Invacare
Annual Report 2016

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 6 invocare.com.au 2016 Annual Report Contents 1 2 4 Performance Highlights Chairman’s Message Chief Executive Offi cer’s Review 6 Community Activities 8 Management Team 9 Financial Report 10 Director’s Report 25 Corporate Governance Statement 30 Remuneration Report 42 Auditor’s Independence Declaration 90 Director’s Declaration 91 Independent Auditor’s Report 96 Shareholder Information 97 Glossary 98 InvoCare Locations 100 Corporate Information 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.” Performance highlights By continuing an unrelenting focus on key strategies, operating earnings after tax have increased by 11.9% despite a modest 0.3% increase in the number of deaths. Revenue from external customers ($ million) Operating EBITDA ($ million) 2012 2013 2014 2015 2016 368.7 385.4 413.0 436.4 450.7 2012 2013 2014 2015 2016 93.0 95.1 101.1 105.4 112.3 Operating earnings after tax ($ million) Ordinary dividends per share (cents per share) 2012 2013 2014 2015 2016 42.5 42.5 46.2 49.4 55.2 2012 2013 2014 2015 2016 34.0 34.5 36.5 38.0 42.5 Profit after tax attributable to members ($ million) 2012 2013 2014 2015 2016 44.5 48.9 54.5 54.8 70.9 InvoCare Annual Report 2016 | 1 Chairman’s Message Investing to Protect and Grow InvoCare delivered a robust financial result for 2016 through an unrelenting focus on its proven business strategy. InvoCare’s operational strategy has enabled the Company to continue to grow in 2016 and to deliver a strong set of financial results. This has contributed to total shareholder returns (price movement plus cash dividends) since the initial public offering in late 2003 remaining above 20% compound annual growth. Operating earnings after tax grew by 11.9% to $55.2 million. The key drivers of this growth were a continued focus on case average and efficient operations, together with gains in the cost of debt following refinancing. The result was achieved despite a lower than expected level of demand and a small decline in market share. Statutory profit after tax increased by $16.1 million (to $70.9 million). This result includes asset sale gains, impairment charges and the non-cash impact of movements in the value of funds under management for prepaid contracts. The gains on prepaid funds under management resulted from the revaluation, by the independent trustees, of property investments in the Sydney market. Gains of this nature are cyclical and InvoCare remains focused on long term returns and the appropriate management of risk for these funds. The operating EBITDA to cash conversion ratio of 104% led the Board to approve a fully franked final dividend of 25.5 cents per share. Total dividends for the year amounted to 42.5 cents per share, an increase of 11.8% on 2015. The dividend payout ratio is 85% (2015: 85%) of operating earnings after tax for 2016. In February 2017, InvoCare announced 2 to the market its Protect and Grow programme to be implemented over the next four years. The approximately $200 million programme of works is focussed on investing in our existing assets in core markets to set the business up for profitable growth over the next 10 to 15 years. The programme is structured to enable the Company to continue to achieve its primary financial objective of delivering year on year operating EPS growth of 10%, with stretch targets of 12% and beyond, whilst also delivering historic levels of return on capital. The focus of the program is threefold: • Network and Brand Optimisation – delivering the right product to the customer, in the right locations at the right price; • People and Culture – greater focus on entrepreneurial ethos by encouraging local leadership; • Operational Efficiencies – capture operational benefits of scale and standardise quality of service provision. The programme will be debt funded, but the Board and management have implemented guidelines to ensure the maintenance of a strong and conservative balance sheet and a shadow investment grade rating. More detail on the funding will be disclosed in the third quarter of this year following the finalisation of Management’s work to determine the optimal approach. who has been on the Board since 2003 resigned in February 2017. On behalf of all shareholders and the Board, I would like to pay tribute to Tina’s commitment and her passionate focus on the development of InvoCare since 2003. Her positive contributions and good humour will be missed. On behalf of the Board and all shareholders I would like to express our appreciation to the InvoCare team for delivering another strong set of financial results, whilst ensuring that they also continue to provide the highest levels of customer service. Over and above their commitment to the Company’s day to day operations, our people’s involvement with the local community is impressive. The Board commends their professionalism and dedication, as well as their sense of vocation and purpose. I would also like to express the Board’s thanks to the Company’s shareholders for their continued support. That support is important as we guide and encourage InvoCare’s executive leadership in the delivery of both the financial results to shareholders, and equally importantly, care, understanding and support to the Company’s customers. Board renewal has continued and we welcome Robyn Stubbs to the Board with effect from 1 January 2017. Tina Clifton Richard Fisher Chairman Operating earnings after tax Dividends Cash conversion ratio 11.9% Operating earnings after tax increased to $55 million 11.8% Dividends for the year increased to 42.5 cents per share 104% Strong cash conversion ratio with 104% of operating EBITDA converted to cash Five-year Financials $’000 2016 2015 2014 2013 2012 Revenue from external customers 450,659 436,371 413,011 385,352 368,652 Operating EBITDA Operating EBITDA margin Operating earnings after tax 112,279 105,426 101,082 95,072 93,026 24.9% 24.2% 24.5% 24.7% 25.2% 55,233 49,366 46,192 42,498 42,479 Operating earnings per share (cents) 50.4 45.1 42.2 38.9 38.8 Profit after tax attributable to members 70,949 54,844 54,515 48,869 44,479 Earnings per share (cents) Dividend paid in respect of the financial year (cents) 64.7 42.50 50.1 38.00 49.8 36.50 44.7 34.50 40.6 34.00 Ungeared, tax free operating cash flow 117,023 102,618 104,721 105,170 86,416 Proportion of EBITDA converted to cash 104% 97% 104% 111% 93% Actual capital expenditure 30,321 22,035 26,665 19,264 18,412 Net Debt 222,927 222,093 218,862 215,057 217,136 Operating EBITDA / Net interest (times) Net debt / EBITDA (times) Funeral homes (number) Cemeteries and crematoria (number) Employees (full time equivalents) Prepaid contract sales per 100 redemptions 10.7 2.0 225 16 1,566 142 8.8 2.1 231 16 8.0 2.2 234 14 6.8 2.3 237 14 6.7 2.3 232 14 1,557 1,532 1,470 1,470 115 108 115 116 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 2016 | 3 Martin Earp Chief Executive Officer Chief Executive Officer’s Review Investing in long term value creation through the Protect and Grow programme In 2016 the business delivered a strong set of financial results and funded the preparatory work required to announce its $200 million Protect and Grow investment strategy. This programme of work was announced in February 2017 and will be rolled out over the next four years in order to deliver long term sustainable value for shareholders for the next 10 to 15 years. Summary of 2016 New Zealand InvoCare delivered strong results for financial year 2016, despite lower than expected deaths in our markets and a decline in market share. Reported profit increased 29.4% ($70.9 million), operating earnings increased by 11.9% ($55.2 million) and operating EBITDA increased by 6.5% ($122.3 million). Australia In Australia, the highlight of the result was the improvement in the Cemeteries and Crematoria division. Despite a reduction in case volume of 2.3%, the division was able to increase sales by 10.1%. This was driven by a change in organisational structure in 2015 and a concerted effort to improve collaboration and accountability. The focus on culture, as well as targeting higher value memorialisation opportunities, has driven the improvement in performance. The funeral business experienced lower than anticipated demand, but a combination of focusing on case average and cost control, delivered a strong result for the division with operating EBITDA of $98.3 million, up 6.1% on the previous year. Singapore The business in Singapore improved its operating EBITDA 2% year on year to SG$8.4 million. Strong competition targeting the business’ lower yielding customers saw a drop in market share from 10.2% to 9.5%. However, the retention of the higher yielding customers meant sales were up 3.9%. Singapore remains an attractive market due to the business’ strong brand proposition; the excellent central business district location of our facility; and a high performing operations team. In 2017 our intention is to upgrade the existing location to capitalise on these features and to meet demand by creating more space for revenue generating activities. This will entail closing the primary location for three months during the second half of the year which will impact performance for 2017. 4 This business had a difficult year, driven in part by a decline of 2.8% in the number of deaths. This, combined with some market share reduction, saw sales decline by 1.2%. Careful cost control, along with improved performance from the Christchurch memorial parks, mitigated the impact and overall operating EBITDA increased by 2.4% (NZ$9.6 million). The small size of the market (5,578 InvoCare cases in 2016) means it will always be more volatile than Australia, but management is focused on increasing market share and case average, whilst positioning the cost base to better accommodate fluctuations in demand. USA An increased focus on volume resulted in sales improving 60% and an EBITDA improvement of 19.8% (loss US$2.3 million). Despite this performance, management determined that the business was unlikely to reach viability by mid-2018 within the capital parameters set to explore the opportunity. A decision was made in February 2017 to close the US funeral business, although the Macera Crematory will remain operational. Pillars of Growth InvoCare has created long term sustainable value for shareholders over many years by focusing on the key pillars of growth, which remain fundamental to the business’ performance. Deaths The long term trend in the number of deaths remains positive due to an increasing and ageing population. However, this year growth in the number of deaths was less than expected at 0.3%. We anticipate growth will revert to the long term average of 1.5% in 2017, and will continue to increase year on year to 2034. Market Share Overall market share for the group was down by 77bps. There are many contributing factors to this decline but the key issue is that the needs of the customer are changing. InvoCare must address and cater for these changes and this is the impetus behind the development of the Protect and Grow investment programme. We will refresh and enhance our product offering to meet the changing market and the needs of our customers and, at the same time, seek to entrench our competitive advantages. Funeral Case Average Funeral case average continued to increase in line with expectations, with an increase of 4% year on year. The value proposition of the business remains competitive and this is demonstrated by strong Net Promoter Scores. It is anticipated that with an increasing range of products and services being demanded by the customer, case average will continue to increase at historic rates and remain a core driver of value creation into the future. Operational Efficiency InvoCare has continued to focus on working more efficiently and pleasingly, operating margins improved by 70bps to 24.9%. Overall operating expenses increased by 2.4%, with non-sales personnel costs increasing by 4.6%, the lowest increase in more than five years. Looking forward, InvoCare will invest in systems to achieve continued improvements in efficiencies, as well as focus on more sophisticated procurement practices. Acquisitions & Greenfield Developments During the year InvoCare conducted a thorough review of its markets as part of its network and brand optimisation programme. While the business was undertaking this analysis it deliberately placed acquisitions and new greenfield developments on hold to ensure they were consistent with the longer term strategy of investment for each region. Prepaid Funerals Prepaid funerals secure future market share and revenue and it is pleasing to report a strong result in 2016. The number of contracts sold increased by 25%, which was driven by decentralising the leadership of the sales team; a targeted marketing campaign; and changes to the pension assets test. In addition, the undelivered prepaid contracts funds under management increased by 12% to $473 million, underpinned by revaluations of the property investments within the Over Fifty Guardian Friendly Society. Protect and Grow Last year I wrote about investing today for future returns. The focus for 2016 has been on undertaking the detailed planning required to successfully implement a programme of investment to set the business up for long-term value creation. Considerable time and effort has been spent to understand the needs of our customers and future demographics in core markets; to conduct detailed competitor analysis for each of the regional markets in which we operate; as well as to ascertain the investment required to improve the efficiency of our operations. This culminated in the announcement in February of our $200 million Protect and Grow programme to be rolled out over the next four years. This investment programme is divided into three distinct categories: 1. Network and Brand Optimisation (‘NBO’) 2. Operational Efficiency 3. People and Culture Network and Brand Optimisation The objective of this programme of work is to deliver the right product; to operate in the right locations; and to offer product at the right price. The capital investment for this work aims to optimise the current asset base in order to underpin growth for the business for the next decade. This first part of the programme is divided into two distinct areas: • Refresh and Enhance – to provide a more contemporary look and feel, whilst also meeting the customers’ needs for a “one-stop-shop”. The high quality full service funeral locations (hubs), will be served by a network of “satellite” shopfronts that will drive utilisation of the enhanced full service locations. The key deliverable for 2017 will be to refresh 22 sites, substantively enhance two sites and commence work on a further 22 sites. • Growth – the market analysis highlighted the opportunity for new sites to be established within the current network. These opportunities include both full service and satellite locations. Work will commence on establishing these greenfield developments in 2017 and continue through to 2020. This organic growth is complementary to InvoCare’s traditional acquisition strategy, work on which will resume following the NBO review. Operational Efficiencies The key objectives of this category of the Protect and Grow programme are to capture the benefits of InvoCare’s scale and to standardise the quality of service provision across the group. This will enable the business to operate more efficiently and to procure more effectively. To this end, we will invest in upgraded operational centres, business systems and processes, all of which will ensure the business is well-positioned to cope with the increased levels of demand forecast over the next 15 or more years. The key deliverables for 2017 are to finalise the scope for the replacement business system; agree the implementation timetable; and commence implementation. The second key deliverable is to complete the design of standalone operational centres and identify the optimal locations for regional operational centres. People and Culture The primary objective of this part of the Protect and Grow programme is to engender an entrepreneurial ethos in the organisation, commencing with measures to empower and encourage local leadership. We aim to develop a culture that draws on the core company values (Collaboration, Accountability, Responsiveness and Excellence) to deliver both customer needs and investor returns. In 2017 a review will be completed of the existing culture and a tailored culture programme rolled out to the broader business. InvoCare will also complete its regional manager restructure with a focus on geographic regions rather than brands. This has required the appointment of regional managers that are both commercial and culturally aligned. The business will closely monitor net promoter scores, levels of collaboration, as well as the traditional financial metrics to monitor and determine the success of the culture initiative. Outlook The four pillars of growth that underpin the InvoCare business remain fundamental to achieving long term growth and returns for our stakeholders. The work undertaken by the management team in 2016 has clearly affirmed this view. However, it has also identified significant potential within that framework to increase market share from our substantial scale and assets; to achieve operational efficiencies; and to better and more productively deploy our capital. Implementing our Protect and Grow programme is the means by which we will realise this potential. Bringing a strong focus to the way in which and the means by which we serve our customers, in the areas delineated by the programme, will positively impact the group’s financial performance. We believe market conditions in the near to mid-term will be favourable with the growth in deaths anticipated to revert to the forecast growth trend line. The initial stages of the programme are expected to stabilise market share in 2017 and improve it in 2018. Indications are that case averages are expected to grow in line with historic increases and the programme’s focus on operational efficiencies will generate near- term productivity gains. The combination of these factors should lead to high single digit growth for EBITDA in 2017, with EPS growth being mid- single digits. The EPS result takes into account the increase in interest costs and depreciation in 2017 due to the additional investment under the Protect and Grow programme. In the longer term it is expected the programme will deliver double digit EPS growth. InvoCare Annual Report 2016 | 5 Bringing 33 Australians home to rest InvoCare was privileged in 2016 to support one of the largest repatriations in Australia’s history when 33 deceased servicemen and their dependants, who had been buried in military cemeteries in Malaysia and Singapore during the Vietnam War, were finally returned home. Of the 521 Australians who were killed in Vietnam or died of wounds sustained in the war, 496 were buried back home in Australia. However, 25 had been interred abroad, as the military rules at that time meant that families were required to cover the cost of repatriation themselves, and some couldn’t afford to do so. In 2016 the Australian Government agreed to fund the repatriation of these servicemen and their dependants. InvoCare immediately offered the Department of Veteran Affairs its full support and expertise, which was gratefully accepted, and InvoCare was entrusted to assist in all stages of this complex operation, which became known as Project Reunite. The repatriation of 33 Australians was an exercise to bring closure to the family and friends of the 25 soldiers and eight dependents who had died during the Vietnam War nearly 50 years ago. They were finally returned home to rest in peace near their loved ones. Participating in this monumental exercise fully captured the spirit of the InvoCare team and demonstrated the core values of Collaboration, Accountability, Responsiveness and Excellence (CARE). On 2 June 2016, two Royal Australian Air Force C-17A Globemasters bearing the returning Australians who had been interred at the Terendak Military Cemetery in Malaysia and the Kranji Cemetery in Singapore finally landed at RAAF Base Richmond in Sydney. Each serviceman and dependant had been placed in a specially-designed coffin, crafted from local timbers, and draped with the Australian flag. His Excellency Governor- General Peter Cosgrove and family, friends and former colleagues of the deceased attended the ramp ceremony, which was conducted with full military honours by Defence Force personnel from Australia’s Federation Guard. 6 This was then followed by a moving and emotional private memorial service for the families of the deceased. The scale of the operation was clearly seen as a 1km funeral cortege consisting of 33 InvoCare black hearses then slowly travelled 50kms in convoy from Richmond Airbase to the InvoCare Operations Centre at Lidcombe under a full police escort. The streets were lined with people paying their respects to those who had made the ultimate sacrifice to serve their country in Vietnam. The InvoCare team also coordinated and assisted with the reinternment arrangements at cemeteries across Australia and the repatriation of one serviceman abroad to the United Kingdom. Throughout our involvement the company was committed to ensuring that the last stages of the 33 Australians’ long journey home were conducted safely, respectfully and peacefully. Many people within the InvoCare team volunteered their time, effort and expertise; not only on the day and in the months beforehand, but also in the weeks after, as the deceased made their way to their final resting places. The InvoCare support was provided at no cost to the families or to the Australian Government. Instead, it gave the team a sense of immense honour and pride to be the only company that could have provided such expertise and assistance. It showed what can be achieved to bring some solace and closure to so many families, through simply working as one team and living the CARE values. Share the Dignity for homeless women As most people prepared to celebrate the festive season with loved ones in 2016, more than 50,000 Australian women and teenage girls found themselves homeless, sleeping rough, or taking refuge in shelters. 