JB Hi-Fi Limited Annual Report 2019

Plain-text annual report

ANNUAL REPORT 2019 For personal use onlyFinancial Summary FINANCIAL PERFORMANCE 2015 Statutory 2016 Statutory 2017(i) Statutory 2017(i) Underlying(ii) 2018 Statutory 2019 Statutory Growth Underlying Sales EBIT NPAT $3.65b $3.95b $5.63b $5.63b $6.85b $7.10b $200.9m $221.2m $268.2m $306.3m $350.6m $372.8m $136.5m $152.2m $172.4m $207.7m $233.2m $249.8m Earnings per share 137.9cps 153.8cps 154.3cps 186.0cps 203.1cps 217.4cps Total dividend - fully franked 90.0cps 100.0cps 118cps 118cps 132cps 142cps 3.5% 6.4% 7.1% 7.1% 7.6% Sales $7.10b $7.10b EBIT $372.8m $372.8m $6.85b $5.63b(i) $350.6m $306.3m(i)(ii) $3.95b $3.65b $221.2m $200.9m 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 NPAT $249.8m $249.8m Stores $233.2m $207.7m(i)(ii) 311 315 303 $152.2m $136.5m 187 194 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 (i) (ii) JB Hi-Fi acquired The Good Guys on 28 November 2016, all amounts disclosed for the 2017 ﬁ nancial year include The Good Guys for the period under JB Hi-Fi ownership. Underlying results exclude transaction fees and implementation costs totaling $22.4m associated with the acquisition of The Good Guys in November 2016 and $15.8m of ﬁ xed asset and goodwill impairments in New Zealand. JB Hi-Fi Limited ABN 80 093 220 136 For personal use onlyChairman’s and Group Chief Executive Ofﬁ cer’s Report Dear fellow shareholder, FY19 has been a strong year for JB Hi-Fi Limited. It is very satisfying to report that the year ended 30 June 2019 was another record year with sales, profits and dividends all up on the prior year. The 2019 result was driven by a combination of sales growth and our low cost of doing business, underpinned by our ongoing emphasis on customer service. Group Overview Gross profit increased by 3.9% to $1.05 billion resulting in a gross margin of 22.1%. CODB was 14.9%, up 7 bps on the prior year. Total operating costs remained well controlled as the business managed costs in line with sales and continued to focus on customer service, invest in strategic initiatives and manage increased volumes through the store network. The business’s low CODB remains a competitive advantage and is maintained through our continued focus on productivity and minimising unnecessary expenditure. JB Hi-Fi Limited and its subsidiaries (the “Group”), comprises two leading retail brands: JB Hi-Fi, with a focus on Technology and Consumer Electronics; and The Good Guys with a focus on Home Appliances and Consumer Electronics. Sales growth, combined with cost control and lower depreciation as the business managed its investment in the store network, drove solid EBIT growth. EBIT was up 3.2% to $301.7 million with EBIT margin down 6 bps at 6.4%. The value proposition for each brand centres around ranging JB Hi-Fi New Zealand the best brands at low prices supported by exceptional customer service across our 315 store network, online offering and through our commercial channels, JB Hi-Fi Solutions and The Good Guys Commercial. Total sales were up 2.0% to NZD236.2 million, with comparable sales up 8.2%. Online sales grew 38.3% to NZD13.3 million or 5.6% of total sales as the business benefited from the improved online platform. Gross margin was The dual branded retail approach is underpinned by five key 17.3%, down 37 bps on the prior year and CODB was 16.7%, enablers that provide the Group with a unique competitive down 57 bps on the prior year. EBIT was (NZD1.9 million), up advantage, those being: • • • • • scale; a low cost operating model evidenced by the Group’s low CODB; quality store locations; strong supplier partnerships; and our multichannel capabilities. The Group achieved sales of $7.1 billion in FY19, up 3.5% on the prior year. EBIT was up 6.4% to $372.8 million and NPAT was up 7.1% to $249.8 million. Earnings per share was up 7.1% to 217.4 cents per share and the total dividend for FY19 was up 10 cents per share to 142 cents per share. Brand Overview JB Hi-Fi Australia JB Hi-Fi Australia total sales grew 4.1% to $4.73 billion, with comparable sales up 2.8%. Online sales grew 23.0% to $258.0 million or 5.5% of total sales, as the Online offer continued to evolve. JB Hi-Fi Solutions recorded double digit sales growth and remains on track to deliver on its longer term aspirational sales target of approximately $500 million per annum. NZD1.0 million or 34.3%. The Good Guys Total sales grew 2.2% to $2.15 billion, with comparable sales up 0.9%. Online sales grew 3.7% to $130.9 million or 6.1% of total sales, with strong sales on The Good Guys website partially offset by a decline in third party marketplace sales. Gross profit was $442.7 million with gross margin up 33 bps to 20.6%. 2HY19 gross margin was up 88 bps as the business benefited from initiatives put in place over the last twelve months and cycled strong price competition in the prior year. Sales growth, combined with gross margin expansion and lower depreciation as significant pre-acquisition IT investment is now fully amortised, drove strong EBIT growth. EBIT was up 19.8% to $72.9 million with EBIT margin up 50 bps to 3.4%. Stores The Group had 315 stores in Australia and New Zealand at 30 June 2019, with 196 JB Hi-Fi Australia stores, 14 JB Hi-Fi New Zealand stores and 105 The Good Guys stores. We continue to both review our existing store portfolio and to apply stringent store selection criteria to potential new sites to ensure that they offer a high level of foot traffic and convenient access for customers. This considered approach to our existing and new store locations means stores should continue to deliver comfortably in excess of their cost of capital. 1 For personal use onlyCHAIRMAN’S AND GROUP CHIEF EXECUTIVE OFFICER’S REPORT (continued) Total Stores: 315* Board and Management Approach 1 2 5 10 14 23 JB Hi-Fi Australia: 196 JB Hi-Fi New Zealand: 14 The Good Guys: 105 23 39 30 63 28 51 3 5 1 3 * As at 30 June 2019 Group Balance Sheet, Capital Management and Dividends The Board recognises the importance of governance, environmental and social matters to our shareholders, suppliers and customers and continually reviews and monitors developments in corporate governance which are relevant to the Group. The Board is committed to ensuring that the Group’s business is conducted ethically and in accordance with high standards of corporate governance. To this end, the Group has a Code of Conduct that provides guidance on what 14 the Group deems to be acceptable behaviour. The relationship between the Board and management is strong and remains engaging and constructive. It continues to be an integral part of the Board’s strategy to encourage innovation and diversification with new products, technology, merchandising formats, advertising and property locations in a controlled and responsible manner. This approach provides opportunities to increase revenue, margin and productivity. The balance sheet continues to grow in strength with relatively The Board firmly believes that equity participation for low financial and operating leverage, evidenced by our solid fixed charges cover of 3.0 times, gearing of 1.0 and interest cover of 26.1 times. JB Hi-Fi Limited regularly reviews all aspects of its capital structure with a focus on maximising returns to shareholders. Continued solid earnings growth and prudent management of our balance sheet, including relatively low gearing, provides the ability to maintain and optimise our capital structure. The Board has declared a final dividend of 51 cents per share fully franked, bringing the total dividend for FY19 to 142 cents per share, up 10 cents per share on the prior year. The Board believes that our dividend payout ratio of 65% appropriately balances the distribution of profit to shareholders, the repayment of debt and the reinvestment of earnings for future growth. Dividend up 7.6% to 142 cps management through the Group’s share ownership-based remuneration schemes create strong alignment with shareholders and are a critical tool in attracting new management, retaining existing management and rewarding performance. In FY19 the Board introduced a new variable reward plan for group executives and a minimum shareholding requirement for group executives and non-executive directors, further strengthening the alignment between the Board, management and shareholders. The Group recognises the importance of diversity. The Board believes that the different perspectives arising from diversity encourage an innovative, responsive, productive and competitive business and creates value for our customers and shareholders. The Group has a Diversity Policy and the Board sets objectives in relation to gender diversity. The Group has introduced a number of initiatives to encourage gender diversity and assist in achieving our diversity objectives, including the introduction of a paid maternity leave scheme, development of part time and flexible work practices and the introduction of a domestic violence policy and paid domestic violence leave program. Workplace Giving Programs 132 142 The Group has workplace giving programs in place that enable directors, executives and employees to donate to 118 registered charitable organisations through our payroll system. 100 90 FY16 FY17 Dividends per Share (cents) FY18 FY15 2 The Group matches dollar for dollar these regular employee contributions, effectively doubling the financial benefit to our community partners. Workplace giving programs have proved to be a very effective FY19 way for employers and employees to join together to support the community. Through the combined giving of the Group and its employees, we believe we can make a real difference to the charities in the program. For personal use onlyJB Hi-Fi Australia Outlook In FY19, the JB Hi-Fi business celebrated its 10-year In FY20 the Group expects total group sales to be circa anniversary of the introduction of its workplace giving $7.25 billion, comprising: program, known as Helping Hands. The Helping Hands program was awarded Best Overall Program and Most Innovative Charity/Employer Partnership at the 2016 and 2017 Workplace Giving Awards and was awarded silver in 2018 Best Overall Program category. • • • JB Hi-Fi Australia $4.84 billion; JB Hi-Fi New Zealand (NZD) $0.24 billion; and The Good Guys $2.18 billion. Each week around 6,500 or 78% of the JB Hi-Fi Australia employees give to the program, which makes it one of the most successful workplace giving programs in Australia. This year almost $2.6 million has been raised and, since its inception, the JB Hi-Fi business and its employees are proud to have raised more than $16.3 million. JB Hi-Fi New Zealand The Helping Hands program was launched in New Zealand in May 2012 and involves over 280 employees (approximately Whilst we continue to see variability in the sales environment, we enter FY20 confident in our ability to execute and grow market share. The key success drivers of the Group continue to be having the biggest range and the lowest prices, supported by a talented and enthusiastic team of over 12,500 team members across Australia and New Zealand. Our team members are our number one asset and our most important competitive advantage, their dedication and knowledge continues to delight our customers everyday. 60% of JB Hi-Fi New Zealand employees) each making weekly We look forward to another successful year in FY20. contributions. This year, for the first time, over $100,000 was raised and, since its inception, over $500,000 has been raised. The Good Guys The Good Guys workplace giving program was launched in July 2017 and is known as The Good Guys Doing Good. This year the program has donated over $376,000 to 14 national charity partners as a result of contributions from approximately 52% of The Good Guys employees. Greg Richards Richard Murray Chairman Group Chief Executive Officer Melbourne, 27 August 2019 3 For personal use only Annual Report for the ﬁ nancial year ended 30 June 2019 Governance, environmental and social statements Directors’ report Operating and ﬁ nancial review Remuneration report Auditor’s independence declaration Independent auditor’s report Directors’ declaration Statement of proﬁ t or loss Statement of proﬁ t or loss and other comprehensive income Balance sheet Statement of changes in equity Statement of cash ﬂ ows Notes to the ﬁ nancial statements Additional securities exchange information Page 5 18 23 32 57 58 62 63 64 65 66 67 68 103 4 JB Hi-Fi Limited ABN 80 093 220 136 For personal use onlyGOVERNANCE, ENVIRONMENTAL AND SOCIAL STATEMENTS JB Hi-Fi Limited (“the Company” or “JB Hi-Fi”) recognises the importance of Governance, Environmental and Social matters to our shareholders, suppliers and customers. The Board continually reviews and monitors developments in corporate governance which are relevant to the Group (being the consolidated entity consisting of the Company and the entities it controls). CORPORATE GOVERNANCE STATEMENT The directors and management of the Group are committed to ensuring that the Group’s business is conducted ethically and in accordance with high standards of corporate governance. The Board believes that: • the Group’s policies and practices comply in all material respects with the 3rd edition of the ASX Corporate Governance Council Principles and Recommendations (the “ASX Recommendations”); and • during the 2019 ﬁ nancial year, it has been compliant with the spirit of the principles contained in the ASX Recommendations. The Company is currently reviewing its policies and practices in view of the recent release of the 4th edition of the ASX Corporate Governance Council Principles and Recommendations, noting that compliance with the 4th edition is required by FY2021. This Corporate Governance Statement has been approved by the Board and is effective as at 12 August 2019. THE BOARD Role The primary role of the Board is to protect and enhance long-term shareholder value. The Board is accountable to shareholders for the performance of the Company and it directs and monitors the business and affairs of the Group on behalf of shareholders. The Board’s responsibilities include: overseeing the business and affairs of the Group; setting (in consultation with management) the strategic and financial objectives of the Group and overseeing management’s implementation of these objectives; monitoring the performance of management; approving the adoption of the Group’s major corporate governance policies; reviewing the Group’s policies on risk oversight and management; overseeing the reliability and integrity of the Group’s accounting, financial reporting and financial management and disclosure practices; overseeing the Group’s process for making disclosure to the market; and the establishment of a formal and transparent procedure for the selection, appointment and review of directors. The Group Chief Executive Officer, who is accountable to the Board, is responsible for managing, directing and promoting the profitable operation and development of the Group. A copy of the Board Charter can be found on the Company’s investor website at https://investors.jbhifi.com.au via the “Investors” and “Corporate Governance” sections. Composition of the Board / Selection and appointment of directors The Board seeks to ensure that the combination of its members provides an appropriate range of experience, skills, diversity, knowledge and perspective to enable it to carry out its obligations and responsibilities. The Board believes that having a range of different skills, backgrounds, experience and gender ensures a diversity of viewpoints which facilitate effective governance and decision making. The Company believes that skills and experience in the areas listed below are desirable for the Board to perform its role effectively. The Board considers that its current composition possesses an effective blend of these skills and experience which enables it and its Committees to effectively govern the business, operate effectively and add value in the context of the Company’s strategy. • • Executive/Management experience Retail expertise and experience • Operational Management expertise and experience • • Financial expertise Property expertise • Mergers & Acquisitions expertise and experience • Governance expertise and experience • Other board experience • • Experience in setting executive remuneration Risk Management expertise and experience 5 For personal use onlyGOVERNANCE, ENVIRONMENTAL AND SOCIAL STATEMENTS (continued) The Company maintains a majority of non-executive directors on its Board. The Board currently comprises seven directors, being six non-executive directors, including the Chairman, and one executive director, being the Group Chief Executive Officer. The Company has written agreements with each