities Australian Operations Singapore Operations New Zealand Operations Other Operations Consolidated 2013 $’000 338,065 6,397 (262,165) 82,297 (15,578) (14,442) 628 (300) (18,308) 84,925 812,542 674,249 2013 $’000 12,982 267 (7,018) 6,231 (512) (748) – – (569) 12,915 37,331 31,701 2013 $’000 34,177 130 (27,771) 6,536 (1,680) (1,630) 30 – (174) 42,870 66,640 39,885 2013 $’000 128 40 (160) 8 – – – – 2 – 54 35 2013 $’000 385,352 6,834 (297,114) 95,072 (17,770) (16,820) 658 (300) (19,049) 140,710 916,567 745,870 Operating EBITDA of $101,082,000 (2013: $95,072,000) is reconciled to profit before tax on the face of the consolidated income statement. (c) Segment information – accounting policies The consolidated entity operates in one industry, being the funeral industry, with significant operations in Australia, New Zealand and Singapore and smaller operations in Hong Kong and the USA. Segment revenues, expenses, assets and liabilities are those that are directly attributable to a segment and the relevant portion that can be allocated to the segment on a reasonable basis. Segment assets include all assets used by a segment and consist primarily of operating cash, receivables, inventories, property, plant and equipment and goodwill and other intangible assets, net of related provisions. Segment liabilities consist primarily of trade and other creditors and employee benefits and, in the case of Singapore, include an allocation of the long-term borrowings raised in Australia to fund the investment in Singapore. New Zealand has long-term borrowings which are arranged in New Zealand but with the support of Australia. Note 4: Revenue from Continuing Operations Sales revenue Sale of goods Services revenue Other revenue Rent Administration fees Sundry revenue Total revenue from continuing operations 2014 $’000 2013 $’000 166,127 246,884 413,011 154,213 231,139 385,352 270 5,245 1,678 7,193 327 5,017 1,490 6,834 420,204 392,186 InvoCare Annual Report 2014 71 2014 $’000 2013 $’000 4,243 12,712 16,955 344 176 443 1,269 2,232 19,187 (2,500) – (100) – 2,000 – 18,587 13,426 2,057 15,483 4,094 11,613 15,707 359 180 353 1,171 2,063 17,770 (4,900) 1,200 – 407 – 110 14,587 14,727 2,093 16,820 470 729 11,116 7,514 11,089 7,092 Note 5: Expenses Profit before income tax includes the following specific expenses: Depreciation Buildings Property, plant and equipment Total depreciation Amortisation of non-current assets Cemetery land Leasehold land and buildings Leasehold improvements Brand names Total amortisation Total depreciation and amortisation Impairment of other assets Cemetery land impairment reversal Cemetery land impairment charge Leasehold land impairment reversal Leasehold land impairment charge Financial assets impairment charge Goodwill Total depreciation, amortisation and impairment Finance costs Interest paid and payable Other finance costs Total financing costs Impairment losses – financial assets Trade receivables Rental expense Operating lease rental – minimum lease payments Defined contribution superannuation expense 72 Notes to the Financial Statements continuedFor the year ended 31 December 2014 Note 6: Income Tax (a) Income tax expense Current tax Deferred tax Under/(over) provided in prior years Income tax expense attributable to continuing operations (b) Reconciliation of income tax expense to prima facie tax payable Prima facie tax at 30% (2013: 30%) on profit before tax Tax effect of amounts which are not deductible/(taxable) in calculation of taxable income Impact of previously unrecognised capital losses offsetting capital gains and unrecognised capital losses Impact of the eliminations of translation gains/(losses) on intercompany balances in foreign currencies Impact of the reassessment of the appropriate depreciation rates applicable to New Zealand building assets Acquisition costs not deductible Impact of share of the net loss of an associate Revenue losses not recognised Other items (net) Difference in overseas tax rates Under/(over) provision in prior years Income tax expense (c) Tax expense/(income) relating to items of other comprehensive income Cash flow hedges Foreign currency translation reserve 2014 $’000 19,993 2,774 (124) 22,643 2013 $’000 20,339 (1,050) (240) 19,049 2014 $’000 2013 $’000 23,181 20,414 (164) 131 – 282 158 168 (61) (581) 406 (583) 132 90 – 260 23,695 20,138 (928) (124) (849) (240) 22,643 19,049 2014 $’000 48 359 2013 $’000 772 – InvoCare Annual Report 2014 73 Note 6: Income Tax continued (d) Deferred tax (asset)/liability The deferred tax (asset)/liability balances comprised temporary differences attributable to: Amounts recognised in profit and loss: Cemetery land Property, plant and equipment Deferred selling costs Prepayments and other Brand names Prepaid contracts Provisions Receivables Accruals and other Amounts recognised directly in equity: Cash flow hedge reserve The net movement in the deferred tax (asset)/liability is as follows: Balance at the beginning of the year Net charge (credit) to income statement – current period Net charge (credit) to income statement – prior periods Amounts recognised due to business combinations net of businesses subsequently sold Amounts recognised directly in equity Effect of movements in exchange rates Balance at the end of the year Deferred tax liabilities/(assets) to be settled within 12 months Deferred tax liabilities/(assets) to be settled after 12 months 2014 $’000 2013 $’000 27,014 5,509 2,957 659 2,046 2,482 (4,528) (1,575) (526) (1,763) 32,275 25,191 7,196 2,859 173 1,761 (149) (4,547) (1,275) (721) (1,733) 28,755 28,755 2,774 28,502 (1,050) 643 101 48 (46) 32,275 (4,404) 36,679 32,275 15 424 772 92 28,755 (7,551) 36,306 28,755 (e) Tax losses The Group has unutilised Australian capital losses with a potential benefit of $Nil (2013: $164,000) at a tax rate of 30% (2013: 30%). The Group has unutilised revenue losses of $168,000 in foreign jurisdictions. 74 Notes to the Financial Statements continuedFor the year ended 31 December 2014 Note 7: Key Management Personnel Disclosures (a) Key management personnel compensation Short-term employee benefits Post-employment benefits Other long-term benefits Share-based payments 2014 $ 2013 $ 3,697,628 3,381,738 153,876 54,160 679,013 162,644 37,704 551,798 4,584,677 4,133,884 Detailed remuneration disclosures are provided in the Remuneration Report on pages 38 to 49. (b) Equity instrument disclosures relating to key management personnel (i) Shares and share appreciation rights provided as remuneration Details of shares and share appreciation rights provided as remuneration, together with terms and conditions of the shares and share appreciation rights, can be found in the Remuneration Report on pages 38 to 49. The Company has not provided any options over unissued shares as remuneration during the 2014 or 2013 financial years. (ii) Holdings of shares and share appreciation rights The number of ordinary shares in the Company, or share appreciation rights in the case of overseas based key management personnel, held during the financial year by each director of InvoCare Limited and other key management personnel of the Group, including indirectly by their personally related parties or by the trustee of the InvoCare Deferred Employee Share Plan, are set out below. During the year, Long Term Incentive (“LTI”) shares or LTI rights were granted to other key management personnel under the terms of the InvoCare Deferred Employee Share Plan the details of which are outlined in Note 8. Non-executive Directors Richard Fisher Christine Clifton Roger Penman Aliza Knox Richard Davis Executive Directors Andrew Smith1 Other key management personnel Phillip Friery1 Greg Bisset1 Andi Luiskandl Wee Leng Goh2 Graeme Rhind2 Balance at start of the year Granted during year as compensation Other changes during year Balance at end of the year 11,580 112,961 16,665 5,172 606,607 – – – – – 376 – 282 167 11,956 112,961 16,947 5,339 (25,000) 581,607 237,357 27,417 (9,289) 255,485 81,385 72,525 11,387 20,192 8,000 9,483 12,044 5,768 4,608 4,011 (6,635) (1,550) – (723) (593) 84,233 83,019 17,155 24,077 11,418 1. Upon final vesting testing in February 2015, shares from grants made in 2010 were forfeited due to EPS performance conditions not being achieved. Andrew Smith forfeited 30,404 shares, Phillip Friery forfeited 20,374 shares and Greg Bisset forfeited 13,985 shares which reduces the balance of shares held at the end of the year as shown in the above table. 2. These grants are share appreciation rights. InvoCare Annual Report 2014 75 Note 7: Key Management Personnel Disclosures continued (c) Loans to key management personnel There were no loans to directors of the Company or other key management personnel. (d) Other transactions with key management personnel There were no transactions with key management personnel of the Group, including their personally related parties, during 2014 or 2013. Note 8: Share-based Payments To align executive and shareholder interests, key management and other senior managers may be offered shares as long-term incentives under the InvoCare Deferred Employee Share Plan which was established in 2007. Performance hurdles apply to certain grants to senior managers which are outlined in detail in the Remuneration Report. Shading in provisions apply with partial vesting when compound earnings per share growth is less than the target. In non-Australian jurisdictions the direct ownership of InvoCare Limited shares presents complex legal and taxation challenges in an employee share plan environment. In these cases senior non-Australian employees are granted share appreciation rights with the same vesting and performance conditions as the Australia Deferred Employee share plan. Total expenses, excluding related on-costs, arising from share-based payment transactions recognised during the period as part of employee benefits expense were as follows: Long-term incentive bonus share expense 2014 $’000 1,335 2013 $’000 1,026 76 Notes to the Financial Statements continuedFor the year ended 31 December 2014Note 8: Share-based Payments continued Details of unvested grants and other movements in the deferred employee share plan follow: Grant date Vesting date 1 January 2009 25 February 2011 25 February 2012 25 February 2013 1 January 2010 25 February 2012 1 March 2010 1 January 2011 1 March 2011 1 July 2011 1 January 2012 1 March 2012 25 February 2013 25 February 2014 25 February 2014 25 February 2013 25 February 2014 25 February 2015 25 February 2014 25 February 2015 25 February 2013 25 February 2014 25 February 2015 25 February 2014 25 February 2015 25 February 2016 25 February 2014 25 February 2015 25 February 2016 1 January 2013 25 February 2015 1 March 2013 25 February 2016 25 February 2017 25 February 2015 25 February 2016 25 February 2017 1 January 2014 25 February 2016 1 March 2014 25 February 2017 25 February 2018 25 February 2016 25 February 2017 25 February 2018 Purchase price per share $ Balance at the start of the year $’000 Granted during the year $’000 Vested during the year $’000 Forfeited during the year $’000 Balance at the end of the year $’000 4.87 4.87 4.87 6.01 6.01 6.01 6.01 7.37 7.37 7.37 7.37 7.37 7.37 7.37 7.37 7.94 7.94 7.94 7.94 7.94 7.94 10.93 10.93 