55% of these women were in this situation as a result of fleeing domestic abuse in their homes. InvoCare’s funeral brands White Lady and Mareena Purslowe decided to make a difference by extending their partnership with Share the Dignity to support the It’s in the Bag Christmas campaign. The campaign follows the well-received sanitary drives initiated by Share the Dignity founder, Rochelle Courtenay. It aims to give women and girls doing it tough at Christmas a reason to smile and feel cared for, as well as restoring some dignity by providing them with handbags filled with essential hygiene products they desperately need, as well as a few little treats. The White Lady Funerals and Mareena Purslowe Funerals locations acted as a collection point in the lead up to Christmas. The InvoCare teams got fully behind the campaign and collected more than 9,500 handbags full of items that would be gratefully received by a homeless woman at any time of the year. These included things such as pads, tampons, deodorants, toothpaste, shower gel, socks, a brush, a magazine, anything that would make a woman or teenage girl who’s struggling feel special. Individuals donating bags were also encouraged to put a thoughtful note into the bag, to show these women that someone cares and that they matter. The donations reached thousands of women at a difficult time. Celebrating at the InvoCare Awards The inaugural InvoCare Awards were held in 2016 and again in March 2017 to celebrate those employees who went above and beyond to achieve their business goals and also for living the InvoCare values of Collaboration, Accountability, Responsiveness and Excellence. Each year awards are presented in 12 categories which cover Funerals, Cemeteries and Crematoria and the CARE Awards. More than 150 employees were invited to the 2016 InvoCare Awards and included three finalists in each category – the people who have excelled in providing the best possible experience for their client families. The overall winners were presented with their Awards by the Chief Executive Office Martin Earp and Board Directors Joycelyn Morton and Richard Davis. Every day InvoCare employees do amazing things for their customers, it’s often the little things that make a difference and at the InvoCare Awards the team are recognised for excelling in each category. It’s a great example of the business building on a culture which is based on people who support each other and put the customer at the heart of everything they do. InvoCare Annual Report 2016 | 7 1 3 4 5 6 7 8 2 9 Martin Earp Chief Executive Officer (1), Josée Lemoine Chief Financial Officer (2), Lachlan Sheldon Group Executive Capital Management (3), Graeme Rhind Chairman InvoCare New Zealand (4), Wee Leng Goh Chief Executive Officer Singapore (5), Steve Nobbs Group Executive Network & Brand Optimisation (6), Fergus Kelly Chief Marketing Officer (7), Keiron Humbler Group Executive Business Operations (8), Greg Bisset Chief Operating Officer InvoCare Australia (9) Management Team The InvoCare management team deploy operational excellence and technical insights to deliver the best results for the business, customers and stakeholders. CEO Martin Earp also announced a key to success will be a greater focus on the entrepreneurial ethos by encouraging local leadership. In 2016, this saw the implementation of a regional manager structure based on geographic regions rather than by brands, with leaders appointed that are commercial and culturally aligned. Set for success 2016 saw the appointment of Josée Lemoine to Chief Financial Officer after Phillip Friery began a planned transition from being involved in the business on a day to day basis but continuing his involvement as Company Secretary and adviser to the CEO on strategic projects. Phillip’s counsel, leadership and expertise have been paramount to the group’s ability to deliver consistently high returns to its shareholders. Josée joined InvoCare in September after recently working with Telstra as Director of Innovation and Business Performance. She has had a finance career spanning several blue chip companies across multiple industries, with a clear focus on driving businesses to deliver commercial outcomes. Steve Nobbs also joined the team in 2016 as Group Executive, Network & Brand Optimisation (NBO). As part of the Protect and Grow strategy, he will be responsible for the NBO programme of work to deliver the right product, to the right locations at the right price. These appointments were made to ensure the leadership would continue to deliver on the current operational requirements and set the business up for long term sustainable growth. 8 Financial Report InvoCare Limited and Controlled Entities Annual Financial Report for the financial year ended 31 December 2016 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 2, 40 Miller 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 23 February 2017. 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 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 Independent Auditor’s Report Notes to the Financial Statements Note 1 Note 2 Note 3 Note 4 Note 5 Note 6 Note 7 Note 8 Note 9 Note 10 Note 11 Note 12 Note 13 Note 14 Note 15 Note 16 Note 17 Note 18 Note 19 Note 20 Note 21 Note 22 Note 23 Note 24 Summary of Significant Accounting Policies Financial Risk Management Segment Information Revenue from Continuing Operations Expenses Income Tax Key Management Personnel Disclosures Share-based Payments Remuneration of Auditors Dividends Earnings per Share Cash and Cash Equivalents Trade and Other Receivables Inventories Prepaid Contracts Interests in Other Entities: Subsidiaries Interests in Other Entities: Associates Property, Plant and Equipment Intangible Assets Derivative Financial Instruments Trade and Other Payables Borrowings Provisions for Employee Benefits Current Liabilities expected to be settled in twelve months Contributed Equity Reserves and Retained Profits Non-controlling Interests Capital and Leasing Commitments Business Combinations Contingent Liabilities and Contingent Assets Cash Flow Information Deed of Cross Guarantee Events after the Balance Sheet Date Related Party Transactions Parent Entity Financial Information Economic Dependence Critical Accounting Estimates and Judgements Company Details Authorisation of the Financial Report Note 25 Note 26 Note 27 Note 28 Note 29 Note 30 Note 31 Note 32 Note 33 Note 34 Note 35 Note 36 Note 37 Note 38 Note 39 Directors’ Declaration 10 25 30 42 43 44 45 46 47 91 48 54 61 62 63 64 66 67 68 69 69 70 70 70 71 72 73 74 76 77 77 77 78 78 79 81 82 82 83 83 84 85 87 87 88 89 89 89 89 90 InvoCare Annual Report 2016 | 9 Directors’ Report The directors submit their report on the consolidated entity consisting of InvoCare Limited (the “Company”) and the entities it controlled at 31 December 2016. 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) Martin Earp Christine Clifton Richard Davis Joycelyn Morton Gary Stead Robyn Stubbs was appointed as an independent Non-executive Director on 1 January 2017 and is a Director at the date of this report. 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 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 $55,233,000 (2015: $49,366,000) as reconciled on page 11. The consolidated after tax profit of the Group attributable to shareholders was $70,949,000 (2015: $54,844,000). 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 25.50 cents per share payable on 7 April 2017. Total full year dividends are 42.50 cents, being 4.50 cents or 11.8% higher than 2015. The full year dividend payout ratio is 85% (2015: 85%) of operating earnings after tax. Dividends to ordinary shareholders of the Company have been paid or recommended as follows: Interim ordinary dividend of 17.00 cents (2015: 15.75 cents) per fully paid share paid on 7 October 2016 Final ordinary dividend of 25.50 cents (2015: 22.25 cents) per fully paid share has been recommended by directors on 23 February 2017 to be paid on 7 April 2017 Total ordinary dividends of 42.50 cents (2015: 38.0 cents) All dividends are fully franked at the company tax rate of 30%. 2016 $’000 2015 $’000 18,706 17,330 28,058 24,482 46,764 41,812 The Dividend Reinvestment Plan (“DRP”) was available for the 2016 interim dividend and $16,842,000 (2015: $14,855,000) was paid in cash and $1,863,000 (2015: $2,475,000) through the issue of 134,327 (2015: 226,049) shares purchased on market at $13.87 (2015: $10.95) per share via the DRP. The shortfall in the DRP take-up was not underwritten in 2016 and shares were not issued at a discount. The DRP will apply to the final 2016 dividend, which is not being underwritten and no discount to the market price will apply. 10 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 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 losses after tax (i) Impairment (loss)/gain after tax (i) Non-controlling interest 2016 $’000 2015 $’000 450,659 436,371 10,175 9,570 (348,555) (340,515) 112,279 24.9% (21,335) (13,555) 964 (79) 78,274 (23,041) 29.4% 55,233 105,426 24.2% (20,180) (14,786) 722 (70) 71,112 (21,746) 30.6% 49,366 Change $’000’s 14,288 605 (8,040) 6,853 (1,155) 1,231 242 (9) 7,162 (1,295) 5,867 50.4 cents 45.1 cents 5.3 cents 16,050 (124) (111) (99) 5,269 (6) 340 (125) 10,781 (118) (451) 26 Net profit after tax attributable to ordinary equity holders of InvoCare 70,949 54,844 16,105 Basic earnings per share Diluted earnings per share Interim ordinary dividend per share Final ordinary dividend per share Total ordinary dividend per share (i) Non-IFRS financial information. 64.7 cents 50.1 cents 14.6 cents 64.6 cents 50.1 cents 14.5 cents 17.00 cents 15.75 cents 1.25 cents 25.50 cents 22.25 cents 3.25 cents 42.50 cents 38.00 cents 4.50 cents % 3.3% 6.3% (2.4%) 6.5% 0.8% (5.7%) 8.3% 33.5% (12.9%) 10.1% (6.0%) (1.2%) 11.9% 11.8% 29.4% 29.1% 28.9% 7.9% 14.6% 11.8% Operating EBITDA and operating earnings are financial measures that 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 above 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 2016 | 11 Directors’ Report continued Business model Results overview InvoCare’s business model is based upon earnings growth from the following pillars: Comparable business operating earnings after tax for 2016 was up by 9.6% or $5.1 million to $53.6 million on 2015. • Annual sales revenue growth from: о Ageing population trends with an approximate 1% annual increase in deaths; о Consistent annual 3-4% pricing increments; о 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. Most pillars contributed positively to 2016 results as depicted in the following table. More detail is provided throughout this report, including in the Outlook section on page 20. Favourable demographics Pricing / average contract values Market share improvements Prepaid contracts New locations/business acquisitions - Operating leverage improvement Including the start-up USA operations and acquisitions in New Zealand, operating earnings after tax for the total Group was up by 11.9% or $5.8 million to $55.2 million (2015: $49.4 million). Statutory reported profit after tax for the comparable business was up 26.1% or $15.4 million to $74.5 million (2015: $59.1 million). The total Group reported profit after tax was up 29.4% or $16.1 million to $70.9 million (2015: $54.8 million). Reported after tax profits were impacted by increased gains on undelivered prepaid contract than the previous year. Total Group sales revenue was up 3.3% or $14.3 million to $450.7 million (2015: $436.4 million). The increase was due to a combination of higher average contract values, increased memorialisation sales in the cemeteries and crematoria, contributions from new businesses and favourable currency movements. Overall numbers of deaths in InvoCare’s core markets increased by approximately 0.8% compared to 2015. Small market share losses were detected in most markets owing to significant competition from smaller operators. Comparable Group EBITDA was up $5.7 million or 5.2% to $114.9 million (2015: $108.8 million). The foreshadowed negative EBITDA for the start-up USA operation of USD2.3 million (or AUD3.1 million), offset by $0.5 million from acquisitions, resulted in total Group EBITDA increasing by 6.5% or $6.9 million to $112.3 million (2015: $105.4 million). As a percentage of sales, comparable EBITDA margins improved from 25.1% in 2015 to 25.7% in 2016. Most of this improvement occurred in the second half where margins rose from 27.3% in 2015 to 28.1%. By comparison, first half margins increased 0.3% from 22.7% in 2015 to 23.0%. Cash flows remained strong for the year. Ungeared, tax free operating cash flow was 104% of EBITDA (2015: 97%), underpinning the ability to pay a fully franked final dividend of 25.50 cents per share, which is 3.25 cents up on last year. This is in addition to the 17.00 cent interim dividend paid in October 2016, taking total dividends declared for the year to 42.50 cents (2015: 38.00 cents). 12 Directors’ Report continuedSales, EBITDA, margins and major profit & loss line items The following table summarises sales revenue, EBITDA and margins by country segments. 1H16 $’000 1H15 $’000 Var % 2H16 $’000 2H15 $’000 Var % FY16 $’000 FY15 $’000 Var % Sales Revenue Australia New Zealand Singapore 184,581 178,124 20,050 21,326 8,386 8,169 Comparable business 213,017 207,619 USA & Acquisitions 1,492 498 3.6% (6.0%) 2.7% 2.6% 202,745 196,234 23,021 22,665 8,850 8,356 234,616 227,255 1,534 999 3.3% 1.6% 5.9% 3.2% 387,326 374,358 43,071 17,236 43,991 16,525 447,633 434,874 3,026 1,497 3.5% (2.1%) 4.3% 2.9% Total EBITDA Australia New Zealand Singapore Comparable business USA & Acquisitions Total Margin on sales Australia New Zealand Singapore Comparable business USA & Acquisitions Total 214,509 208,117 3.1% 236,150 228,254 3.5% 450,659 436,371 3.3% 56,635 52,610 41,617 40,029 3,464 3,899 48,980 (1,708) 47,272 22.5% 17.3% 46.5% 23.0% 3,144 3,909 47,082 (1,907) 45,175 22.5% 14.7% 47.9% 22.7% 4.0% 10.2% (0.3%) 4.0% 4,977 4,257 65,869 (862) 4.6% 65,007 - 2.6% (1.4%) 0.3% 27.9% 21.2% 48.1% 28.1% 5,377 4,062 62,049 (1,798) 60,251 26.8% 23.7% 48.6% 27.3% 7.7% (7.4%) 4.8% 6.2% 98,252 92,639 8,441 8,156 8,521 7,971 114,849 109,131 (2,570) (3,705) 6.1% (0.9%) 2.3% 5.2% 7.9% 112,279 105,426 6.5% 1.1% (2.5%) (0.5%) 0.8% 25.4% 19.4% 47.3% 25.7% 24.7% 19.4% 48.2% 25.1% 0.7% - (0.9%) 0.6% 22.0% 21.7% 0.3% 27.5% 26.4% 1.1% 24.9% 24.2% 0.7% The following table shows the EBITDA performance of the business by halves, discussed in the following sections of the report. 1 H16 $’000 1 H15 $’000 Var % 2 H16 $’000 2 H15 $’000 Var % FY 16 $’000 FY 15 $’000 Var % Total – all lines of business Sales Revenue Other revenue Expenses: Cost of goods sold Personnel 214,509 208,117 3.1% 236,150 228,254 4,787 3,792 26.2% 5,388 5,778 (60,011) (60,347) (75,263) (69,685) Advertising & promotions (8,731) (8,497) Occupancy & facility expenses (14,325) (14,236) Motor vehicle expenses Other expenses Operating expenses Operating EBITDA Operating margin % (3,785) (9,909) (4,159) (9,810) (172,024) (166,734) 47,272 45,175 22.0% 21.7% 0.6% (8.0%) (2.8%) (0.6%) 9.0% (1.0%) (3.2%) 4.6% 0.3% (67,014) (65,098) (75,495) (72,646) (7,799) (8,218) (14,129) (13,919) (4,096) (7,998) (4,665) (9,235) (176,531) (173,781) 65,007 60,251 27.5% 26.4% 3.5% (6.7%) (2.9%) (3.9%) 5.1% (1.5%) 12.2% 13.4% (1.6%) 7.9% 1.1% 450,659 436,371 10,175 9,570 3.3% 6.3% (127,025) (125,445) (150,758) (142,331) (16,530) (16,715) (28,454) (28,155) (7,881) (8,824) (17,907) (19,045) (348,555) (340,515) 112,279 105,426 24.9% 24.2% (1.3%) (5.9%) 1.1% (1.1%) 10.7% 6.0% (2.4%) 6.5% 0.8% InvoCare Annual Report 2016 | 13 Directors’ Report continued A summary of the comparable business operating EBITDA by major income statement line item by halves is presented in the following table. 1 H16 $’000 1 H15 $’000 Var % 2 H16 $’000 2 H15 $’000 Var % FY 16 $’000 FY 15 $’000 Var % Total – all lines of business Sales Revenue Other revenue Expenses: Cost of goods sold Personnel 213,017 207,619 4,712 3,779 (60,065) (60,251) (73,777) (68,413) Advertising & promotions (7,640) (7,828) Occupancy & facility expenses (14,113) (14,163) (3,676) (9,478) (4,114) (9,547) 2.6% 24.7% 0.3% (7.8%) 2.4% 0.4% 10.6% 0.7% Motor vehicle expenses Other expenses Operating expenses Operating EBITDA Operating margin % Number of deaths and cases (168,749) (164,316) (2.7%) (173,743) (170,925) 48,980 47,082 23.0% 22.7% 4.0% 0.3% 65,869 62,050 28.1% 27.3% 234,616 227,254 3.2% 447,633 434,873 4,996 5,721 (12.7%) 9,708 9,500 (67,142) (65,288) (74,050) (71,368) (7,049) (7,123) (13,907) (13,728) (4,014) (7,581) (4,592) (8,826) (2.8%) (3.8%) 1.0% (1.3%) 12.6% 14.1% (1.6%) 6.2% 0.8% (127,207) (125,539) (147,827) (139,781) (14,689) (14,951) (28,020) (27,891) (7,690) (8,706) (17,059) (18,373) (342,492) (335,241) 114,849 109,132 25.7% 25.1% 2.9% 2.2% (1.3%) (5.8%) 1.8% (0.5%) 11.7% 7.2% (2.2%) 5.2% 0.6% 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. Projections for New Zealand have been sourced from the latest data supplied by Statistics New Zealand. 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 Actual and Projected Calendar and Fiscal Year Deaths – New Zealand 57.5 52.5 47.5 ) 0 0 0 ’ ( 14 42.5 r e b m u N 37.5 32.5 27.5 22.5 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Actual rolling annual deaths per Statistics NZ Series 3 Trend plus/minus 5% NZ projected deaths 2016 (base)-2068 Directors’ Report continued 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 Actual and Projected Calendar and Fiscal Year Deaths – New Zealand 57.5 52.5 47.5 42.5 37.5 32.5 27.5 22.5 ) 0 0 0 ’ ( r e b m u N 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Actual rolling annual deaths per Statistics NZ Series 3 Trend plus/minus 5% NZ projected deaths 2016 (base)-2068 The table below illustrates the trends in InvoCare’s funeral case volumes over the last 24 months, clearly demonstrating how the volumes have changed from period to period. Australia New Zealand Singapore Total comparable business Total Group (incl. USA & acqns) 2016 vs 2015 2015 vs 2014 Half 1 (1.6%) (4.3%) (9.0%) (2.2%) (1.2%) Half 2 (1.8%) (4.5%) (2.7%) (2.2%) (1.5%) Full Year Half 1 (1.7%) (4.3%) (5.5%) (2.2%) (1.4%) 2.4% 3.0% 4.8% 2.5% 3.6% Half 2 0.9% (1.2%) 7.4% 0.8% 2.2% Full Year 1.6% 0.7% 6.0% 1.6% 2.8% 1. Comparable businesses in the table comprise a different mix in 2016 from 2015. The 2015 percentages are as presented in the FY2015 results presentation. Commentary on the period since 31 December 2016 is set out in the Outlook section on page 20. Sales Key components of the comparable sales movements are summarised below: • Australian funeral sales increased 1.5% or $4.3 million to $301.8 million (2015: $297.5 million). о Average revenue per funeral contract, excluding disbursements and delivered prepaid impacts, increased 4.1% (2015: 2.7%) and contributed an estimated $9.0 million to sales growth. Contributing to the average revenue were the combined effects of price increases (averaging between 3% and 4%) and strong performance in markets that have historically yielded high average revenue per contract such as Victoria. о The number of funeral services performed was down on the previous year by 1.7%. InvoCare’s market intelligence indicates that across its overall markets the number of deaths increased by approximately 0.8%. Market share losses in Queensland, New South Wales and Western Australia were mitigated to some extent by gains made in other states. Management has been actively pursuing strategies to address market share with more details provided in the Outlook section of this Directors’ Report on page 20. о The number of new prepaid funeral contracts sold for comparable Australian business increased by 24.9% on the previous year and exceeded the number of prepaid services performed by 42.0% (2015: 14.8%). Strong customer demand for prepaid funeral contracts before the new age pension entitlement rules came into effect on 1 January 2017 and an effective marketing campaign accounted for most of the increase. Prepaid funerals performed in the year were 14.3% (2015: 13.8%) of comparable at need funerals. • Australian cemeteries and crematoria sales were up 10.1% or $9.0 million to $97.7 million (2015: $88.7 million). Services performed decreased by 2.3% in line with the case volume decrease experienced by the funeral business, price increases were similar to the funeral business and memorialisation sales were strong. The net increase in the deferred revenue pool of unconstructed memorials was approximately $2.0 million (2015: $3.4 million) taking the pool to approximately $16.9 million (2015: $14.9 million) that will be constructed and included in sales revenue in future periods. New contracts added to the pool amounted to $6.0 million (2015: $7.8 million) and the InvoCare Annual Report 2016 | 15 Directors’ Report continued amount constructed and included in sales was $4.0 million (2015: $4.3 million). In addition, deferred revenue includes $46.5 million (2015: $44.0 million) of pre-sold plaques, ash containers and other miscellaneous items deliverable and recognisable in sales revenue at the customer’s future time of need. • Comparable New Zealand sales (in NZD) were down 3.1% or $1.5 million to $45.9 million (2015: $47.4 million). Case volumes were down 4.3% due to combination of a 3.0% decline in numbers of death and, minor, market share losses across InvoCare’s market in New Zealand. Funeral case averages increased 2.5%. Case averages benefited from price increases (2-3%) at the beginning of each of January and July but were impacted by customers seeking low priced offerings and wanting less service from funeral directors. In AUD New Zealand sales were down 0.2% to $44.2 million (2015: $44.3 million) which included favourable FX movements of $0.4 million. • Singapore funeral sales (in SGD) increased by 3.9% to $17.7 million (2015: $17.0 million). Case volume decrease of 5.5% was offset by a 9.5% increase in case averages driven by customer demand for high value funeral offerings. Majority of the case volume decrease stemmed from the low cost segment of the market where management made a strategic decision to not compete. In AUD Singapore sales increased 4.3% to $17.2 million (2015: $16.5 million), which included favourable FX movements of $0.1 million. • Intra-group elimination of cemeteries and crematoria sales to InvoCare owned funeral homes amounted to $12.8 million (2015: $12.4 million). • USA operations, set up in early 2015, generated revenues of US$1.4 million (A$1.9 million). Over 700 funeral cases and over 2,400 cremations were performed during the year. Funeral case averages achieved were over US$1,200 and cremation case averages achieved were over US$250. Subsequent to the balance date, a strategic decision was made to execute an orderly closure of the Group’s USA funeral operations after a detailed review of its performance to date. It is expected that the closure will cost approximately $700,000. Acquired businesses, being two cremation memorial parks in Christchurch (New Zealand) in July 2015 contributed, (in NZD), $2.2 million to sales in 2016, before the elimination on consolidation of sales of $0.9 million by the acquired Christchurch memorial parks to InvoCare owned funeral homes in Christchurch. Other revenue Other revenue increased by $0.6 million to $10.2 million (2015: $9.6 million). Other revenue mainly comprises administration fees upon initial sale of prepaid funeral contracts and trailing commissions on prepaid funds. The increase in 2016 was mainly attributable to higher administration fees on prepaid funeral contracts following the strong sales growth recorded in the year. Operating expenses and EBITDA1 Operating expenses (excluding depreciation, amortisation, acquisition related and finance costs) for the comparable operations increased $7.2 million or 2.2% to $342.5 million. Tight cost management, particularly during the second half, resulted in the Operating EBITDA1 to sales margin increasing to 25.7%, from 25.1% in 2015. The second half margin was 28.1%, compared to 27.3% in the second half of 2015. Australia recorded a strong EBITDA growth with New Zealand and Singapore businesses recording a slight EBITDA decline and growth respectively. Growth in EBITDA to sales margin was achieved in Australia and New Zealand whereas Singapore business recorded a slight decline mainly due to increased marketing expense to combat strong competition. After including expenses of the USA operation of $5.4 million and from new business acquisitions of $0.6 million, the total Group operating expenses increased by 2.4% or $8.0 million and margins improved by 0.8% to 24.9%. Favourable FX movements benefited Operating EBITDA by $0.1 million, as the NZD and SGD strengthened against the AUD. Depreciation and amortisation expenses Depreciation and amortisation expenses were up $1.1 million in 2016 to $21.3 million (2015: $20.2 million). This increase included $0.4 million associated with the USA and other acquired businesses. Finance costs Finance costs declined by $1.2 million to $13.4 million (2015: $14.8 million). Lower interest rates and expiry of some higher fixed cost swaps were the main contributors to lower debt interest. More information about the Group’s debt facilities is set out under the Capital Management section. Acquisition related costs Acquisition costs of $0.1 million were in line with those incurred in 2015. Share of associate After writing down InvoCare’s investment in online memorial associate to $nil, equity accounting of the associates losses is no longer required. The associate, in which InvoCare has a 35% interest, continues to record losses during its start-up phase. 1 Operating EBITDA is non-IFRS financial information. 