director setting out the terms of their appointment. Apart from the Group Chief Executive Officer, directors are subject to shareholder re-election by rotation at least every three years. The Company provides shareholders with all material information in its possession relevant to the election or re-election of a director. A copy of the Company’s Board Composition & Succession Policy, which includes the procedure for the selection and appointment of directors, can be found on the Company’s investor website at https://investors.jbhifi.com.au via the “Investors” and “Corporate Governance” sections. The Board will undertake appropriate checks before appointing any person or putting forward to shareholders a candidate for election as a director. Details of the directors as at the date of this report, including further information about their experience, expertise and term of office, are set out in the Directors’ Report. Independence The Company considers that each of its directors (including the Chairman) is independent with the exception of Richard Murray, the Group Chief Executive Officer. The Board regards directors as independent directors if they: do not have a material relationship with the Company other than solely as a result of being a director; are independent of management; and do not have any business or other relationship that could compromise the independent exercise of their judgement and their ability to act in the best interests of the Company. The independence of each director is considered on a case-by-case basis. Richard Uechtritz was Chief Executive Officer of the Company between July 2000 and May 2010 and a consultant to the Company from May 2010 to November 2013. Given the passage of time, the Board is of the opinion that Richard is an independent director, and that neither these previous roles, nor his relationship with current management, compromises his ability to exercise independent, unfettered judgement or act in the best interests of the Company. Beth Laughton is a non-executive director and chair of the audit, compliance & risk management committee of GPT Funds Management Limited (“GPTFM”), the responsible entity for the GPT Wholesale Shopping Centre Fund. Wai Tang is a non-executive director and member of the audit committee and the risk & compliance committee of Vicinity Limited. Mark Powell is a non-executive director and member of the audit & risk management committee of Kiwi Property Group Limited. The Board notes that each of the GPT Wholesale Shopping Centre Fund, Vicinity Limited and Kiwi Property Group Limited have ownership interests in shopping centres in which the Company currently leases stores. The Board is of the opinion that Beth, Wai and Mark are independent directors on the basis that individual leasing arrangements at the Company, GPTFM, Vicinity Limited and Kiwi Property Group Limited are generally determined at a managerial level rather than Board level. Wai Tang is a non-executive director of ASX listed Ovato Limited which provides catalogue printing services to the Group. The Board is of the opinion that Wai is an independent director on the basis that these arrangements are determined at a managerial level rather than Board level. In addition, the Company’s internal protocols provide that Beth, Wai and Mark would be excluded from any discussion and decision making where any conflict of interest arises between their roles as a director of the Company and of GPTFM/Vicinity Limited/Kiwi Property Group Limited/Ovato Limited. Conﬂ ict of interest If a conflict of interest arises, the director concerned does not receive the relevant Board papers, is not present at the meeting whilst the item is considered and takes no part in decision making. Directors must keep the Board advised, on an ongoing basis, of any interests that could potentially conflict with those of the Company. Directors are required to promptly disclose to the Board interests in contracts, other directorships or offices held, possible related party transactions and any other material personal interests in a matter relating to the Company’s affairs. 6 For personal use onlyBoard meetings The Board meets regularly, dependent on business requirements. Prior to any meeting, the directors receive all necessary Board papers. As well as holding regular Board meetings, the Board also meets to comprehensively review business plans and the strategy of the Group. Access to information and independent advice Each director has the right of access to all relevant Company information and to the Group’s executives. Subject to prior consultation with the Chairman, each director may seek independent professional advice at the Company’s expense. Professional development of directors The Company recognises the need for its directors to develop and maintain the skills and knowledge needed to perform their roles as directors effectively. The Company provides the directors with briefings and advice on developments in both the law and current practice in areas relevant to the Company and their role as directors (including, for example, corporate governance, accounting and remuneration). The Company does this using both the Company’s external advisors (including the Company’s auditors, legal and remuneration advisors) and management (including the Group Chief Financial Officer and the Company Secretary & General Counsel). Individual directors also take advantage of professional development opportunities provided by third parties such as the Australian Institute of Company Directors and major accounting and legal firms. The Company has an induction program for new directors. BOARD COMMITTEES Details of the Committees established by the Board are set out below. Audit and Risk Management Committee The Board has established an Audit and Risk Management Committee. The Audit and Risk Management Committee is charged primarily with assisting the Board in its: • oversight of the reliability and integrity of the Group’s financial management, financial reporting and disclosure, and related non-financial reporting and disclosure practices; • • oversight of the independence, performance, appointment and removal of the external auditor; and review of the Group’s policies on risk oversight and management, and in discharging its responsibility to satisfy itself that an adequate and sound system of risk management and internal control has been implemented to manage the material risks affecting the Group’s business, including compliance with all applicable laws. A copy of the Audit and Risk Management Committee Charter can be found on the Company’s investor website at https://investors.jbhifi.com.au via the “Investors” and “Corporate Governance” sections. During the 2019 financial year, the Audit and Risk Management Committee comprised the following non-executive directors, all of whom were independent with relevant financial, commercial and risk management experience, including an independent chair who is not the Chair of the Board: • Beth Laughton: Ongoing member and Chair of Committee; • Wai Tang: Ongoing member of Committee; • Stephen Goddard: Ongoing member of Committee; and • Mark Powell: Ongoing member of Committee. Details of the background and experience of each of these non-executive directors are outlined in the Directors’ Report. The Audit and Risk Management Committee meets regularly. Details of the meetings held and members’ attendance during the 2019 financial year are listed in the Directors’ Report. Directors who are not members of the Audit and Risk Management Committee may attend any Audit and Risk Management Committee meeting. 7 For personal use onlyGOVERNANCE, ENVIRONMENTAL AND SOCIAL STATEMENTS (continued) Remuneration Committee The Board has established a Remuneration Committee. The Remuneration Committee is charged primarily with reviewing and making recommendations to the Board regarding the framework, structure and quantum of remuneration of executive officers and non-executive directors. A copy of the Remuneration Committee Charter can be found on the Company’s investor website at https://investors.jbhifi.com.au via the “Investors” and “Corporate Governance” sections. During the 2019 financial year, the Remuneration Committee comprised the following directors, each of whom are considered by the Company to be independent: • Greg Richards: Ongoing member and Chair of Committee; • Beth Laughton: Ongoing member of Committee; and • Wai Tang: Ongoing member of Committee. The Remuneration Committee meets as required. Details of the meetings held and members’ attendance during the 2019 financial year are listed in the Directors’ Report. Directors who are not members of the Remuneration Committee may attend a Remuneration Committee meeting at the invitation of the Chairman when considered appropriate. Nominations Committee The Board has decided not to establish a Nominations Committee. Rather, the Board itself is responsible for: • • • • establishing formal and transparent procedures for the selection and appointment of new directors to the Board; appointment of directors to fill vacancies or as additional directors and ensuring that the Board has the appropriate balance of skills, knowledge, experience, independence and diversity to enable it to discharge its duties and responsibilities effectively (including the process for recruiting new directors); induction programs for new directors; selecting, appointing and regularly evaluating the performance of, and planning for the succession of, the Group Chief Executive Officer; and • ensuring that internal procedures are in place for evaluating Board performance and the performance of individual directors and Board Committees. A copy of the Board Charter and the Board Composition & Succession Policy can be found on the Company’s investor website at https://investors.jbhifi.com.au via the “Investors” and “Corporate Governance” sections. COMPANY SECRETARY The Company Secretary is accountable directly to the Board, through the Chair, on all matters to do with the proper functioning of the Board. CODE OF CONDUCT The Group acknowledges the need for directors, executives and employees to observe the highest ethical standards of corporate behaviour. The Group has adopted a Code of Conduct to provide directors, executives and employees with guidance on what the Group deems to be acceptable behaviour. A copy of the Code of Conduct can be found on the Company’s investor website at https://investors.jbhifi.com.au via the “Investors” and “Corporate Governance” sections. WHISTLEBLOWER POLICY The Group has recently adopted a Whisteblower Policy which will be launched in the businesses in August 2019. The Group will ensure that the Board and/or Audit and Risk Management Committee is informed of any material incidents reported under this Policy. 8 For personal use onlyDIVERSITY The Group recognises the importance of diversity and values the competitive advantage that is gained from a diverse range of skills, backgrounds, experience and gender at all levels of the organisation. The Group has a Diversity Policy which is available on the Company’s investor website at https://investors.jbhifi.com.au via the “Investors” and “Corporate Governance” sections. The Diversity Policy states that the Group appreciates that the different perspectives arising from diversity encourage an innovative, responsive, productive and competitive business and create value for our customers and shareholders. The Group’s objective is that Board appointments, employment and advancement decisions are based on merit, qualifications and competence, and that employment opportunities shall not be influenced, affected or limited by discrimination. The Group believes that no barrier should exist that prevents this from occurring. Gender diversity As at 30 June 2019, the proportion of women engaged by the Group was as follows: • • Board: 29% being 2 of 7 directors (2018: 29%). Group Executive (the executives classiﬁ ed as key management personnel of the Company as listed on page 34 of this Report, excluding the executive director/Group CEO): 14% being 1 out of 7 (2018: 0%). • Senior Management/Executive (excluding the executive director/Group CEO): 13% being 6 of 45 employees (2018: 17%). For these purposes, Senior Management/Executive means: • • the 7 executives referred to above; and the 38 next most senior managers of the Group. • Group: 40.5% being 5,094 of 12,564 employees (2018: 40.9%). The Board has set measurable objectives in relation to gender diversity. These objectives, and the progress towards achieving them are set out in the table below: Objective To improve the percentage of female to male commissioned store sales staff To improve the percentage of female to male store managers To improve the percentage of female to male territory/area managers To increase the percentage of female to male senior managers June 2019 June 2018 32% 16% 18% 13% 29% 15% 19% 17% The Group and the JB Hi-Fi and TGG businesses have implemented various initiatives to assist in achieving the Group’s diversity objectives as set out below: • reviewed the gender composition of the workforce across both businesses, in particular the representation of women in • • • • • • • • • • leadership roles; introduced a paid maternity leave scheme for all employees of the Group; developed systems to enable regular reporting and assessment of progress towards the adopted gender diversity objectives; reviewed employee pay to consider whether any gender based disparity exists; developed part time and ﬂ exible work practices, with speciﬁ c focus on return to work from maternity leave; reorganised the managerial structure within JB Hi-Fi stores, aimed at achieving greater female representation at management level over the medium term; encouraged female participation in leadership development programs; conducted a Group-wide employee survey in the JB Hi-Fi business with speciﬁ c focus on equal opportunity and diversity; conducted focus groups to determine potential barriers to women’s progression to leadership and/or return from parental leave; introduced a domestic violence policy and paid domestic violence leave program for both businesses; introduced diversity and unconscious bias training facilitated by an external expert diversity advisor, including compliance training setting out equal opportunity obligations and expectations of all employees and training to increase leaders’ capability in managing parental leave and ﬂ exibility requests; and • introduced a competency framework to support recruitment decisions based on relevant technical and behavioural competencies. 9 For personal use onlyGOVERNANCE, ENVIRONMENTAL AND SOCIAL STATEMENTS (continued) SAFETY The Group is committed to providing a healthy and safe work environment for all its team members, contractors, customers and visitors. In FY2019 the Lost Time Injury Frequency Rate (LTIFR) in JB Hi-Fi was 1.66 and in The Good Guys was 7.46, an improvement of 56% and 12% year on year respectively. There were no work-related fatalities recorded during the reporting period. The decrease in LTIFR was supported by a Group wide focus on safety culture, investment in safety equipment and safe work practices, continued improvements in team member awareness and education. SHAREHOLDINGS OF DIRECTORS AND EMPLOYEES Directors’ current shareholdings are detailed in the Directors’ Report and are updated by notification to the ASX as required. The Board has approved and adopted a Securities Trading Policy setting out the rules and procedures applying to directors, officers and employees dealing in securities. All non-executive directors and the 8 executives listed on page 34 are subject to the Company’s Minimum Shareholding Policies which were introduced in FY2019 and require: • Non-Executive Directors to hold the equivalent of 1.0 times base Board fees in shares; • The Group CEO to hold the equivalent of 1.5 times fixed pay in shares; and • Other Group executives to hold the equivalent of 1.0 times fixed pay in shares. This level of shareholding is required to be built over 5 years from the introduction of the policy (or appointment, if later). Subject to certain specific and limited exceptions, directors and key employees may only trade in the Company’s shares, and any other securities of the Company, during designated Trading Windows. These four-week Trading Windows follow the release of the Company’s Final Results (August/September), Interim Results (February/March) and the Annual General Meeting (October/November). Directors and Group executives are required to obtain the Chairman’s consent in advance of any such trading and any transaction conducted by directors in shares of the Company is notified to the ASX. A copy of the Securities Trading Policy can be found on the Company’s investor website at https://investors.jbhifi.com.au via the “Investors” and “Corporate Governance” sections. INTEGRITY OF REPORTING The Company has put in place controls designed to ensure the integrity of its financial reporting and that the Company complies with all regulatory requirements relevant to this reporting. In accordance with the Corporations Act and the ASX Recommendations, the Group Chief Executive Officer and Group Chief Financial Officer have stated in writing to the Board that, in their opinion: (a) the financial records of the consolidated entity (consisting of the Company and the entities it controlled for the financial year ended 30 June 2019) for the financial year have been properly maintained in accordance with section 286 of the Corporations Act; (b) the financial statements for the financial year and the notes required by the accounting standards give a true and fair view of the consolidated entity’s financial position and performance, and comply with the accounting standards; (c) the statements in (a) and (b) above are founded on a sound system of risk management and internal control which is operating effectively; and (d) subsequent to 30 June 2019, no changes or other matters have arisen that would have a material effect on the operation of the risk management and internal control systems of the Group. The Company’s financial statements are subject to an annual audit by an independent, professional auditor who also reviews the Company’s half yearly financial statements. The Audit and Risk Management Committee oversees this process on behalf of the Board. Deloitte has been the Company’s external auditor since 2002. The audit engagement partner is rotated every five years. Information on procedures for the selection and appointment of the external auditor and for the rotation of external audit engagement partners can be found in the Charter of the Audit and Risk Management Committee on the Company’s investor website at https://investors.jbhifi.com.au via the “Investors” and “Corporate Governance” sections. 