10.93 10.93 10.93 10.93 11.36 11.36 11.36 11.36 11.36 11.36 12 87 155 254 254 254 49 305 305 305 59 59 7 7 7 368 368 368 58 58 58 413 413 413 73 73 73 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 426 426 427 75 75 76 (7) (50) (89) – – – (49) – – – (59) – – – – (144) – – (58) – – – – – – – – – – – – – – (5) (37) (66) – – – – – – – – (5) – – – – – – – (5) (5) (3) (3) (2) – – – (7) (7) (7) (3) (3) (3) – – – 254 254 254 – 305 305 305 – 54 7 7 7 224 368 368 – 53 53 410 410 411 73 73 73 419 419 420 72 72 73 Note: The data in this table has been calculated in whole dollars and presented in thousands and as a consequence some totals and movements cannot be computed from the table as presented. InvoCare Limited has no options over unissued shares granted to executive management outstanding at balance date. 4,855 1,505 (456) (161) 5,743 InvoCare Annual Report 2014 77 Note 8: Share-based Payments continued Details of unvested grants and other movements in share appreciation rights follow: Grant date Vesting date 22 February 2010 22 February 2012 22 February 2013 22 February 2014 24 February 2011 24 February 2013 24 February 2014 24 February 2015 21 February 2012 21 February 2014 21 February 2015 21 February 2016 1 January 2012 25 February 2014 25 February 2015 25 February 2016 1 March 2012 25 February 2014 25 February 2015 25 February 2016 1 January 2013 21 February 2015 21 February 2016 21 February 2017 21 February 2013 21 February 2015 21 February 2016 21 February 2017 1 March 2013 21 February 2015 21 February 2016 21 February 2017 1 January 2014 25 February 2016 25 February 2017 25 February 2018 25 February 2014 25 February 2016 25 February 2017 25 February 2018 1 March 2014 25 February 2016 25 February 2017 25 February 2018 Purchase price per share $ Balance at the start of the year $’000 Granted during the year $’000 Vested during the year $’000 Increase during the year $’000 Balance at the end of the year $’000 6.01 6.01 6.01 7.37 7.37 7.37 7.76 7.76 7.76 7.76 7.76 7.76 7.76 7.76 7.76 10.93 10.93 10.93 10.93 10.93 10.93 10.93 10.93 10.93 11.36 11.36 11.36 11.36 11.36 11.36 11.36 11.36 11.36 20 20 20 20 20 20 19 19 19 33 33 33 6 6 6 26 26 26 15 15 15 6 6 6 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 30 30 30 17 17 17 7 7 7 – – – – – – (10) – – (14) – – (6) – – – – – – – – – – – – – – – – – – – – 2 2 2 2 2 2 1 2 2 5 5 5 – – – 2 2 2 2 2 2 1 1 1 2 2 2 1 1 1 – – – 22 22 22 22 22 22 10 21 21 24 38 38 – 6 6 28 28 28 17 17 17 7 7 7 32 32 32 18 18 18 7 7 7 Note: The data in this table has been calculated in whole dollars and presented in thousands and as a consequence some totals and movements cannot be computed from the table as presented. The plan rules allow, in instances where full vesting does not occur, an additional year to satisfy the vesting conditions. 435 162 (30) 56 623 78 Notes to the Financial Statements continuedFor the year ended 31 December 2014Note 9: Remuneration of Auditors During the year, the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms. (a) Audit services PricewaterhouseCoopers – Australian firm Audit and review of financial reports PricewaterhouseCoopers – non-Australian firm Audit and review of financial reports Non-PricewaterhouseCoopers – Singaporean firm Audit and review of financial reports Total remuneration for audit services (b) Non-audit services PricewaterhouseCoopers – Australian firm Assurance services Accounting advisory services Taxation services Other Services PricewaterhouseCoopers – non-Australian firms Taxation services Other services Non-PricewaterhouseCoopers – Singaporean firm Other services Total remuneration for non-audit services 2014 $ 2013 $ 310,630 408,630 9,355 8,741 28,446 348,431 28,720 446,091 28,733 – 53,856 38,696 32,321 2,857 26,000 45,122 73,000 – 58,599 12,623 11,896 168,359 12,011 227,355 For 2013, included in $408,630 for audit and review of financial reports is $80,000 in relation to the scope changes for the 2012 audit. It is the Company’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers’ expertise and experience with the consolidated entity are important and auditor independence is not compromised. These assignments are principally tax advice and advisory services, or where PricewaterhouseCoopers is awarded assignments on a competitive basis. It is the Company’s policy to seek competitive tenders for any major consulting projects. InvoCare Annual Report 2014 79 Note 10: Dividends Dividends paid 2014 $’000 2013 $’000 Final ordinary dividend for the year ended 31 December 2013 of 19.5 cents (2012: 19.0 cents) per fully paid share paid on 4 April 2014 (2012: 5 April 2013), fully franked based on tax paid at 30% (2012: 30%) 21,455 20,901 Interim ordinary dividend for the year ended 31 December 2014 of 15.75 cents (2013: 15.0 cents) per share paid on 3 October 2014 (2013: 4 October 2013), fully franked based on tax paid at 30% (2013: 30%) Dividends paid to members of InvoCare Limited On 16 December 2014 (2013: 24 July 2013) dividend totalling 25.29 cents (2013: 4.46 cents) per fully paid share, fully franked based on tax paid at 30%, was paid to non-controlling interests. Dividends not recognised at year end In addition to the above dividends, since the year end, the directors recommended the payment of a final dividend to InvoCare Limited shareholders of 20.75 cents (2013: 19.5 cents) per fully paid ordinary share, fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend, expected to be paid on 02 April 2015 out of 2014 profits, but not recognised as a liability at year end is: Franking credit balance The amounts of franking credits available for subsequent financial years are: Franking account balance at the end of the financial year Franking credits that will arise from the payment of income tax payable at the end of the financial year Reduction in franking account resulting from payment of proposed final dividend of 20.75 cents (2013: 19.5 cents) Note 11: Earnings per Share Reconciliation of Earnings to Profit and Loss Profit from ordinary activities after income tax Less profit attributable to non-controlling interests Profit used to calculate basic and diluted EPS Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Weighted average number of ordinary shares used as the denominator in calculating diluted earnings per share Earnings per share for profit attributable to the ordinary equity holders of the Company Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 80 17,329 38,784 203 38,987 16,505 37,406 36 37,442 22,831 21,456 23,737 7,974 (9,785) 21,926 23,435 8,346 (9,195) 22,586 2014 $’000 2013 $’000 54,627 (112) 54,515 48,999 (130) 48,869 2014 Number 2013 Number 109,375,375 109,394,543 109,375,375 109,394,543 2014 cents 49.8 49.8 2013 cents 44.7 44.7 Notes to the Financial Statements continuedFor the year ended 31 December 2014Note 12: Cash and Cash Equivalents Cash on hand Cash at bank Cash at bank attracts floating interest rate of 1.25% (2013: between 1.25% and 2.0%) Reconciliation to cash at the end of the year: The above figures are reconciled to cash at the end of the financial year as shown in the statement of cash flows as follows: Balances as above Balances per the statement of cash flows Note 13: Trade and Other Receivables Current Trade receivables Provision for doubtful receivables Prepayments Other receivables Non-current Trade receivables Provision for doubtful receivables Security deposits Other receivables (a) Impaired receivables Movements in the provision for impairment of receivables are as follows: As at 1 January Provision for impairment recognised during the year Receivables written off as uncollectible As at 31 December Note 14: Inventories Current Finished goods – at cost Work in progress – at cost 2014 $’000 79 10,409 10,488 2013 $’000 82 8,817 8,899 10,488 10,488 8,899 8,899 2014 $’000 2013 $’000 34,407 (2,214) 6,328 716 39,237 34,131 (2,571) 5,297 1,509 38,366 15,006 13,571 (16) 298 1,093 16,381 (37) 364 400 14,298 2014 $’000 2,608 470 (848) 2,230 2013 $’000 2,631 729 (752) 2,608 2014 $’000 2013 $’000 21,522 791 22,313 20,104 1,533 21,637 InvoCare Annual Report 2014 81 Note 15: Prepaid Contracts (a) Income statement impact of undelivered prepaid contracts Gain on prepaid contract funds under management Change in provision for prepaid contract liabilities Net gain/(loss) on undelivered prepaid contracts (b) Movements in prepaid contract funds under management Balance at the beginning of the year Sale of new prepaid contracts Initial recognition of contracts paid by instalment Redemption of prepaid contract funds following service delivery Increase due to business combinations Increase in fair value of contract funds under management Balance at the end of the year (c) Movements in prepaid contract liabilities Balance at the beginning of the year Sale of new prepaid contracts Initial recognition of contracts paid by instalment Decrease following delivery of services Increase due to business combinations Increase due to re-evaluation of delivery obligation Balance at the end of the year 2014 $’000 24,832 (13,917) 10,915 2013 $’000 20,622 (19,032) 1,590 2014 $’000 2013 $’000 373,609 350,905 33,326 3,241 (35,389) 1,348 24,832 400,967 31,951 2,941 (32,810) – 20,622 373,609 2014 $’000 2013 $’000 376,525 355,090 33,990 3,241 (35,180) 1,348 13,917 393,841 31,951 2,941 (32,489) – 19,032 376,525 (d) Classification of prepaid funds under management and liabilities The current and non-current portions of the prepaid contract assets and liabilities are disclosed separately to more clearly reflect the expected pattern of usage associated with the timing of actual contract redemptions. (e) Nature of contracts under management and liabilities Prepaid contracts are tripartite agreements, currently entered into and performed in Australia only, whereby InvoCare agrees to deliver a specified funeral service, cremation or burial at the time of need and the beneficiary invests the current price of the service to be delivered with a financial institution and conditionally assigns the benefit to InvoCare. InvoCare records the value of the invested funds as an asset and revalues the invested funds to fair value at the end of each reporting period. InvoCare also records a liability at the current selling price of the service to be delivered and adjusts this liability for the change in selling prices during the period. The assignment of the benefit of the invested funds to InvoCare, in most cases, only becomes unconditional when InvoCare demonstrates that it has delivered the service specified. InvoCare receives the investment returns as well as the initial investment when the service has been delivered. As generally required by law, the funds are controlled by trustees who are independent of InvoCare. InvoCare permits, on request, contracts to be paid by instalments over periods not exceeding three years. In some instances these contracts are never fully paid. If, during the three-year period the contract becomes at-need, the family is given the option of either paying outstanding instalments and receiving the contracted services at the original fixed price or using the amount paid as a part payment of the at-need service. If the contract is not fully paid after three years InvoCare only permits the family to use the amounts paid as a partial payment of the at-need services. At the end of the year the total balance of amounts received from instalment payments for incomplete contracts was $6,488,000 (2013: $6,235,000). These funds and the relevant liability are recognised when the contract has been fully paid. During the year the non-cash fair value movements (i.e. investment earnings) of $24.8 million in prepaid contract funds under management (2013: $20.6 million) was greater than the non-cash growth due to selling price increases of $13.9 million in the liability for future service delivery obligations (2013: $19.0 million). 