16 Directors’ Report continuedUndelivered prepaid contract gains Net gains on undelivered prepaid contracts were $22.9 million (2015: $7.5 million). The current year gain comprised of a $39.4 million increase in the fair value of funds under management offset by $16.5 million growth in the future liability to deliver prepaid services. The fair value uplift of $39.4 million in funds under management was $19.6 million higher than PCP due to returns on the main Guardian Fund being impacted by positive revaluations of unlisted property investments. During the year the preneed liability was increased to progressively recognise the impact of expected price increases. This resulted in liability growth of $16.5 million which was up on last year’s $12.3 million. Please refer to the accompanying financial statements for detailed Consolidated Income Statement and Consolidated Balance Sheet impact of undelivered prepaid contract performance. Approximately 80% of InvoCare’s prepaid funds under management are with the Over Fifty Guardian Friendly Society. Asset allocations for this fund remained relatively steady over the year with strong returns delivered from direct property investments. The trustees of the Guardian fund continued to evaluate asset allocation strategies that will deliver required returns with acceptable levels of risk and volatility. This may see a further shift in asset classes should the right opportunities be identified. Asset allocations, which are being closely reviewed as equity markets remain volatile, are set out below: Equities Property Cash and fixed interest Asset sales 31 Dec 2016 % 30 June 2016 % 31 Dec 2015 % 13 32 55 15 27 58 17 26 57 Minor after tax gains and losses on asset sales were recorded in both 2016 and 2015. Impairments All of the Group’s previously impaired assets, being memorial parks and the Group’s investment in its associate, were assessed during 2016 and no change to the impairment provision was deemed necessary (2015: after tax impairment gain of $0.3 million). Income tax expense Income tax expense on reported profit was $27.8 million (2015: $26.7 million), representing an effective rate of 29.2% (2015: 32.7%). The effective rate represents a return to trend as 2014 had an effective rate of 29.3%. The major cause of the increase in 2015 was adjustments to prior periods covering a total of four years. An analysis of tax paid, based on tax residency status, for Australia and the Group is set out on the following page. InvoCare Annual Report 2016 | 17 Directors’ Report continued Profit before tax Tax at nominal rate in relevant country Increase / (decrease) due to non-temporary differences Non-deductible expenses Foreign exempt dividends Capital gains offset against previously unrecognised capital losses Impairment of financial assets Revenue tax losses not recognised Other items Increase / (decrease) due to temporary differences Depreciation and amortisation Unrealised prepaid contract funds under management gains and losses Accruals and creditors Provisions Deferred expenses Gains / (losses) on the sale of fixed assets Impairment of cemetery land Other items Income tax paid or payable Income tax paid1 Australia Group 2016 $’000 96,928 29,078 139 (837) (118) - - - 1,008 (6,357) (77) (13) (136) 205 - 367 23,259 24.0% 2015 $’000 82,553 24,766 2016 $’000 100,372 29,173 147 (1,815) - 790 - - 1,017 (1,965) 377 703 (254) (95) (1,620) 204 22,255 27.0% 176 - (118) 43 794 30 1,239 (6,357) (85) (38) (136) 190 - 433 25,344 25.2% 2015 $’000 81,715 23,669 226 - - 790 948 (132) 1,343 (1,965) 371 759 (254) (103) (1,620) 177 24,209 29.6% 1. Calculated as the total amount of income tax paid divided by the Profit before Tax. The governance of the tax functions of the Group have been delegated by the Board to the Audit, Risk & Compliance Committee who adopt a conservative approach when considering tax planning initiatives. Tax planning initiatives are not implemented until they receive approval from the Audit, Risk & Compliance Committee. Additionally, the committee receives a regular report on the Group’s tax compliance activities. The Group has a limited number of international related party arrangements in place. An Australian subsidiary receives dividends from Singapore Casket Company, which is resident in Singapore, and the New Zealand group is charged management fees based on time spent for management, administration, accounting and other services provided by the Australian operation. In addition to income tax paid the Australian group pays payroll tax, $5,716,000 in 2016 (2015: $5,533,000), fringe benefits tax, $2,264,000 in 2016 (2015: $2,701,000) and land tax on owned buildings, $3,544,000 in 2016 (2015: $3,159,000), to various state governments. Council and water rates paid to various authorities totaled $1,901,000 in 2016 (2015: $1,807,000). 18 Directors’ Report continuedCash flow highlights Net cash provided by operating activities Asset sale proceeds Asset purchases Purchase of subsidiaries and businesses Payments to funds for pre-paid contract sales Receipts from funds for pre-paid contracts performed Net cash used in investing activities Dividends paid to InvoCare shareholders Net increase in borrowings Other movements Net cash used in financing activities Net increase / (decrease) in cash during year Cash at start of year Exchange rate effects Cash at end of the year 2016 $’000 2015 $’000 78,496 4,510 (30,321) (1,270) (46,669) 39,253 (34,497) (43,188) 2,235 (123) 64,631 1,138 (22,035) (7,076) (35,338) 37,022 (26,289) (40,157) 70 (118) (41,076) (40,205) 2,923 8,679 (74) 11,528 (1,863) 10,488 54 8,679 The operating EBITDA conversion to cash ratio for the period was 104% which was up compared to the 97% achieved in 2015 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 Capital expenditure related to: Property, refurbishments and facility upgrades Motor vehicles Information Technology Other assets Total capital expenditure 2016 $’000 2015 $’000 112,279 105,426 78,496 13,233 25,319 (25) 117,023 104% 2016 $’000 11,028 6,832 7,504 4,957 64,631 14,380 23,690 (83) 102,618 97% 2015 $’000 6,446 7,320 4,322 3,947 30,321 22,035 Purchase of businesses included $1.3 million deferred purchase consideration paid in relation to historical acquisitions. Dividends paid in the year totalled $43.2 million (2015: $40.2 million), including $4.5 million (2015: $6.6 million) for the on-market purchase of shares for the dividend reinvestment plan. There were no shares required to be purchased during 2016 and 2015 by the InvoCare Deferred Employee Share Plan Trust in connection with the long-term, share-based incentives scheme. Share grants in 2016 were made using unvested, forfeited shares from prior years’ grants. Capital management At 31 December 2016, the Group had drawn down $235 million borrowings (from total $290 million debt facilities) compared to $252 million at 30 June 2016 and $232 million at 31 December 2015. Net debt at 31 December 2016 was $223 million, which compared to the balance at 30 June 2016 of $239 million and 31 December 2015 of $223 million. InvoCare Annual Report 2016 | 19 Directors’ Report continued The Group has $290 million bi-lateral, multi-currency, revolver facilities which comprise five-year tranche of $170 million, maturing in December 2018, and a five-year tranche of $120 million, maturing in December 2020. The five-year tranche maturing in December 2018 is provided in equal $42.5 million proportions by Australia and New Zealand Banking Group Limited (“ANZ”), Commonwealth Banking Group Limited (“CBA”), Westpac Banking Corporation (“Westpac”) and HSBC Bank Australia Limited (“HSBC”) or their New Zealand affiliates. The five-year tranche maturing in December 2020 is provided by ANZ ($45 million), CBA ($45 million) and HSBC ($30 million). The Group intends to renegotiate the tranche falling due in 2018 in the latter part of 2017. The current facilities’ drawings comprise AUD164.0 million, SGD27.0 million and NZD44.5 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 2016, being 1.98:1 and 10.05:1 respectively. To maintain certainty over cash flows, the Group has policies limiting exposure to interest rate fluctuations. In accordance with the policy, at balance date, 78% of Australia and New Zealand debt principal was covered by floating to fixed interest rate swaps. Due to the level of stability of Singapore interest rates and their quantum Singapore debt is not covered by interest rate swaps. The overall average effective interest rate is currently 4.6% (2015: 5.4%), inclusive of fixed rates on hedged debt, floating rates on unhedged debt, margins (based on tranche tenor and leverage – currently averaging around 150bps), undrawn commitment fees and amortisation of establishment fees. Headroom on the debt facilities of $55.0 million, and cash of $11.5 million, provide $66.5 million in available funds at 31 December 2016. This amount together with operating cash flows will provide further capacity to fund near-term growth opportunities. Outlook Re-Cap of 2015 Strategic Review During 2015, the Board reviewed the Group’s strategy and concluded that: • Business fundamentals in core markets remain strong; • Potential to drive greater operational efficiencies; • On-going opportunities for market share improvements from existing assets; • Opportunities for more efficient deployment of capital; and • Acquisition opportunities still exist in Melbourne, Adelaide and Singapore. Planning work undertaken in 2016 During 2016 the CEO and the executive team undertook detailed planning work to identify the key projects that will deliver the key strategic actions identified above. The key areas of work that have been undertaken are summarised below: • Customer – detailed research into the evolving customer needs; • Demographics – assessment of current and future demographics of core markets; • Brands – review of both InvoCare’s and Competitors brand relevance and physical product; • Network – identification of optimisation opportunities (growth, disposal and consolidation); • Operational Efficiency – assessment of current operations, identification of key areas of opportunities and detailed planning for projects that will deliver improvements; • Culture – developed clarity on key behaviours required to deliver the strategic objective of local leadership within a strong business system framework; • Organisational Structure – identification of appropriate structure to assist support the cultural objectives. 20 Directors’ Report continuedThe outlook for 2017 is for a continued improvement in the Groups operating EBITDA growth with high single digit growth anticipated for 2017. The operating EPS growth for 2017 is expected to be slightly lower due to additional costs of debt impacting in 2017, whilst the main benefits associated with the capital will start coming on line in 2018 and beyond. Total sales revenue for the month of January 2017 was up approximately 9% on January 2016, due mainly to case volume growth in all three core markets. Consistent with past practice, funeral prices were increased as planned in late 2016 and cemetery and crematoria prices are scheduled to be increased during the first quarter of 2017. The outlook for 2017 is highly dependent on the number of deaths that occur in 2017, and as has been seen in the past this can cause short-term volatility, despite the positive longer-term trend. The longer-term outlook is for continuing improvement in operating EBITDA performance and for operating EPS growth to reliably deliver double-digit growth. Significant events after the balance date Subsequent to the balance date a strategic decision was made to execute an orderly closure of the Group’s USA funeral operations after a detailed review of its performance to date. Other than this, 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. 2020 Plan: Protect and Grow The outcome of this work has been consolidated into a four year plan named “Protect and Grow” estimated to cost $200 million. The focus of this plan is to ensure that the strong operational platform developed over 20 years is maintained and improved, and that growth by acquisition is augmented by the opening of new locations within existing core markets. The Protect and Grow plan has three core programmes of work: • Network and Brand Optimisation – refresh and enhance existing facilities to better meet the evolving needs of customers, and growth through the opening of new locations within and adjacent to the existing network. • People and Culture – ensure that InvoCare provides the highest level of responsiveness to customer needs and further strengthens the culture of accountability and collaboration. In order to promote collaboration the structure of how InvoCare operates will shift to managing locations by geography rather than by brands and empowering local leaders. • Operational Efficiencies – will be driven by a major project of renewing InvoCare’s business systems and operational practices. In addition, InvoCare will invest in standalone operational centres that will ensure it is positioned to cope with the increased level of demand that will be driven by favourable demographics and increased market share. The implementation is planned to be undertaken over a four year period to allow the company to monitor the performance of the investments and make adjustments to future investments where required. It is expected that the ramp-up period for the benefits associated with these investments will be from 2018 through to 2022. The expected returns from this investment program will be consistent with what the Group has earned over previous years. Funding the 2020 Plan InvoCare has always maintained an extremely robust balance sheet with strong credit metrics that is managed within a strong financial framework and this will continue. Whilst the intention is to fund the $200m plan using a combination of operation cash flow and additional debt, the company will seek to maintain a shadow credit rating that is equivalent to that of Investment Grade. The sourcing of debt will be undertaken in two tranches. Firstly during 2017 InvoCare will increase its existing facilities to $350m (up from $290m). This will fund the initial work and provide a sensible amount of headroom to allow for opportunistic acquisitions and maintain a conservative liquidity buffer. The longer term funding requirements (2018-20) will be put in place by the end of 2017 following a review to identify the best mix of maturities, funding instruments and facility pricing. The core pillars of growth are summarised below: • Demographics – a revision to the long-term growth trend (1.5% increase in deaths per annum); • Market Share – stabilised in 2017, improving in 2018 and beyond; • Case Average – growth consistent with recent history; • Operating Expenses – continued efficiency gains; • Acquisitions / New Developments – increased activity in both new developments and acquisitions following the network and brand review. InvoCare Annual Report 2016 | 21 1 2 3 4 5 6 7 Mr Richard Fisher (1), Mr Martin Earp (2), Mr Richard Davis (3), Ms Joycelyn Morton (4), Ms Robyn Stubbs (5), Mr Gary Stead (6), Dr Christine (Tina) Clifton (7) Information on directors Mr Richard Fisher AM MEc LLB Chairman of the Board Chair of Nomination Committee Member of People, Culture & Remuneration Committee Age 67 years Appointed October 2003 Richard Fisher is General Counsel to The University of Sydney and is an Adjunct Professor in its Faculty of Law. Richard is the immediate past Chairman of Partners at Blake Dawson (now Ashurst) and specialised in corporate law. He has been a director of InvoCare Limited since 24 October 2003. He is also a director of Sydney Water. Richard is formerly a part-time Commissioner at the Australian Law Reform Commission, an International Consultant for the Asian Development Bank and a Member of the Library Council of NSW. 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: 17,914 ordinary shares in InvoCare Limited Mr Martin Earp MSc, BSc (Hons), MBA Chief Executive Officer Age 48 years Appointed April 2015 Martin Earp joined InvoCare on 30 March 2015, was appointed as a Director on 13 April 2015 and assumed the role of CEO and Managing Director on 1 May 2015. Prior to joining InvoCare Martin was the CEO of Campus Living Villages and was responsible for the strategic direction and operational leadership of the company. He worked for Transfield Holdings for over twelve years in a number of operational roles 22 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 worked for a London based transport consultancy advising on large infrastructure and investment deals. Martin holds an MBA from the Australian Graduate School of Management, a Masters in Traffic Engineering and a degree in Transportation Management and Planning. Interest in shares: 29,545 ordinary shares in InvoCare Limited / 160,313 options in InvoCare Limited Dr Christine (Tina) Clifton MB BS (Hons) BHA Non-executive Director Chair of People, Culture & Remuneration Committee Member of Audit, Risk & Compliance Committee Member of Nomination Committee Age 61 years Appointed October 2003 Tina Clifton is a registered medical practitioner. Tina has been a director of InvoCare Limited since October 2003. She has also been a Director of various public and private companies over the last 15 years. 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. Tina holds degrees in medicine and health administration and obtained a specialist qualification in medical administration. Interest in shares: 112,961 ordinary shares in InvoCare Limited Directors’ Report continuedMr Richard Davis BEc Non-executive Director Member of People, Culture & Remuneration Committee Member of Finance, Capital & Investment Committee Member of Nomination Committee Age 61 years Appointed February 2012 Mr Gary Stead BCom LLB MBA Non-executive Director Chair of Finance, Capital & Investment Committee Member of Audit, Risk & Compliance Committee Member of Nomination Committee Age 59 years Appointed September 2014 Richard Davis was appointed a non-executive director of InvoCare Ltd 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 is currently serving as Chairman of Singapore Casket Company (Private) Limited. 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 and chairman in May 2015) Monash IVF Group Limited (appointed non-executive director and chairman in June 2014) Interest in shares: 521,607 ordinary shares in InvoCare Limited Ms Joycelyn Morton BEc FCA FCPA FIPA FGIA FAICD Non-executive Director Chair of Audit, Risk & Compliance Committee Member of Finance, Capital & Investment Committee Member of Nomination Committee Age 57 years Appointed August 2015 Joycelyn Morton was appointed a director of InvoCare Limited on 19 August 2015. She has more than 37 years experience in finance and taxation having begun her career with Coopers & Lybrand (now PwC), followed by senior management roles with Woolworths Limited and global leadership roles in Australia and internationally within the Shell Group of companies. Joycelyn was National President of both CPA Australia and Professions Australia, she has served on many committees and councils in the private, government and not-for-profit sectors. Former ASX listed non-executive director roles include Crane Group Limited, Count Financial Limited, and Chair of Noni B Limited. Effective 1 January 2017 Joycelyn joined the Board of ASC Pty Ltd, Australia’s largest specialised defence shipbuilding organisation. Joycelyn holds a Bachelor of Economics from the University of Sydney. Other Public Company Directorships held in the last three years: Thorn Group Limited (appointed non-executive director in October 2011 and Chair in 2014) Argo Investments Limited (appointed non-executive director in March 2012) Argo Global Listed Infrastructure Limited (appointed non-executive director in 2015). Interest in shares: 8,205 ordinary shares in InvoCare Limited Gary Stead was appointed a non-executive director of InvoCare Limited on 1 September 2014. Gary is currently Managing Director of HPS Investment Partners, LLC based in Sydney, Australia. Prior to his current role, Gary was the Managing Director and Co-Head of Olympus Capital Asia Credit and previously founder and Managing Director of Australia-focused structured credit fund, Shearwater Capital and Chief Executive of Fortress Investment Group Australia, where he established its Australian operations in 2004. Gary’s prior experience included 13 years at Merrill Lynch, where he held various leadership positions, including Co-Head of Investment Banking in Japan, Vice Chairman of Investment Banking in Australia, and Head of Mergers and Acquisitions in Australia, Asia-Pacific and Japan, following earlier roles at both Schroders in Australia and Salomon Brothers in New York. After starting his working career as a solicitor with degrees in law and commerce from the University of New South Wales, he subsequently completed an MBA at Wharton Graduate School of Business at the University of Pennsylvania before commencing a 30-year investment banking career. Interest in shares: 6,615 ordinary shares in InvoCare Limited Ms Robyn Stubbs BBus MSc GAICD Non-executive Director Age 53 years Appointed January 2017 Robyn Stubbs was appointed a director of InvoCare Limited on 1 January 2017. She has more than 25 years experience in senior marketing, sales, leasing and broader management roles with large and complex organisations, including Stockland, Ten Network, Fairfax Media, Lend Lease and Unilever. Robyn is a non-executive director of the responsible entity for ASX listed Aventus Retail Property Fund and is a Board Member of Lifeline Northern Beaches Incorporated and Harness Racing New South Wales. Robyn holds a Bachelor of Business from the University of Technology Sydney, is a graduate of The Australian Institute of Company Directors and has completed an MSc in coaching psychology from the University of Sydney. Other Public Company Directorships held in the last three years: Aventus Retail Property Fund (appointed non-executive director from 16 October 2015) Interest in shares: Nil ordinary shares in InvoCare Limited InvoCare Annual Report 2016 | 23 Directors’ Report continued Company Secretary Mr Phillip Friery BBus CA Phillip Friery was appointed Company Secretary in January 2007 and Chief Financial Officer in March 2007. He retired as Chief Financial Officer effective 8 September 2016. 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. 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: 51,874 ordinary shares in InvoCare Limited / 33,441 options in InvoCare Limited Chief Financial Officer Ms Josée Lemoine BCom / Chartered Professional Accountants of Canada Josée was appointed Chief Financial Officer on 8 September 2016. Josée has had a finance career spanning several blue chip companies across multiple industries and geographies, with a clear focus on driving businesses to deliver commercial outcomes. Josée’s most recent role was with Telstra, having led the Finance transformation program as part of her broader portfolio. Prior to this, Josée held senior leadership roles at Rio Tinto Alcan, Fairfax, Boral and Arnott’s. She started her career at KPMG where she worked in Canada, New Zealand and Hungary. Josée holds a Bachelor of Commerce from the Hautes Etudes Commerciales (HEC) at the University of Montréal and is a member of the Chartered Professional Accountants of Canada (formerly known as the Canadian Institute of Chartered Accountants). Interest in shares: 2,931 ordinary shares in InvoCare Limited / 14,754 options in InvoCare Limited Meetings of directors Details of the meetings attended by each director during the year ended 31 December 2016 are set below. Non-executive Directors Richard Fisher Christine Clifton Richard Davis Gary Stead Joycelyn Morton Executive Director Martin Earp A = number of meetings attended. Board Audit, Risk & Compliance Committee Finance, Capital & Investment Committee People, Culture & Remuneration Committee Nomination Committee A 11 9 11 10 11 11 B 11 11 11 11 11 11 A 6* 4 6* 6 6 6* B - 6 - 6 6 - A 6* 3* 7 7 6 7* B - - 7 7 7 - A 6 5 7 3* 6* 5* B 7 7 7 - - - A 3 2 3 3 3 - B 3 3 3 3 3 - 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. Robyn Stubbs was appointed a Director effective from 1 January 2017. 