10 For personal use onlyCONTINUOUS DISCLOSURE The Company seeks to provide relevant and timely information to its shareholders and is committed to fulfilling its continuous disclosure obligations. The Board has approved a Continuous Disclosure Policy to ensure that the procedures for identifying and disclosing material price sensitive information in accordance with the Corporations Act and ASX Listing Rules are clearly articulated. This policy sets out the obligations of employees in respect of such information. The Group Chief Executive Officer, in consultation with the Chairman where appropriate, is responsible for communication with the ASX. A copy of the Continuous Disclosure Policy can be found on the Company’s investor website at https://investors.jbhifi.com.au via the “Investors” and “Corporate Governance” sections. SHAREHOLDER COMMUNICATIONS The Company’s investor website https://investors.jbhifi.com.au contains an overview of the Group’s businesses and their history and the following information for shareholders: • • • • • • all market announcements and related documents, which are posted immediately after release to the ASX; details relating to the Company’s directors and executives; Board and Board Committee charters and other corporate governance documents; a calendar of forthcoming key dates such as the date of results releases and the Company’s AGM; a summary of the Company’s dividend policy and its dividend payment history; and details of how investors can contact the Company and its share registry. Shareholders can elect to receive communications from the Company’s share registry electronically which also gives shareholders the opportunity to manage their account details and holdings electronically. Shareholders are also able to send communications to the Company and receive responses to these communications electronically. A copy of the Company’s Shareholder Communication Policy can be found on the Company’s investor website at https://investors.jbhifi.com.au via the “Investors” and “Corporate Governance” sections. The Company has an investor relations program which involves regular meetings with significant current and potential investors, and with analysts and the financial media. The Company holds its Annual General Meeting in Melbourne, to which all shareholders are invited. Shareholders who are unable to attend can appoint a proxy to attend and vote or, alternatively, can vote electronically in advance of the Meeting. The Company ensures that the external auditor attends its 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. RISK IDENTIFICATION AND MANAGEMENT The Group’s policy is to consider the balance of risk and reward, as far as practicable, in order to optimise the returns gained from its business activities and to meet the expectations of its shareholders. The Board has delegated to the Audit and Risk Management Committee responsibility for overseeing the implementation of policies and procedures aimed at ensuring that the Group conducts its operations in a manner that adequately manages risk to protect its people, the environment and the Group’s assets and reputation. The Group has an effective risk management framework in line with ISO31000 which enables management to identify and manage risk appropriately. The Committee regularly reviews and revises this framework and it is approved by the Board on an annual basis. The risk management framework was last approved by the Board in November 2018. Risk identification and management is also a key focus of the executive and management teams. The JB Hi-Fi business does not have an internal audit function. Instead, risk identification and management for the JB Hi-Fi business is managed on a day-to-day basis by a dedicated risk management team. Risk identification and management for The Good Guys business as well as internal audit is managed on a day-to-day basis by a dedicated business assurance team. A copy of the Group’s Risk Management Policy can be found on the Company’s investor website at https://investors.jbhifi.com.au via the “Investors” and “Corporate Governance” sections. 11 For personal use onlyGOVERNANCE, ENVIRONMENTAL AND SOCIAL STATEMENTS (continued) ECONOMIC, ENVIRONMENTAL & SOCIAL SUSTAINABILITY RISKS Economic sustainability risks Economic sustainability risks are risks to the Group’s ability to continue operating at its current level of economic production over the long term. The Group is exposed to a number of economic sustainability risks, which have a real possibility of substantively impacting on the Group’s ability to create or preserve value for its shareholders over the short, medium or long term. These economic sustainability risks (together with the Group’s strategies for managing these risks) are discussed in the “Business Strategies and Prospects” section of the Operating and Financial Review commencing on page 28. Environmental sustainability risks Environmental sustainability risks are risks to the Group’s ability to continue operating in a manner that does not compromise the health of the ecosystems in which it operates over the long term. The Group does not believe that it is exposed to any environmental sustainability risks which have a real possibility of substantively impacting on the Group’s ability to create or preserve value for its shareholders over the short, medium or long term. Notwithstanding this, environmental sustainability is important to the Group and, accordingly, the Group has implemented several initiatives to minimise the impact of its operations on the environment. These initiatives are discussed in the Environmental Statement on page 14 and include participation by the JB Hi-Fi business in the Carbon Disclosure Project and the Australian Packaging Covenant. Social sustainability risks Social sustainability risks are risks to the Group’s ability to continue operating in a manner that meets accepted social norms and needs over the long term. The Group does not believe that it is exposed to any social sustainability risks which have a real possibility of substantively impacting on the Group’s ability to create or preserve value for its shareholders over the short, medium or long term. Notwithstanding this, the Group prides itself on conducting its business in a socially responsible manner and believes that it is important to give back to the community. The Group’s initiatives in this regard are discussed in the Social Statement on page 16, the most significant of which are the Group’s workplace giving programs. The Group is currently engaging with its suppliers in relation to ethical sourcing and “modern slavery” standards, and intends to publish a modern slavery statement by December 2020 as required by legislation. BOARD AND EXECUTIVE PERFORMANCE JB Hi-Fi monitors and evaluates the performance of its Board, Board Committees, individual directors, and executives in order to fairly review, and actively encourage enhanced, Board and management effectiveness. In June/July of each year, each director completes a written board review and assessment document, and subsequent one-on-one interviews then take place between the Chair and each director which cover: • • • review of Board performance as a whole; review of the individual director’s performance; and review of the Chair’s performance. The Chair reports back to the Board on the discussions and the Board considers any issues as necessary. Directors may also discuss the Chair’s performance with the Chair of the Company’s Audit & Risk Management Committee, who will report back to the Board if necessary. The Chair provides informal feedback to directors throughout the year as necessary. Each Board Committee reviews its performance and reports the results of the review to the Board. Where necessary, recommendations will be made to the Board for improving the effectiveness of the relevant Committee. 12 For personal use onlyReview of the Group CEO’s performance is evaluated by the Chair, with ultimate oversight by the Board. This involves an assessment against both financial and non-financial performance measures. All other Group executives are evaluated by the Group CEO including: (i) assessment against both financial and non-financial performance measures; and (ii) a one-on-one meeting between the Group CEO and executive to discuss the executive’s performance. The Group CEO provides a summary of the evaluation of each executive to the Board and the Remuneration Committee. Evaluation of the Board, Board Committees, individual directors and Group executives has been conducted in respect of the 2019 financial year. DIRECTORS’ FEES AND EXECUTIVE REMUNERATION Directors’ fees The details of remuneration paid to each non-executive director during the financial year and the principles behind the setting of such remuneration are included in the Remuneration Report. Executive remuneration The amount of remuneration, both monetary and non-monetary, for the executives who had authority and responsibility for planning, directing and controlling the activities of the Group during the financial year, and the principles behind the setting of such remuneration, are included in the Remuneration Report. 13 For personal use onlyGOVERNANCE, ENVIRONMENTAL AND SOCIAL STATEMENTS (continued) ENVIRONMENTAL STATEMENT The Group is committed to understanding and attempting to mitigate any adverse environmental impacts its business has on the Australian and New Zealand environments, and has implemented several initiatives to help achieve this. Carbon disclosure project The Carbon Disclosure Project (“CDP”) is a not-for-profit organisation that collates and reports company environmental actions to external users such as investors and other corporations. The Group has systems in place to ensure it is reporting and monitoring energy consumption and greenhouse gas emissions. In addition, the Group seeks to identify opportunities and implement solutions to reduce energy consumption and greenhouse gas emissions whilst maintaining its low cost of doing business. The Group’s response to the CDP in 2018 was assessed as a D. The Group is currently developing a Sustainability Framework which will be released in FY2020 and is designed to ensure a strategic and structured approach to the management of sustainability and which is likely to improve the Group’s CDP rating. Promotion of energy efﬁ cient products The Group supports the Smarter Choice program in conjunction with the Victorian and New South Wales State Governments. This program educates employees of the Group on how to best advise customers about the energy efficiency of products. The Good Guys business also works with state-based organisations that provide home energy assistance. These include: • • Energex in Queensland (which promotes PeakSmart air-conditioners, which help reduce peak electricity demand); New South Wales Office of Environment & Heritage (which assists eligible residents through the Appliance Replacement Offer to reduce energy bills by subsidising the purchase of energy efficient product upgrades); and • Brotherhood of St Laurence in Victoria (which assists low income and vulnerable households in replacing appliances with more energy efficient ones). Australian packaging covenant The Group is a signatory to the Australian Packaging Covenant. This is a voluntary program involving both Government and industry with the intention of ensuring that the environmental impact from packaging is reduced, measured and understood. Each signatory to the Australian Packaging Covenant is required to have an action plan which sets out what the signatory proposes to do to contribute to the Australian Packaging Covenant’s objectives and goals. During FY2019, JB Hi-Fi was assessed at a Performance Level 2 (Good Progress) which was the same as FY2018. The Good Guys were assessed at Performance Level 1 (Getting Started). Additional initiatives that will be implemented by the Group will be addressed in conjunction with the new Group Sustainability Framework and these are likely to lead to an improvement in the ratings. Cartridges 4 Planet Ark The Group is a Cartridges 4 Planet Ark collection partner. This program enables consumers to drop used printer cartridges in stores, where they are collected and returned for recycling and remanufacturing, ensuring landfill is avoided. In FY2019, almost 41,000 cartridges were recycled through the Group’s participation in this program. Since the commencement of the Group’s participation in this program approximately 264,000 cartridges have been recycled (in addition to cartridges recycled by The Good Guys prior to its acquisition by the Group). TAKE2 The Group has committed to participate in Sustainability Victoria’s TAKE2 program, which is a collective climate change program supporting individuals, government, businesses and other organisations to help Victoria achieve net zero emissions by 2050. REDCycle The Group has committed to support the REDCycle Program, which enables soft plastics such as plastic bags to be returned to over 1800 sites around Australia and New Zealand and converted into furniture for schools and communities. 