82 Notes to the Financial Statements continuedFor the year ended 31 December 2014Note 16: Interests in Other Entities: Subsidiaries (a) Interests in subsidiaries Set out below are the Group’s principal trading subsidiaries at 31 December 2014. Unless otherwise stated, the subsidiaries as listed below have share capital consisting solely of ordinary shares, which are held directly by the Group, and the proportion of ownership interests held equals to the voting rights held by the Group. The country of incorporation or registration is also their principal place of business. Name of entity InvoCare Australia Pty Limited Bledisloe Australia Pty Ltd Bledisloe New Zealand Limited Country of incorporation Principal activities Australia Australia Funeral services provider Funeral services provider New Zealand Funeral services provider Singapore Casket Company (Private) Limited Singapore Funeral services provider Ownership interest held by the Group 2014 % 100 100 100 100 2013 % 100 100 100 100 InvoCare Australia Pty Limited and Bledisloe Australia Pty Ltd have been granted relief from the necessity to prepare financial reports in accordance with Class Order 98/1418 issued by the Australian Securities and Investments Commission. For further information refer to Note 32. (b) Significant restrictions Other than those imposed by the legislative provisions in the respective country of incorporation, for the subsidiaries listed above, the Group has no significant restriction on its ability to access or use assets and settle liabilities. InvoCare Annual Report 2014 83 Note 16: Interests in Other Entities: Subsidiaries continued (c) Complete list of subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of InvoCare Limited and the following controlled entities in accordance with the accounting policy in Note 1(b). Name of entity InvoCare Australia Pty Limited New South Wales Cremation Company Pty Limited LifeArt Australasia Pty Limited Macquarie Memorial Park Pty Limited Oakwood Funerals Pty Limited Dignity Pre-Arranged Funerals Pty Limited Memorial Guardian Plan Pty Limited Pine Grove Forest Lawn Funeral Benefit Company Pty Limited Kitleaf Pty Limited The Australian Cremation Society Pty Limited Country of incorporation Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Metropolitan Burial and Cremation Society Funeral Contribution Fund Pty Limited Australia Labor Funerals Contribution Fund Pty Limited IVC Custodians Pty Limited Bledisloe Group Holdings Pty Ltd Bledisloe Finance Pty Ltd (Struck off in 2014) Bledisloe Holdings Pty. Ltd. (Struck off in 2014) Bledone Pty Ltd Bledtwo Pty Ltd (Struck off in 2014) Bledisloe Australia Pty Ltd A.C.N. 001 068 373 Pty Ltd (Struck off in 2014) A.C.N. 000 146 261 Pty Ltd (Struck off in 2014) A.C.N. 000 963 299 Pty Ltd (Struck off in 2014) F Tighe & Co Pty Ltd (Struck off in 2014) Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Crematorium Chapel Funerals of Australasia Pty Ltd (Struck off in 2014) Australia William Lee & Sons Pty Ltd (Struck off in 2014) Dylhost Pty Ltd (Struck off in 2014) Australian Funerals Pty Limited Metropolitan Funeral Services Pty. Ltd. Sydney Cremation Services Pty Ltd (Struck off in 2014) Australia Australia Australia Australia Australia Cemetery & Crematorium Management Services Pty Ltd (Struck off in 2014) Australia Cemetery & Crematorium Finance Trust (dissolved) Nationwide Care Services Pty Ltd (Struck off in 2014) South-East Asia & Australasian Services Pty Ltd (Struck off in 2014) Tuckers Funeral & Bereavement Services Pty Ltd Geelong Mortuary Transfer Services Pty Ltd IVC Employee Share Plan Managers Pty Ltd InvoCare Hong Kong Limited InvoCare Consulting Services (Beijing) Co., Ltd Australia Australia Australia Australia Australia Australia Hong Kong SAR People’s Republic of China Equity Holding 2014 % 2013 % 100 100 100 83 100 100 100 100 100 100 100 100 100 100 – – 100 – 100 – – – – – – – 100 100 – – – – – 100 100 100 100 100 100 100 100 83 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 84 Notes to the Financial Statements continuedFor the year ended 31 December 2014 (c) Complete list of subsidiaries continued Name of entity InvoCare (Singapore) Pty Limited Singapore Casket Company (Private) Limited Casket Palace Pte. Ltd. Simplicity Casket Private Limited Casket Company Embalming and Funeral Services Pte. Ltd Lavender Flora Pte. Ltd. Simplicity Flora Pte. Ltd. SCC Care Services Pte. Ltd. (formerly SCC Funeral Supplies Pte. Ltd.) InvoCare New Zealand Limited Bledisloe New Zealand Limited InvoCare USA, Inc. Macera Crematorium, Inc IVC-Santa Ana, LLC Country of incorporation Australia Singapore Singapore Singapore Singapore Singapore Singapore Singapore New Zealand New Zealand USA USA USA Equity Holding 2014 % 100 100 100 100 100 100 100 100 100 100 100 100 100 2013 % 100 100 100 100 100 100 100 100 100 100 – – – Shares in subsidiaries are carried at cost and relate to InvoCare Limited’s ownership interest in InvoCare Australia Pty Limited, InvoCare (Singapore) Pty Limited, InvoCare New Zealand Limited, InvoCare Hong Kong Limited and InvoCare USA, Inc. All shares held are ordinary shares. InvoCare Australia Pty Limited, InvoCare (Singapore) Pty Limited and Bledisloe Australia Pty Ltd have been granted relief from the necessity to prepare financial reports in accordance with Class Order 98/1418 issued by the Australian Securities and Investments Commission. For further information refer to Note 32. During 2013 the solvent winding up of a total of 14 entities was commenced and this process was completed during 2014. (d) Subsidiaries with non-controlling interests (“NCI”) One subsidiary, Macquarie Memorial Park Pty Limited, has non-controlling interests of 16.86% (2013: 16.86%). During the year dividends totalling $203,000 were paid to non-controlling interests (2013: $35,745). Note 17: Interests in Other Entities: Associates (a) Interests in associates (i) Set out below is the associate of the Group at 31 December 2014. The entity listed below has share capital consisting solely of ordinary shares, which are held directly by the Group. The country of incorporation or registration is also its principal place of business, and the proportion of ownership interest is the same as the proportion of voting rights held. The interest held in this entity is not material to the Group. Name of entity Country of incorporation Nature of relationship Measurement method 2014 % 2013 % 2014 $’000 2013 $’000 % of ownership interest Carrying Amount HeavenAddress Pte. Ltd Singapore Associate Equity method 34.59 34.59 2,423 4,705 HeavenAddress Pte. Ltd offers online memorial services to allow families and communities to celebrate the life of a loved one. (ii) Commitments and contingent liabilities in respect of associates: The Group has no commitments or contingent liabilities in respect of its associates at 31 December 2014 (2013: Nil). (b) Impairment During 2014 a review of the Group’s investment in its associate was undertaken which resulted in an impairment write down of $2,000,000. As a result the recoverable amount of the Group’s investment in its associate as at 31 December 2014 is now $2,423,000. The recoverable amount is based on value-in-use calculations whereby cash flow projections provided by the associate’s management have been discounted to present value using selected discount rates. Cash projections which covered an initial three-year period have then been extrapolated using estimated growth rates of 3% for both revenues and expenses. Sensitivities were conducted on a number of variables including revenue growth and discount rates. Given the start-up nature of the business, more weight was placed on the existing business than on future opportunities when developing growth scenarios. A pre-tax rate of 17.8% (2013: Nil) was used to discount the cash projections. This is higher than the 10.9% rate used for impairing existing business assets and reflects the greater risk associated with a start-up investment. From these scenarios Management has selected a mid-point which it believes is in a range of possible future outcomes. The Group will continue to monitor its investment in the associate for indicators of any future impairment losses or reversals. InvoCare Annual Report 2014 85 Note 18: Property, Plant and Equipment At 1 January 2014 Cost Accumulated depreciation/mortisation Impairment write-downs Net book amount Year ended 31 December 2014 Additions Business combinations Disposals Depreciation/mortisation and impairment charge Effect of movement in exchange rates Transfers/reclassifications Closing net book amount At 31 December 2014 Cost Accumulated depreciation/mortisation Impairment write-downs Net book amount At 1 January 2013 Cost Accumulated depreciation/mortisation Impairment write-downs Net book amount Year ended 31 December 2013 Additions Business combinations Disposals Depreciation/mortisation and impairment charge Effect of movement in exchange rates Transfers/reclassifications Closing net book amount At 31 December 2013 Cost Cemetery land $’000 Freehold land $’000 Buildings $’000 Leasehold land and buildings $’000 Leasehold improve- ments $’000 Plant and equipment $’000 Total $’000 107,727 (6,665) (12,276) 78,685 128,958 – – (46,737) – 4,534 (2,641) – 5,148 109,302 434,354 (2,554) (66,936) (125,533) – – (12,276) 88,786 78,685 82,221 1,893 2,594 42,366 296,545 251 – – 2,156 – – 4,555 1,443 – – 854 5,114 415 (34) (4,243) 477 (1,578) (1,609) 213 – (217) 1,087 15,750 47 (10) 82 (414) 26,970 1,987 (675) (176) (443) (12,712) (15,418) – – 35 492 264 – 1,630 (2,695) 91,193 83,959 82,341 1,713 3,802 45,336 308,344 107,979 83,959 132,262 (7,010) (9,776) – – (49,921) – 4,534 (2,821) – 6,622 118,779 454,135 (2,820) (73,443) (136,015) – – (9,776) 91,193 83,959 82,341 1,713 3,802 45,336 308,344 106,189 74,890 123,627 (6,307) (15,976) 83,906 – – (42,306) – 74,890 81,321 763 1,994 (1,370) 3,662 1,041 (760) 4,900 (2,521) – 2,379 – – – 4,518 (2,208) – 99,960 (59,792) – 2,310 40,168 601 29 (7) 12,794 496 (368) 414,084 (113,134) (15,976) 284,974 19,592 3,560 (2,738) – (4,022) (486) (352) (11,786) (13,305) 2,408 – 979 – – – 13 – 1,062 – 4,462 – 88,786 78,685 82,221 1,893 2,594 42,366 296,545 1,772 – (233) 3,341 – – 107,727 78,685 128,958 – – (46,737) – 4,534 (2,641) – 5,148 (2,554) – 109,302 434,354 (66,936) (125,533) – (12,276) 78,685 82,221 1,893 2,594 42,366 296,545 Accumulated depreciation/mortisation Impairment write-downs Net book amount (6,665) (12,276) 88,786 86 Notes to the Financial Statements continuedFor the year ended 31 December 2014Note 18: Property, Plant and Equipment