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 senior management attend Board and Committee meetings by invitation. 24 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 2016. 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: stepped down as CFO on 8 September 2016 (“CFO”) but remains Company Secretary; and • Josée Lemoine, Chief Financial Officer: effective 8 September 2016 (“CFO”). 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 Senior Executives (being the direct reports of the CEO including the 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 or senior executive, thorough background checks are undertaken to ensure that the individual has the appropriate background to hold their position with the Company. For directors, information about these checks is included in the Notice of Meeting when the individual stands for election. For senior executives, information about the checks is held by the Company Secretary. All Board members have formal letters of appointment which clearly articulate the roles, responsibilities, expectations and remuneration of directors. All senior executives have agreed formal contracts stipulating the terms of their employment including duties, obligations and conditions. Company Secretary Created in September 2016 the Company Secretary is a dedicated part-time position that 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 supported 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 released its Inclusion Policy during February of 2016, which is available on its website: www.invocare.com.au. The Inclusion Policy provides a framework that reinforces the Company’s long held commitment to diversity, with a focus on creating an inclusive organisational culture where all individuals feel respected and valued for their uniqueness. The nature of InvoCare’s businesses means that its employees come into daily contact with families from every walk of life and facet of society so a focus on inclusion makes a direct contribution to the business’s ongoing success, as well as being in line with community and stakeholder expectations. From a gender perspective, women currently comprise 43% (2015: 33%) of the Board, 36% (2015: 25%) of the group executive and 40% (2015: 35%) of Australian management. InvoCare’s current focus is on specific actions that will achieve overall gender equality at the Australian management level by the end of 2020, that is, a minimum of 45% management roles will be held by either gender. The Australian entity is a relevant employer under the terms of the Workplace Gender Equality Act. 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 2016, 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 2016 | 25 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. Senior executive evaluation After the conclusion of each financial year the CEO evaluates and documents the performance of each member of the Group Executive (senior executives including Other KMPs). The results of the achievement of targeted key performance indicators are reviewed by the People, Culture & Remuneration Committee along with market remuneration data for each role type. The Committee and the Board also review and determine each senior executive’s key performance indicators and remuneration for the ensuing year. The People, Culture & Remuneration Committee evaluate 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, the Board monitors the key performance indicators and strategic plan for the Group, at least quarterly, which provides the opportunity to more regularly evaluate the performance of senior executives outside the annual review process. 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 Senior Executives or managers attend Board and Committee meetings by invitation. At the date of this report, the composition of the Board Committees is as follows: Audit, Risk & Compliance People, Culture & Remuneration Finance, Capital & Investment Nomination Chair Chair Director Richard Fisher Christine Clifton Richard Davis Joycelyn Morton Chair Gary Stead Robyn Stubbs Nomination Committee Chair 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. 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 CEO succession planning, Board succession planning, and Board and committees’ performance appraisals. In 2014, the Committee assisted the Board in making the decision not to renew the former CEO’s contract at the end of its term on 30 April 2015. Martin Earp was appointed as CEO following an external search conducted with the Committee’s oversight. Although the replacement CEO was appointed as recently as 1 May 2015, there is an ongoing focus on CEO succession. In terms of Board succession planning and composition, there have been two new directors appointed in the last eighteen months. These appointments were made to provide additional expertise and / or replace the skills of departing directors. In addition, Christine Clifton has foreshadowed her intention to retire before the next Annual General Meeting. Similar Richard Fisher has advised the Board he will retire in the course of 2018. Planning for their succession is now underway. Moreover, with the appointment of Robyn Stubbs to the Board it has been possible to refresh the membership of the Board’s Committees and Robyn has been appointed to each of the People, Culture & Remuneration, the Finance, Capital & Investment and the Nominations committees. 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 26 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 focusses its search on potential candidates who complement the existing skill set of the Board. The current matrix is summarised in the following table: Business Management Legal Accounting / Finance Funeral Industry Health International Business Director / Skill Set Richard Fisher Tina Clifton Richard Davis Joycelyn Morton Gary Stead Robyn Stubbs Martin Earp Board independence Directors’ induction 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. 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. The skills, experience and expertise relevant to the position of each director and their term of office are set out starting on page 22 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 advisers 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. 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. 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. 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 and employees, 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 InvoCare Annual Report 2016 | 27 Corporate Governance Statement continued Principle 4 – Safeguard Integrity in Corporate Reporting Audit, Risk & Compliance Committee The Audit, Risk & Compliance Committee provides assistance to the Board in fulfilling its corporate governance, 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. 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, Risk & Compliance Committee. The Audit, Risk & Compliance Committee comprises three independent non-executive directors and is chaired by Joycelyn Morton. Ms Morton is an FCPA, FCA and FGIA and brings a wealth of financial and taxation experience to the Committee. Other members are Christine Clifton and Gary Stead. The number of meetings held during the year and the individual attendances at those meetings is set out in the Information on Directors section of the Directors’ Report on page 24. The external auditor met with the Audit, Risk & Compliance 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. 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 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 28 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 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, 19 May 2017 at the offices of PricewaterhouseCoopers, One International Towers, Waterman Quay, Barangaroo. Shareholders are also able to direct any questions relating to the Company’s securities to the share registry, Link Market Services Limited. Principle 7 – Recognise and Manage Risk The Board, through the Audit, Risk & Compliance Committee, reviews and oversees the Group’s risk management systems. Audit, Risk & Compliance Committee The Audit, Risk & Compliance 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 Committee does not have responsibility for strategy, which is a Board responsibility. 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 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 Directors’ Report continued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 Audit, Risk & Compliance 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 Senior Executives who are responsible for escalating these to the Audit, Risk & Compliance 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 workplace health and safety issues. These are managed and reported to the Committee by the Group Executive Business Operations. 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 Audit, Risk & Compliance Committee Charter is available on the Company’s website: www.invocare.com.au Internal control The Group maintains a register of delegated authorities, which is 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 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. Principle 8 – Remunerate Fairly and Responsibly 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 employees, and do not receive retirement benefits, bonus payments or incentive shares. Senior executive remuneration and other terms of employment are reviewed annually by the Committee, having regard to individual and Group 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, long-term incentives and fringe benefits. The Remuneration Report which begins on page 30 provides detailed information about the current remuneration practices and the levels of remuneration, including recent changes to long term incentive arrangements. 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 managers and other senior employees, such as finance team members, who have access to information that is not generally available. In addition, it applies to all 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 People, Culture & Remuneration Committee The Directors’ Report continues with the Remuneration Report. InvoCare’s remuneration policy ensures that remuneration packages properly reflect employees’ duties and responsibilities, and that remuneration is competitive in attracting, retaining and motivating people of appropriate calibre. The People, Culture & Remuneration Committee reviews and makes recommendations to the Board on senior executive remuneration and appointment and on overall Group remuneration and benefits policies. The People, Culture & Remuneration Committee comprise three independent non-executive directors with Christine Clifton as Chair and Richard Fisher and Richard Davis as members. The number of meetings held during the year and the individual attendances at those meetings is set out in the Information on Directors section of the Directors’ Report on page 24. The People, Culture & 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. InvoCare Annual Report 2016 | 29 The Remuneration Report B. Executive remuneration policy and framework The Remuneration Report summarises the key compensation policies and practices for the year ended 31 December 2016, 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. Executive remuneration policy and framework c. Relationship between remuneration and InvoCare’s performance d. Non-executive director remuneration policy e. Details of remuneration f. Service agreements g. Share-based compensation h. Use of remuneration consultants 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 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, 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 CEO’s and Senior Executives’ total remuneration is benchmarked to comparable positions in comparable size companies (taking into account sales revenue, market capitalisation and industry), with the value of the incentives included in total remuneration based on amounts that can be achieved when individual and overall Group performance targets are met. For the purposes of this report, the key management personnel (“KMP”) 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: Commencing January 2016, the Group will seek to clawback all or part of an executive’s incentives that has already been paid to ensure the executive has not been inappropriately awarded in circumstances including: Non-executive directors Richard Fisher (Chairman) Christine Clifton Richard Davis Joycelyn Morton Gary Stead Other key management personnel Martin Earp (Managing Director and Chief Executive Officer) Josée Lemoine (Chief Financial Officer from 8 September 2016) Phillip Friery (Chief Financial Officer until 8 September 2016 and Company Secretary) Greg Bisset (Chief Operating Officer Australia) Wee Leng Goh (Chief Executive Officer Singapore) Graeme Rhind (Chief Operating Officer New Zealand) A Group Executive Team (“GET”) comprising Martin Earp’s direct reports continues to operate. The Board has determined that not all members of the Group Executive Team are considered KMP, as they do not have responsibility for planning, directing and controlling a substantial part of the operations of InvoCare. Periodically changes are made to the Group Executive Team to reflect the evolving strategy and structure of the Company. The use of the term Senior Executives in this report means members of the Group Executive Team. 30 • a material misstatement or omission in the Group’s financial statements; • if actions or inactions seriously damage the Group’s reputation or put the Group at significant risk; and / or • a material abnormal occurrence results in an unintended increase in the award. In accordance with InvoCare’s Share Trading Policy, senior managers are prohibited from trading the Company’s shares other than during specified trading windows, or with approval in exceptional circumstances, provided they do not possess inside information. In addition, 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. Remuneration structure The compensation of the CEO and other Senior Executives is comprised of payments and / or allocations under the following categories: • total fixed remunerations including base salary and benefits, 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 compensation. Directors’ Report continuedThe target remuneration mix for the CEO and other KMP, as depicted in the following graph (and averaged for the other KMP), 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 – 2016 47% 24% 29% CEO – 2015 51% 28% 21% Other key management personnel – 2016 Other key management personnel – 2015 60% 60% 18% 22% 20% 20% 0% 20% 40% ■ TFR ■ STI potential ■ LTI potential 60% 80% 100% During 2016 Senior Executives and many of their direct reports were transitioned to Total Fixed Remuneration (“TFR”) rather than a “Base plus superannuation” description. The intent is to implement this, more current practice across all levels of management during 2017. No director or other key management personnel has, at 31 December 2016 or during or since the end of the financial year, had any loans to or from the Group. The CEO and Senior Executives hold options over unissued shares in the Company under the terms the LTI scheme introduced during 2016. Section G provides detail for each KMP. Short-term incentives (“STI”) STIs are awarded for achievement of pre-determined financial and non-financial objectives. For Senior Executives, the target criteria and possible bonus levels are defined each year by the People, Culture & Remuneration Committee and Board, in consultation with the CEO. For other executives, the Senior Executives determine the objectives and reward levels 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 for 2016 was up to a maximum of 51.4% of TFR for the CEO and from 24.8% up to a maximum of 44.7% for the other Senior Executives. The target criteria for Senior Executives is heavily weighted to overall financial performance, measured by EBITDA, being 50% of the potential STI opportunity for the CEO other Senior Executives, but is also tailored to the relevant circumstances of each executive. In the case of the EBITDA target 50% of the STI amount is paid when 95% or more of the target is achieved. If 100% or more of the target is achieved the STI amount is limited to 100% of the target STI. The Group seeks to reward executives for sustained outperformance and this is reflected in the design and vesting arrangements in the LTI Plan, as well as an increased weighting to LTI incentive opportunities from 2016. In summary, the criteria used to determine short-term bonuses for Senior Executive 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; and • other operational targets specific to the particular role including items like ERP implementation or decrease employee initiated turnover by 10% in Australia. 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, for example these objectives include key performance indicators such as average revenue per case, sales of prepaid contracts, the management of labour costs, client survey results and debtors’ days outstanding. 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. The People, Culture & Remuneration Committee considers that STI bonuses are awarded for achievement of key performance criteria for a particular financial year, without payment for outperformance, 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, provides incentive for outperformance over the longer term, encourages executives to remain employed with the Group, and ensures alignment with shareholder interests. Long-term incentives (“LTI”) During 2015 the People, Culture & Remuneration Committee reviewed the design and operation of the LTI arrangements. As a consequence, a new LTI plan was introduced from January 2016 to eligible participants. It is referred to as the Performance Long Term Incentive Plan (PLTIP) and is aimed at attracting, rewarding and retaining high performing executives who contribute to the overall medium and long term success of InvoCare. Key features of the PLTIP: • participants will be restricted to the CEO, the other Senior Executives, operational General Managers and selected high performing or high potential senior managers by invitation and as approved by the Board; • • the awards are performance shares rights (“PSRs”) or options; there is a return on capital gateway before any awards meeting performance conditions will vest; • no dividends will be paid on unvested awards; and • there will be no voting rights. For offshore employees participating in the PLTIP, any vested awards may be settled in cash instead of equity. 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 (“Deferred Shares”), or, in the case of foreign managers who may not be able to participate in Australian share offers, share equivalents (“Deferred Rights”). No consideration is payable by the employee for the DESP offer, but they are subject to continuous service and, for senior management, performance conditions. Deferred Shares are purchased on-market and hence the DESP is operated on a non-dilutive basis. Share equivalents for offshore employees are settled in cash. Participants in the PLTIP are not eligible for grants under the existing DESP. This existing plan will be retained and continue for remaining participants and, at the CEO’s discretion, future participants. From January 2016, awards under the DESP will vest subject to continuous service only and recognise the contribution of primarily middle level managers over time through the granting of modest amounts of equity. InvoCare Annual Report 2016 | 31 Remuneration report continued 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. finance costs and after deducting tax) divided by the average invested capital during the year (being the average of the beginning and end of year balances of total assets less surplus cash less non- interest bearing liabilities). “Normalised earnings” means reported profit as adjusted: A tiered arrangement by level applies to offers under the PLTIP: • CEO – of the maximum LTI award, 75% is in options and 25% in PSRs; • • to remove the impacts of any gains or losses arising from the sale, disposal or impairment of non-current assets; to maintain consistency in accounting policies across the respective vesting periods for each grant; and • for PLTIP awards from February 2016: о to reflect constant currency; and о to remove impacts of non-cash movements in prepaid contracts and associated funds under management. In the case of the CEO, CFO and Group Executive Capital Management, the non-cash movements for Guardian Plan prepaid contracts and funds under management will be included in the EPS figure utilised in calculating vesting for PLTIP. Compound growth per annum of normalised EPS 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 and analysis by the Board. As part of the review of LTI arrangements during 2015, the People, Culture & Remuneration Committee re-affirmed the appropriateness of the EPS absolute measure, including by comparison to the commonly used Total Shareholder Return (“TSR”) relative metric. The reasons for this conclusion include: • • • • InvoCare is a stable business without a true comparator peer or group to benchmark performance against within Australia; 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, together with the introduction of a ROIC gateway, more closely reflects management performance and success in incrementally creating value through good decision making and sustained and improving performance over time. Subject to the ROIC gateway condition, the EPS performance conditions applying for PLTIP awards in 2016 and 2017 are as set out below: • GET Participants – 75% in options and 25% in PSRs; and • Other Participants – 50% in options and 50% in PSRs. The value of LTI award offered in 2016 was up to a maximum of 60% of TFR for the CEO and up to a maximum 41.3% for the other Senior Executives. The number of PSRs was calculated at the date of issue by dividing the value of LTI to be awarded in PSRs by the face value of an InvoCare share. The face value is based on the 10-day VWAP for InvoCare shares starting from the first day of the Trading Window immediately following the announcement of the full-year result. The number of options was calculated based upon the value of LTI to be awarded in options divided by the option valuation at the award date. This option value was determined by an independent actuary using a Black Scholes valuation methodology. The valuation for allocation excludes dividends and does not incorporate any discount relating to the performance and tenure conditions. Under the DESP, the number of Deferred Shares or Deferred Rights is calculated by dividing the value of the LTI award by the on-market acquisition cost of InvoCare shares on the 10-day VWAP at the date of the grant if sufficient shares are available in the trust to satisfy the grant. Vesting of the LTI awards under the PLTIP and DESP will be in three equal tranches in February of each of the second, third and fourth subsequent years after the year of offer. This is to allow for the impact that the number of deaths has on the Group’s annual result, which is outside the control of management particularly given the fixed cost nature of the business. Vesting of the first LTI tranche two years out from the initial grant, in part compensates for the fact STIs are capped and there is no additional reward for short term outperformance. Over the longer term, sustained levels of short- term outperformance should translate into higher LTI rewards. Upon vesting of Deferred Shares under the DESP, the employee has the discretion to leave the Deferred Shares in trust, withdraw or sell any number of them. Upon vesting of Deferred Rights under the DESP, the employee will be paid in cash an amount equivalent to the number of vested Deferred Rights multiplied by the value of those rights derived by reference to the market value of InvoCare shares. Upon vesting of PSRs under the PLTIP, the employee will be provided with InvoCare