14 For personal use onlyE-Waste All e-waste from Store and Support operations is recycled. Store initiatives The Group continues to review its store operations and has introduced various initiatives with the aim of ensuring its impact on the environment is reduced. In order to reduce energy consumption stores have been fitted with LED lighting and a trial is underway to control, monitor, measure and optimise energy consumption in stores. Waste from operations is recycled where possible with stores having paper and cardboard recycling bins. A trial is underway to identify opportunities to reduce plastic waste going to landfill. JB Hi-Fi New Zealand stores no longer provide customers with plastic bags; customers now have the option of a paper bag or are able to purchase reusable bags. 15 For personal use onlyGOVERNANCE, ENVIRONMENTAL AND SOCIAL STATEMENTS (continued) SOCIAL STATEMENT As one of Australia’s and New Zealand’s leading retailers, the Group understands the impact it can have on people and the community. The Group is committed to working with its employees, customers and suppliers to ensure a strong and sustainable future for our people and the community in which we live and operate. Modern slavery reporting and group ethical sourcing policy The Group is in the process of developing and implementing a Group Ethical Sourcing Policy, which outlines the Group’s minimum standards for labour, environmental management, ethics and health and safety in relation to the sourcing of products by the Group. In conjunction with this, in FY2019 the Group became a member of the Responsible Business Alliance, which is the world’s largest industry coalition dedicated to corporate social responsibility in global supply chains. The Group will submit an Annual Slavery Statement to the Department of Home Affairs by Dec 2020. JB Hi-Fi’s workplace giving program – “Helping Hands” During FY2019, JB Hi-Fi celebrated the 10-year anniversary of the introduction of Helping Hands, which is the business’ workplace giving program. Through this program, JB Hi-Fi directors, executives and employees are able to donate to registered charitable organisations. The JB Hi-Fi business matches dollar for dollar employee contributions through its payroll system, effectively doubling the financial benefit to its charity partners. Our Helping Hands program was awarded Best Overall Program and Most Innovative Charity/Employer Partnership at the 2016 and 2017 Workplace Giving Awards and was awarded silver in 2018 Best Overall Program category. The JB Hi-Fi business works with Workplace Giving Australia to develop and maintain the program and, in doing so, contributes to the Group’s vision of delivering significant social impact through employers and community organisations working together. Through the combined giving of the JB Hi-Fi business and its employees, the Group believes it makes a real difference to the charities in the program. Helping Hands – Australia The Helping Hands program in Australia involves around 6,500 JB Hi-Fi Australia employees (approximately 78% of total JB Hi-Fi Australia employees) each making weekly contributions to registered charitable organisations. In FY2019 almost $2.6 million has been raised and, since its inception, the JB Hi-Fi business and its employees are proud to have raised more than $16.3 million. During 2018 The Group proactively sought feedback from its employees as to the cause areas they wanted to support. Based on that feedback a charity rotation plan has been introduced, which has resulted in two new charity partners, Kids Under Cover and JB Hi-Fi Helping Out, being introduced. JB Hi-Fi Helping Out has been set up to enable employees to donate, for a limited time, to a charity that is delivering an innovative initiative within a cause area the employees are passionate about. The first charity to be supported through JB Hi-Fi Helping Out is McAuley Community Service for Women which provides services for women and their children who are escaping family violence, and for women who are homeless. The current charity partners who receive contributions are Bush Heritage Australia, ReachOut.com, Medicins Sans Frontieres (Doctors Without Borders), The Song Room, RedKite, Fred Hollows Foundation, Oxfam, Animal Welfare League Australia (“AWLA”), Kids Under Cover and JB Hi-Fi Helping Out. Helping Hands – New Zealand The Helping Hands program was launched in New Zealand in 2012 and involves over 280 employees (approximately 60% of JB Hi-Fi New Zealand employees) each making weekly contributions. This year, for the first time, over $100 thousand was raised and since its inception over $503 thousand has been raised. The current charity partners in New Zealand are ShelterBox, Kenzies Gift, Forest and Bird, Youthline and Plunket. 16 For personal use onlyThe Good Guys’ “Doing Good” workplace giving program The Good Guys business launched its workplace giving program, Doing Good, in July 2017. Under this program The Good Guys matches dollar for dollar contributions made by employees, effectively doubling the benefit to its national charity partners. This year the program has donated over $376 thousand to 14 national charity partners as a result of contributions from approximately 52% of The Good Guys employees. Donations were made to the following charities: Berry Street, Circus Oz, Orange Sky Laundry, The Good Foundation, Whitelion, KickStart for Kids, McGrath Foundation, Soldier On, Prostate Cancer Foundation of Australia, EdConnect, Perth Children’s Hospital Foundation, Daniel Morcombe Foundation, HeartKids and RSPCA. “Change for Change” – donation boxes in JB Hi-Fi stores The Helping Hands program has driven the placement of “Change for Change” boxes in all JB Hi-Fi stores across Australia and New Zealand. These boxes have been placed at point of sale locations to encourage donations from customers. All donations collected are shared evenly amongst the Helping Hands program’s charity partners. This year almost $48 thousand has been collected in Australia and, since inception, the program has raised over $642 thousand. In New Zealand approximately $31 thousand has been collected since boxes were first introduced into stores. One-off fundraising campaigns During the year the Group partnered with both current Helping Hands charity partners and other charities to deliver one-off fundraising campaigns. Current partners Songroom and ReachOut received over $200 thousand each as a result of instore campaigns. Drought Angels and The Christchurch Foundation received contributions from employees, which were matched dollar for dollar by the Group, to assist with events during the year. “Employer Leadership Group” – founding partner The JB Hi-Fi business is a founding partner of Workplace Giving Australia’s “Employer Leadership Group” (“ELG”) that was formed in 2010 to generate awareness of the benefits of workplace giving programs across the leadership of Australian businesses. The Group’s CEO, Richard Murray, is Chairperson of the ELG. Members of the ELG have demonstrated best practice in engaging with their employees around community issues and are committed to leading the growth of the sector alongside Workplace Giving Australia. As a founding partner, the JB Hi-Fi business seeks to play its part in encouraging workplace giving as a low cost and highly efficient way of generating funds for the charitable sector. In addition to the Group’s workplace giving programs and Change for Change contributions detailed above, from 2012 to 2019 the Group has made contributions to Workplace Giving Australia totalling $300 thousand in order to support its initiatives. The recent addition of the Business Council of Australia as a member of Workplace Giving Australia is an exciting step forward in the continued growth of workplace giving in Australia and towards the realisation of Workplace Giving Australia’s vision of one million Australians giving to charity through their place of work by 2020. 17 For personal use onlyDIRECTORS’ REPORT The directors of JB Hi-Fi Limited (the “Company”) submit herewith the annual financial report of the consolidated entity consisting of the Company and the entities it controlled (the “Group”) for the financial year ended 30 June 2019. In order to comply with the provisions of the Corporations Act 2001, the Directors report as follows: The names and particulars of the directors of the Company during or since the end of the financial year are: Name Mr Greg Richards Chairman Particulars Greg was appointed to the Board in December 2007 and was appointed Chairman of the Board in June 2012. Greg is a member and Chairman of the Remuneration Committee and Non-Executive Director was Chairman of the Audit and Risk Management Committee from February 2010 until B.Ec (Hons) May 2012. Prior to 2006, Greg had over 25 years’ experience in the investment banking industry. Most recently he was with Goldman Sachs JBWere for over 19 years where he was an equity partner for 17 years, working primarily in equity capital markets. Greg was previously the non-executive chairman of Vitaco Holdings Limited. Mr Stephen Goddard Stephen was appointed to the Board in August 2016 and is a member of the Audit and Risk Non-Executive Director Management Committee. Stephen has more than 30 years’ retail experience having held MSc. BSc (Hons) senior executive positions with some of Australia’s best known retailers. These include Finance Director and Operations Director for David Jones, founding Managing Director of Ofﬁ ceworks, and various senior management roles with Myer. Stephen is currently a non-executive director and Chair of the Audit and Risk Management Committees of both GWA Group Limited and Accent Group Limited and a non-executive director of Nick Scali Limited. He was previously a non-executive director and Chair of the Audit and Risk Management Committees of Paciﬁ c Brands and Surfstitch Group Ltd. Ms Beth Laughton Beth was appointed to the JB Hi-Fi Board in May 2011, became Chair of the Audit & Risk Non-Executive Director Management Committee in June 2012 and is also a member of the Company’s Remuneration B.Ec, FAICD, FCA Committee. After qualifying as a Chartered Accountant, Beth spent over 25 years in corporate ﬁ nance, providing mergers and acquisition advice and arranging equity funding for companies in a range of industries including specialty retail. For 12 years her primary focus was on information technology, telecommunications and entertainment. She is also a member of the Board of GPT Funds Management Limited and Chair of its Audit, Compliance & Risk Management Committee and a non-executive director of Shopping Centres Australasia Property Group RE Limited and Shopping Centres Australasia Property Holding Pty Ltd. Beth was previously a member of the Defence SA Advisory Board and its Audit & Risk Management Committee, a non-executive director of Port Adelaide Maritime Corporation, a non-executive director and Chair of the Audit Committee of both Sydney Ferries and CRC Care Pty Ltd, and a non-executive director and member of the Audit Committee of the ASX listed Australand Property Group companies. Mr Mark Powell Mark was appointed to the Board in March 2017 and is a member of the Audit & Risk Non-Executive Director Management Committee. Mark has over 25 years’ executive experience in retail, logistics and BSc (Hons), MSc, MBA (Distinction), wholesale distribution in the UK, Spain, North America, Australia and New Zealand. This includes BApp. Theol, MA (Hons) being UK Logistics Operations Director for Tesco Plc, running Wal-Mart Canada’s logistics operations and CEO of Warehouse Stationery in NZ. Mark also spent ﬁ ve years as Group CEO for The Warehouse Group, an NSX listed retail group which includes Noel Leeming, NZ’s largest technology and appliances retailer. He was an advisor to the board of The Good Guys for 18 months prior to its acquisition by JB Hi-Fi. Mark is currently a non-executive director and member of the Audit and Risk Committee of NZX listed Kiwi Property Group Limited. He is also involved on a voluntary basis on the boards of several not-for-proﬁ t organisations. Ms Wai Tang Non-Executive Director BAppSC, MBA, GAICD Wai was appointed to the Board in September 2015 and is a member of the Company’s Audit & Risk Management Committee and Remuneration Committee. Wai has extensive retail industry experience and knowledge gained through senior executive and board roles. Her former senior executive roles included Operations Director for Just Group and Chief Executive Ofﬁ cer of the Just Group sleepwear business, Peter Alexander. Prior to joining the Just Group, Wai was General Manager of Business Development for Paciﬁ c Brands. Wai was co-founder of the Happy Lab retail confectionery concept. Wai is also a non-executive director and member of the Audit Committee and the Risk & Compliance Committee of Vicinity Limited, and a non-executive director of Ovato Limited, Metcash Limited, the Melbourne Festival and Visit Victoria. Wai’s former directorships include Speciality Fashion Group and the Melbourne Fashion Festival. 18 For personal use onlyMr Richard Uechtritz Non-Executive Director Richard has over 30 years’ experience in retailing. He was co-founder of Australia’s two leading photo chains, Rabbit Photo and Smiths Kodak Express. He was also a director of Kodak (Australasia) Pty Ltd. Richard led the management buy-in of JB Hi-Fi in July 2000 and was CEO and Managing Director until his resignation from these positions in May 2010. Richard re-joined the Board in April 2011 as a non-executive director. He is also a non-executive director of Seven Group Holdings Limited. Mr Richard Murray Group Chief Executive Officer and Executive Director B.Comm, Grad.Dip. Applied Finance & Investment, FCA Richard became Chief Executive Ofﬁ cer on 1 July 2014 having been appointed to the Board in June 2012. Richard has 25 years’ experience in retail and ﬁ nance. He joined JB Hi-Fi as CFO in 2003 and took the business through the IPO process. Prior to this Richard worked with Deloitte for 10 years. He is currently Chairman of Workplace Giving Australia’s Leadership Group, which aims to encourage Australian businesses to set up workplace giving programs. Each of the aforementioned directors held ofﬁ ce for the whole ﬁ nancial year and since the end of the ﬁ nancial year. Company Secretary Particulars Mr Doug Smith BA (Hons). Admitted to legal practice in Victoria & in England & Wales. Doug was appointed Company Secretary in June 2012. Doug joined JB Hi-Fi as General Counsel in September 2010 and has over 25 years’ legal and company secretarial experience in-house and in private practice. Directorships of other listed companies Directorships of other listed companies held by directors in the 3 years immediately before the end of the financial year and since the end of the financial year are as follows: Name Company Period of Directorship Greg Richards Vitaco Holdings Limited August 2015 (listed September 2015) – Stephen Goddard GWA Group Limited Accent Group Limited Nick Scali Limited Pacific Brands Limited Surfstitch Group Limited December 2016 Since October 2016 Since November 2017 Since March 2018 May 2013 – July 2016 November 2014 (listed December 2014) – December 2016 Beth Laughton Shopping Centres Australasia Property Group Since 13 December 2018 Mark Powell Kiwi Property Group Limited (NZX) Since October 2017 Wai Tang Vicinity Limited Ovato Limited Metcash Limited Since May 2014 Since October 2017 Since 1 August 2019 Richard Uechtritz Seven Group Holdings Limited Since June 2010 19 For personal use onlyDIRECTORS’ REPORT (continued) Principal activity The Group’s principal activity in the course of the financial year was the retailing of home consumer products. The Group offers a wide range of leading brands with particular focus on consumer electronics, software (including music, games and movies), whitegoods and appliances. There have been no significant changes in the nature of the principal activity of the Group during the financial year other than as detailed herein. Operating and Financial Review The Operating and Financial Review, which forms part of this Directors’ Report, is presented separately on pages 23 to 31. Changes in state of affairs During the financial year there was no significant change in the state of affairs of the Group. Subsequent events There have been no matters or circumstances occurring subsequent to the end of the financial year, that have significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. Future developments Information regarding likely developments in the operations of the Group in future financial years is set out in the Operating and Financial Review and elsewhere in the Annual Report. Environmental regulations The Group is not involved in any activities that have a marked influence on the environment within its area of operation. As such, the directors are not aware of any material issues affecting the Group or its compliance with the relevant environmental agencies or regulatory authorities. Dividends In respect of the financial year ended 30 June 2018, as detailed in the Directors’ Report for that financial year, an interim dividend of 86.0 cents per share and a final dividend of 46.0 cents per share, both franked to 100% at the 30% corporate income tax rate, were paid to the holders of fully paid ordinary shares on 9 March 2018 and 7 September 2018 respectively. In respect of the financial year ended 30 June 2019, an interim dividend of 91.0 cents per share was paid to the holders of fully paid ordinary shares on 8 March 2019 and the directors have declared the payment of a final dividend of 51 cents per share, to be paid to the holders of fully paid ordinary shares on 6 September 2019. Both dividends are franked to 100% at the 30% corporate income tax rate. The total dividend for the financial year of 142 cents per share represents a payout ratio of approximately 65% of net profit after tax. Indemniﬁ cation of ofﬁ cers and auditors The Company indemnifies current and former directors and officers for any loss arising from any claim by reason of any wrongful act committed by them in their capacity as a director or officer (subject to certain exclusions as required by law). During the financial year, the Company has paid premiums in respect of contracts insuring the directors and officers against any liability of this nature. In accordance with normal commercial practices, under the terms of the insurance contracts the nature of the liabilities insured against and the amount of the premiums paid are confidential. The Company has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify an officer or auditor of the Company or of any related body corporate against a liability incurred as such by an officer or auditor. 