continued (a) Assets in the course of construction The carrying amounts of assets disclosed above include the following expenditure recognised in relation to property, plant and equipment which is in the course of construction: Freehold buildings Leasehold improvements Plant and equipment Total assets in the course of construction 2014 $’000 1,115 129 2,513 3,757 2013 $’000 937 123 781 1,841 (b) Impairment All impaired cemetery and crematorium sites were reassessed at 31 December 2014 using the same methodology as previously applied and a net write back (i.e. reversal of previous impairment write downs) amounting to $2,500,000 was deemed necessary to the impairment provision. The net amount comprised of $2,500,000 in the reversal of previous impairments for two cemetery and crematorium sites in Queensland. During 2013 a review of the Group’s property requirements in the Australian Capital Territory (“ACT”) identified an undeveloped parcel of leasehold land was no longer strategically significant to the Group’s long-term growth in the ACT. Accordingly, it was decided to impair the parcel of land given that the costs to exit the site may exceed its carrying value. The parcel of land was subsequently sold in 2014 and as a result $100,000 of the initial impairment loss recognised in 2013 was reversed in 2014. The following table summarises the impairment losses/reversals along with the recoverable amount estimates for the individual sites: Site Name Allambe Gardens Memorial Park, Queensland Mt Thompson Memorial Gardens, Queensland Tweed Heads Memorial Gardens, New South Wales Leasehold Land, Australian Capital Territory Impairment Loss/(Reversal) Recoverable Amount Estimates 2014 $’000 (500) (2,000) – (100) (2,600) 2013 $’000 (3,000) (1,900) 1,200 407 (3,293) 2014 $’000 15,000 12,800 2,200 100 30,100 2013 $’000 13,000 10,800 2,100 – 25,900 The impairment losses recognised over the years may be reversed in future years. The Group has no impairment at other cemetery and crematorium sites, or of other property, plant and equipment assets. The total recoverable amount of the Group’s assets is well in excess of carrying value. The recoverable amount of cash-generating units is based on value-in-use calculations. These calculations use cash flow projections based on financial estimates approved by management based on past performance and future expectations. The cash flows cover an initial five- year period and are then extrapolated beyond five years using estimated growth rates of 4% in revenues and 3% in expenses which are not inconsistent with historical trends and forecasts included in reports prepared by market analysts. A sensitivity analysis has been conducted on the impaired sites by moving the underlying assumptions both up and down 10%. This analysis demonstrates that changing the assumptions is unlikely to result in a material change in the currently recognised impairment losses. Management considers that a +/–10% shift is within the reasonably possible range of long-term outcomes. The pre-tax discount rate used was 10.9% (2013: 10.9%), reflecting the risk estimates for the business as a whole. (c) Property held for sale During the year a review of the Group’s property requirements in New South Wales, Australia and the North Island of New Zealand identified parcels of land and buildings which were no longer strategically significant to the Group’s long-term growth and being actively marketed. Accordingly they have been classified as held for sale. InvoCare Annual Report 2014 87 Note 19: Intangible Assets At 1 January 2014 Cost Accumulated amortisation Net book amount Year ended 31 December 2014 Acquisition of subsidiary/businesses Effect of movement in exchange rates Impairment Amortisation charge Net book amount At 31 December 2014 Cost Accumulated amortisation Net book amount At 1 January 2013 Cost Accumulated amortisation Net book amount Year ended 31 December 2013 Additions Acquisition of subsidiary/businesses Effect of movement in exchange rates Impairment Amortisation charge Net book amount At 31 December 2013 Cost Accumulated amortisation Net book amount Goodwill $’000 Brand name $’000 Total $’000 140,710 – 140,710 2,315 2,365 – – 145,390 12,674 (4,472) 8,202 48 109 – (1,269) 7,090 153,384 (4,472) 148,912 2,363 2,474 – (1,269) 152,480 145,390 – 12,922 (5,832) 158,312 (5,832) 145,390 7,090 152,480 129,429 – 129,429 – 4,451 6,940 (110) – 140,710 140,710 – 140,710 11,179 (3,124) 8,055 435 473 410 – (1,171) 8,202 12,674 (4,472) 8,202 140,608 (3,124) 137,484 435 4,924 7,350 (110) (1,171) 148,912 153,384 (4,472) 148,912 (a) Impairment test for goodwill For the Group’s Australian-based operations, goodwill cannot be allocated on a non-arbitrary basis to individual cash-generating Units (“CGU”s) due to the significant history of numerous acquisitions, especially during the years 1993 to 1999, and resulting post-acquisition business integration activities and operational changes over many years. The New Zealand, Singapore and USA operations are separate CGUs and the associated goodwill arising from that acquisition has been allocated to the single New Zealand, Singapore or USA CGU. As a result, the lowest level within the Group at which goodwill is monitored for management purposes comprises the grouping of all CGUs within a country of operation. The recoverable amounts of the total of Australian, New Zealand, Singapore and USA CGUs are based on value-in-use calculations. These calculations use cash flow projections based on approved financial estimates covering a five-year period. Cash flows beyond the five-year period have been extrapolated using estimated growth rates. The assessment also considered the reasonable possible long-term shift in key assumptions which will not cause further impairment. (b) Key assumptions used for value-in-use calculations Budgeted cash flows have been based on past performance and expectations for the future. The growth rates of 4% in revenue and 3% in expense projections are not inconsistent with historical trends and forecasts included in reports prepared by market analysts. The pre-tax discount rate used for assessing the carrying value of goodwill in each CGU was 10.9% (2013: 10.9%), reflecting the risk estimates for the business as a whole. Sensitivity analysis indicates significant headroom exists in the value-in-use calculations for Australia, New Zealand, Singapore and USA compared to the carrying value of goodwill. 88 Notes to the Financial Statements continuedFor the year ended 31 December 2014Note 20: Derivative Financial Instruments Current liabilities Interest rate swap contracts – cash flow hedges Non-current assets Interest rate swap contracts – cash flow hedges Non-current liabilities Interest rate swap contracts – cash flow hedges 2014 $’000 622 622 – – 5,284 5,284 2013 $’000 1,342 1,342 1 1 4,437 4,437 Full details of the derivatives being used by the Group and the risks and ageing of the existing derivatives are set out in Note 2 – Financial Risk Management. In September 2010, a controlled entity entered into a bank loan amounting to SG$27 million which was renewed in 2012. This loan, which was taken out to support the investment in Singapore, has been designated as a hedge of the net investment in this subsidiary. The fair value and carrying amount of the borrowing at 31 December 2014 was $24.9 million (31 December 2013: $23.8 million). There was no ineffectiveness to be recorded from net investments in foreign entity hedges. Note 21: Trade and Other Payables Current Trade payables Sundry payables and accrued expenses Deferred cash settlement for business interests acquired Non-current Deferred cash settlement for business interests acquired 2014 $’000 2013 $’000 25,560 9,879 1,652 37,091 260 260 24,926 8,324 1,313 34,563 1,124 1,124 Full details of the risks and currency exposure of trade and other payables are set out in Note 2 – Financial Risk Management. Note 22: Borrowings Short-term borrowings Lease liabilities Long-term borrowings Borrowings are represented by: Principal amount of bank loans – unsecured Lease liabilities Loan establishment costs Full details of the risks, ageing and available facilities are set out in Note 2 – Financial Risk Management. 2014 $’000 2013 $’000 2 2 11 11 230,304 225,228 – (954) 2 (1,274) 229,350 223,956 InvoCare Annual Report 2014 89 Note 23: Provisions for Employee Benefits Current Employee benefits Non-current Liability for long service leave (a) Employee numbers Number of full-time equivalent employees 2014 $’000 2013 $’000 13,726 12,732 2,409 2,027 2014 Number 2013 Number 1,532 1,470 (b) Superannuation plan The Company contributes to accumulation-type employee superannuation plans in accordance with statutory requirements. (c) Exempt Employee Share Plan The Company’s Exempt Employee Share Plan provides employee members the opportunity to acquire ordinary shares in InvoCare Limited to the tax exempt value of $1,000. There are 321 members at 31 December 2014 and the balance owing by employee plan members for the purchase price of shares was $151,814 (2013: $161,962). Note 24: Current Liabilities expected to be settled within twelve months The amounts included in current liabilities which are expected to be settled within twelve months are set out below. Trade and other payables Short-term borrowings Current tax liabilities Prepaid contract liabilities Deferred revenue Employee benefits Total current liability Expected to settle within twelve months 2014 $’000 2013 $’000 2014 $’000 2013 $’000 37,091 34,563 37,091 34,563 2 9,364 33,847 7,588 13,726 101,618 11 9,946 30,481 6,925 12,732 94,658 2 9,364 33,847 7,588 6,996 94,888 11 9,946 30,481 6,925 6,604 88,530 The amounts expected to be settled within twelve months have been calculated based on the historical settlement patterns. 