shares, satisfied either by a new issue or by on-market purchase. In the case of vested options, the exercise period is from the date of grant until 10th anniversary of the grant (eg for 2016 awards the end of option life will be February 2026). Both schemes use the compound growth per annum in normalised Earnings per Share (“EPS”) over the vesting period. However, a ‘gateway’ condition must be met before any PLTIP awards can vest. The gateway requires a minimum level of Return on Invested Capital (“ROIC”) greater that the Weight Average Cost of Capital (“WACC”). This is a safety net to ensure that capital is being employed efficiently and earnings growth is translating to shareholder value. ROIC is defined as the annual operating earnings (excluding net 32 Directors’ Report continued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% 86% plus 1.4% for each 0.1% EPS over 11% 72% plus 1.4% for each 0.1% EPS over 10% 58% plus 1.4% for each 0.1% EPS over 9% 44% plus 1.4% for each 0.1% EPS over 8% 30% plus 1.4% for each 0.1% EPS over 7% Nil For DESP grants made in 2015, 2014 and 2012 the EPS performance vesting conditions are: 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 For DESP grants made in 2013 the EPS performance vesting conditions are: 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 If the compound EPS growth performance conditions are not met at the vesting date, the unvested LTI awards 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 awards at the fifth anniversary of the grant are automatically forfeited. To receive 100% of the LTI awards, 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. In general, should a participant cease employment as a result of resignation or termination in circumstances the Board determines as related to their performance, all unvested equity awards held by the participant will lapse. In exceptional circumstances, the Board has the discretion to determine the extent to which all or part of any unvested equity may vest and the specific performance testing to be applied. In circumstances where a termination is for reasons including retirement, death, total and permanent disablement, and bona fide redundancy, the Board may, at its sole discretion, allow all or part of the unvested equity awards to continue on foot and vest subject to the original terms and performance and service conditions set out in the letter of offer and plan rules at the time of award. In the event of a change in control or other circumstances where the Board determines it is not practical or appropriate for the unvested equity to continue on foot, the Board has the discretion to determine the extent to which all or part of any unvested equity may vest and the specific performance testing to be applied. If no determination is made by the Board, all equity awards held by the participant will lapse upon termination of employment. The Board has the discretion to determine that any LTI benefit payable in the above termination circumstances can be settled in cash. The following table summarises the performance to date for the grants made since 2012 which impact remuneration in the current or a future financial year. InvoCare Annual Report 2016 | 33 Remuneration report continued LTI share grant year Target annual compound normalised EPS growth from 1 January of grant year Normalised EPS on 1 January of grant year 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 2016 7% to 12% 49.8 cents 2017 7% to 12% 61.6 cents Performance condition testing date and vesting outcome February 2014 – 39% of the first 1/3rd tranche vested February 2015 – 100% vesting of second and unvested first tranches February 2016 – 91% vesting of third 1/3rd tranche vested February 2017 – 100% of all unvested shares vest February 2015 – 100% of first 1/3rd tranche vested February 2016 – 54% of second 1/3rd tranche vested February 2017 – 100% vesting of third tranche and unvested second tranche shares February 2018 – not required February 2016 – 100% of first 1/3rd tranche vested February 2017 – 100% of second 1/3rd tranche vested February 2018 – to be determined February 2019 (if required) February 2017 – 100% of first 1/3rd tranche vested February 2018 – to be determined February 2019 – to be determined February 2020 (if required) February 2018 – to be determined February 2019 – to be determined February 2020 – to be determined February 2021 (if required) February 2019 – to be determined February 2020 – to be determined February 2021 – to be determined February 2022 (if required) Future offers of LTI awards may be made at the discretion of the Board and the service and performance conditions for any future offers may vary from previous LTI offers. Further details of LTI awards are set out under the heading “G. Share-based Compensation”. C. 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 an annualised 21.3% return for shareholders between listing in December 2003 and the end of 2016. As depicted by the following graph, the growth of an investment of $1 in InvoCare at listing exceeds the ASX200 growth over that period. Growth of $1 in IVC with all dividends reinvested vs ASX 200 accumulation index Since IVC listing December 2003 IVC with divs reinvested ASX 200 Accumulation index $14.00 $12.00 $10.00 1 $ n o n r u t e R $8.00 $6.00 $4.00 $2.00 $0.00 34 3 0 0 2 - c e D 4 0 0 2 - r p A 4 0 0 2 - p e S 5 0 0 2 - b e F 5 0 0 2 - l u J 5 0 0 2 - c e D 6 0 0 2 - y a M 6 0 0 2 - t c O 7 0 0 2 - r a M 7 0 0 2 - g u A 8 0 0 2 - n a J 8 0 0 2 - n u J 8 0 0 2 - v o N 9 0 0 2 - r p A 9 0 0 2 - p e S 0 1 0 2 - b e F 0 1 0 2 - l u J 0 1 0 2 - c e D 1 1 0 2 - y a M 1 1 0 2 - t c O 2 1 0 2 - r a M 2 1 0 2 - g u A 3 1 0 2 - n a J 3 1 0 2 - n u J 3 1 0 2 - v o N 4 1 0 2 - r p A 4 1 0 2 - p e S 5 1 0 2 - b e F 5 1 0 2 - l u J 5 1 0 2 - c e D 6 1 0 2 - r p A 6 1 0 2 - p e S Directors’ Report continued Based upon achievements in 2016, the People, Culture & Remuneration Committee determined the CEO and Senior Executives achieved an average 80% of their target STI opportunity. 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 Martin Earp Josée Lemoine Phillip Friery Greg Bisset Wee Leng Goh Graeme Rhind Average Cash STI bonus Payable % Forfeited % 92 88 88 65 83 39 80 8 12 12 35 17 61 20 The following factors were among those considered by the People, Culture & Remuneration Committee in making its assessment on the achievement of the STI opportunity: • EBITDA; • Key operational projects; • Market share; • New business acquisitions; and • Culture initiatives. When assessing the non-numeric targets the Board had the benefit of a detailed review undertaken by Executive Governance. In addition to STI, upon satisfying service and performance conditions, the Senior Executives also received the benefit of the vesting of LTI awards made in prior years. Further details are set out on page 40 under the heading “G. Share-based Compensation”. The table below shows measures of the Group’s financial performance over the last five years, including those required by the Corporations Act 2001. However, these are not necessarily consistent with the measures used in determining the at-risk incentive components of Senior Executives’ remuneration. As a consequence, there may not always be a direct correlation between the statutory key performance measures and the variable remuneration awarded. Reported profit after tax Basic earnings per share Operating earnings after tax – note 1 Normal dividends Normal dividends per share Dividend payout of operating earnings Total return per share – note 2 Total shareholder return – note 2 Share price – 31 December 2016 $70.9m 64.7¢ $55.2m $46.5m 39.3¢ 85% $2.25 20% $13.87 2015 $54.8m 50.1¢ $49.4m $40.2m 38.0¢ 85% $0.28 2% $12.01 2014 $54.5m 49.8¢ $46.2m $40.1m 36.5¢ 95% $1.41 13% $12.10 2013 $48.9m 44.7¢ $42.5m $37.9m 34.5¢ 90% $2.60 30% $11.04 2012 $44.5m 40.6¢ $42.5m $37.4m 34.0¢ 88% $1.39 18% $8.78 1. Operating earnings after tax is a financial measure, which is 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. 2. 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. D. Non-executive director remuneration policy Non-executive directors 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 $1,250,000, being the amount approved by shareholders at the Annual General Meeting held on 22 May 2015. InvoCare Annual Report 2016 | 35 Remuneration report continued This remuneration of the non-executive directors is determined by the Board. During the 2016 financial year, annual fees for non-executive directors were $264,000 for the Chairman of the Board and $132,000 for each of the other non-executive directors with an additional $11,000 for the Chairman of the Audit, Risk & Compliance Committee. Using market information, the Board has determined 2017 fees will be increased to $270,600 for the Chairman and $135,300 for each of the other non-executive directors. The Chair of the Audit, Risk & Compliance Committee will be paid an additional annual fee of $11,275 for the additional work associated with the Committee. The aggregate of these fees is below the current pool limit. 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 2016 and 31 December 2015 other than Richard Davis who received $8,624 in 2015. 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 DESP or PLTIP on a fee sacrifice basis. No shares or options have been issued or allocated to non-executive directors under either 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, with the exception of Robyn Stubbs who was appointed on 1 January 2017, have equity interests in the Company meeting this requirement. Directors’ equity holdings are set out under the heading “Information on directors” starting on page 22 of the Directors’ Report and in Note 7: “Key Management Personnel Disclosures” on page 66 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. 36 Directors’ Report continuedE. 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 employee benefits Cash salary or fee Note 1 Short- term cash bonus Note 2 Non- monetary benefits Notes 3 Post employment benefits Other long-term benefits Share-based payments Super- annuation Note 4 Long service leave Note 5 LTI shares at risk Note 6 LTI shares forfeited Note 7 Total Statutory Remuneration Note 8 Executives’ Actual Remuneration Note 9 Non-executive directors Year $ 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 Richard Fisher (Chairman) Christine Clifton Richard Davis Aliza Knox (resigned 31 August 2015) Joycelyn Morton (appointed 19 August 2015) Roger Penman (resigned 15 December 2015) Gary Stead (appointed 01 September 2014) Executive directors Martin Earp (appointed 30 March 2015) Andrew Smith (note 12) (contract ended 30 April 2015) Phillip Friery Greg Bisset Josée Lemoine Wee Leng Goh (note 10) Graeme Rhind (note 11) 2016 2015 2016 2015 2016 2015 2016 2015 2016 $ - - - - - - - - - - - - - - $ - - - - - - - - - - - - - - $ 22,904 20,041 11,452 10,932 11,452 10,932 - - 12,406 4,034 - - 11,452 10,932 $ - - - - - - - - - - - - - - $ - - - - - - - - - - - - - - 241,096 210,959 120,548 115,068 120,548 115,068 - 84,000 130,594 42,464 - 34,125 120,548 115,068 $ - - - - - - - - - - - - - - - - - - $ $ 264,000 231,000 132,000 126,000 132,000 126,000 - 84,000 143,000 46,498 - 34,125 132,000 126,000 1,567,593 1,259,146 1,001,071 920,067 - - 560,879 1,612,326 764,991 405,211 55,170 26,941 5,351 309,929 572,739 295,326 26,531 22,730 2,630 81,115 - - - - - - 2015 231,756 44,072 12,409 8,667 4,419 259,556 Other key management personnel 306,510 120,097 35,730 17,877 14,222 138,695 - 633,131 561,952 369,123 158,636 35,801 19,205 8,507 104,351 (128,636) 566,987 701,518 389,297 125,704 26,723 30,001 12,987 166,832 751,544 689,546 361,581 168,612 27,393 30,003 12,447 136,291 (108,700) 627,627 779,967 139,499 66,428 7,298 8,651 680 29,652 - - - - 274,704 50,679 5,790 14,573 259,579 56,343 5,753 14,481 223,544 35,417 20,339 11,376 - - - - - 91,006 - - - 252,208 217,894 - - 436,752 403,290 68,358 (81,827) 322,687 416,251 93,861 - 384,537 336,357 2015 232,993 13,451 13,305 12,978 - 51,791 - 324,518 335,041 InvoCare Annual Report 2016 | 37 Remuneration report continued Notes to Remuneration Table: 1. The total cost of fees and salary, including annual leave taken and the increase or decrease in the annual leave provision applicable to that individual. 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 on page 35. 3. The cost to the Company, including any fringe benefits tax, for the provision of fully maintained cars, and other items. 4. Contributions to superannuation. 5. Long service leave accruals in accordance with relevant Australian Accounting Standards. 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. 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, leave entitlements 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, including termination benefits. 10. Wee Leng Goh, Chief Executive Officer of Singapore Casket Company, received total remuneration of SG$448,630 (2015:SG$333,563), which has been converted to Australian dollars at the average exchange rate for the year of 0.9556 (2015: 0.9676). 11. Graeme Rhind, Chief Operating Officer of New Zealand, received total remuneration of NZ$410,455 (2015:NZ$349,514), which has been converted to Australian dollars at the average exchange rate for the year of 0.9618 (2015: 0.9284). 12. Andrew Smith stepped down as Chief Executive Officer on 30 April 2015 and is therefore no longer a KMP. F. Service Agreements Chief Executive Officer Remuneration and other terms of employment for the CEO, Martin Earp, have been formalised in a service agreement, which may be updated from time to time. The service agreement specifies that employment commenced on 30 March 2015, the role of CEO was assumed on 1 May 2015 and, subject to agreement to extend the term, the contract ends on 30 March 2018. The agreement 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 2017 provides for Martin Earp’s remuneration as follows: • Total fixed remuneration (i.e. annual base salary, superannuation and motor vehicle) of $867,825 (“TFR”); • Short-term incentive bonus of up to $446,062, being 51.4% TFR; and • LTI award under the PLTIP to the value of $520,695, being 60.0% of TFR. The STI opportunity will be subject to key performance conditions and weightings as follows: • EBITDA achievement (65% weighting) – with no STI earned until 95% of EBITDA budget is achieved at which level 50% of STI is payable, with no further payment until 100% budget achievement; • Culture programme roll out (15% weighting) – assessed by external consultant review of success; and • 2017 Network and Brand Optimisation roll out (20% weighting) The Board intends seeking the approval of shareholders at the next AGM for the CEO’s LTI awards. The People, Culture & Remuneration Committee and Board have the discretion to provide additional performance incentives. Further details of the share-based remuneration are set out in Section G – Share-based Compensation. Former Chief Executive At the Annual General Meeting held on 20 May 2016, shareholders approved the cash settlement of long-term incentive shares subject to the satisfaction of the original vesting attaching to those rights. Accordingly, Mr Smith was paid a total of $157,000 before tax during 2016 for the shares that would have otherwise vested and the STI approved at the same meeting. 38 Directors’ Report continuedThe relevant tests have been applied to the unvested grants that existed and a further 16,893 units will vest on 23 February 2017. Using the closing share price on 31 December 2016 that total value of the payment would be approximately $234,000. There are a further 24,257 shares to be tested with 16,698 to be tested in February 2018 and 7,559 in February 2019. Other Senior Executives Remuneration and other terms of employment for each of the other Senior Executives are formalised in service agreements or letters of appointment as varied from time to time. The senior executives’ total remuneration package is reviewed annually by the People, Culture & Remuneration Committee and Board and provides for remuneration to include: • TFR; • short-term incentive bonus averaging 42% of TFR with no retesting to recover any previous year shortfall; and • LTI awards averaging 38% of TFR. Termination Arrangements for Senior Executives Up to six months’ notice or payment in lieu of notice is generally required in the event of termination by the company. The company 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. Termination benefits are limited to statutory leave entitlements, unless determined otherwise by the People, Culture & Remuneration Committee and Board. Unless the Board exercises its discretion, upon termination for any reason, unvested LTI awards will be forfeited. The Board proposes putting a resolution dealing with termination benefit arrangements to shareholders at the next AGM. The approval sought will cover the following items: • payment in lieu of notice of termination under individual executive contracts of employment; • the cash component of STI awards, at the Board’s discretion where the termination was not “for cause”; • at the discretion of the Board where the termination is due to retirement, death, total and permanent disability and bona fide redundancy, the option to allow LTI awards to remain on foot and be tested in line with the rules established at the time of grant; and • superannuation benefits. Except for the CEO who is not subject to any post-employment restraints, other Senior Executives are generally subject to post- employment restrictions for up to twelve months after employment termination without consideration paid for the restraint. 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. InvoCare Annual Report 2016 | 39 Remuneration report continued G. Share-based Compensation Details of the LTI share and LTI share rights grants, vesting and forfeits for the Chief Executive Officer and other key management personnel are set out below. Martin Earp Phillip Friery Josée Lemoine Greg Bisset Wee Leng Goh Graeme Rhind Year of grant Final year vesting may occur (note1) Number of shares or rights granted Value at grant date (note 2) Number vested during year Total number vested Vested % 2015 2016 2012 2013 2014 2015 2016 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2020 2021 2017 2018 2019 2020 2021 2021 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 2017 2018 2019 2020 2021 17,410 10,617 8,098 9,617 9,483 8,079 6,644 2,931 16,088 12,212 12,044 10,260 7,457 5,081 4,124 4,607 4,074 4,155 4,536 3,464 4,011 3,422 2,858 $239,200 $128,250 $64,334 $105,140 $107,768 $111,001 $80,258 $35,410 $127,803 $133,525 $136,863 $140,969 $90,079 $39,432 $45,075 $52,336 $55,977 $49,259 $35,199 $37,862 $45,565 $47,018 $35,238 - - 2,452 1,715 3,161 - - - 4,871 2,177 4,014 - - 1,537 735 1,374 - - 1,373 617 1,140 - - - - 7,850 4,921 3,161 - - - 15,596 6,248 4,014 - - 4,925 2,109 1,374 - - 4,397 1,771 1,140 - - - - 97% 51% 33% - - - 97% 51% 33% - - 97% 51% 33% - - 97% 51% 33% - - Maximum value yet to vest (note 3) $239,200 $137,702 $1,970 $51,327 $71,818 $111,001 $86,173 $38,015 $3,914 $65,186 $91,221 $140,969 $96,717 $2,797 $33,890 $48,696 $57,375 $51,794 $2,371 $27,917 $40,896 $47,245 $38,398 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 2016 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 2016 and the 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 2016 and for the 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. 40 Directors’ Report continuedDetails of the LTI options grants, vesting and forfeits for the Chief Executive Officer and other key management personnel are set out below. Martin Earp Phillip Friery Josée Lemoine Greg Bisset Wee Leng Goh Graeme Rhind Year of grant Final year vesting may occur (note1) Number of options granted Value at grant date (note 2) Number vested during year Total number vested Vested % 2016 2016 2016 2016 2016 2016 2021 2021 2021 2021 2021 2021 160,313 $384,750 33,441 14,754 37,533 20,946 14,416 $80,258 $35,410 $90,079 $49,259 $35,238 - - - - - - - - - - - - - - - - - - Maximum value yet to vest (note 3) $537,049 $112,027 $49,426 $125,736 $67,771 $49,933 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 2016 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 the 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 2016 and for the 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. 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 67. H. Use of remuneration consultants During the year, the People, Culture & Remuneration Committee requested support from external consultants to provide remuneration benchmarks for selected Senior Executives and to understand best practice principles for remuneration report writing. This advice did not constitute a “remuneration recommendation” as defined in the Corporations Act 2001 (Cth). 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 66. Australian Firm Assurance services Taxation services Other services Non-Australian Firms Taxation services Other services Total $ 26,350 51,250 69,500 63,763 17,144 228,007 Indemnifying officers or auditor Auditor’s Independence Declaration 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. The copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 42. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial / Directors’ Reports) Instrument 2016/191, 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 instrument. Signed in accordance with a resolution of the Board of Directors. 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 2016: Richard Fisher Director Martin Earp Director Dated this 23rd day of February 2017 InvoCare Annual Report 2016 | 41 Auditor’s Independence Declaration As lead auditor for the audit of InvoCare Limited for the year ended 31 December 2016, 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 23 February 2017 PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 DX 77 Sydney, Australia T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 42 Consolidated Income Statement For the year ended 31 December 2016 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 and amortisation expenses Intangible assets impairment charge Cemetery land impairment reversal Financial assets impairment charge Finance costs Interest income Net gain on undelivered prepaid contracts Acquisition related costs 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 2016 $’000 460,834 (127,025) (121,961) 2015 $’000 445,941 (125,445) (115,446) 5 5 5 5 5 15 6 (28,797) (16,530) (28,454) (7,881) (17,907) 112,279 (21,335) (154) - - (13,555) 964 22,928 (79) (676) 100,372 (29,324) 71,048 71,048 70,949 99 71,048 (26,885) (16,715) (28,155) (8,824) (19,045) 105,426 (20,180) - 5,400 (2,635) (14,786) 722 7,527 (70) 312 81,716 (26,747) 54,969 54,969 54,844 125 54,969 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) 11 11 64.7 64.6 50.1 50.1 The above Consolidated Income Statement should be read in conjunction with the accompanying notes. InvoCare Annual Report 2016 | 43 Consolidated Statement of Comprehensive Income For the year ended 31 December 2016 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 26 26 2016 $’000 71,048 2015 $’000 54,969 1,048 1,083 2,131 73,179 73,080 99 73,179 1,179 (551) 628 55,597 55,472 125 55,597 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 44 Consolidated Balance Sheet For the year ended 31 December 2016 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 Deferred selling costs Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables 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. Notes 2016 $’000 2015 $’000 12 13 14 15 18 (c) 13 18 15 19 21 20 15 23 21 22 20 6 (d) 15 23 25 26 26 27 11,528 48,556 25,738 39,260 2,704 1,536 129,322 8,679 41,139 24,451 35,066 3,499 1,299 114,133 27,976 22,881 4 332,008 433,796 152,495 9,590 955,869 4 322,248 387,218 152,751 9,374 894,476 1,085,191 1,008,609 44,671 966 9,935 37,595 10,243 14,511 39,313 1,130 10,111 34,954 8,660 14,318 117,921 108,486 91 234,455 1,774 41,062 400,433 52,216 3,029 733,060 850,981 234,210 134,914 7,344 90,815 233,073 1,137 174 230,772 3,062 36,420 373,494 50,457 2,306 696,685 805,171 203,438 133,694 5,529 63,054 202,277 1,161 234,210 203,438 InvoCare Annual Report 2016 | 45 Consolidated Statement of Changes in Equity For the year ended 31 December 2016 Attributable to Owners of InvoCare Limited Balance at 1 January 2016 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 Transfer of shares from the deferred plan to the InvoCare Exempt Share Plan Trust Employee shares – value of services Balance at 31 December 2016 Balance at 1 January 2015 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 Transfer of shares from the deferred plan to the InvoCare Exempt Share Plan Trust Employee shares – value of services Balance at 31 December 2015 10 26 25 26 10 26 25 26 Notes Contributed equity $’000 133,694 Retained profits $’000 Non controlling interests $’000 Total Total equity $’000 63,054 202,277 1,161 203,438 70,949 73,080 99 73,179 Reserves $’000 5,529 2,131 - (43,188) (43,188) (123) (43,311) - - 866 (866) - - - - 354 550 90,815 233,073 48,367 186,805 - 550 7,344 6,756 628 54,844 55,472 - - - - 354 550 1,137 1,154 125 234,210 187,959 55,597 354 - 134,914 131,682 - - - (40,157) (40,157) (118) (40,275) 1,684 (1,684) 328 - 133,694 - (171) 5,529 - - - - 328 (171) - - - - 328 (171) 63,054 202,277 1,161 203,438 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 46 Consolidated Statement of Cash Flows For the year ended 31 December 2016 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 Cash flows from investing activities Proceeds from sale of property, plant and equipment 31 Purchase of subsidiaries and other businesses including acquisition costs, net of cash acquired Purchase of property, plant and equipment Payments to funds for pre-paid contract sales Receipts from funds for pre-paid contracts performed Net cash outflow from investing activities Cash flows from financing activities 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 12 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. Notes 2016 $’000 2015 $’000 508,492 489,769 (400,828) (395,007) 9,359 117,023 25 (13,233) (25,319) 78,496 4,510 (1,270) (30,321) (46,669) 39,253 (34,497) 84,735 (82,500) (43,188) (123) 7,856 102,618 83 (14,380) (23,690) 64,631 1,138 (7,076) (22,035) (35,338) 37,022 (26,289) 45,023 (44,953) (40,157) (118) (41,076) (40,205) 2,923 8,679 (74) 11,528 (1,863) 10,488 54 8,679 InvoCare Annual Report 2016 | 47 Notes to the Consolidated Financial Statements For the year ended 31 December 2016 Note 1: Summary of Significant Accounting Policies consistency with the policies adopted by the Group. 