20 For personal use onlyDirectors’ meetings The following table sets out the number of directors’ meetings (including meetings of Committees of directors) held during the 2019 financial year and the number of meetings attended by the members of the Board or the relevant Committee. During the financial year, 14 Board meetings, 6 Remuneration Committee meetings and 6 Audit and Risk Management Committee meetings were held. Directors G. Richards S. Goddard B. Laughton M. Powell W. Tang R. Uechtritz R. Murray Board of Directors Remuneration Committee Audit and Risk Management Committee Held Attended Held Attended Held Attended 14 14 14 14 14 14 14 14 14 14 14 13 14 14 6 – 6 – 6 – – 6 – 6 – 5 – – – 6 6 6 6 – – – 6 6 6 6 – – Directors’ shareholdings The following table sets out each director’s relevant interest in shares, debentures, and rights or options in shares or debentures of the Company, or a related body corporate, as at the date of this Report. Directors G. Richards S. Goddard B. Laughton M. Powell W. Tang R. Uechtritz R. Murray(i) Fully paid ordinary shares Executive share options Direct number Indirect number Total Direct number Indirect number Total 3,455 4,500 5,804 2,000 – 11,516 107,818 23,031 26,486 – – – 5,000 – 2,304 4,500 5,804 2,000 5,000 11,516 110,257 – – – – – – 270,823 – – – – – – – – – – – – – 270,823 (i) Excludes any restricted shares that may be granted by the Board in August 2019 pursuant to achievement of incentives under the Company’s Variable Reward Plan. Remuneration Report The Remuneration Report, which forms part of this Directors’ Report, is presented separately on pages 32 to 56. Proceedings on behalf of the Company The directors are not aware of any persons applying for leave under s.237 of the Corporations Act 2001 to bring, or intervene in, proceedings on behalf of the Company. Non-audit services Given the size and complexity of the Group, it can be in the interests of the Group to engage the services of its auditor to assist in a range of related projects. The directors are aware of the issues relating to auditor independence and have in place policies and procedures to address actual, potential and perceived conflicts in relation to the provision of non-audit related services by the Company’s auditor. The directors have not engaged the auditor to provide any non-audit services in the 2019 financial year. Auditor’s independence declaration The auditor’s independence declaration is included on page 57 of the Annual Report. 21 For personal use onlyDIRECTORS’ REPORT (continued) Rounding off of amounts The Company is a company of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 dated 24 March 2016, and in accordance with that Corporations Instrument, amounts in the Directors’ Report and financial report are rounded off to the nearest hundred thousand dollars, unless otherwise indicated. Signed in accordance with a resolution of the directors made pursuant to s.298(2) of the Corporations Act 2001. On behalf of the directors Greg Richards Chairman Melbourne 12 August 2019 Richard Murray Group Chief Executive Ofﬁ cer 22 For personal use only OPERATING AND FINANCIAL REVIEW OVERVIEW OF OPERATIONS The Group, which includes both the JB Hi-Fi and The Good Guys businesses, sells the following products: • • consumer electronics including televisions, audio equipment, computers and cameras; telecommunications products and services; • whitegoods, cooking products, heating & cooling products, small appliances and kitchen accessories; and • software (CDs, DVDs, Blu-ray discs and games) and musical instruments. The Group also provides information technology and consulting services. The Group holds significant market-share in many of its product categories. The Group’s sales are primarily from its branded retail store networks (196 JB Hi-Fi/JB Hi-Fi Home stores in Australia, 14 JB Hi-Fi stores in New Zealand and 105 The Good Guys stores in Australia as at 30 June 2019) and online operations (JB Hi-Fi and The Good Guys websites). Sales are also generated from the Group’s commercial and education businesses, JB Hi-Fi Solutions and The Good Guys Commercial. GROUP FINANCIAL PERFORMANCE – HIGHLIGHTS Total Sales ($m) Earnings before interest and tax ($m) Net profit after tax ($m) Earnings per share (basic ¢) Dividend per share (¢) FY2019 7,095.3 372.8 249.8 217.4 142.0 FY2018 6,854.3 350.6 233.2 203.1 132.0 Mvt +3.5% +6.4% +7.1% +7.1% +7.6% Total sales grew by 3.5% to $7,095.3 million, earnings before interest and tax grew by 6.4% to $372.8 million and net profit after tax grew by 7.1% to $249.8 million. Earnings per share were up 7.1% to 217.4 cps. 23 For personal use only OPERATING AND FINANCIAL REVIEW (continued) DIVISIONAL PERFORMANCE JB Hi-Fi Australia Total Sales ($m) Gross Profit ($m) Gross Margin (%) Cost of Doing Business (%) EBITDA ($m) EBITDA Margin (%) EBIT ($m) EBIT Margin (%) Stores (#) FY2019 4,726.0 1,046.2 22.14% 14.89% 342.3 7.24% 301.7 6.38% 196 FY2018 4,539.7 1,006.5 22.17% 14.82% 333.6 7.35% 292.3 6.44% Mvt +4.1% +3.9% (4 bps) +7 bps +2.6% (11 bps) +3.2% (6 bps) 193 +3 stores Total sales were up 4.1% to $4,726.0 million (FY2018: $4,539.7 million) and comparable sales growth was 2.8%. It was a pleasing finish to FY2019 with strong sales in the key tax time promotional period driving quarter four comparable sales growth of 3.3%. Hardware and services sales (all sales excluding Music, Movies and Games Software categories) were up 5.4% for the financial year, with comparable sales up 4.1%, driven by the Communications, Audio, Fitness, Games Hardware and Connected Technology categories. Software sales were down 7.3% and on a comparable basis were down 8.3% as a result of double digit declines in the Movies and Music categories which was partially offset by strong growth in the Games Software category. By value, software sales represent 9.3% of total sales (FY2018: 10.0%). Online sales in Australia grew 23.0% (FY2018: 32.1%) to $258.0 million or 5.5% of total sales (FY2018: 4.6%), as the JB Hi-Fi Australia business continues to invest in and evolve its online offer. A continued focus on growing sales and gross profit dollars saw gross profit increase by 3.9% to $1,046.2 million. Gross margin decreased by 4 bps to 22.14%, driven primarily by sales mix as the business manages the decline in higher margin software categories and the growth of low margin brands and categories, and price investment to reinforce the business’ market leadership. The JB Hi-Fi Australia business’ low Cost of Doing Business (“CODB”) remains a competitive advantage and is maintained through continued focus on productivity, minimising unnecessary expenditure and leveraging scale. CODB increased by 7 bps to 14.89% and in absolute terms grew 4.6%. Total operating costs remained well controlled as the JB Hi-Fi Australia business managed costs in line with sales and continued to focus on customer service, investing in strategic initiatives and managing increased volumes through the store network. Sales growth, combined with cost control drove EBITDA growth of 2.6%. Depreciation declined by 1.4% as the business managed its investment in the store network. EBIT was up 3.2% to $301.7 million, while EBIT Margin was down 6 bps to 6.38%. 24 For personal use only JB Hi-Fi New Zealand(i) Total Sales (NZ$m) Gross Profit (NZ$m) Gross Margin (%) Cost of Doing Business (%) EBITDA (NZ$m) EBITDA Margin (%) EBIT (NZ$m) EBIT Margin (%) Stores (#) FY2019 236.2 40.8 17.29% 16.71% 1.4 0.58% (1.9) FY2018 231.5 40.9 17.66% 17.28% 0.9 0.38% (2.9) (0.80%) (1.24%) 14 15 Mvt +2.0% (0.1%) (37 bps) (57 bps) +56.1% +20 bps +34.3% +44 bps (1 store) (i) Amounts disclosed for JB Hi-Fi New Zealand are in local currency to remove the impacts of foreign currency translation on trading performance, the Australian dollar performance is presented in Note 2 of the financial statements. Total sales in FY2019 were up 2.0% to NZ$236.2 million, with comparable sales up 8.2%. The key growth categories were Communications, Fitness, Audio and Small Appliances. Online sales in New Zealand for FY2019 grew 38.3% to NZ$13.3 million or 5.6% of total sales (FY2018: 4.1%) as the business benefited from the improved online platform. Gross margin was down 37 bps on FY2018 to 17.29% due to sales mix. CODB was down 57 bps on FY2018 to 16.71%, driven by cost control and strong comparable sales growth. In absolute terms CODB declined 1.3% on FY2018. Sales growth, combined with cost control, drove EBITDA growth of 56.1%. Depreciation declined by 13.2%, as we managed our investment in the store network. EBIT was -NZ$1.9 million up NZ$1.0 million from FY2018. The Good Guys Total Sales ($m) Gross Profit ($m) Gross Margin (%) Cost of Doing Business (%) EBITDA ($m) EBITDA Margin (%) EBIT ($m) EBIT Margin (%) Stores (#) FY2019 2,147.9 442.7 20.61% 16.63% 85.5 3.98% 72.9 3.40% 105 FY2018 2,101.3 426.1 20.28% 16.60% 77.3 3.68% 60.9 2.90% Mvt +2.2% +3.9% +33 bps +3 bps +10.6% +30 bps +19.8% +50 bps 103 +2 stores Total sales were up 2.2% to $2,147.9 million (FY2018: $2,101.3 million) and comparable sales growth was 0.9%. The key growth categories for FY2019 were Refrigeration, Laundry, Dishwashers, Televisions, Communications and Computers. Online sales for FY2019 were up 3.7% to $130.9 million or 6.1% of total sales (FY2018: 6.0%) with strong sales on The Good Guys website partially offset by a decline in third party marketplace sales. Gross profit for FY2019 was up 3.9% to $442.7 million from $426.1 million in FY2018, with gross margin up 33 bps to 20.61% (FY2018: 20.28%). Gross margin in the second half was up 88 bps as the business benefited from the initiatives put in place over the last twelve months and the cycling of strong price competition in the second half of FY2018. CODB for FY2019 was up 3 bps to 16.63% and in absolute terms grew 2.4% on FY2018 with total operating costs in line with expectations and store wages remained well controlled. Sales growth, combined with gross margin expansion drove strong EBITDA growth of 10.6%. Depreciation declined by 23.5% as significant pre-acquisition IT investment is now fully amortised. EBIT was up 19.8% to $72.9 million from $60.9 million in the previous financial year, while EBIT Margin was up 50 bps to 3.40%. 25 For personal use only OPERATING AND FINANCIAL REVIEW (continued) GROUP BALANCE SHEET, CAPITAL MANAGEMENT AND DIVIDENDS The Group’s total net assets at the end of the financial year were $1,044.1 million, which was $96.5 million higher than at the end of FY2018. In June 2019, the Group restructured its multi-tranche term debt facilities, resulting in a reduction in these facilities by $110.0 million to $440.0 million. In conjunction with this restructure, the Group also increased its trade finance facility by $110 million to $140.0 million, which is renewable annually, and reduced its overdraft facilities by $30 million, resulting in overdraft facilities of $50.0 million and NZ$10.0 million which are renewable annually. The Group now has term debt facilities as follows: • • • $60.0 million with an expiry date of September 2020; $242.0 million with an expiry date of July 2021; and $138.0 million with an expiry date of July 2022. The financial covenants included in the Group’s financing facilities are leverage and fixed charges cover ratios. The Group has complied with each of its financial covenants throughout the period. At the end of the financial year the Group had total interest bearing liabilities of $439.1 million and cash on hand of $119.2 million resulting in net debt of $319.9 million, a reduction of $77.5 million from the prior year. The total dividend for the 2019 financial year of 142.0 cents per share represents a payout ratio of approximately 65% of the full year earnings. The Board currently believes a 65% dividend payout ratio appropriately balances the distribution of profit to shareholders, the repayment of debt and reinvestment of earnings for future growth. The final dividend for the 2019 financial year of 51.0 cents per share fully franked will be paid on 6 September 2019 with a record date of 23 August 2019. INVESTMENTS FOR FUTURE PERFORMANCE Investments of $59.3 million were made during the financial year in capital expenditure projects, an increase of $4.9 million from $54.4 million during the previous financial year. Capital expenditure remains well controlled as the Group continues to invest in the store portfolio, our digital propositions and strategic initiatives. These investing activities are anticipated to contribute towards earnings growth in FY2020 and beyond. WORKING CAPITAL Total inventory on hand decreased from the previous financial year by $4.4 million as a result of better than expected sales in the key tax time promotional period, and trade and other payables decreased by $8.4 million. Inventory turnover was 6.3 times up from 6.2 times in FY2018. Financial and operating leverage remains low as is evidenced by solid fixed charges cover of 3.0 times (FY2018: 2.9 times) and interest cover of 26.1 times (FY2018: 21.1 times). The Company’s gearing ratio decreased to 1.0 (FY2018: 1.1). 26 For personal use onlySTORES The Group’s sales are primarily from its branded retail store networks, located both in stand-alone destination sites and shopping centre locations. The store locations as at 30 June 2019 are set out below. 1 2 5 10 14 23 JB Hi-Fi Australia JB Hi-Fi New Zealand The Good Guys 23 39 30 63 28 51 Total JB Hi-Fi Stores – 210 Total The Good Guys Stores – 105 3 5 1 3 14 In Australia, 5 new JB Hi-Fi stores were opened and two were closed in FY2019. One JB Hi-Fi store was closed in New Zealand during FY2019. Two new The Good Guys stores were opened during FY2019. JB HI-FI SOLUTIONS (COMMERCIAL, EDUCATION & INSURANCE) The Group’s commercial, insurance and education businesses, JB Hi-Fi Solutions and The Good Guys Commercial, comprises: • Corporate, Government & Education sales of products and services; and • Insurance replacements. The business recorded double digit sales growth in FY2019 and remains on track to deliver on its longer term aspirational sales target of approximately $500m per annum, through both organic growth and strategic acquisitions. 