90 Notes to the Financial Statements continuedFor the year ended 31 December 2014Note 25: Contributed Equity Fully paid ordinary shares Ordinary shares Balance at the beginning of the financial year Total contributed equity Treasury shares (note 25 (b)) 2014 $’000 2013 $’000 131,682 132,393 2014 Number 2014 $’000 2013 Number 2013 $’000 110,030,298 136,858 110,030,298 110,030,298 136,858 110,030,298 136,858 136,858 (661,978) (5,176) (631,733) (4,465) Total consolidated contributed equity 109,368,320 131,682 109,398,565 132,393 (a) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. (b) Treasury shares Treasury shares are shares in InvoCare Limited that are held by the InvoCare Deferred Employee Share Plan Trust for the purpose of issuing shares under the InvoCare Deferred Employee Share Plan, as set out in Note 8. Date 1 January 2013 25 February 2013 Details Balance Shares vested 28 February 2013 to 07 March 2013 Acquisition of shares by the Trust 01 July 2013 31 December 2013 31 December 2013 25 February 2014 Forfeit of shares on termination of employment Transfer of shares to members of the Exempt Employee Share Plan Shares provisionally forfeited but not yet de-allocated by the Trustee Unallocated shares held by the Trustee Balance Shares vested 03 March 2014 to 10 June 2014 Acquisition of shares by the Trust 01 August 2014 to 16 August 2014 Forfeit of shares on termination of employment 31 December 2014 Shares provisionally forfeited but not yet de-allocated by the Trustee Unallocated shares held by the Trustee 31 December 2014 Balance Number of shares 634,252 (70,260) 77,003 (23,520) $’000 4,171 (388) 842 (193) (13,927) (160) (36,740) 64,925 631,733 (71,735) 102,883 (5,219) (126,777) 131,093 661,978 (179) 372 4,465 (457) 1,168 (52) (763) 815 5,176 (c) Dividend reinvestment plan During 2006, the Company activated its Dividend Reinvestment Plan under which holders of ordinary shares may elect to have all or part of their dividend entitlements satisfied in ordinary shares rather than by being paid in cash. InvoCare Annual Report 2014 91 Note 26: Reserves and Retained Profits (a) Reserves Share-based payments reserve Hedging reserve – cash flow hedge reserve Foreign currency translation reserve Movements: Share-based payments reserve Balance at the beginning of the year Deferred employee share plan expense Vesting of deferred employee share plan shares Balance at the end of the year Hedging reserve Balance at the beginning of the year Revaluation to fair value – gross Deferred tax Balance at the end of the year Foreign currency translation reserve Balance at the beginning of the year Currency translation differences Balance at the end of the year (b) Retained profits Movements in retained profits were as follows: Balance at the beginning of the year Net profit for the year Dividends paid during the year Balance at the end of the year 2014 $’000 2013 $’000 4,020 (4,071) 6,807 6,756 3,142 1,335 (457) 4,020 (3,989) (130) 48 (4,071) 5,270 1,537 6,807 3,142 (3,989) 5,270 4,423 2,504 1,026 (388) 3,142 (6,564) 3,347 (772) (3,989) 940 4,330 5,270 32,636 54,515 (38,784) 48,367 21,173 48,869 (37,406) 32,636 (c) Nature and purpose of reserves (i) Share-based payments reserve The share-based payments reserve is used to recognise the expensed portion of shares granted to employees under the terms of the Australian Deferred Employee Share Plan. (ii) Hedging reserve – cash flow hedge reserve The hedging reserve is used to record gains or losses on hedging instruments that are cash flow hedges which are recognised directly in equity. Amounts are recognised in profit and loss when the associated hedged transaction affects the profit and loss. (iii) Foreign currency translation reserve Exchange differences arising on translation of the foreign controlled entities and from the hedging of the net investment in foreign operations are taken to the foreign currency translation reserve as set out in Notes 1(d) and 1(s). The reserve is recognised in the profit and loss when the net investment is sold. 92 Notes to the Financial Statements continuedFor the year ended 31 December 2014 Note 27: Non-controlling Interests Reconciliation of non-controlling interests in controlled entities: Share capital Retained earnings Balance at the beginning of the year Add share of operating earnings Less dividends paid Closing balance of retained earnings Reserves Balance at the end of the year Note 28: Capital and Leasing Commitments (a) Operating lease commitments Non-cancellable operating leases contracted for at the reporting date but not capitalised in the financial statements: Payable – minimum lease payments – – – not later than 12 months between 12 months and five years greater than five years 2014 $’000 2013 $’000 800 346 112 (203) 255 99 800 252 130 (36) 346 99 1,154 1,245 2014 $’000 2013 $’000 10,095 22,148 12,447 44,690 10,006 21,879 14,814 46,699 Non-cancellable operating leases contracted for at the reporting date but not capitalised in the financial statements include the following: Not later than 12 months Between 12 months and five years Greater than five years Property $’000 Equipment $’000 9,714 21,886 12,447 44,047 381 262 – 643 Total $’000 10,095 22,148 12,447 44,690 The Group leases premises, motor vehicles and sundry office equipment under non-cancellable operating leases with terms generally from one to five years. The Rookwood Crematorium lease expires in 2025. The Great Southern Garden of Remembrance lease expires in 2047 with an option to renew for a further 50 years. InvoCare Annual Report 2014 93 Note 28: Capital and Leasing Commitments continued (b) Finance lease commitments Non-cancellable finance leases in respect of motor vehicles contracted for at the reporting date and capitalised in the financial statements: Payable – minimum lease payments – – not later than 12 months between 12 months and five years (c) Capital expenditure commitments Capital expenditure commitments contracted or conditionally contracted at the reporting date but not recognised as liabilities payable: Building purchase Building extensions and refurbishments – within one year Plant and equipment purchases – within one year (d) Other expenditure commitments Documentary letters of credit outstanding at balance date payable: – within one year Note 29: Business Combinations 2014 $’000 2013 $’000 2 – 2 – 1,099 2,162 11 2 13 4,085 48 1,398 68 129 Charles Crawford and Sons (a) Summary of acquisition On 15 December 2014, a subsidiary, InvoCare Australia Pty Limited, completed the acquisition of the funeral business assets of Charles Crawford and Sons (“Charles Crawford”) which has operated in the Melbourne market since 1987. Provisional accounting for this acquisition has been completed as at 31 December 2014. Details of the purchase consideration, the net assets acquired and goodwill are as follows: (b) Purchase consideration Purchase consideration Cash paid Total purchase consideration Fair value of net identifiable assets acquired (refer (c) below): Goodwill $’000 2,103 2,103 1,247 856 The goodwill recognised is attributable to the workforce and the profitability of the acquired business. It will not be deductible or tax purposes. (c) Assets acquired The assets and liabilities recognised as a result of the acquisition are as follows: Inventories Prepayments Property, plant and equipment Brand name Deferred tax liabilities Net identifiable assets acquired Fair Value $’000 17 3 1,280 48 (101) 1,247 The acquired business contributed revenues of $73,000 and after tax profit of $23,000 to the Group for the period from 15 December 2014 to 31 December 2014. If the acquisition had occurred on 1 January 2014, consolidated revenue for the year ended 31 December 2014 would have increased by approximately $1,211,000 and profit after tax by approximately $165,000. 94 Notes to the Financial Statements continuedFor the year ended 31 December 2014 Note 29: Business Combinations continued Macera Crematorium, Inc (a) Summary of acquisition On 26 November 2014, a subsidiary, InvoCare USA, Inc., completed the acquisition of the crematorium business assets of Macera Crematorium, Inc (“Macera”) which has operated in the Santa Ana, California market in the United States since 1991. Provisional accounting for this acquisition has been completed as at 31 December 2014. Details of the purchase consideration, the net assets acquired and goodwill are as follows: (b) Purchase consideration Purchase consideration Cash paid Total purchase consideration Fair value of net identifiable assets acquired (refer (c) below): Goodwill $’000 2,162 2,162 703 1,459 The goodwill recognised is attributable to the expected synergy benefits following the Group’s entry into a new market. It will not be deductible for tax purposes. (c) Assets acquired The assets and liabilities recognised as a result of the acquisition are as follows: Property, plant and equipment Provisions Net identifiable assets acquired Fair Value $’000 707 (4) 703 The acquired business contributed revenues of $79,000 and after tax profit of $4,000 to the Group for the period from 26 November 2014 to 31 December 2014. If the acquisition had occurred on 1 January 2014, consolidated revenue for the year ended 31 December 2014 would have increased by approximately $547,000 and profit after tax by approximately $6,000. Tilton, Opie & Pattinson Funeral Services The funeral business assets of Tilton, Opie & Pattinson Limited were acquired in 2013. Included in the purchase contract was a $46,000 retention payment which was paid in 2014. Resthaven Funeral Services The funeral business assets of Resthaven Funeral Services were acquired in 2013. Included in the purchase consideration was $324,000 in future payments to be paid if predetermined revenue targets are achieved in each of the next five calendar years. In early 2015 a payment totalling $95,000 of the $324,000 in future payments will be made. Tuckers Funeral & Bereavement Services Tuckers Funeral & Bereavement Services Pty Ltd and Geelong Mortuary Transfer Services Pty Ltd were acquired in December 2012. Included in the purchase consideration was $2,100,000 in future payments to be paid if predetermined revenue targets are achieved in each of the next three calendar years. The predetermined revenue target was achieved in 2013 and as a result $574,000 of the $2,100,000 in future payments was paid in 2014. The predetermined revenue target was also achieved in 2014 and as a result $700,000 of the $2,100,000 in future payments will be paid in early 2015. InvoCare Annual Report 2014 95 Note 30: Contingent Liabilities and Contingent Assets The Group had contingent liabilities at 31 December 2014 in respect of bank guarantees given for leased premises of controlled entities to a maximum of: 1,088 1,221 For information about the deed of cross guarantees given by InvoCare Limited, InvoCare Australia Pty Limited, InvoCare (Singapore) Pty Limited, Bledone Pty Ltd and Bledisloe Australia Pty Ltd, refer to Note 32. No liability was recognised by the consolidated entity in relation to the guarantees as the fair value of the guarantees is immaterial. Note 31: Cash Flow Information 2014 $’000 2013 $’000 Reconciliation of cash flow from operations with profit from ordinary activities after income tax Profit from ordinary activities after income tax Non-cash items in profit from ordinary activities Depreciation, amortisation and impairment Reversal of impairment loss Share-based payments expense Loan establishment costs Imputed interest from deferred purchase consideration Net (gain)/loss on disposal of property, plant and equipment Unrealised (gain)/loss on prepaid contracts Other prepaid contract movements Business acquisition costs classified in investing activities Share of net loss of an associate Changes in assets and liabilities, net of the effects of purchase and disposal of subsidiaries (Increase)/decrease in trade and other receivables (Increase)/decrease in inventories (Increase)/decrease in deferred selling expenses Increase/(decrease) in trade and other payables Increase/(decrease) in deferred revenue Increase/(decrease) in income taxes payable Increase/(decrease) in deferred taxes Increase/(decrease) in provisions 2014 $’000 2013 $’000 54,515 48,869 21,187 (2,600) 1,596 366 91 (334) (10,915) 186 1,215 525 19,487 (4,900) 1,148 589 113 (2,972) (1,590) 325 537 300 (2,954) (3,204) (676) (326) 1,665 2,615 (583) 3,520 2,660 71,753 (275) (382) 8,464 3,009 4,730 253 (2,285) 72,216 96 Notes to the Financial Statements continuedFor the year ended 31 December 2014 Note 32: Deed of Cross Guarantee InvoCare Limited, InvoCare Australia Pty Limited and InvoCare (Singapore) Pty