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 The consolidated financial statements and notes of InvoCare Limited also comply with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). (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 IFRS 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 2016 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 48 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. These trusts are 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 entites 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 intially being recognised at cost. The Group’s share of its associates’ post-acquisition profits or losses and its share of post-acqusition 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 recognise 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. (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 Note 1: Summary of Significant Accounting Policies continued (d) Foreign currency translation continued 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 in other comprehensive income. 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 recognised in other comprehensive income. 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. 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 (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. (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. 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. 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 InvoCare Annual Report 2016 | 49 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 1: Summary of Significant Accounting Policies continued (i) Business combinations and acquisitions of assets Continued 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 depreciation or 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 Twelve 50 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. (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. 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: Note 1: Summary of Significant Accounting Policies continued • hedges of the risks associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges); or (o) Property, plant and equipment continued • Buildings 40 years • Plant and equipment 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. (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 Twelve 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 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. 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. 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, 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 InvoCare Annual Report 2016 | 51 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 1: Summary of Significant Accounting Policies continued any, is recognised in the statement of comprehensive income with a corresponding adjustment to equity. (t) Employee benefits continued (u) Contributed equity 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. (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 corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. (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. Cash settled share based payments are valued at each reporting date using a Black Scholes valuation technique. Increases or decreases in value are recorded as part of employee benefits expense. 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 52 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. (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 presented 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, are presented 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 ASIC Corporations (Rounding in Financial / Directors’ Reports) Instrument 2016/191, 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 instrument. Note 1: Summary of Significant Accounting Policies continued (aa) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2016 reporting periods. The Group’s assessments of the impacts of these new standards and interpretations are set out below. (ii) AASB 9 Financial Instruments AASB 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The standard is not applicable until 1 January 2018. After a detailed assessment, management believes that the new standard is unlikely to have a material impact on the Group’s current accounting practices. (i) AASB 15 Revenue from Contracts with Customers (iii) AASB 16 Leases AASB 16 was issued in February 2016. It will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short- term and low-value leases. The standard is not applicable until 1 January 2019 but is available for early adoption. The standard will affect primarily the accounting for the group’s operating leases. As at the reporting date, the group has non- cancellable operating lease commitments of $44,089,000. However, the group has not yet determined to what extent these commitments will result in the recognition of an asset and a liability for future payments and how this will affect the group’s profit and classification of cash flows. A preliminary analysis of AASB 15 Revenue from Contracts with Customers has been completed. This has demonstrated that with the exception of the accounting for Prepaid Contracts no other material changes are expected to result. In regards to Prepaid Contracts, given the time frame between contract inception and contract redemption, financing will be recognised on the contract liability. The objective of this being to adjust the consideration paid so that revenue is recognised at an amount that reflects the price that a customer would have paid for the services if the customer had paid cash for those services when provided. This differs from the current practice of recognising revenue at the consideration paid by the customer at contract inception. Further, costs will be recognised for providing the services as incurred unless they qualify for capitalisation as a fulfilment or acquisition cost. The Group currently recognise revenue for 10% of Prepaid Contract value at inception as compensation for the cost of marketing / preparing the contract, however, under the new standard, mobilisation and sales / marketing efforts would not qualify as a distinct service provided to the customer. As such, the revenue will be deferred until the service is provided. Certain of the associated mobilisation and fulfilment costs may be allowed to be capitalised. The Group is continuing its analysis of the changes to enable the expected financial impacts to be quantified. InvoCare Annual Report 2016 | 53 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 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 Audit, Risk & Compliance Committee, which operate under policies approved by the Board, is 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 2016 $’000 11,528 68,277 2015 $’000 8,679 55,759 473,056 422,284 4 4 552,865 486,726 43,965 234,455 2,740 281,160 39,487 230,772 4,192 274,451 * excluding prepayments and security deposits / ^ excluding unamortised balance of compensation received in relation to a leased premises (a) Market risk (i) Cash flow and fair value 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. The broad policy of the Group to keep 75% of debt, measured by individual currency, on fixed interest rates over the next twelve months by entering into interest rate swap contracts. The policy, however, provides flexibility to reduce the level of coverage in low interest rate currency or when the interest rate outlook is relatively benign. 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 4.64% (2015: 5.38%) inclusive of swaps and margins but excluding establishment fees. At balance date, interest rate swaps for 71% (2015: 64%) of borrowings were in place. Of these interest rate swaps 28% (2015: 19%) were denominated in New Zealand dollar fixed interest instruments, with the balance denominated in Australian dollars. As at 31 December 2016 the weighted average fixed interest rate payable on the interest rate swaps is 3.45% (2015: 4.38%) and the weighted average variable rate receivable as at 31 December 2016 is 1.85% (2015: 2.44%). The following variable rate borrowings and interest rate swap contracts are outstanding: 31 December 2016 31 December 2015 Weighted average interest rate Balance $’000 Weighted average interest rate Balance $’000 Bank loans Interest rate swaps (notional principal) Net exposure to cash flow interest rate risk 4.64% 3.45% 235,181 166,787 401,968 5.38% 4.38% 238,819 148,124 386,943 54 Note 2: Financial Risk Management continued (a) Market risk continued (i) Cash flow and fair value 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 Four to five years 2016 $’000 60,000 31,191 30,000 75,596 30,000 2015 $’000 60,000 60,000 28,110 30,000 30,000 226,787 208,110 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 (2015: 100 basis points) and 50 basis points in Singapore (2015: 50 basis points) in the interest rate would result in additional interest expense after tax of $415,000 (2015: $395,000). A decrease of 100 basis points in Australian and New Zealand rates (2015: 100 basis points) and 50 basis points in Singapore (2015: 50 basis points) in the interest rate would result in an after tax gain of $415,000 (2015: $395,000). 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 2016 and the movements in the fair value of these instruments have been quarantined in equity. If interest rates decline by 100 basis points (2015: 100 basis points) a further $1,144,000 (2015: $1,179,000) 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 $1,144,000 (2015: $1,179,000) net of tax. The overall impact on the Group has been summarised on page 60. The Group’s cash and cash equivalents held in Australia are interest bearing. At 31 December 2016 the weighted average interest rate was 0.00% (2015: 0.67%). If interest rates changed by 100 basis points (2015: 100 basis points) the Group’s after tax result would increase or decrease by $53,000 (2015: $44,000). (ii) Foreign exchange risk The Group rarely undertakes significant 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. The Group’s exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows: New Zealand Dollars Singapore Dollars New Zealand Dollars Singapore Dollars Borrowings Derivatives 53,381 1,132 25,800 - 41,696 1,126 26,136 - 2016 $’000 2015 $’000 InvoCare Annual Report 2016 | 55 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 2: Financial Risk Management continued (a) Market risk continued (ii) Foreign exchange risk continued The Group has no significant unhedged foreign exchange exposures at 31 December 2016. 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. (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 income is 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 2016 and 31 December 2015 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 2016 31 December 2015 Increase Decrease Increase Decrease 6,150 4,541 - 10,691 (6,150) (4,541) - (10,691) 7,179 3,294 - 10,473 (7,179) (3,294) - 10,473 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 that are closer to the end of their expected life take a more conservation 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 2016 % 13 32 55 2015 % 17 26 57 Approximately 85% 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. 56 Note 2: Financial Risk Management continued (b) Credit risk continued (i) Impaired receivables The total amount of the provision for doubtful receivables was $2,281,000 (2015: $2,268,000). As at 31 December 2016, receivables with a nominal value of $2,945,000 (2015: $3,050,000) 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 2016, trade receivables of $11,928,000 (2015: $8,745,000) 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 (iii) Other receivables 2016 $’000 6,163 8,711 2015 $’000 4,365 4,381 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: InvoCare Annual Report 2016 | 57 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 2: Financial Risk Management continued (c) Liquidity risk continued Finance facilities available Unrestricted access was available at balance date to the following lines of credit: Total facilities - 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 2016 $’000 2015 $’000 290,000 290,000 9,442 9,685 299,442 299,685 235,203 231,832 1,621 2,416 236,824 234,248 54,797 7,821 62,618 58,168 7,269 65,437 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 2016 Trade and other payables Borrowings Derivatives 31 December 2015 Trade and other payables Borrowings Derivatives Less than one year $’000 44,671 - - Less than one year $’000 39,313 - 1,130 Two to three Years $’000 91 153,892 2,225 Two to three Years $’000 174 163,332 2,978 More than three Years $’000 - 81,311 515 More than three Years $’000 - 68,500 84 Total $’000 44,762 235,203 2,740 Total $’000 39,487 231,832 4,192 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 $290 million, $120 million expiring in December 2020 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 2016. 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. (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. 58 Note 2: Financial Risk Management continued (d) Capital risk management continued 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 2016, basic EPS was 64.7 cents (2015: 50.1 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 50.4 cents (2015: 45.1 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 18% (2015:19%) 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 $8.40 or 840% (2015: $7.25 or 725%) up to 31 December 2016. • 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 2016 dividends represents a payout ratio of 85% (2015: 85%) of operating earnings after tax. • Monitoring participation in the Dividend Reinvestment Plan: Up to 14% 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: о Interest cover (EBITDA/Net Interest Expense) must be greater than 3.00:1. о 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 in Australia and New Zealand. At 31 December 2016 the proportion of debt hedged was 78% (2015: 72%). The hedge contracts extend to the second half of 2020. • Managing refinancing risk: The Group’s borrowing facilities were renewed during 2015 and have been split into two tranches across four banks in order to reduce refinancing risk. During 2017, the tranche currently expiring in December 2018 will be renegotiated and the overall value of the facility increased to ensure the Group’s growth plans are appropriately funded. InvoCare Annual Report 2016 | 59 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 2: Financial Risk Management continued (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. 4 4 - - - - Interest rate risk Foreign exchange risk - 100 basis points + 100 basis points - 10% + 10% Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Carrying amount $’000 31 December 2016 Financial assets Cash and cash equivalents Accounts receivable Prepaid contract funds under management Other financial assets Financial liabilities 11,528 68,274 (53) - 473,056 (2,760) Trade and other payables 43,965 Borrowings Derivatives 234,455 (415) 2,740 - Total increase / (decrease) (3,228) - - - - - - 53 - 2,760 - - 415 - - - - - - - - - - - - - - - - - - - - - - - - - - (285) 3,606 233 (3,386) 1,144 1,144 - (1,144) - (3,606) - 3,386 3,228 (1,144) (285) - 233 - Interest rate risk Foreign exchange risk - 100 basis points + 100 basis points - 10% + 10% Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Profit $’000 Equity $’000 Carrying amount $’000 8,679 55,759 (44) - 422,284 (1,385) 230,772 (395) 4,192 - (1,824) 1,179 1,179 - - - - - - 44 - 1,385 - - 395 - 1,824 - - - - - - - - - - - - - - - - - - - - - 2 - - - - (133) 1,444 109 (1,432) (1,179) (1,179) - (1,444) (133) - - 109 1,432 2 31 December 2015 Financial assets Cash and cash equivalents Accounts receivable Prepaid contract funds under management Other financial assets Financial liabilities Borrowings Derivatives Total increase / (decrease) (f) Fair value estimation Trade and other payables 39,487 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. This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its financial instruments into the three levels prescribed under the accounting standards as detailed below: 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 $1,000 (2015: $1,000). Similarly, a 10% decrease in the discount rate results in an increase in contingent consideration of $1,000 (2015: $1,000). 60 Note 2: Financial Risk Management continued (f) Fair value estimation continued Level 2 Prepaid contract funds under management Derivatives financial instruments Level 3 Contingent consideration 2016 $’000 2015 $’000 473,056 (2,740) 422,284 (4,192) (283) (1,457) Effective 31 December 2016 prepaid contract funds under management assets have been classified as Level 2 as they are not publically traded. As this is a modification in the application of levels compared to prior years, comparatives have been restated to reflect the change in classification methodology. Management believes that this modification results in a better representation of the classification of levels as it reflects levels for the actual asset held by the Plan, (the fund), instead of the underlying investments held by the fund. No financial instruments or derivatives are held for trading. The contingent consideration represents expected future payments for business acquisitions, which are subject to performance hurdles. The carrying value is calculated by discounting the expected future payments to their present value using the current interest rate on the Group’s borrowings. 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 2016 and 31 December 2015 is outlined below. Revenue from external customers Other revenue (excluding interest income) Operating expenses Operating EBITDA Depreciation and amortisation Intangible assets impairment charge Finance costs Interest income Income tax expense Total goodwill Total assets Total liabilities Australian Operations Singapore Operations 2016 $’000 386,924 9,010 2016 $’000 17,236 463 New Zealand Operations 2016 $’000 44,246 210 (297,818) (9,543) (35,461) 98,116 (18,103) - (10,527) 935 (27,695) 85,780 944,820 759,677 8,156 (530) - (652) - (1,028) 13,992 42,414 28,776 8,995 (2,510) (154) (2,376) 27 (590) 46,380 93,841 61,889 Other Operations Consolidated 2016 $’000 2,253 492 (5,733) (2,988) (192) - - 2 (11) 1,721 4,116 639 2016 $’000 450,659 10,175 (348,555) 112,279 (21,335) (154) (13,555) 964 (29,324) 147,873 1,085,191 850,981 InvoCare Annual Report 2016 | 61 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 3: Segment Information continued (b) Segment information provided to the Chief Executive Officer (“CEO”) continued Revenue from external customers Other revenue (excluding interest income) Operating expenses Operating EBITDA Depreciation and amortisation Cemetery land impairment reversal Financial assets impairment charge Finance costs Interest income Income tax expense Total goodwill Total assets Total liabilities Australian Operations Singapore Operations New Zealand Operations Other Operations Consolidated 2015 $’000 374,080 8,367 (289,895) 92,552 (17,090) 5,400 (2,635) (11,831) 661 (25,343) 85,780 886,448 725,160 2015 $’000 16,525 397 (8,951) 7,971 (635) - - (789) - (930) 14,168 38,181 28,802 2015 $’000 44,337 704 (36,398) 8,643 (2,304) - - (2,165) 61 (457) 45,323 80,286 50,697 2015 $’000 1,429 102 (5,271) (3,740) (151) - - (1) - (17) 1,704 3,694 512 2015 $’000 436,371 9,570 (340,515) 105,426 (20,180) 5,400 (2,635) (14,786) 722 (26,747) 146,975 1,008,609 805,171 Operating EBITDA of $112,279,000 (2015: $105,426,000) 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. Group’s operations in Hong Kong and the USA have been aggregated under “Other Operations” in the tables above due to their relatively small size. Note 4: Revenue from Continuing Operations Sales revenue Sale of goods Services revenue Other revenue Rent Administration fees Sundry revenue 2016 $’000 190,216 260,443 450,659 357 6,914 2,904 10,175 2015 $’000 178,707 257,664 436,371 345 5,623 3,602 9,570 Total revenue from continuing operations 460,834 445,941 62 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 Intangible assets impairment charge Financial assets impairment charge 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 2016 $’000 2015 $’000 4,436 14,323 18,759 540 176 660 1,200 2,576 21,335 - 154 - 21,489 11,469 2,086 13,555 4,382 13,394 17,776 389 176 567 1,272 2,404 20,180 (5,400) - 2,635 17,415 12,739 2,047 14,786 649 923 11,439 8,824 11,422 8,396 InvoCare Annual Report 2016 | 63 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 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% (2015: 30%) on profit before tax Tax effect of amounts which are not deductible/(taxable) in calculation of taxable income 2016 $’000 25,344 4,259 (279) 29,324 2016 $’000 30,112 Impact of previously unrecognised capital losses offsetting capital gains and unrecognised capital losses (118) Impact of the eliminations of translation gains / (losses) on intercompany balances in foreign currencies Impact of impairment of financial assets Acquisition costs not deductible Revenue losses not recognised Other items (net) Difference in overseas tax rates Under / (over) provision in prior years Income tax expense (c) Tax expense relating to items of other comprehensive income Cash flow hedges 30 43 - 794 (319) 30,542 (939) (279) 29,324 2016 $’000 410 2015 $’000 24,207 1,406 1,134 26,747 2015 $’000 24,515 (48) (123) 790 27 1,358 308 26,827 (1,214) 1,134 26,747 2015 $’000 552 64 Note 6: Income Tax continued (d) Deferred tax liability The deferred tax 