27 For personal use onlyOPERATING AND FINANCIAL REVIEW (continued) BUSINESS STRATEGIES AND PROSPECTS The following factors are considered important in understanding the strategy of the Group and the main opportunities and threats that may have a significant effect on its results and its prospects for future years. These factors are listed regardless of whether they were significant in FY2019. Business risks There are a number of factors, both specific to the Group and of a general nature, which may threaten both the future operating and financial performance of the Group and the outcome of an investment in the Group. There can be no guarantee that the Group will achieve its stated objectives or that forward looking statements will be realised. The operating and financial performance of the Group is influenced by a variety of general economic and business conditions, including levels of consumer spending, inflation, interest and exchange rates, access to debt and capital markets, and government fiscal, monetary and regulatory policies. A prolonged deterioration in general economic conditions, including an increase in interest rates or a decrease in consumer and business demand, may have an adverse impact on the Group’s business or financial condition. The specific material business risks faced by the Group, and how the Group manages these risks, are set out below. • Competition – the markets in which the Group operates remain highly competitive and any increased competition from new and existing competitors may lead to price deﬂ ation and a decline in sales and proﬁ tability. As the #1 player in a fragmented Australian market, the Group’s scale allows it to maintain focus on market share and absorb margin pressure during periods of heightened market price activity and consolidation. The Group also believes that its competitive advantages and the plans for growth set out below will allow it to maintain its market leading position. • A loss or erosion of reputation – both the JB Hi-Fi business and The Good Guys business enjoy a high level of loyalty and trust with customers. The JB Hi-Fi business has been consistently ranked among Australia’s most reputable companies in the Corporate Reputation Index released by the Reputation Institute and AMR (1st in 2014 and 2016 and 3rd in 2012, 2013, 2015, 2017 and 2019). The JB Hi-Fi business was also awarded the Roy Morgan Customer Satisfaction Award for Furniture/Electrical store of the year for 2017 and 2019, whilst The Good Guys business won the same award for 2011, 2012, 2013, 2014 and 2016 and ﬁ nished second in 2019. Additionally, The Good Guys Business won the Canstar Blue Most Satisﬁ ed Customers Electronic Retailers Award from 2011 to 2018 with JB Hi-Fi ﬁ nishing second in 2018. A decline in this high level of loyalty and trust could compromise the market leading positions of the JB Hi-Fi business and The Good Guys business and adversely affect the Group’s operating and ﬁ nancial performance. This could occur as a result of a wide range of factors or events, including: • a loss or erosion of the reputation of the JB Hi-Fi and The Good Guys businesses for price leadership and high levels of customer service. The Group seeks to mitigate this risk through careful monitoring of its competitors’ pricing and market share data, senior management monitoring of customer complaints, and use of customer service and engagement analytics; • a major information security breach of the Group’s IT systems. The Group seeks to mitigate this risk through investment in IT security measures, including incident response planning and testing; • a major workplace health and safety incident or customer injury. The Group seeks to mitigate this risk through having appropriate occupational health and safety procedures and staff training in place for all of its sites; or • a signiﬁ cant breach of regulatory or legislative requirements. The Group seeks to mitigate this risk through appropriate staff training on key regulatory and legislative requirements relevant to its business, as well as making legal and regulatory compliance a key focus of the management team. • Consumer discretionary spending and changes in consumer demands – the Group is exposed to consumer spending cycles and changes in consumer demands. A reduction in consumer spending and demand may lead to a decline in the Group’s sales and proﬁ tability. The Group maintains its relevance using its strong market position supported by its everyday low price proposition. The Group’s stores, which are both in convenient and high trafﬁ c locations, seek to maximise both destination and impulse sales, reﬂ ected in the Group’s high sales per square metre of ﬂ oor space. The Group also closely monitors changes in the economic environment, consumer demand and new products, and is able to respond quickly to such changes. 28 For personal use only• Online competition taking sales from the Group’s stores – the Group seeks to provide customers with a quality online offer, while leveraging the beneﬁ ts of its physical stores. The Group continues to innovate both in-store and online in order to give customers the choice as to how to transact with the JB Hi-Fi and The Good Guys businesses. The Group’s market leadership and scale gives it global relevance with suppliers and drives signiﬁ cant buying power which enables the Group to compete successfully with online players, as does its low cost of doing business. The Group also believes that the existence of its store networks will continue to provide conﬁ dence in after-sales service and support to its online customers, whilst also enabling fast online fulﬁ lment via delivery from stores and click & collect. • Digitisation of physical software leading to a fall in traditional software sales beyond expectations – the JB Hi-Fi business will maintain a software presence in store while the category is still providing solid returns, whilst adjusting inventory, range and in-store space allocated to the category as appropriate. • Ineffective inventory management - a failure to maintain sufﬁ cient inventory (or holding excessive inventory) may adversely affect the Group’s operating and ﬁ nancial performance. The Group mitigates this risk through regular monitoring of inventory quality and stock levels. • Failure to maintain key supplier relationships – the Group has strong partnerships with all major suppliers, with its dual brand retail approach providing ranging and merchandising optionality and facilitating the execution of strategic initiatives at scale. The Group’s store locations and high trafﬁ c websites provide suppliers with high visibility for their products. However, a failure to maintain key supplier relationships could adversely impact on the Group’s operating and ﬁ nancial performance. The Group has signiﬁ cant supplier management processes to mitigate this risk and, whilst at any one time certain products and suppliers are more important than others, the large and diverse range of products stocked by the businesses means that reliance on any one supplier or product is less than for some smaller competitors. In addition, the JB Hi-Fi and The Good Guys businesses have proven records of expansion into new product categories and introducing new brands, rather than remaining reliant on those products and brands which were successful in previous years. • Acquisition of The Good Guys business – the acquisition of The Good Guys business does not deliver the expected outcomes for the Group. For example, The Good Guys business does not, itself, perform as expected or the acquisition has an adverse effect on the performance of the JB Hi-Fi business due to, for example, management being preoccupied with The Good Guys business. • Growth of JB Hi-Fi Solutions and The Good Guys Commercial - the JB Hi-Fi Solutions and The Good Guys Commercial businesses do not deliver the expected growth outcomes for the Group. The Group continues to invest in these businesses to support their continued growth. • JB Hi-Fi New Zealand business - if the performance of the JB Hi-Fi New Zealand business does not improve as expected, this may have an adverse impact on the Group’s operating and ﬁ nancial performance. The Group is in the process of implementing a turnaround strategy to improve performance in the JB Hi-Fi New Zealand business. • Increasing cost of doing business – certain costs of doing business are outside of the Group’s control. For example, the Group’s cost of doing business is impacted by the annual Fair Work Award wage reviews (which have resulted in increases totalling 15% over the past 5 years to 30 June 2019), and rising energy costs. However, the increasing scale of the Group’s operations continues to deliver cost reductions which mean that higher wage costs can be offset to some extent by cost reductions in other areas. • Leasing arrangements – the ability to identify suitable sites and negotiate suitable leasing terms for new and existing stores is key to the Group’s ongoing growth and proﬁ tability. The Group believes that it will continue to be able to do this as it has done successfully to date. • Loss of, or inability to attract and retain, key staff – the Group’s ability to attract and retain talented staff is critical to its operating and ﬁ nancial performance. In recognition of this, succession planning and executive/senior management team composition is a key focus for the Board and Group executive team. • IT systems – the Group’s increasing reliance on IT systems means that outages, disruptions and security breaches could have a detrimental impact on its operating and ﬁ nancial performance, and any failure to maintain and upgrade its IT systems over time has the potential to inhibit the achievement of the Group’s business initiatives. To mitigate these risks, the Group has documented disaster recovery processes (including off-site IT back-up infrastructure) and invests in IT security measures. The Group also continues to invest and develop its IT resources and capabilities to support the Group’s strategic objectives. 29 For personal use onlyOPERATING AND FINANCIAL REVIEW (continued) • Changes in regulatory environment – changes in the regulatory environment in which the Group operates may increase compliance costs, and even (in extreme cases) affect the ability of the Group to sell certain types of products and services or conduct certain activities. Whilst such changes are outside the control of the Group, the Group monitors proposed changes in the regulatory environment so that it can assess the impact of such changes and develop appropriate response strategies where possible. • Finance – a breach of the Group’s debt covenants or inability to access ﬁ nancing facilities would adversely affect the Group’s operating and ﬁ nancial performance. The Group has signiﬁ cant headroom in both its debt facilities and covenants. Additionally, cash ﬂ ow forecasts and debt capacity are closely monitored by management. Details of the Group’s ﬁ nancing facilities are set out on page 26. • Fraud and corruption – the Group has no history of material fraud or corruption, and seeks to minimise the risk of loss arising from fraud and corruption through appropriate policies, procedures and controls. • Changes to Australian Accounting Standards – the Australian Accounting Standards are set by the Australian Accounting Standards Board (“AASB”). Changes to the Australian Accounting Standards issued by AASB could adversely affect the ﬁ nancial performance and position reported in the Group’s ﬁ nancial statements. • Litigation/breach of legal or regulatory requirements – legal proceedings and claims may arise from time to time in the ordinary course of the Group’s businesses and may result in high legal costs, adverse monetary judgements and/or damage to the Group’s businesses which could have an adverse impact on the Group’s ﬁ nancial position and ﬁ nancial performance. Additionally, a signiﬁ cant breach of regulatory requirements or laws could adversely impact the Group’s ability to carry on its business. The Group seeks to mitigate this risk through appropriate staff training on key regulatory and legislative requirements relevant to its business, as well as making legal and regulatory compliance a key focus of the management team. Business Strategies The Group believes that the following strategies/factors will continue to drive growth in sales and earnings: • proactive management of store portfolio with continuation of the Group’s disciplined approach to selecting new stores based on high foot trafﬁ c and closure of underperforming or sub-scale existing stores; continued focus on customer service and in-store experience; continued growth opportunities in many categories and in market share, both in physical stores and online; continued technological innovation and the launch of new products and updated models which will continue to drive new and replacement sales; realisation of efﬁ ciencies from the acquisition of The Good Guys and leveraging the scale of the Group; continued development of the Group’s websites and online offering, aimed at enhancing the user experience across multiple platforms (e.g. computer, tablet & phone) to drive continued growth in online sales; expansion of the online product range and depth beyond that which is practical in store; signiﬁ cant opportunities to grow JB Hi-Fi Solutions and The Good Guys Commercial and expand into new markets; ongoing focus on the Group merchandise function to provide strategic guidance and oversight of the Group’s buying, identify Group buying opportunities and strengthen supplier relationships; design and implementation of an expanded services offering for the JB Hi-Fi Australia business; continued execution of the Group’s strategy to improve the performance of the JB Hi-Fi New Zealand business; personalisation of marketing and customer experiences; improved supply chain and logistics systems to support the Group’s expansion; and continued mitigation of the business risks faced by the Group detailed on pages 28 to 30. • • • • • • • • • • • • • 30 For personal use onlyTRADING OUTLOOK – as at 12 August 2019 July 2019 sales update • total sales growth for the JB Hi-Fi Australia business in July 2019 was 4.1% (July 2018: 2.9%) with comparable sales growth of 3.2% (July 2018: 0.3%); • total sales growth for the JB Hi-Fi New Zealand business in July 2019 was -0.4% (July 2018: -2.1%) with comparable sales growth of -0.3% (July 2018: 3.4%); and • total sales growth for The Good Guys business in July 2019 was -2.1% (July 2018: 2.7%) with comparable sales growth of -3.4% (July 2018: 1.4%). FY2020 Guidance Whilst there continues to be variability in the sales environment, the Group remains confident in its ability to execute and grow market share. In FY2020 the Company expects total Group sales to be circa $7.25 billion, comprising: • • • JB Hi-Fi Australia $4.84 billion; JB Hi-Fi New Zealand (NZD) $0.24 billion; and The Good Guys $2.18 billion. 31 For personal use onlyREMUNERATION REPORT (audited) CONTENTS • Summary (page 32) • Group Executive Remuneration for FY2019 (page 34) • Non-Executive Director Remuneration (page 41) • Other Information (page 42) • • • Key Management Personnel Compensation (page 43) Key Management Personnel Equity/Options (page 48) Share Options (page 53) SUMMARY Remuneration overview The Board recognises that the performance of the Group depends on the quality and motivation of its people, including both the Group executives (being those persons listed as executives on page 34) and the approximately 12,500 employees of the Group across Australia and New Zealand. The Company’s remuneration strategy seeks to appropriately reward, incentivise and retain key employees. The Board aims to achieve this by setting competitive remuneration packages that include a mix of fixed remuneration and incentives (“packages”). Snapshot - FY2019 remuneration Group executive FY2019 remuneration packages To remain competitive in attracting and retaining key talent in FY2019 the Board considered the remuneration levels and remuneration structures for Group executives with reference to external market benchmarks as well as the skills, experience, complexity and responsibilities of the executive roles. As a result of this review, for FY2019 the Board: • increased fixed remuneration by 3.9% for the Group CEO and between 3.0% and 8.4% for other Group Executives (excluding the Group CFO). The Group CFO’s fixed remuneration was increased by 16.6% given it had been set low compared to market upon his appointment; • introduced a minimum shareholding requirement for Group executives to create stronger alignment between executive reward values and shareholder outcomes; • replaced the previous short and long term incentive structure with a single simpler Variable Reward Plan (VRP). During FY2018 the Board reviewed the previous short term and long term incentive structures in place noting: (i) the difﬁ culty in setting long term EPS growth targets that were seen as motivating by executives and considered challenging enough by shareholders in a volatile retail environment where it is difﬁ cult to conﬁ dently form a long term view on performance; and (ii) that the success of meeting LTI targets (or not) in past years was often linked to macro-economic factors or share price volatility, as much as the quality of company or executive performance. This led to volatility in LTI vesting (generally near or close to 100% or not at all). The new VRP allows for ﬂ exibility in setting performance targets to take into account changing trading conditions, providing a more motivating remuneration framework for Group executives and greater alignment with shareholders, with only 25% of incentives earned being paid in cash and the remainder in restricted shares. Further detail on the new VRP is set out on pages 35 to 37; and • reduced the overall amount of remuneration offered to Group executives (from what would have been offered had the previous structure been retained for FY2019), reducing the proportion of the reward paid in cash, and increasing the proportion of reward delivered in fully paid ordinary shares that are to be held over the long term under the new minimum shareholding requirement. Group executive FY2019 incentive achievement The 2019 financial year has been a successful year for the Group, with management having delivered record revenue (up 3.5%), EBIT (up 6.4%) and EPS (up 7.1%) in a challenging retail environment. This strong performance has been reflected in vesting outcomes of incentives for Group executives, with between 71% and 82% of rewards available under the VRP for the year (or, in the case of Terry Smart, the Company’s STI plan) being earned. 