Limited entered into a Deed of Cross Guarantee on 11 December 2006 under which each company guarantees the debts of the others. Effective from 15 June 2011 Bledone Pty Ltd and Bledisloe Australia Pty Ltd became parties to this Deed of Cross Guarantee. By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare a Financial Report and Directors’ Report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. The above companies represent a “Closed Group” for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by InvoCare Limited, they also represent the “Extended Closed Group”. Set out below is a consolidated income statement, statement of comprehensive income, summary of movements in consolidated retained earnings and balance sheet for the year ended 31 December 2014 of the Closed Group. (a) Consolidated income statement, statement of comprehensive income, and a summary of movements in consolidated retained profits of the Closed Group Consolidated income statement of the Closed Group Revenue from continuing operations Finished goods and consumables used Employee benefits expense Employee related and on-cost expenses Advertising and public relations expenses Occupancy and facilities expenses Motor vehicle expenses Other expenses Depreciation, impairment and amortisation expenses Reversal of impairment loss Finance costs Interest income Net gain/(loss) on prepaid contracts Acquisition costs Inter-segment revenue Share of net loss of associate Net gain/(loss) on disposal of non-current assets Profit before income tax Income tax expense Profit for the year Changes in the fair value of cash flow hedges, net of tax Changes in foreign currency translation reserve, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year Summary of movements in consolidated retained profits of the Closed Group Retained profits at the beginning of the financial year Profit for the year Dividends paid Retained profits at the end of the financial year 2014 $’000 2013 $’000 339,301 323,264 (94,809) (84,014) (20,683) (12,082) (20,648) (7,381) (14,025) 85,659 (14,956) 600 (13,113) 672 10,915 (482) 2,073 (525) 322 71,165 (18,616) 52,549 212 (227) (15) 52,534 37,298 52,549 (38,784) 51,063 (90,617) (78,668) (18,770) (10,865) (20,309) (6,829) (13,056) 84,150 (15,644) 4,900 (14,683) 606 1,892 (273) 1,943 (300) 217 62,808 (15,809) 46,999 2,140 (3,207) (1,067) 45,932 27,705 46,999 (37,406) 37,298 InvoCare Annual Report 2014 97 Note 32: Deed of Cross Guarantee continued (b) Balance sheet of the Closed Group Current assets Cash and cash equivalents Trade and other receivables Inventories Prepaid contract funds under management Property held for sale Deferred selling costs Total current assets Non-current assets Trade and other receivables Shares in subsidiaries Property, plant and equipment Prepaid contract funds under management Intangible assets Deferred selling costs Equity accounted investments Total non-current assets Total assets Current liabilities Trade and other payables Derivative financial instruments Current tax liabilities Prepaid contract liabilities Deferred revenue Provisions for employee benefits Total current liabilities Non-current liabilities Trade and other payables Long-term borrowings Derivative financial instruments Deferred tax liabilities Prepaid contract liabilities Deferred revenue Provisions for employee benefits Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained profits/(Accumulated losses) Total equity 98 2014 $’000 2013 $’000 1,011 33,082 20,128 32,997 2,519 1,138 90,875 44,578 130,704 246,936 367,970 11,688 8,203 2,423 812,502 903,377 31,376 613 7,051 33,554 7,588 10,508 90,690 – 193,500 4,864 28,770 359,995 42,818 2,165 632,112 722,802 180,575 3,080 31,996 19,385 28,991 – 1,039 84,491 12,933 185,477 238,607 328,435 11,048 7,972 4,705 789,177 873,668 28,046 1,342 7,666 28,631 6,925 11,883 84,493 29,118 190,870 4,437 24,443 331,041 40,915 1,914 622,738 707,231 166,437 131,682 132,393 (2,170) 51,063 (3,254) 37,298 180,575 166,437 Notes to the Financial Statements continuedFor the year ended 31 December 2014Note 33: Events after the Balance Sheet Date No significant subsequent events have occurred since 31 December 2014. Note 34: Related Party Transactions (a) Parent entity The ultimate parent entity within and for the Group is InvoCare Limited. (b) Subsidiaries Interests in subsidiaries are set out in Note 16. (c) Directors and key management personnel Disclosures relating to directors and key management personnel are set out in Note 7. (d) Transactions with related parties 2014 $ 2013 $ Transactions with other related parties Contributions to superannuation funds on behalf of employees 7,513,557 7,091,636 (e) Guarantees and other matters Under the terms of common terms deed executed on 20 December 2013, InvoCare Limited and its material wholly-owned entities (the “Guarantors”) have individually guaranteed to the financiers the due and punctual payment in full of any liabilities or obligations under the debt facilities provided under the terms of individual Facility Agreements. The Guarantors have also indemnified the financiers against any loss or damage suffered by the financiers arising from any failure by a borrower or any Guarantor to satisfy the obligations. Under Australian income tax consolidation legislation, InvoCare Limited assumes responsibility for the income tax payable by the consolidated Australian tax group comprising InvoCare Limited and its wholly-owned entities. A Tax Sharing and Funding Agreement (“TSA”) between InvoCare Limited and its wholly-owned Australian entities covers the funding, accounting and calculation of the tax liability for each individual entity, and also caters for entities joining and exiting the group. In accordance with the terms of the TSA, InvoCare Australia Pty Limited makes tax payments on behalf of InvoCare Limited and receives reimbursement through the intercompany loan account for amounts paid except for the tax allocated to that entity. Note 35: Parent Entity Financial Information (a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts. Balance sheet Current assets Total assets Current liabilities Total liabilities Shareholders’ equity Contributed equity Reserves Share-based payments Hedging reserve – cash flow hedge reserve Foreign currency translation reserve Retained earnings Total shareholders’ equity Profit for the year after tax Total comprehensive income for the year 2014 $’000 2013 $’000 75 368,240 8,254 174,791 25 372,632 9,529 174,231 131,682 132,393 4,020 (3,833) 837 60,743 193,449 32,615 34,542 3,142 (4,045) – 66,911 198,401 44,311 46,997 InvoCare Annual Report 2014 99 Note 35: Parent Entity Financial Information continued (b) Contingent liabilities of the parent entity 2014 $’000 2013 $’000 The parent entity had contingent liabilities at 31 December 2014 in respect of bank guarantees given for leased premises of controlled entities to a maximum of: 1,088 1,221 No liability was recognised by the parent entity or the consolidated entity in relation to the guarantees as the fair value of the guarantees is immaterial. (c) Contractual commitments for the acquisition of property, plant or equipment The parent entity has no contractual commitments for the acquisition of property, plant or equipment at 31 December 2014 (31 December 2013: Nil). (d) Tax consolidation legislation InvoCare Limited and its wholly-owned Australian controlled entities implemented the tax consolidation legislation from 1 January 2004. The accounting policy in relation to this legislation is set out in Note 1(g). On adoption of the tax consolidation legislation, the entities in the tax consolidated group entered into a tax sharing and funding agreement which, in the opinion of the directors, limits the joint and several liability of the wholly-owned entities in the case of a default by the head entity InvoCare Limited. This agreement was updated on 5 June 2007 and provides that the wholly-owned entities will continue to fully compensate InvoCare Limited for any current tax payable assumed and be compensated by InvoCare Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to InvoCare Limited under the tax consolidation legislation. The amounts receivable or payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. InvoCare Australia Pty Limited, as permitted by the tax funding agreement, acts on behalf of InvoCare Limited for the purpose of meeting its obligations to make tax payments, or receive refunds, and reimburses, or is compensated by, that entity through the intercompany loan account for amounts of tax paid, or received, except for the tax allocated to that entity. Note 36: Economic Dependence The parent entity depends on dividend and interest income from, and management fees charged to, its controlled entities to source the payment of future dividends and fund its operating costs and debt service obligations as borrower under the bank loan facility agreements. The parent entity’s financial position is sound, notwithstanding a net current liability situation being shown in the balance sheet. Adequate cash resources are available to enable it to meet its obligations as and when they fall due, through either drawing on unused finance facilities, which at the reporting date amounted to $30,450,000 as outlined in Note 2(c), or by on-demand repayment of intercompany advances. 100 Notes to the Financial Statements continuedFor the year ended 31 December 2014Note 37: Critical Accounting Estimates and Judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (i) Estimated impairment of goodwill The Group tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note 1(p). The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions. Refer to Note 19 for details of these assumptions and the potential impact of changes to the assumptions. (ii) Estimated impairment of other non-financial assets and cash-generating units The Group annually considers if events or changes in circumstances indicate that the carrying amount of other assets or cash-generating units may not be recoverable. Similarly, at each reporting date, assets or cash-generating units that suffered a previous impairment are reviewed for possible reversals of the impairment. The recoverable amounts are determined based on value-in-use calculations which require the use of assumptions. Refer to Notes 17 and 18 for details of these assumptions. (iii) Timing of recognition of deferred plaque and miscellaneous merchandise revenue Prepaid cemetery/crematorium plaque and miscellaneous merchandise sales are currently brought to account over an assumed 15-year period. Unredeemed merchandise sales (included within deferred revenue on the balance sheet) total $41.4 million at 31 December 2014 (2013: $39.2 million). The 15-year period is based on the actuarially assessed average period between a customer entering into a prepaid funeral plan and the contract becoming at-need. The actual history of a prepaid cemetery/crematorium contract may differ from the profile of a prepaid funeral plan; however, in the absence of more specific data being available, the funeral data has been applied. The average 15-year period is an assumption only and therefore subject to uncertainty. It is possible that there will remain