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 liability is as follows: Balance at the beginning of the year Net charge 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 (assets) to be settled within 12 months Deferred tax liabilities to be settled after 12 months (e) Tax losses 2016 $’000 2015 $’000 29,389 29,524 4,109 3,338 364 1,350 10,508 (5,889) (229) (1,068) (810) 41,062 36,420 4,259 (41) - 410 14 41,062 (1,481) 42,543 41,062 5,208 3,202 960 1,675 1,621 (2,892) (770) (898) (1,210) 36,420 32,275 1,406 602 1,481 552 104 36,420 (2,326) 38,746 36,420 The Group has no unutilised Australian capital losses (2015: $120,000 benefit) at the corporate tax rate of 30% (2015: 30%). The Group has unutilised revenue losses with a potential benefit of US$5,800,000 (2015: US$3,266,000) in foreign jurisdictions although recovery of these losses is highly unlikely. InvoCare Annual Report 2016 | 65 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 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 2016 $ 2015 $ 3,786,464 3,602,155 179,086 33,240 829,975 164,935 28,003 382,299 4,828,765 4,177,392 Detailed remuneration disclosures are provided in the Remuneration Report on pages 30 to 41. (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 starting on pages 30 to 41. For details of the share options issued please refer to Note 8: Share based payments on page 67. (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. Balance at start of the year Granted during year as compensation Other changes during year Balance at end of the year Non-executive Directors Richard Fisher Christine Clifton Richard Davis Gary Stead Joycelyn Morton Executive Directors Martin Earp Other key management personnel Phillip Friery Josée Lemoine Greg Bisset Wee Leng Goh Graeme Rhind 17,389 112,961 561,607 6,500 6,000 17,410 64,411 - 79,294 13,125 11,255 - - - - - 525 - (40,000) 115 2,205 10,617 1,518 6,644 2,931 7,457 4,155 2,858 (19,181) - (18,749) (3,646) (3,130) 17,914 112,961 521,607 6,615 8,205 29,545 51,874 2,931 68,002 13,634 10,983 66 Note 7: Key Management Personnel Disclosures continued (b) Equity instrument disclosures relating to key management personnel continued (iii) Share options The number of share options in the Company held during the financial year by key management personnel of the Group are set out below: Balance at start of the year Granted during year as compensation Other changes during year Balance at end of the year Executive Directors Martin Earp Other key management personnel Phillip Friery Josée Lemoine Greg Bisset Wee Leng Goh Graeme Rhind - - - - - - 160,313 33,441 14,754 37,533 20,946 14,416 - - - - - - 160,313 33,441 14,754 37,533 20,946 14,416 (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 2016 or 2015. Note 8: Share-based Payments The Group provides benefits to employees (including Key Management Personnel) through share-based incentives. Four plans are currently in operation. (a) Performance Long-term Incentive Plan (“PLTIP”) This plan provides share rights and options to senior staff and is heavily weighted towards options so employees are incentivised to maximise shareholder value in the longer term. The plan was introduced during 2016 and is described more fully in the Remuneration Report. For senior staff it replaces the schemes previously used and more fully described below. As the plan permits settlement in either equity or cash, at the Board’s discretion, it is treated as a cash-settled plan. The fair value of the instruments in the plan was determined at 31 December 2016 based on the following inputs. Share price at Grant Date Share Price at 31 December 2016 Exercise Price Annualised Risk Free Rate Volatility Compound Dividend Yield Fair Value at 31 December 2016 Options $12.08 $13.87 $12.08 2.76% 25.00% 3.00% $3.35 Rights $12.08 $13.87 - 2.76% 25.00% 3.00% $12.97 The determination of fair value does not include an adjustment for performance or service conditions. (b) Deferred Employee Share Plan (“DESP”) This plan introduced in 2007 is settled by the transfer of equity instruments to participants upon vesting. The required ordinary shares are purchased on market around the time of the grant and held by the Deferred Employee Share Plan Trust. In the event that the Trust has sufficient ordinary shares, due to forfeits, new grants are valued at the VWAP of ordinary shares traded during the first 10-days of the Trading Window that immediately follows the announcement of the full-year results for the full year. (c) Share Appreciation Rights (“SARs”) For overseas based employees, where settlement in equity can present challenges, cash settled SARs are offered. The fair value of these rights is determined on the same basis as the PLTIP Rights adjusted for the dividend rights which attach. InvoCare Annual Report 2016 | 67 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 8: Share-based Payments continued (d) Exempt Employee Share Plan (“EESP”) Australian based permanent employees with more than six-months service and a salary less than $180,000 per annum are annually offered the opportunity to acquire $1,000 worth of InvoCare Limited shares via a salary sacrifice arrangement as permitted by Australian Taxation Legislation. During 2016, 344 employees accepted the offer and at 31 December 2016 a further $179,271 was remaining to be collected via payroll deductions. (e) Expense Long-term incentive bonus expense (f) Awards Outstanding Outstanding at the beginning of the year Granted during the year Vested during the year Forfeited during the year Balance at the end of the year Note 9: Remuneration of Auditors 2016 $’000 1,656 2015 $’000 261 PLTIP Options - PLTIP Rights - 504,270 108,782 - (5,399) 498,871 - (1,073) 107,709 DESP SARs 310,266 17,544 (88,485) (37,293) 202,032 41,268 384 (11,918) - 29,734 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 Taxation services Other Services PricewaterhouseCoopers – non-Australian firms Taxation services Other services Non-PricewaterhouseCoopers – Singaporean firm Other services Total remuneration for non-audit services 2016 $ 2015 $ 400,900 416,900 29,935 - 31,008 461,843 31,460 448,360 26,350 51,250 69,500 63,763 17,144 23,617 80,506 16,666 48,391 485 16,206 244,213 13,157 182,822 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. 68 Note 10: Dividends Dividends paid 2016 $’000 2015 $’000 Final ordinary dividend for the year ended 31 December 2015 of 22.25 cents (2014: 20.75 cents) per fully paid share paid on 8 April 2016 (2014: 2 April 2015), fully franked based on tax paid at 30% (2014: 30%) 24,482 22,827 Interim ordinary dividend for the year ended 31 December 2016 of 17.00 cents (2015: 15.75 cents) per share paid on 7 October 2016 (2015: 9 October 2015), fully franked based on tax paid at 30% (2015: 30%) Dividends paid to members of InvoCare Limited On 16 June 2016 and 12 December 2016 (2015: 20 July 2015) dividend totalling 15.45 cents (2015: 14.75 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 25.50 cents (2015: 22.25 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 7 April 2017 out of 2016 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 25.50 cents (2015: 22.25 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) 18,706 43,188 123 43,311 17,330 40,157 118 40,275 28,058 24,482 28,120 28,120 4,227 8,563 (12,025) 20,322 (10,492) 26,191 2016 $’000 2015 $’000 71,048 (99) 70,949 54,969 (125) 54,844 2016 Number 2015 Number 109,671,454 109,533,561 109,906,820 109,533,561 2016 cents 64.7 64.6 2015 cents 50.1 50.1 InvoCare Annual Report 2016 | 69 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 12: Cash and Cash Equivalents Cash on hand Cash at bank Cash at bank attracts floating interest rate of 0.00% (2015: 0.75%) 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 (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 70 2016 $’000 87 11,441 11,528 2015 $’000 83 8,596 8,679 2016 $’000 2015 $’000 43,786 (2,279) 5,758 1,291 48,556 35,737 (2,265) 6,138 1,529 41,139 26,772 22,290 (2) 1,206 27,976 (4) 595 22,881 2016 $’000 2,269 649 (637) 2,281 2015 $’000 2,230 923 (884) 2,269 2016 $’000 2015 $’000 24,641 1,097 25,738 22,487 1,964 24,451 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 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 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 re-evaluation of delivery obligation Balance at the end of the year 2016 $’000 39,426 (16,498) 22,928 2015 $’000 19,790 (12,263) 7,527 2016 $’000 2015 $’000 422,284 400,967 46,669 3,930 (39,253) 39,426 473,056 35,338 3,211 (37,022) 19,790 422,284 2016 $’000 2015 $’000 408,448 393,841 46,669 3,930 (37,517) 16,498 438,028 35,338 3,211 (36,205) 12,263 408,448 (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, most of 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 $6,977,000 (2015: $6,797,000). 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 $39.4 million in prepaid contract funds under management (2015: $19.8 million) was greater than the non-cash growth due to selling price increases of $16.5 million in the liability for future service delivery obligations (2015: $12.3 million). InvoCare Annual Report 2016 | 71 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 16: Interests in Other Entities: Subsidiaries (a) Interests in subsidiaries Set out below are the Group’s principal trading subsidiaries at 31 December 2016. 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 InvoCare New Zealand Limited Country of incorporation Principal activities Australia Australia New Zealand Funeral services provider Funeral services provider Funeral services provider Funeral services provider Singapore Casket Company (Private) Limited Singapore Ownership interest held by the Group 2016 % 100 100 100 100 2015 % 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 2016 Bledisloe New Zealand Limited was renamed InvoCare New Zealand Limited and InvoCare New Zealand Limited was renamed InvoCare Holdings NZ Limited. (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. (c) Subsidiaries with non-controlling interests (“NCI”) One subsidiary, Macquarie Memorial Park Pty Limited, has non-controlling interests of 16.86% (2015: 16.86%). During the year dividends totalling $123,000 were paid to non-controlling interests (2015: $118,000). 72 Note 17: Interests in Other Entities: Associates (a) Interests in associates (i) Set out below is the associate of the Group at 31 December 2016. 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 HeavenAddress Pte. Ltd Singapore Associate Equity method 2016 % 34.59 2015 % 34.59 2016 $’000 - 2015 $’000 - % of ownership interest Carrying Amount 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 2016 (2015: Nil). (b) Impairment As at 31 December 2015 the recoverable amount of the Group’s investment in its associate was nil as a result of impairment write-downs in 2015 and 2014. 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. A review of the associate’s performance in 2016 was carried out and no reversal of previous impairment write-down was deemed necessary. 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% (2015: 17.8%) was used to discount the cash projections. This is higher than the 10.9% rate used for valuing 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 reversals. InvoCare Annual Report 2016 | 73 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 18: Property, Plant and Equipment Cemetery land $’000 Freehold land $’000 Buildings $’000 111,588 85,164 137,741 Leasehold land and buildings $’000 4,534 (3,005) - Leasehold improvements $’000 Plant and equipment $’000 Total $’000 7,510 128,857 475,394 (3,268) (81,593) (148,770) - - (4,376) 85,164 84,236 1,529 4,242 47,264 322,248 85,422 84,727 1,343 5,249 55,348 332,008 - - (176) (10) 1,343 4,534 (3,191) - 2,220 (586) 24,869 (2,534) 32,950 (3,795) (660) (14,323) (20,135) 33 72 740 5,249 55,348 332,008 8,859 143,712 497,240 (3,610) (88,364) (160,856) - - (4,376) 4,534 (2,821) - 1,713 - - - 6,622 (2,820) - 118,779 454,135 (73,443) (136,015) - (9,776) 3,802 45,336 308,344 1,027 15,399 22,215 - (19) 336 (385) 6,679 (827) - (4,382) (176) (567) (13,394) (13,508) 226 - (44) (800) (8) - (1) - (28) - 145 (800) 99,813 85,164 84,236 1,529 4,242 47,264 322,248 111,588 85,164 137,741 (53,505) - 4,534 (3,005) - 1,529 7,510 128,857 475,394 (3,268) (81,593) (148,770) - - (4,376) 4,242 47,264 322,248 85,164 84,236 At 1 January 2016 Cost Accumulated depreciation / amortisation Impairment write-downs Net book amount Year ended 31 December 2016 Additions Disposals Depreciation / amortisation & impairment charge Effect of movement in exchange rates Closing net book amount At 31 December 2016 Cost Accumulated depreciation / amortisation Impairment write-downs Net book amount At 1 January 2015 Cost Accumulated depreciation / amortisation Impairment write-downs Net book amount Year ended 31 December 2015 Additions Business combinations Disposals Depreciation / amortisation & impairment charge Effect of movement in exchange rates Transfers / reclassifications Closing net book amount At 31 December 2015 Cost (7,399) (4,376) 99,813 550 - (540) 96 (7,939) (4,376) 99,919 (7,010) (9,776) 91,193 25 3,584 - 5,011 - - 99,919 85,422 84,727 112,234 85,422 107,979 83,959 - - (53,505) - - - - 5,311 (675) (4,436) 258 291 142,479 (57,752) - 132,262 (49,921) - 83,959 82,341 746 433 (200) 5,018 2,326 (223) - - - - - - Accumulated depreciation / amortisation Impairment write-downs Net book amount (7,399) (4,376) 99,813 74 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 Cemetery land Total assets in the course of construction (b) Impairment 2016 $’000 694 521 514 543 2,272 2015 $’000 2,008 700 1,721 - 4,429 All impaired cemetery and crematorium sites were reassessed at 31 December 2016 using the same methodology as previously applied and no change to the impairment provision was deemed necessary. The following table summarises the impairment losses/reversals along with the recoverable amount estimates for the individual sites for 2016 and 2015: Site Name Allambe Gardens Memorial Park, Queensland Mt Thompson Memorial Gardens, Queensland Tweed Heads Memorial Gardens, New South Wales Impairment Loss / (Reversal) Recoverable Amount Estimates 2016 $’000 - - - - 2015 $’000 (3,000) (2,400) - (5,400) 2016 $’000 17,500 15,300 2,100 34,900 2015 $’000 17,500 15,300 2,100 34,900 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% (2015: 10.9%), reflecting the risk estimates for the business as a whole. (c) Property held for sale During 2015 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 2016 | 75 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 19: Intangible Assets At 1 January 2016 Cost Accumulated amortisation Net book amount Year ended 31 December 2016 Impairment write-downs Effect of movement in exchange rates Amortisation charge Net book amount At 31 December 2016 Cost Accumulated amortisation Net book amount At 1 January 2015 Cost Accumulated amortisation Net book amount Year ended 31 December 2015 Acquisition of subsidiary / businesses Effect of movement in exchange rates Amortisation charge Net book amount At 31 December 2015 Cost Accumulated amortisation Net book amount (a) Impairment test for goodwill Goodwill $’000 Brand name $’000 Total $’000 146,975 - 146,975 (154) 1,051 - 147,872 147,872 - 147,872 145,390 - 145,390 1,536 49 - 146,975 146,975 - 146,975 12,909 (7,133) 5,776 - 47 (1,200) 4,623 12,991 (8,368) 4,623 12,922 (5,832) 7,090 - (42) (1,272) 5,776 12,909 (7,133) 5,776 159,884 (7,133) 152,751 (154) 1,098 (1,200) 152,495 160,863 (8,368) 152,495 158,312 (5,832) 152,480 1,536 7 (1,272) 152,751 159,884 (7,133) 152,751 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. During 2016, a strategic decision was made to close a previously acquired small business in New Zealand as it no longer fits the Group’s long-term strategy. As a result, $154,000 in goodwill recognised in the prior years in relation to this acquisition was fully impaired. (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% (2015: 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. 76 Note 20: Derivative Financial Instruments Current liabilities Interest rate swap contracts – cash flow hedges Non-current liabilities Interest rate swap contracts – cash flow hedges 2016 $’000 2015 $’000 966 966 1,774 1,774 1,130 1,130 3,062 3,062 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. 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 2016 $’000 2015 $’000 32,683 11,796 192 44,671 91 91 26,446 11,583 1,284 39,313 174 174 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 Long-term borrowings Borrowings are represented by: Principal amount of bank loans – unsecured Loan establishment costs Full details of the risks, ageing and available facilities are set out in Note 2 – Financial Risk Management. 2016 $’000 2015 $’000 235,203 (748) 234,455 231,833 (1,061) 230,772 InvoCare Annual Report 2016 | 77 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 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 (b) Superannuation plan 2016 $’000 2015 $’000 14,511 14,318 3,029 2,306 2016 Number 2015 Number 1,566 1,557 The Company contributes to accumulation-type employee superannuation plans in accordance with statutory requirements. 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 Current tax liabilities Prepaid contract liabilities Deferred revenue Employee benefits Total current liability Expected to settle within twelve months 2016 $’000 44,671 9,935 37,595 10,243 14,511 2015 $’000 39,313 10,111 34,954 8,660 14,318 2016 $’000 44,671 9,935 37,595 10,243 8,476 2015 $’000 39,313 10,111 34,954 8,660 8,031 116,955 107,356 110,920 101,069 The amounts expected to be settled within twelve months have been calculated based on the historical settlement patterns. 78 Note 25: Contributed Equity Fully paid ordinary shares 2016 $’000 2015 $’000 134,914 133,694 2016 Number 2016 $’000 2015 Number 2015 $’000 Ordinary shares Balance at the beginning of the financial year Total contributed equity Treasury shares (note 25 (b)) 110,030,298 110,030,298 (331,724) 136,858 136,858 (1,944) 110,030,298 110,030,298 (444,300) Total consolidated contributed equity 109,698,574 134,914 109,585,998 (a) Ordinary shares 136,858 136,858 (3,164) 133,694 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. InvoCare Annual Report 2016 | 79 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 25: Contributed Equity continued (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 2015 25 February 2015 30 April 2015 30 April 2015 Details Balance Shares vested Shares vested Forfeit of shares on termination of employment 22 May 2015 to 3 July 2015 Forfeit of shares on termination of employment 6 July 2015 Transfer of shares to members of the Exempt Employee Share Plan 6 August 2015 to 14 December 2015 Forfeit of shares on termination of employment 31 December 2015 Shares provisionally forfeited but not yet de-allocation by the Trustee 31 December 2015 18 January 2016 25 February 2016 26 February 2016 8 April 2016 11 April 2016 01 July 2016 18 July 2016 31 July 2016 1 August 2016 26 August 2016 1 December 2016 7 December 2016 16 December 2016 30 December 2016 31 December 2016 31 December 2016 Unallocated shares held by the Trustee Balance Forfeit of shares on termination of employment Shares vested Forfeit of shares on termination of employment Forfeit of shares on termination of employment Forfeit of shares on termination of employment Forfeit of shares on termination of employment Forfeit of shares on termination of employment Shares vested Transfer of shares to members of the Exempt Employee Share Plan Forfeit of shares on termination of employment Forfeit of shares on termination of employment Forfeit of shares on termination of employment Forfeit of shares on termination of employment Forfeit of shares on termination of employment Movement in unallocated shares held by the Trustee Number of shares 661,978 (133,614) (57,334) (50,513) (4,006) (26,730) (1,681) (76,996) 133,196 444,300 (13,186) (88,481) (972) (811) (2,701) (259) (11,787) (364) (24,081) (810) (1,158) (1,662) (3,599) (348) 37,643 $’000 5,176 (988) (695) (627) (41) (328) (20) (737) 1,424 3,164 (144) (861) (11) (9) (31) (2) (136) (5) (354) (9) (14) (21) (41) (5) 423 Balance 331,724 1,944 (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. 80 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 (c) Nature and purpose of reserves (i) Share-based payments reserve 2016 $’000 2015 $’000 1,849 (1,844) 7,339 7,344 2,165 550 (866) 1,849 (2,892) 1,467 (419) (1,844) 6,256 1,083 7,339 2,165 (2,892) 6,256 5,529 4,020 (171) (1,684) 2,165 (4,071) 1,731 (552) (2,892) 6,807 (551) 6,256 63,054 70,949 (43,188) 90,815 48,367 54,844 (40,157) 63,054 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. InvoCare Annual Report 2016 | 81 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 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 2016 $’000 2015 $’000 800 800 262 99 (123) 238 99 1,137 255 125 (118) 262 99 1,161 2016 $’000 2015 $’000 11,289 24,353 8,447 44,089 11,828 30,530 11,045 53,403 During the year a lease for premises located at 181 Miller Street, North Sydney, which was compulsorily acquired by Transport for NSW as part of the Sydney Metro project, was rescinded and appropriate compensation received. As a consequence lease commitments totalling $3,483,000 for periods after 31 December 2016, included in the 2015 comparative have been removed from the lease commitments disclosed. 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 11,018 23,891 8,447 43,356 271 462 - 733 Total $’000 11,289 24,353 8,447 44,089 82 Note 28: Capital and Leasing Commitments continued 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. (a) Capital expenditure commitments Capital expenditure commitments contracted or conditionally contracted at the reporting date but not recognised as liabilities payable: Building purchase – within one year Building extensions and refurbishments – within one year Plant and equipment purchases – within one year (b) Other expenditure commitments Documentary letters of credit outstanding at balance date payable: - within one year Note 29: Business Combinations Tuckers Funeral & Bereavement Services 2016 $’000 2015 $’000 6,600 705 528 - 2,539 5,345 113 129 On 10 December 2012, a subsidiary InvoCare Australia Pty Limited completed the acquisition of Tuckers Funeral & Bereavement Services Pty Ltd and Geelong Mortuary Transfer Services Pty Ltd together with the property assets owned by a party related to the vendors (“Tuckers”). Tuckers has been operating since 1883, and is recognised to be one of the largest regional funeral directors in Australia. The company operates in the state of Victoria and its main facilities are located in Geelong West, with additional chapels and offices located in Grovedale, Lara and Barrabool Hills. Included in the purchase consideration was $2.1 million 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 2015 and as a result a payment, representing the final instalment of future payments, of $900,000 was made during the year. Harewood Memorial Gardens and Crematorium / Cremation Society of Canterbury On 22 July 2015, a subsidiary, InvoCare New Zealand (formerly Bledisloe New Zealand Limited), completed the acquisition of the cemetery and cremation assets of Harewood Memorial Gardens and Crematorium Limited and Cremation Society of Canterbury Limited (“Harewood”) which have operated crematoria in the Christchurch market for over 70 years. Retention amount of $286,000, included in the purchase consideration, was paid in January 2016. Note 30: Contingent Liabilities and Contingent Assets The Group had contingent liabilities at 31 December 2016 in respect of bank guarantees given for leased premises of controlled entities to a maximum of: 2016 $’000 2015 $’000 1,510 2,287 For information about the deed of cross guarantee 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. InvoCare Annual Report 2016 | 83 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 Note 31: Cash Flow Information 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) on prepaid contracts Other prepaid contract movements Business acquisition costs classified in investing activities 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 2016 $’000 2015 $’000 70,949 54,844 21,489 - 1,656 384 10 676 (22,928) 1,814 79 (12,512) (1,287) (453) 5,276 3,343 (176) 4,642 5,534 78,496 22,815 (5,400) 779 366 56 (312) (7,527) 837 71 (8,403) (2,138) (816) 2,136 6,049 748 4,145 (3,619) 64,631 84 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 2016 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 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 2016 $’000 2015 $’000 369,619 (99,743) (94,572) (24,300) (11,745) (21,348) (6,297) (13,418) 98,196 (16,545) - (11,106) 932 22,928 (53) 2,095 (445) 96,002 (25,785) 70,217 1,015 331 1,346 71,563 68,390 70,217 (43,188) 95,419 358,727 (97,652) (90,059) (22,218) (11,629) (21,145) (7,307) (14,550) 94,167 (15,448) 2,823 (12,543) 649 7,527 9 2,341 507 80,032 (22,548) 57,484 1,662 (1,255) 407 57,891 51,063 57,484 (40,157) 68,390 InvoCare Annual Report 2016 | 85 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 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 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 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 86 2016 $’000 2015 $’000 1,219 42,226 22,059 39,260 2,519 1,537 108,820 44,344 138,789 259,577 433,796 11,238 9,068 896,812 1,005,632 37,177 966 8,409 37,379 10,243 13,109 107,283 559 35,309 21,997 35,066 3,320 1,299 97,550 47,126 136,425 252,774 387,218 11,418 8,857 843,818 941,368 32,594 1,130 7,304 34,700 8,660 13,061 97,449 181,064 189,076 685 36,242 400,433 49,317 2,861 670,602 777,885 227,747 1,936 31,313 373,494 47,559 2,074 645,452 742,901 198,467 134,914 133,694 (2,586) 95,419 227,747 (3,617) 68,390 198,467 Note 33: Events after the Balance Sheet Date Subsequent to the balance date a strategic decision was made to execute an orderly closure of the Group’s USA funeral operations after a detailed review of its performance to date. Management expects to incur approximately $700,000 in costs associated with the closure. Other than this no significant subsequent events, not otherwise disclosed, have occurred since 31 December 2016. 