32 For personal use onlyIn regards to FY2019 VRP targets, 75% of available rewards were linked to financial measures, primarily FY2019 Group EPS growth, with between 65% and 82% of available rewards for the financial performance component earned by each Group executive. The remaining 25% of available rewards were dependent upon the achievement of various strategic measures deemed relevant for the individual executive. Between 71% and 87% of available rewards for this strategic component were earned by each executive. Further detail is set out on pages 36 to 37. Group executive incentive achievement outcomes under the FY2019 VRP were broadly in line with achievement outcomes under the Group’s previous incentive structure when comparing similar financial performance, as shown in the table on page 39. All long-term incentives (“LTI”) issued to Group executives prior to the adoption of the variable reward plan for FY2019 were in the form of share options subject to both service and performance based conditions. Given strong EPS growth in recent years, some of the options issued to Group executives in previous years vested in FY2019. Non-Executive Directors FY2019 remuneration Fees for non-executive directors remained at the levels set for FY2018, with no increases. In FY2019 the Company adopted a minimum shareholding requirement for non-executive directors. FY2020 remuneration The Company will retain the same structure for FY2020 Group executive remuneration as was used in FY2019. With the exception of Lynda Blakely and Simon Page who have recently been promoted to their Group executive roles: • • there will be no increases in fixed annual remuneration for Group executives for FY2020; and only Tim Carter will receive an increase to his incentive package for FY2020. The Group financial component of the VRP (EPS growth) will again be set in line with the Company’s historical incentive ranges i.e. commencing rewards when performance exceeds the previous year’s earnings performance and paying maximum reward at 10% earnings growth. Within this range the % of the incentive payable will be set taking account of Board approved annual budgets and longer term corporate plans. Fees for non-executive directors will remain at the levels set for FY2018 and FY2019. 33 For personal use onlyREMUNERATION REPORT (continued) GROUP EXECUTIVE REMUNERATION FOR FY2019 Details of executive key management personnel The following persons acted as executive directors and/or Group executives during and since the end of the financial year and are considered members of key management personnel for reporting purposes: Executive Director Richard Murray Group Chief Executive Officer Executives Cameron Trainor Managing Director – JB Hi-Fi (Managing Director – Group Merchandise from 13 August 2018 – Terry Smart Nick Wells Tim Carter James Saretta Lynda Blakely Simon Page 18 June 2019) Managing Director – The Good Guys Group Chief Financial Officer Group Supply Chain & Commercial Director Strategy & Digital Director Group HR Director (from 4 June 2019) Group Technology Director (from 4 June 2019) Group executive remuneration policy – 2019 ﬁ nancial year The Board believes that executive remuneration should be fair and reasonable, structured effectively to attract, motivate, retain and reward valued executives, and designed to produce value for shareholders. The Remuneration Committee annually reviews the remuneration packages of all Group executives and makes recommendations to the Board. Remuneration packages are reviewed with due regard to performance and data on remuneration paid by comparable companies. Where appropriate, the Remuneration Committee may receive expert independent advice regarding remuneration levels required to attract, retain and compensate Group executives given the nature of their work and responsibilities. In setting the FY2019 remuneration packages, the Board and the Remuneration Committee considered a number of factors, including current market practice. The Remuneration Committee also considered current market conventions with regard to the splits between fixed remunerations and incentive elements. The package splits for FY2019 were as follows: Executive R. Murray C. Trainor T. Smart N. Wells T. Carter J. Saretta S. Page L. Blakely Fixed 33% 38% 38% 38% 43% 43% 45% 70% Incentive(i) 67% 62% 62% 62% 57% 57% 55% 30% Total 100% 100% 100% 100% 100% 100% 100% 100% (i) For all Group executives other than T. Smart, L. Blakely and S. Page, incentive is in the form of VRP. For T. Smart and L. Blakely the incentive is the combined STI/LTI opportunity, and for S. Page the incentive is the combined STI/LTI and VRP opportunity as set out on page 38. Further details on each of the key elements of Group executive remuneration for the 2019 financial year are set out below. Fixed remuneration Fixed remuneration is paid by way of base salary, motor vehicle allowances and superannuation. No elements of fixed remuneration are dependent on performance conditions. 34 For personal use only Variable Reward Plan Incentive In FY2018, the Remuneration Committee and the Board reviewed the reward framework to consider what was fit for purpose for the Group going forward in a changing retail environment which is subject to macroeconomic factors often beyond the control of the Group. When considering the appropriateness of the previous STI and LTI structure, the Board noted that: • it is increasingly difficult to set long term EPS growth targets that are seen as motivating by executives and considered challenging enough by shareholders in a volatile retail environment where it is difficult to confidently form a long term view on performance; and • in the past, the success of meeting LTI targets (or not) has often been linked to macro-economic factors or share price volatility as often as the quality of company or executive performance. This has led to volatility in LTI vesting (generally near or close to 100% or not at all). To address these challenges, for FY2019 the Board elected to simplify its Group executive reward framework to one that is fit for a retail business that is subject to many short term influences by combining the previous Group STI and LTI structures into a single VRP. Under the VRP, performance is assessed at the end of each financial year against a scorecard of robust measures and awards under the VRP are delivered: • • 25% in cash at the end of the one-year performance period; and 75% in restricted shares, to be released progressively in equal tranches over years 2, 3 and 4. This is a significant reduction from the proportion of cash available annually to executives under the previous STI and LTI plans. By granting the majority of the reward as shares that are restricted over the medium to longer term, and are subject to long term share price risk and clawback, the VRP provides for stronger shareholder alignment than the Group’s previous STI and LTI program. This, combined with the introduction of minimum shareholding guidelines as set out on page 40, encourages Group executives to think and act like shareholders and to make decisions in the long term interests of the Group. In addition, in view of the move to an annual performance period rather the previous 3 and 4 year periods applicable to the LTI, Group executive opportunity levels under the VRP were made at a 20% discount to the LTI opportunity levels that would have been offered had the previous structure been retained. The amount of discount reflects relative STI and LTI outcomes over recent years. During the restricted period dividends are paid on the restricted shares and the executive may exercise votes attaching to these shares. The market value of a share used to calculate the number of restricted shares granted will be the volume weighted average price of shares traded on the ASX in the 5 trading days immediately following the release of the Company’s financial results for the year to which the award relates, or the actual average cost incurred by the Company in acquiring the shares. All rewards under the VRP are subject to clawback at the Board’s discretion in the event of fraud, dishonesty, material misstatement, material breach or negligence by the Group executive and in certain other circumstances. Subject to the Board exercising its discretion to the contrary, a Group executive will not be eligible to receive a VRP award in respect of a particular performance period if, during that period, the executive ceases to be employed, or has given notice of his or her resignation from employment or has been given notice of termination from employment. A Group executive who ceases to be employed during the restriction period will, subject to the Board’s discretion: • • forfeit the restricted shares if they are a “bad leaver” (termination for cause or resignation to work for a competitor); retain the restricted shares, subject to the restrictions, if they are a “good leaver” (retirement, redundancy, disablement, mental/terminal illness or death). Treatment of restricted shares where a Group executive leaves in other circumstances is at the Board’s discretion. Further detail on the performance measures under the FY2019 VRP is set out on the following pages. 35 For personal use onlyREMUNERATION REPORT (continued) FY2019 VRP incentive scorecard - performance conditions and outcomes Under the VRP, performance is assessed at the end of each financial year against a scorecard of robust measures. 75% of the rewards under the plan for each executive are dependent on financial targets and the remaining 25% of the scorecard are based on strategic measures approved by the Board and aligned with the Group’s long term corporate plans. The financial targets in the scorecard are predominantly based on Group EPS, with some executives also having targets relating to aspects of the business for which that executive is responsible or where particular focus is required. For FY2019, for the Group financial component of the VRP, the performance range was in line with the Company’s historical incentive ranges i.e. commencing rewards when performance exceeds the previous year’s earnings performance and paying maximum reward at 10% earnings growth. Within this range the % of the incentive payable was set taking account of Board approved budgets and longer term corporate plans. Composition of, and achievement under, the FY2019 VRP for Group executives (STI for Terry Smart) was as follows: MEASURE ACHIEVEMENT (as a % of maximum available) PERFORMANCE COMMENTARY GROUP CEO – RICHARD MURRAY Financial Group EPS 77% Richard achieved above target results in respect of Group EPS Measures (75%) (7.1% growth from 203.1 to 217.4 cents per share). Strategic OHS, diversity, 76% Richard achieved his overall strategic objectives with continued Measures succession/talent, (25%) strategic initiatives, improvements in OHS metrics (LTIFR down significantly), significant diversity initiatives introduced, implementation of key Investor relations strategic initiatives, finalisation of Group leadership team and progress in succession planning and talent development, and effective investor relations engagement. MANAGING DIRECTOR, JB HI-FI – CAMERON TRAINOR (GROUP MERCHANDISE DIRECTOR FROM AUGUST 2018 – JUNE 2019) Financial Group EPS, Group 77% Cameron achieved above target results in respect of Group Measures comparative sales, (75%) Group stock turns, Strategic Measures (25%) Group synergies/ cost-out Establish Group Merchandise Function, OHS, succession/talent/ diversity, Group services & Private Label Strategy EPS (7.1% growth from 203.1 to 217.4 cents per share), and achieved the maximum available in respect of Group stock turn and Group synergy targets. Achievement for Group comparative sales was below target. 78% Cameron achieved his overall strategic objectives with the successful establishment of Group Merchandise Function, continued improvements in OHS metrics (LTIFR down significantly), progress in succession planning and talent development in merchandise teams across the Group, and implementation of Private Label Strategy with introduction of the “FFalcon” brand. MANAGING DIRECTOR, THE GOOD GUYS – TERRY SMART(1) Financial Group EPS, 65% Terry achieved above target results in respect of Group Measures TGG EBIT, TGG (75%) comparative sales, EPS (7.1% growth from 203.1 to 217.4 cents per share) and The Good Guys EBIT. Achievement for The Good Guys TGG stock turns comparative sales growth and stock turns was below target. Strategic OHS, succession/ 87% Terry exceeded his overall strategic objectives with continued Measures talent/diversity, improvements in OHS metrics (LTIFR down significantly), (25%) Group Merchandise progress in succession planning and talent development Function, category architecture, process improvements and simplification including key leadership appointments in The Good Guys senior management and executive teams, supporting the successful establishment of Group Merchandise Function, implementation of category architecture resulting in improvements in store layout and merchandising, and significant improvements in and simplification of business processes resulting in cost savings. 36 For personal use onlyMEASURE ACHIEVEMENT (as a % of maximum available) PERFORMANCE COMMENTARY GROUP CFO – NICK WELLS Financial Group EPS, 80% Nick achieved above target results in respect of Group EPS Measures Group synergies/ (75%) costs-out, Group stock turns, Group interest expense (7.1% growth from 203.1 to 217.4 cents per share) and Group interest expense, and achieved the maximum available in respect of Group stock turn and Group synergy targets. Strategic OHS, succession/ 77% Nick achieved his overall strategic objectives with continued Measures talent/diversity, (25%) risk management, investor relations, Support Office consolidation improvements in OHS metrics (LTIFR down significantly), progress in succession planning and talent development and diversity within the finance team, effective investor relations engagement and successful consolidation of JB Hi-Fi and TGG Support Offices into one support office. GROUP SUPPLY CHAIN & COMMERCIAL DIRECTOR – TIM CARTER Financial Group EPS, JB 82% Tim achieved above target results in respect of Group EPS Measures Hi-Fi Solutions EBIT, (75%) JB Hi-Fi Solutions comparable sales growth, supply chain savings (7.1% growth from 203.1 to 217.4 cents per share) and supply chain savings, and achieved the maximum available in respect of JB Hi-Fi Solutions EBIT and comparable sales growth. Strategic OHS, succession/ 83% Tim exceeded his overall strategic objectives with continued Measures talent/diversity, Group (25%) supply chain strategy, Group Private Label Strategy, Group Commercial strategy improvements in OHS metrics (LTIFR down significantly), progress in succession planning and talent development including key leadership appointments, development of Group supply chain strategy, implementation of Private Label Strategy with introduction of the “FFalcon” brand, and continued roll-out of Group commercial strategy including JB Hi-Fi Solutions and The Good Guys Commercial. STRATEGY & DIGITAL DIRECTOR – JAMES SARETTA Financial Group EPS, JB Hi-Fi 81% James achieved above target results in respect of Group Measures Online EBIT, JB Hi-Fi (75%) Online comparative sales, Group synergies/costs-out EPS (7.1% growth from 203.1 to 217.4 cents per share), and achieved the maximum available in respect of JB Hi-Fi Online EBIT, JB Hi-Fi Online comparative sales growth, and Group synergy targets. Strategic Group strategy 71% James achieved his overall strategic objectives with ongoing Measures framework, Group development of the Group’s strategy framework, the Group’s (25%) supply chain strategy, role of brands strategy and the Group’s succession planning role of brands strategy, succession/ talent/diversity, OHS & talent development framework, and improvement in OHS metrics (LTIFR down significantly). Notes 1. Given T. Smart received a one-off 3 year grant of LTI on re-joining the Group in April 2017, he did not participate in the VRP for FY2019. Instead, he was able to earn an STI in FY19. Further detail is set out below. Information for L. Blakely and S. Page is not included as they only became key management personnel on 4 June 2019. 2. 