unperformed contracts at the end of the 15-year amortisation period, yet all revenue will have been recognised. Offsetting this is the likelihood that contracts performed during the 15-year period will have unrecognised revenue. Actual redemptions information is being collated for a sample of sites in order to determine a more accurate historical pattern of cemetery/ crematorium prepaid sale redemptions. The information collated to date suggests there is no material misstatement of revenue using the assumed 15 years period. The impact of recognising revenue over five years less (or five years more) than 15 years would be to increase annual revenue by approximately $2.5 million (decrease by $1.2 million). Note 38: Company Details InvoCare Limited is a company limited by shares, incorporated and domiciled in Australia. The registered office and principal place of business of the Company is: Level 4, 153 Walker Street North Sydney NSW 2060 Note 39: Authorisation of the Financial Report This financial report was authorised for issue by the directors on 17 February 2015. The Company has the power to amend and reissue this report. InvoCare Annual Report 2014 101 Directors’ Declaration In the directors’ opinion: (a) the financial statements and notes set out on pages 52 to 101 are in accordance with the Corporations Act 2001, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the Company’s and consolidated entity’s financial position as at 31 December 2014 and of their performance for the financial year ended on that date; and (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; and (c) at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group identified in Note 32 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 32. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. Richard Fisher Director Sydney 17 February 2015 Andrew Smith Director 102 Independent Auditor’s Report to the members of InvoCare Limited Report on the financial report We have audited the accompanying financial report of InvoCare Limited (the company), which comprises the consolidated balance sheet as at 31 December 2014, and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration for the InvoCare Group (the consolidated entity). The consolidated entity comprises the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) the financial report of InvoCare Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2014 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the financial report and notes also comply with International Financial Reporting Standards as disclosed in Note 1. InvoCare Annual Report 2014 103 Independent Auditor’s Report continued to the members of InvoCare Limited Report on the Remuneration Report We have audited the remuneration report included in pages 38 to 49 of the directors’ report for the year ended 31 December 2014. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. Auditor’s opinion In our opinion, the remuneration report of InvoCare Limited for the year ended 31 December 2014 complies with section 300A of the Corporations Act 2001. Matters relating to the electronic presentation of the audited financial report This auditor’s report relates to the financial report and remuneration report of InvoCare Limited (the company) for the year ended 31 December 2014 included on InvoCare Limited’s website. The company’s directors are responsible for the integrity of the InvoCare Limited website. We have not been engaged to report on the integrity of this website. The auditor’s report refers only to the financial report and remuneration report named above. It does not provide an opinion on any other information which may have been hyperlinked to/from the financial report or the remuneration report. If users of this report are concerned with the inherent risks arising from electronic data communications they are advised to refer to the hard copy of the audited financial report and remuneration report to confirm the information included in the audited financial report and remuneration report presented on this website. PricewaterhouseCoopers Brett Entwistle Partner Sydney 17 February 2015 104 Shareholder Information Shares and options as at 25 March 2015 Shares on issue Options on issue Distribution of shareholders as at 25 March 2015 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Number 110,030,298 Nil Number of shareholders Number of shares Percentage % 5,326 6,821 1,333 668 38 2,919,343 16,823,147 9,890,268 14,108,826 66,288,714 2.65% 15.29% 8.99% 12.82% 60.25% 14,186 110,030,298 100.00% There were 185 holders of less than a marketable parcel of ordinary shares (being 37 based on a price of $13.25 on 25 March 2015) who hold a total of 1,708 ordinary shares. Equity security holders Largest 20 holders of ordinary shares at 25 March 2015 1. HSBC Custody Nominees (Australia) Limited 2. National Nominees Limited 3. J P Morgan Nominees Australia Limited 4. Citicorp Nominees Pty Limited 5. HSBC Custody Nominees (Australia) Limited (Nt-Comnwlth Super Corp A/C) 6. Argo Investments Limited 7. Milton Corporation Limited 8. National Nominees Limited (Db A/C) 9. BKI Investment Company Limited 10. Australia Foundation Investment Company Limited 11. BNP Paribas Nominees Pty Ltd (Drp) 12. Australian United Investment Company Limited 13. AET SFS Pty Ltd (Invocare Share Plans) 14. UBS Wealth Management Australia Nominees Pty Ltd 15. UCA Growth Fund Limited 16. Mr Richard Hugh Davis 17. Gwynvill Trading Pty Ltd 18. Mirrabooka Investments Limited 19. Warbont Nominees Pty Ltd (Accumulation Entrepot A/C) 20. Netwealth Investments Limited (Wrap Services A/C) Total for top 20 Substantial holders Substantial holders in the Company as at 25 March 2015 are set out below: JCP Investment Partners Ltd Mondrian Investment Partners Limited National Australia Bank Limited Group Voting rights The voting rights attaching to each class of security are set out below: Number of shares Percentage % 18,912,166 12,108,916 10,989,020 4,580,399 2,611,842 2,082,191 1,865,903 1,775,052 1,358,474 1,150,000 1,084,721 1,000,000 924,989 665,597 500,000 487,439 415,643 360,000 342,342 329,005 63,543,699 17.19% 11.01% 9.99% 4.16% 2.37% 1.89% 1.70% 1.61% 1.23% 1.05% 0.99% 0.91% 0.84% 0.60% 0.45% 0.44% 0.38% 0.33% 0.31% 0.30% 57.75% Number of shares held Percentage % 14,363,249 8,542,485 6,757,884 13.05% 7.76% 6.14% Ordinary shares On a show of hands, each member present in person and each other person present as a proxy of a member has one vote. On a poll, each member present in person has one vote for each fully paid share held by the member and each person present as a proxy of a member has one vote for each fully paid share held by the member that the proxy represents. InvoCare Annual Report 2014 105 InvoCare Locations Contemporary – Australia and New Zealand New South Wales Queensland Victoria South Australia New Zealand Blackwell Funerals (est 1940) Aberfoyle Park Glenside Paradise Payneham Prospect Rosewater South Brighton Torrensville Tasmania Turnbull Family Funerals (est 1936) North Hobart New Zealand South Island John Rhind Funeral Directors (est 1881) Christchurch Kaiapoi Academy Funeral Services (est 1982) Christchurch Geoffrey T Sowman (est 1869) Blenheim Sowman Memorials Blenheim Fraser Lawrence Memorials Christchurch Le Pine including Le Pine Heritage (est 1891) Altona Box Hill Camberwell Croydon Dandenong Eltham Ferntree Gully Footscray West Glen Waverley Greensborough Healesville Ivanhoe Kew East Lilydale Mordialloc Oakleigh Pakenham Thornbury Le Pine Asian Funerals Glen Waverley West Footscray W D Rose (est 1884) Brighton Burwood Cheltenham Joseph Allison (est 1853) Brunswick Essendon Other Providers Mulqueen Funerals (est 1932) Coburg Southern Cross (est 1998) Noble Park Tuckers Funeral & Bereavement Service (est 1883) Geelong West Grovedale Highton Lara Werribee Funerals Werribee Charles Crawford & Son Melton George Hartnett Funerals (est 1947) Albany Creek Cleveland Holland Park Redcliffe Sandgate Wynnum Metropolitan Funerals (est 1941) Aspley Cleveland Mt Gravatt Petrie Redcliffe Southport Springwood Toowong Wynnum Other Providers Cannon & Cripps (est 1886) Kelvin Grove Drysdale Funerals (est 1983) Nambour Tewantin Somerville Funerals (est 1932) Nerang Robina Southport City Funeral Services (est 1959) Mackay Gatton Funerals (est 1983) Gatton Hiram Philp Funerals (est 1903) Toowoomba Mackay Funerals (est 1884) Mackay Burkin Svendsens (est 1884) Cairns Laidley Funeral Services (est 1995) Beaudesert Beaudesert Funeral Services (est 1980) Beaudesert North Island Forrest Funeral Services (est 1978) Browns Bay (Auckland) Orewa (Auckland) Fountain’s Funeral Services (est 1956) Papakura (Auckland) Manurewa (Auckland) Sibuns Funeral Directors (est 1913) Remuera (Auckland) H Morris Funerals (est 1933) Northcote (Auckland) Lychgate Funeral Home (est 1876) Wellington Johnsonville Karori Resthaven Funerals (est 2000) Manurewa (Auckland) Howick (Auckland) Gee & Hickton (est 1946) Lower Hutt Upper Hutt Akatarawa Crematorium Guardian North City (est 1966) Porirua (Wellington) James R Hill (est 1965) Hamilton Pellows Funeral Directors (est 1963) Hamilton Elliotts Funeral Services (est 1967) Tauranga Mt Maunganui Kati Kati Beth Shan Funeral Directors (est 1977) Napier Cleggs Funeral Services (est 1919) Hawera Vospers (est 1933) New Plymouth Wairarapa Funeral Services (est 1938) Masterton Guardian Funeral Providers Guardian Funerals Ballina Bankstown Blacktown Bondi Junction Burwood Campbelltown Casino Chatswood Cremorne Frenchs Forest Hurstville Leppington Lidcombe Lismore Merrylands Minchinbury North Ryde Parramatta Rockdale Warrawee Hansen & Cole Funerals (est 1936) Bulli Kembla Grange Wollongong J W Chandler Funerals (est 1885) Richmond Windsor Boland Funerals (est 1962) Maroubra Tobin Brothers Funerals (est 1946) Queanbeyan Australian Capital Territory Tobin Brothers Funerals (est 1946) Belconnen Kingston Tuggeranong Other Providers Allan Drew Funerals (est 1985) Castle Hill Rouse Hill Ann Wilson Funerals (est 1995) Dee Why Mona Vale David Lloyd Funerals (est 1885) Adamstown Belmont Beresfield Toronto Liberty Funerals (est 1994) Chatswood Granville Universal Chung Wah (est 1955) Chatswood Fairfield W N Bull (est 1892) Newtown Parramatta Western Australia Purslowe Funerals (est 1907) Mandurah Midland North Perth South Fremantle Victoria Park Wangara Other Providers Oakwood Funerals (est 1999) Booragoon Rockingham Chipper Funerals (est 1889) Mandurah Myaree Rockingham Subiaco Christian Funerals (est 1978) Maylands 106 New South Wales Queensland Victoria South Australia Western Australia Simplicity Funerals (est 1979)+ Balgowlah Bankstown Bateau Bay Chatswood Erina Hornsby Liverpool Mascot Miranda Newcastle Newtown Buranda Cairns* Ipswich Kedron Logan Miami Parkwood Strathpine Sunshine Coast* Bayswater Carnegie Frankston Pascoe Vale Reservoir Sunshine Werribee Penrith Randwick Ryde Smithfield South Sydney* Toukley East Tweed Heads Woy Woy Wyong Australian Capital Territory Canberra* * Mobile Arranger + Incorporate Value Funerals Black Forest Brahma Lodge Enfield Gawler Morphett Vale Victor Harbor Joondalup Kelmscott Mandurah Osborne Park South Perth* Spearwood New Zealand Christchurch* Grey Lynn (Auckland) Nelson New Lynn (Auckland) Royal Oak (Auckland) Wellington* New South Wales Queensland Victoria South Australia Western Australia White Lady Funerals (est 1987) Hillcrest Glenside Plympton Ashmore Cairns Caloundra Chelmer Clayfield Kelvin Grove Morningside Tanah Merah Warana Caulfield South Burwood Doncaster Epping Heathmont Heidelberg Mornington North Essendon Rosebud South Melbourne Operating as Mareena Purslowe & Associates Funerals Fremantle Midland Subiaco Willetton Bankstown Belmont Bondi Junction Camden Charlestown Charmhaven Eastwood Five Dock Frenchs Forest Liverpool Manly Mayfield Mosman Queanbeyan Rockdale Roseville Sutherland Tweed Heads Wyoming Narrabeen Nelson Bay Northern Rivers* Pennant Hills Penrith Australian Capital Territory Belconnen Kingston Tuggeranong Singapore Singapore Casket Company (est 1920) Simplicity Casket Company (est 2009) Lavender Street Mount Vernon Sin Ming Drive Cemeteries and Crematoria New South Wales Queensland Albany Creek Memorial Park (est 1964) Allambe Gardens Memorial Park (est 1968) Great Southern Memorial Gardens (est 1997) Mt Thompson Memorial Gardens (est 1934) Toowoomba Garden of Remembrance (est 1966) Bridgeman Downs Nerang Carbrook Holland Park Toowoomba Castlebrook Memorial Park (est 1973) Forest Lawn Memorial Park (est 1962) Lake Macquarie Memorial Park (est 1994) Lakeside Memorial Park (est 1964) Lung Po Shan Information Centre (est 2000) Newcastle Memorial Park (est 1936) Northern Suburbs Memorial Gardens and Crematorium (est 1933) Pinegrove Memorial Park (est 1962) Po Fook Shan Information Centre (est 2002) Rookwood Memorial Gardens and Crematorium (est 1925) Tweed Heads Memorial Gardens (est 1971) Rouse Hill Leppington Ryhope Dapto Haymarket Beresfield North Ryde Minchinbury Cabramatta Rookwood Necropolis Tweed Heads InvoCare Annual Report 2014 107 Tasmania North Hobart USA Macera Crematory San Diego Glossary AASB ABS ACCC AIFRS ASX Australian Accounting Standards Board Australian Bureau of Statistics Australian Competition & Consumer Commission The Australian equivalents to International Reporting Standards for annual reporting periods beginning on or after 1 January 2005 Australian Securities Exchange which is the operating brand of ASX Limited ASX Corporate Governance Principles and Recommendations The eight essential corporate governance principles and best practice recommendations of the ASX Corporate Governance Council 3rd Edition 2014 Cemetery CGU Condolence Lounge Constitution Crematorium Crypts DRP EBITDA EEO EPS A place for burials and memorialisation A cash-generating unit which is the smallest identifiable group of assets that independently generates cash inflows A facility for family and friends to gather at after the funeral service – usually offering a catering service The Constitution of the Company A place for cremations and memorialisation Above ground burial facilities Dividend reinvestment plan Earnings before interest, tax, depreciation and amortisation Equal Employment Opportunity Earnings per share Funeral Arrangement The process in which the funeral service is planned and necessary documentation prepared Funeral Home The InvoCare location where a funeral can be arranged and where some services can be conducted Memorial or Memorialisation The physical marker or tribute to the life of the deceased Memorial Park WH&S Operating Earnings Prepaid Cemetery and Crematorium Services An InvoCare location offering cremation, burial and memorialisation services Work Health and Safety Earnings before the net gain/(loss) on undelivered prepaid contracts, asset sales gains/ (losses), minority interests and any other unusual items as disclosed in the relevant reconciliations. Cemetery and crematorium services that have been arranged and paid for in advance Prepaid Funeral Fund The fund where prepaid funeral monies are held in trust until the funeral service is provided Volume A term that refers to the number of funeral services, burials and cremations performed 108 Personal details guide For the benefit of our stakeholders, this guide enables you to record important personal information. This will assist your family and funeral director to make arrangements ensuring everything is conducted in accordance with your wishes. Should you require assistance in completing it or further copies of the guide for other family members, please call Guardian Plan on Freecall 1 800 PRE PLAN (1 800 772 7526) Personal Information Family name Address Date of birth Place of birth (Town/City/State/Country) If born overseas, year arrived in Australia Occupation during working life Given names Postcode Female Male Name and Address of Person Who I Would Like to Make Any Arrangements (For instance, registering the death and contacting the funeral director, e.g. executor, solicitor, family member) Name Address Funeral Director (Funeral director you would like to conduct your service) Name Address Next of Kin This information is needed when the death is registered. Name Address Executor of My Will Executor will need certain financial information when applying for grant of probate. Name Address Telephone Telephone Telephone Telephone Postcode Postcode Postcode Postcode Copy of My Will Date of Will Deposited with (Name and Address) Solicitor Name Address Family Doctor Name Address Personal Documents Birth Certificate Location Marriage Certificate Location Telephone Telephone Postcode Postcode Medicare Card Card number (to be returned to Medicare office) Centrelink Pension Number Type of pension Veterans’ Affairs Number Passport Name shown on passport (Passport should be returned to passport office in your area, details at local Post Office) Passport number Expiry date Driver Licence Number State of issue Club or association memberships (Should be returned to appropriate organisation. It may be that a claim can be made for unexpired memberships or mortality fund benefit.) Family Details Father’s surname Usual occupation Mother’s maiden surname Usual occupation Spouse surname First names First names First names Marriage Details (Please tick appropriate box(es)) Married Divorced Separated Widowed Never married De facto Details of Marriage(s) First marriage (Place/City/Town/Country) Age at date of marriage Name of spouse (at date of marriage) Second marriage (if applicable) (Place/City/Town/Country) Age at date of marriage Name of spouse (at date of marriage) Children’s Details (List all children in order of date of birth, including legally adopted, deceased (D), still born (SB), or if no children write “none”.) First name First name First name First name Date of birth Date of birth Date of birth Date of birth Female Female Female Female Male Male Male Male Financial Information (Information below may be required by the executor of your Will.) Bank account details Bank name Account numbers Bank branch Location of documents, books, statements Building society/Financial institution Building society/Financial institution name Account numbers Address Income tax records Tax File Number Location of records Deeds of property Property address(es) Location of records Mortgage details Location of records Lender Reference number Address of lender Life insurance policies Location of records Superannuation Details Stocks and shares Location of records Safe deposit box Box location/number Location of keys Accountant Name Telephone Address Postcode Car details Registration number and state Registration document location Location of purchase receipt/H.P. details Military Information (If applicable) Branch of service Date entered service Date of discharge Grade, rank or rating Wars/Conflicts served Service serial number Place Place Additional Information Historical information Every individual is deserving of a meaningful obituary written in their memory. It is here that you may list those achievements and accomplishments that have been of pride to you and your family that are not mentioned elsewhere in your “Personal details guide”. Education Name of primary school Date attended from Name of secondary school Date attended from Name of tertiary institution Date attended from Qualifications attained to to to Societies/Clubs Memberships and positions held (include dates) Other (including civic or public office held) Special achievements (details of any special achievements or recognitions) Medical History This information is very important for your spouse, children and grandchildren. It is also suggested that you keep an updated copy of your medical records for your family, as doctors often ask for it. Special Instructions and Information We suggest that you use these lines to keep our information current. We also recommend that you always date these entries to avoid possible confusion later. Person to be notified Name Relationship Person to be notified Name Relationship Person to be notified Name Relationship Telephone Telephone Telephone Corporate Information InvoCare Limited ABN 42 096 437 393 Directors Richard Fisher (Chairman) Andrew Smith (Managing Director and Chief Executive Officer) Christine Clifton (Non-executive Director) Richard Davis (Non-executive Director) Martin Earp (Executive Director) Aliza Knox (Non-executive Director) Roger Penman (Non-executive Director) Gary Stead (Non-executive Director) Company Secretary Phillip Friery Registered Office Level 4, 153 Walker Street North Sydney NSW 2060 Telephone: 02 9978 5200 Facsimile: 02 9978 5299 Website: ww w.invocare.com.au Share Registry Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Toll free: 1300 854 911 Facsimile: 02 9287 0303 Stock Exchange Listing InvoCare Limited is a company limited by shares that is incorporated and domiciled in Australia. InvoCare Limited’s shares are listed on the Australian Securities Exchange only. ASX code is IVC. Auditors PricewaterhouseCoopers Darling Park Tower 2 201 Sussex Street Sydney NSW 1171 Solicitors Addisons Lawyers Level 12 60 Carrington Street Sydney NSW 2000 Anthony Harper Lawyers Level 15, Chorus House 66 Wyndham Street Auckland New Zealand Bankers Australia and New Zealand Banking Group Limited 242 Pitt Street Sydney NSW 2000 ANZ Bank New Zealand Limited ANZ Centre 23–29 Albert Street Auckland New Zealand Commonwealth Bank of Australia 201 Sussex Street Sydney NSW 2000 HSBC Bank Australia Limited 580 George Street Sydney NSW 2000 The Hongkong and Shanghai Banking Corporation 1 Queen Street Auckland New Zealand Westpac Banking Corporation 275 Kent Street Sydney NSW 2000 Westpac New Zealand Limited 16 Takutai Square Auckland New Zealand Printing Specifications Pages 1–16 are printed on Impress Silk. Impress ensures that all virgin pulp is derived from well-managed forests and controlled sources. It is manufactured by an ISO 14001 certified mill and is Elemental Chlorine Free. Pages 16–108 are printed on ENVI Uncoated. ENVI Recycled 50/50 Uncoated contains 50% recycled fibre. It is made from elemental and process chlorine free pulp derived from sustainably managed forests and non-controversial sources. ENVI Recycled 50/50 Uncoated is certified neutral and Australian Paper is an ISO 14001 accredited mill. Designed and produced by Precinct I N V O C A R E L I M I T E D A N N U A L R E P O R T 2 0 1 4 www.invocare.com.au 

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