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 material to the Group 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 Transactions with other related parties Contributions to superannuation funds on behalf of employees 8,823,797 8,395,542 (e) Guarantees and other matters Under the terms of common terms deed executed on 20 December 2013 and amended on 22 December 2015, 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. 2016 $ 2015 $ InvoCare Annual Report 2016 | 87 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2016 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 (b) Contingent liabilities of the parent entity The parent entity had contingent liabilities at 31 December 2016 in respect of bank guarantees given for leased premises of controlled entities to a maximum of: 2016 $’000 2015 $’000 131 404,463 9,898 165,373 188 381,571 8,782 173,044 134,914 133,694 1,849 (1,156) 1,080 102,403 239,090 71,831 73,604 2,165 (2,171) 1,080 73,759 208,527 53,174 53,224 2016 $’000 2015 $’000 1,510 2,287 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 2016 (31 December 2015: Nil). (d) Tax consolidation legislation InvoCare Limited and its wholly-owned Australian controlled entities implemented the tax consolidation legislation from 1 January 2004. 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. 88 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 $62,618,000 as outlined in Note 2(c), or by on-demand repayment of intercompany advances. 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 $46.5 million at 31 December 2016 (2015: $44.0 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 $3.3 million (decrease by $1.6 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 2, 40 Miller Street North Sydney NSW 2060 Note 39: Authorisation of the Financial Report This financial report was authorised for issue by the directors on 23 February 2017. The Company has the power to amend and reissue this report. InvoCare Annual Report 2016 | 89 Directors’ Declaration In the directors’ opinion: (a) the financial statements and notes set out on pages 42 to 90 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 2016 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 23 February 2017 Martin Earp Director 90 Independent Auditor’s Report To the Shareholders of InvoCare Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of InvoCare Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group’s financial position as at 31 December 2016 and of its financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group’s financial report comprises: the consolidated balance sheet as at 31 December 2016 the consolidated income statement for the year then ended the consolidated statement of comprehensive income for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 DX 77 Sydney, Australia T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. InvoCare Annual Report 2016 | 91 Independent Auditor’s Report continied To the Shareholders of InvoCare Limited Materiality Audit scope Key audit matters • Amongst other relevant topics, we communicated the following key audit matters to the Audit and Risk Committee: о Cemetery land impairment and reversal assessment о Accounting for prepaid funeral contracts о Revenue recognition They are further described in the Key audit matters section of our report. • For the purpose of our audit we used overall Group materiality of $5 million, which represents 5% of the Group’s profit before tax. • We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. • We chose Group profit before tax because, in our view, it is the metric against which the performance of the Group is most commonly measured by users. • There is no common materiality threshold within the funeral services industry so we selected 5% which is within the range of acceptable quantitative profit related materiality thresholds used for publicly listed entities. • Our audit focused on where the directors made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. • The Group has operations within Australia, New Zealand, Singapore, Hong Kong and the USA, with the accounting functions led from the head office in Sydney, Australia. • We conducted audits of the financial information of the Australian and New Zealand operations given their financial significance to the Group. As shown in note 3 of the Financial Report, the Australian and New Zealand operations account for 96% of revenue and 95% of Operating EBITDA of the Group. • The scale of operations in other territories is, in our view, insignificant to the overall results of the Group, and as such, we performed specific risk-focused audit procedures over those operations. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. 92 Key audit matter How our audit addressed the Key audit matter Cemetery land impairment and reversal assessment Refer to Note 1(j), Note 18(b) and Note 37(ii). We focused on this area due to the size of the Cemetery land balance (historical cost of $112.2 million as at 31 December 2016) and because the directors’ assessment of the ‘value in use’ of the Group’s Cash Generating Units (CGU’s – typically defined as physical Cemetery / Crematoria locations) involves significant judgements about the future results of the business and the discount rates applied to future cash flow forecasts. In particular, we focused our audit effort on the carrying value of previously impaired sites at Allambe Gardens Memorial Park, Mount Thompson Memorial Gardens and Tweed Heads Memorial Gardens (each of which was previously impaired but no change in carrying value in the current year). The Allambe and Mount Thompson sites in South Eastern Queensland recognised impairment losses in 2004 and 2006 as a result of increased competition in the region, but each have shown steady improvement in business performance and outlook since 2013 and have recognised reversals of impairment in 2013, 2014 and 2015. Tweed Heads was impaired by $1.2 million in 2013 and its carrying value is being closely monitored for further indicators of impairment or reversal of impairment. The remaining Cemetery land values have been assessed for internal and external indicators of impairment, and based on this assessment no indicators of impairment were identified by the Group. To evaluate the composition of the Group’s future cash flow forecasts and the process by which they were drawn up, we: • Developed an independent range of possible alternative inputs for revenue growth rate, expected death rate and weighted average cost of capital that could have been used. We found them to be consistent with the rates and assumptions used by the Group. • Compared the prior year cash flow forecast to current year actual results to consider whether any forecasts included assumptions that, with hindsight, had been inaccurate. We found that the assumptions and expectations within the forecast were materially consistent with the actual results. • Agreed some of the forecast inputs, such as revenue growth rate, expected death rate and weighted average cost of capital used in the valuation model to Board approved budgets. • Considered whether all relevant locations for impairment testing had been identified, by considering both the Group’s own internal assessment and our own independent assessment of potential indicators for impairment. No new or different locations were identified for additional focus. For Allambe, Mount Thompson and Tweed Heads, we also: • Compared long-term growth rates used by the Group to economic and industry forecasts and found that they were consistent. • Assessed the discount rate used by the Group by forming an independent expectation of what the weighted average cost of capital would be with reference to comparable organisations and independent broker reports. We challenged the Group on the adequacy of their sensitivity calculations over all their CGUs by varying critical inputs into the valuation model by plus or minus 10% and assessing how the calculations would change. We determined that the calculations were most sensitive to assumptions for revenue growth rates and discount rates and as such, focused our testing on these assumptions. We found that these assumptions were consistently applied and in line with our expectations, which were based on historical experience and industry performance. InvoCare Annual Report 2016 | 93 Independent Auditor’s Report continued To the Shareholders of InvoCare Limited Key audit matter How our audit addressed the Key audit matter Accounting for prepaid funeral contracts For the asset value invested, we: Refer to note 1(n) and note 15. The Group enters into prepaid funeral contracts whereby they agree to deliver a specified funeral, cremation or burial service at the time of need. The beneficiary invests the current price of the service to be delivered with a financial institution and conditionally assigns the benefit to the Group. For each prepaid funeral contract, the Group records an asset for the value of the funds invested (funds under management) and a liability to deliver the services. As at 31 December 2016, InvoCare had recorded $473.1 million of funds under management and $438.0 million of contract liabilities. We focused on prepaid funeral contracts due to the: • Size of the asset and liability balances • Agreed the balances recorded to statements and confirmation balances received from independent custodians indicating that assets were recorded accurately and in the correct period. For the liability recognised, we: • Considered whether the Group’s methodology used to measure prepaid contract liabilities had been consistently applied • Tested the mathematical accuracy of the calculations used in the application of price increases on service delivery obligations • Selected a sample of new contracts issued and contract redemptions and compared the date and value to that recorded by the Group. We found the sample tested to be accurate and recorded or redeemed in the correct period. For the revenue recognised, we: • Significant time difference that may arise between receipt of cash from customers and the subsequent recognition of revenue on the delivery of services (redemption date) • Potential for deliberate manipulation or error in the timing of recording revenue arising from the: • Compared the redemption dates and values for a sample of prepaid funeral contracts against the dates and values at which the revenue had been recorded. We found that the revenue had been recorded accurately and in the correct period for the sample tested. о high volume of transactions, contracts (over 80,000 contracts) and different asset management trusts (29 trusts) о manual translation, into the accounting records, of the assets balances held in the trusts Revenue recognition (other than prepaid funeral contracts – refer key audit matter 2 above) Refer to note 1(e) and note 4 We focused on the recognition of revenue as revenue is comprised of a number of different streams, some of which can be complex (specifically, large memorials e.g. Crypts or multiple plot sales, timing of deferred plaque and miscellaneous merchandise revenue and payments by instalment). Complexity can arise from a significant difference between the timing of receipt of cash from customers and the subsequent recognition of revenue from funeral service and memorial delivery. Due to the manual processes and calculations for the different elements of a funeral service and memorial, the high number of different revenue sources and the recognition of these in the accounting records, additional audit effort has been applied. Other information We assessed the design of the manual and IT controls over revenue systems to consider whether they had been implemented effectively. This included testing key Inventory and Accounts Receivable reconciliations at 31 December 2016 by agreeing material reconciling items to supporting documents. We found the controls were suitable for the purpose of our audit. For a sample of revenue transactions, we compared the delivery dates against the date on which the revenue had been recorded. We found that revenue had been recorded accurately in the correct period and in accordance with the Group’s accounting policy for the sample tested. The directors are responsible for the other information. The other information included in the Group’s annual report for the year ended 31 December 2016 comprises the Directors Report (but does not include the financial report and our auditor’s report thereon), which we obtained prior to the date of this auditor’s report. The other information also includes the Performance Highlights, Chairman’s Message, Chief Executive Officer’s Review, Shareholder Information and InvoCare Locations, which are expected to be made available to us after the date of this auditor’s report. 94 Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received as identified above, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001, and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. This description forms part of our auditor’s report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 30 to 41 of the directors’ report for the year ended 31 December 2016. In our opinion, the remuneration report of InvoCare Limited, for the year ended 31 December 2016 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Brett Entwistle Partner 23 February 2017 InvoCare Annual Report 2016 | 95 Shareholder Information Shares and options as at 13 March 2017 Shares on issue Options on issue Distribution of shareholders as at 13 March 2017 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Number 110,030,298 498,871 Percentage % 3.76% 18.17% 9.51% 13.61% 54.95% 100.00% Number of shareholders 8,200 8,376 1,432 686 40 18,734 Number of shares 4,132,303 19,995,974 10,466,761 14,973,896 60,461,364 110,030,298 There were 235 holders of less than a marketable parcel of ordinary shares (being 35 based on a price of $14.17 on 13 March 2017) who hold a total of 2,108 ordinary shares. Equity security holders Number of shares Percentage % Largest 20 holders of ordinary shares at 13 March 2017 1. HSBC Custody Nominees (Australia) Limited 2. J P Morgan Nominees Australia Limited 3. Citicorp Nominees Pty Limited 4. National Nominees Limited 5. Argo Investments Limited 6. Milton Corporation Limited 7. BKI Investment Company Limited 8. BNP Paribas Nominees Pty Ltd (Drp) 9. Australia Foundation Investment Company Limited 10. Australian United Investment Company Limited 11. IOOF Investment Management Limited (IPS Super A/C) 12. AET SFS Pty Ltd (InvoCare Share Plans) 13. Warbont Nominees Pty Ltd 14. BNP Paribas Noms Pty Ltd 15. Mr Richard Hugh Davis 16. Netwealth Investment Limited 17. Gwynvill Trading Pty Ltd 18. CS Fourth Nominees Pty Limited 19. HSBC Custody Nominees (Australia) Investments Limited - A/C 2 20. Navigator Australia Ltd (MLC Investment Sett A/C) Total for top 20 Substantial holders Substantial holders in the Company as at 13 March 2017 are set out below: JCP Investment Partners Ltd Mondrian Investment Partners Limited Voting Rights The voting rights attaching to each class of security are set out below: Ordinary Shares 23,128,873 10,482,864 6,229,479 3,616,686 2,082,191 1,950,914 1,358,474 1,329,168 1,150,000 1,000,000 687,675 686,880 631,776 602,125 521,607 508,618 415,643 376,328 374,069 340,815 57,474,185 21.02% 9.53% 5.66% 3.29% 1.89% 1.77% 1.23% 1.21% 1.05% 0.91% 0.62% 0.62% 0.57% 0.55% 0.47% 0.46% 0.38% 0.34% 0.34% 0.31% 52.23% Number of shares held Percentage % 6,726,849 12,007,408 6.11% 10.91% 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. 96 Glossary AASB ABS ACCC AIFRS ASX ASX Corporate Governance Principles and Recommendations Cemetery CGU 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 The eight essential corporate governance principles and best practice recommendations of the ASX Corporate Governance Council 3rd Edition 2014 A place for burials and memorialisation A cash-generating unit which is the smallest identifiable group of assets that independently generates cash in flows Condolence Lounge A facility for family and friends to gather at after the funeral service – usually offering a catering service Constitution Crematorium The Constitution of the Company A place for cremations and memorialisation Crypts DRP EBITDA EEO EPS 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 An InvoCare location offering cremation, burial and memorialisation services Operating Earnings Prepaid Cemetery and Crematorium Services 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 InvoCare Annual Report 2016 | 97 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 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 George Hartnett Funerals (est 1947) Albany Creek Cleveland Holland Park Kelvin Grove Redcliffe Sandgate Wynnum Metropolitan Funerals (est 1941) Aspley Cleveland Mt Gravatt Petrie Redcliffe Southport Springwood Toowong Wynnum Other Providers Drysdale Funerals (est 1983) Nambour Tewantin Somerville Funerals (est 1932) Nerang 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 Beaudesert Funeral Services (est 1980) Beaudesert Le Pine including Le Pine Heritage (est 1891) Box Hill Camberwell Croydon Dandenong Eltham Ferntree Gully Footscray West Glen Waverley Greensborough Healesville Ivanhoe Kew East Lilydale Mordialloc Oakleigh Pakenham 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 North Island Forrest Funeral Services (est 1978) Browns Bay Orewa Fountain’s Funeral Services (est 1956) Manurewa Papakura Sibuns Funeral Directors (est 1913) Remuera H Morris Funerals (est 1933) Northcote Lychgate Funeral Home (est 1876) Johnsonville Karori Wellington Resthaven Funerals (est 2000) Howick Manurewa Gee & Hickton (est 1946) Lower Hutt Porirua Upper Hutt Akatarawa Crematorium James R Hill (est 1965) Hamilton Pellows Funeral Directors (est 1963) Hamilton Elliotts Funeral Services (est 1967) Kati Kati Mt Maunganui Tauranga Beth Shan Funeral Directors (est 1977) Hastings 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 Cremorne Hurstville Leppington Lidcombe Lismore Merrylands Minchinbury North Ryde Parramatta Rockdale Roseville Chase 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) Fairfield W N Bull (est 1892) Newtown Parramatta Western Australia Purslowe Funerals (est 1907) Midland North Perth 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 98 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 Northern Rivers* Penrith Randwick Ryde Smithfield South Sydney* Toukley East Tweed Heads Woy Woy Wyong ACT Canberra* * Mobile Arranger + Incorporate Value Funerals Bayswater Carnegie Frankston Pascoe Vale Reservoir Sunshine Werribee Buranda Brisbane North* Gold Coast* Ipswich Kedron Logan Parkwood Robina Strathpine* Sunshine Coast* Black Forest Brahma Lodge Enfield Gawler Gawler and Barrossa Valley* Morphett Vale South Adelaide* Victor Harbor Tasmania Hobart* Joondalup Kelmscott Mandurah Osborne Park Southern Region* New Zealand Nelson Christchurch New Lynn Royal Oak Sydenham Wellington* New South Wales Queensland Victoria South Australia Western Australia White Lady Funerals (est 1987) Bankstown Belmont Bondi Junction Bulli Camden Charlestown Charmhaven Eastwood Five Dock Liverpool Mayfield Mosman Narrabeen Northern Rivers Pennant Hills Penrith Queanbeyan Rockdale Roseville Salamanda Sutherland Toronto Tweed Heads Wyoming Ashmore Cairns Caloundra Chelmer Clayfield Kelvin Grove Miami Morningside Nambour Tanah Merah Warana Burwood Doncaster Epping Glen Huntly Heathmont Heidelberg Mornington North Essendon Rosebud South Melbourne Singapore Singapore Casket Company (est 1920) Simplicity Casket Company (est 2009) Lavender Street Mount Vernon Sin Ming Drive Hillcrest Glenside Plympton Operating as Mareena Purslowe Funerals Fremantle Midland Mandurah North Perth Subiaco Victoria Park Wangara Tasmania North Hobart Australian Capital Territory Belconnen Kingston Tuggeranong USA Macera Crematory San Diego Cemeteries and Crematoria New South Wales Queensland 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 & Crematorium (est 1971) Rouse Hill Leppington Ryhope Dapto Haymarket Beresfield North Ryde Minchinbury Cabramatta Rookwood Necropolis Tweed Heads Albany Creek Memorial Park(est 1964) Allambe Memorial Park & Crematorium (est 1968) Great Southern Memorial Gardens & Crematorium (est 1997) Mt Thompson Memorial Gardens & Crematorium (est 1934) Toowoomba Garden of Remembrance & Crematorium (est 1966) New Zealand Harewood Memorial Gardens & Crematorium (est 1963) Woodlawn Memorial Gardens & Crematorium (est 1936) Bridgeman Downs Nerang Carbrook Holland Park Toowoomba Christchurch Christchurch InvoCare Annual Report 2016 | 99 Corporate Information InvoCare Limited ABN 42 096 437 393 Directors Richard Fisher (Chairman) Martin Earp (Managing Director and Chief Executive Officer) Richard Davis (Non-executive Director) Joycelyn Morton (Non-executive Director) Gary Stead (Non-executive Director) Robyn Stubbs (Non-executive Director) Company Secretary Phillip Friery Registered Office Level 2, 40 Miller Street North Sydney NSW 2060 Telephone: 02 9978 5200 Facsimile: 02 9978 5299 Website: www.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 One International Towers Sydney Watermans Quay, Barangaroo Sydney NSW 2000 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 Tower 1 - International Towers Sydney 100 Barangaroo Avenue 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 100 Contents 1 2 4 Performance Highlights Chairman’s Message Chief Executive Offi cer’s Review 6 Community Activities 8 Management Team 9 Financial Report 10 Director’s Report 25 Corporate Governance Statement 30 Remuneration Report 42 Auditor’s Independence Declaration 90 Director’s Declaration 91 Independent Auditor’s Report 96 Shareholder Information 97 Glossary 98 InvoCare Locations 100 Corporate Information 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.” 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 6 invocare.com.au 2016 Annual Report 

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