37 For personal use onlyREMUNERATION REPORT (continued) Short-term incentive Given Terry Smart received a one-off 3 year grant of LTI on re-joining the Group in April 2017, he did not participate in the VRP for FY2019. Instead, he was able to earn an STI in FY19 based on the same scorecard structure as other Group executives under the VRP. 80% of Terry’s STI will be paid in cash, with the remaining 20% deferred into shares which are subject to a restriction on sale/disposal for 1 year after issue. The number of shares granted is calculated on the basis of the volume weighted average share price for the Company’s shares in the five days following the release of the Company’s FY2019 results to the ASX. From FY2021Terry will participate in the VRP. Simon Page and Lynda Blakely were also eligible to receive STIs in FY2019, having only been appointed as Group executives (and become key management personnel) on 4 June 2019. Simon and Lynda will participate in the VRP (and will not be eligible to receive STIs) in FY2020. Long-Term Incentive (“LTI”) Plan Some of the options granted to Group executives prior to FY2019 under the Company’s previous LTI structure vested in FY2019. Details of options that vested and were exercised are set out on page 51. Further details of the terms of these options are included under the heading “Group share option plans” on page 53. Relationship between ﬁ nancial performance and remuneration The Group’s executive remuneration is directly related to the performance of the Group through the linking of the incentives to certain financial measures as detailed previously and shown below. The financial performance of the Group is summarised in the table below, whilst the alignment of executive remuneration to the performance of the Group is detailed in the graph and the table on page 39. Growth FY2015 FY2016 FY2017 FY2018 FY2019 FY2019 1. Financial performance: Sales ($m) EBIT ($m) Net profit attributable to owners of the Company ($m) Basic EPS (cents) 2. Shareholder value created: Company share price at the end of the reporting period ($) 3,625.1 3,954.5 5,628.0 6,854.3 7,095.3 200.9 221.2 290.5(v) 350.6 372.9 136.5 137.9 152.2 153.8 192.2(v) 172.1(v) 233.2 203.1 249.8 217.4 19.48 24.10 23.37 22.52 25.85 Market capitalisation ($m) 1,928.3 2,384.6 2,674.0 2,587.2 2,969.7 Enterprise value(i) ($m) 2,018.7 2,442.5 3,160.0 2,984.5 3,289.6 4% 6% 7% 7% 15% 15% 10% CAGR Last 5 years(iii) 15% 14% 14% 11% 7% 10% 11% Movement in enterprise value during the financial year ($m) Dividends paid to shareholders during the financial year ($m) On market share buy-back ($m) Shareholder value created(ii) 71.7 423.8 717.5 (175.5) 305.1 87.2 5.0 93.2 13.2 119.1 151.6 157.4 4% 15% – – – - per annum ($m) 163.9 530.2 836.6 (23.9) 462.5 - cumulative ($m) since IPO 2,561.2 3,091.4 3,928.1 3,904.2 4,366.7 12% 22%(iv) (i) Enterprise value is measured as the sum of market capitalisation and net debt. (ii) Shareholder value created is measured as the increase in the enterprise value, plus cash dividends and share buy-backs paid during the financial year. Cumulative shareholder value is measured from the date of listing in October 2003 when opening shareholder value was $201.7m. (iii) Percentage movement shown is the compound annual growth rate over the last 5 years. (iv) Percentage movement shown is the compound annual growth rate since IPO. (v) FY2017 EBIT, net profit and EPS exclude transaction fees and implementation costs totalling $22.4m associated with the acquisition of The Good Guys in November 2016 but include New Zealand Goodwill and New Zealand Fixed Asset impairments of $15.8 million. 38 For personal use onlyThe graph below shows the relationship between total Group executive remuneration and EPS over the past 5 years and the high correlation of Group executive remuneration with Company performance. Group executive remuneration and EPS over the last 5 financial years: 14,000,000 12,000,000 10,000,000 $ n o i t a r e n u m e R 8,000,000 6,000,000 4,000,000 2,000,000 - Notes 250 200 150 100 50 - ) e r a h s r e p s t n e c ( S P E LTI/VRP Shares STI/VRP Cash Fixed EPS 2015 2016 2017 2018 2019 1. The graph shows the aggregate total of remuneration for the Group executive team for each year from 2015 to 2019, excluding payments made in relation to departures from the Group. The number of executives engaged during each of these years varied. 2. LTI/VRP expense is the current period LTI/VRP expense only, excluding any prior period write-backs. 3. EPS in FY2017 excludes transaction fees and implementation costs totalling $22.4m associated with the acquisition of The Good Guys in November 2016 but includes New Zealand Goodwill and New Zealand Fixed Asset impairments of $15.8 million. Group CEO STI and VRP incentive achievement over the last 5 financial years: Group executive incentive achievement outcomes continue to align with the financial performance and strategic objectives of the Group. The table below sets out the Group CEO’s incentive achievement over the last 5 years, with FY2019 under the VRP and FY2015 to FY2018 under the Group’s previous STI incentive structure. Group Financial Target Incentive Target (Growth) 0 - 10% 0 - 10% 0 - 10% 23% - 34%(ii) 0 - 10% Actual Growth 5.1% 10.1% 21.2% 30.8% 7.1% Achievement Non-Financial Target Achievement Total Achievement 51% 100% 100% 71% 77% 100% 100% 100% 96% 74% 63% 100% 100% 77% 76% Financial Year(i) 2015 2016 2017 2018 2019 Notes (i) FY2015 – FY2018 STI target based on EBIT, FY2019 VRP target based on EPS. (ii) FY2018 target increased due to the acquisition of The Good Guys and JB Hi-Fi New Zealand goodwill impairment in the base in the prior year, on an underlying basis this represented 0-10% growth target. 39 For personal use only REMUNERATION REPORT (continued) The effectiveness of the executives’ performance related remuneration in driving performance is reflected in the long term growth of the share price of the Company. The following graph plots the JB Hi-Fi closing share price and the ASX 200 on a daily basis between listing on the ASX and 1 August 2019. The JB Hi-Fi closing share price compound annual growth rate between listing and 1 August 2019 is 20.0%, whilst the ASX 200 compound annual growth rate over the same period is 4.7%. e c i r P e r a h S $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00 $0.00 3 0 - t c O 4 0 - t c O 5 0 - t c O 6 0 - t c O 7 0 - t c O 8 0 - t c O 9 0 - t c O 0 1 - t c O 1 1 - t c O 2 1 - t c O 3 1 - t c O 4 1 - t c O 5 1 - t c O 6 1 - t c O 7 1 - t c O 8 1 - t c O 9 1 - t c O JB Hi-Fi Share Price ASX 200 (rebased against JBH share price) Key terms of executive employment agreements The remuneration and other terms of employment for each of the Group executives are set out in individual Company employment agreements. None of the executives are subject to a fixed term of employment. Name R. Murray C. Trainor Notice Periods/Termination Payment/Non-compete 12 months’ notice (or payment in lieu) 12 months’ post termination non-compete and non-solicitation restriction 9 months’ notice (or payment in lieu) if terminated by the Company 6 months’ notice if notice is given by the executive 6 months’ post termination non-compete and non-solicitation restriction T. Smart, N. Wells, T. Carter, J. Saretta, L. Blakely, S. Page 6 months’ notice (or payment in lieu) 6 months’ post termination non-compete and non-solicitation restriction Each Group executive may be terminated immediately for serious misconduct. In no instance would a payment in lieu of notice exceed the termination payments limits set out in the Corporations Act 2001. Each of the Group executive service contracts contains contractual entitlements for the Company to clawback incentive remuneration in the event of fraud, dishonesty, or material misstatements in, or omissions from, the Company’s financial statements or misstatements concerning the satisfaction of a performance condition. Minimum shareholding guidelines Building Group executive shareholdings is a priority of the Board in the context of executive retention, and to ensure Group executives are invested in the long term success of the Group and aligned with shareholder interests. In conjunction with introducing the VRP, a minimum shareholding requirement for senior executives was introduced in FY2019, being: • • 1.5 times fixed pay for the CEO; and 1.0 times fixed pay for the other Group executives. This level of shareholding is required to be built over 5 years from the introduction of the VRP (or appointment, if later). 40 For personal use only NON-EXECUTIVE DIRECTOR REMUNERATION FY2019 Non-Executive Director Remuneration The following persons acted as non-executive directors of the Company during and since the end of the financial year and are considered members of key management personnel: Greg Richards Non-executive Director, Chair of the Board and Remuneration Committee Stephen Goddard Non-executive Director and Member of the Audit and Risk Management Committee Beth Laughton Non-executive Director, Chair of the Audit and Risk Management Committee and Member of the Remuneration Committee Mark Powell Non-executive Director and Member of the Audit and Risk Management Committee Wai Tang Non-executive Director, Member of the Audit and Risk Management Committee and the Remuneration Committee Richard Uechtritz Non-executive Director The overriding objective of the JB Hi-Fi remuneration policies with regard to non-executive directors is to ensure the Company is able to attract and retain non-executive directors with the skills and experience to enable the Board to discharge its oversight and governance responsibilities in an effective and diligent manner. The Board also believes that remuneration for non-executive directors should reflect the time commitment and responsibilities of the role. The remuneration packages for non-executive directors for FY2019 are set out below and are at the same level as those for FY2018. Aggregate non-executive director remuneration for FY2019 was within the amount determined by the Company in its Annual General Meeting on 26 October 2017 being $1,500,000. Role Chair of the Board Non-executive director Additional Committee Fees Remuneration Committee Chair Fees 2019 $ Fees 2018 $ $300,000 $300,000 $134,000 $134,000 $25,000 $25,000 Audit and Risk Management Committee Chair $32,000 $32,000 Audit and Risk Management Committee member $16,000 $16,000 Remuneration Committee member $14,000 $14,000 Superannuation contributions are made by the Company on behalf of non-executive directors in line with statutory requirements and are included in the remuneration package amount. It is the policy of the Company not to pay lump sum retirement benefits to non-executive directors. It is the policy of the Company not to have any elements of non-executive director remuneration at risk. Specifically, non-executive directors do not receive any bonus payments and are not entitled to participate in any Company share option plans or the VRP. In order to further align non-executive directors with shareholders of the Company, a minimum shareholding requirement for non-executive directors was introduced in October 2018, being 1 times the base board fees for the non-executive director. This level of shareholding is required to be built over 5 years from the introduction of the policy (or appointment, if later). FY2020 Non-Executive Director Remuneration Non-executive directors’ fees will remain at the current level for FY2020. The Remuneration Committee will continue to review remuneration for non-executive directors on an annual basis in order to ensure that the objectives set out above in respect of non-executive directors’ remuneration are met. 41 For personal use only REMUNERATION REPORT (continued) OTHER INFORMATION Remuneration recommendations In FY2018, KPMG-3dc was engaged to provide remuneration recommendations for FY2019 in accordance with the provisions of the Corporations Act 2001 and was paid $16,000 (excluding GST) for remuneration recommendations regarding the FY2019 remuneration levels for the Group CEO and Group CFO. KPMG-3dc provided a formal declaration confirming that its recommendations were made free from undue influence by the member or members of the key management personnel to whom the recommendations related and, in view of this declaration and the process adopted in the engagement of KPMG-3dc and receipt of its recommendations, the Board is satisfied that each of the recommendations were free of undue influence by such persons. During FY2019, KPMG-3dc acted as remuneration advisor to the Remuneration Committee. No remuneration recommendations (as defined in the Corporations Act) were provided by KPMG-3dc during FY2019. Board policy with regard to executives limiting their exposure to risk in relation to equity options The Company’s Securities Trading Policy prohibits directors, executives, senior management and other specified employees from altering the economic benefit or risk derived by them in relation to any unvested equity options that they hold. The Policy also requires directors and Group executives to obtain prior written approval from the Chair of the Board before altering the economic benefit or risk derived by them in relation to any shares or vested options in JB Hi-Fi held by them. Each year directors and executives are required to sign a declaration that they are in compliance with all elements of the JB Hi-Fi Securities Trading Policy. These declarations have been received in relation to the 2019 financial year from all directors and Group executives. 42 For personal use onlyKEY MANAGEMENT PERSONNEL COMPENSATION Key management personnel for FY2019 include the non-executive directors and the eight identified executives set out on page 34. The aggregate compensation of the key management personnel of the Group for FY2019 is set out below: Short-term employee benefits Salary, fees & allowances Bonus VRP Cash Post-employment benefits Superannuation Share based payments Options expense VRP expense Consolidated 2019 $ 2018 $ 6,175,428 5,796,481 746,652 3,177,120 1,388,686 – 8,310,766 8,973,601 238,607 238,607 230,482 230,482 2,723,538 2,942,717 1,506,541 – 4,230,079 2,942,717 12,779,452 12,146,800 43 For personal use onlyREMUNERATION REPORT (continued) The compensation for each member of the key management personnel of the Group is set out below: Salary, fees & allowances $ 304,951 164,384 149,772 122,374 136,986 136,986 1,015,453 1,324,519 1,003,943 $ – – – – – – – – – Short-term employee benefits Post- employ- ment benefits Bonus(ii) VRP Cash(ii) Share based payments Options(i)(ii) VRP(ii)(iii) Total share based payments Total short-term employee benefits Super- annuation $ $ 304,951 20,049 164,384 15,616 149,772 14,228 122,374 11,626 136,986 13,014 136,986 13,014 $ – – – – – – $ – – – – – – – $ – – – – – – – Total $ 325,000 180,000 164,000 134,000 150,000 150,000 $ – – – – – – – 1,015,453 87,547 – 1,103,000 534,759 1,859,278 24,519 930,246 579,323 1,509,569 3,393,366 319,277 1,323,220 24,519 430,514 345,883 776,397 2,124,136 1,004,036 727,421 – 1,731,457 25,000 657,865 – 657,865 2,414,322 673,557 549,999 550,000 – – – 222,458 896,015 24,519 264,900 240,996 505,896 1,426,430 159,467 709,466 24,519 235,319 172,756 408,075 1,142,060 152,725 702,725 24,519 185,263 165,452 350,715 1,077,959 33,092 15,385 20,829 3,846 – – 48,477 24,675 1,886 1,579 15,447 3,984 2,131 17,578 – 3,984 67,941 30,238 5,159,975 746,652 1,388,686 7,295,313 151,060 2,723,538 1,506,541 4,230,079 11,676,452 6,175,428 746,652 1,388,686 8,310,766 238,607 2,723,538 1,506,541 4,230,079 12,779,452 2019 Non-executive directors G. Richards B. Laughton W. Tang R. Uechtritz S. Goddard M. Powell Executives R. Murray C. Trainor T. Smart(iv) N. Wells T. Carter J. Saretta S. Page(v) L. Blakely(v) (i) In accordance with Accounting Standards, remuneration includes the amortisation of the fair value of options issued under the Group share option plans that are expected to vest, less any write-back on options lapsed or expected to lapse as a result of actual or expected performance against non-market hurdles (“Option Accounting Value”). The fair value of options is measured at grant date in accordance with the relevant accounting standard and progressively allocated to profit and loss over the vesting period of the option. The amount included in remuneration above may not be indicative of the benefit (if any) that key management personnel may ultimately realise should the equity instruments vest. (ii) Performance based. (iii) In accordance with Accounting Standards, remuneration includes the amortisation of the value of VRP that is paid in restricted shares. The value of shares is progressively allocated to profit and loss over the restriction period of the share. (iv) Given T. Smart received a one-off 3 year grant of LTI on re-joining the Group in April 2017, he did not participate in the VRP for FY2019. Instead, he was able to earn an STI in FY19. 80% of this STI will be paid in cash with 20% paid in deferred shares. Further detail is set out on page 38. (v) All amounts disclosed for S. Page and L. Blakely are for the period that they were classified as key management personnel (4 June 2019 to 30 June 2019). 44 For personal use onlyPerformance based Short-term employee benefits Bonus VRP Cash Maximum Potential Actual Maximum Potential Actual % of total potential remuneration – – $ – – $ – – 1,030,000 38% 727,421 – – – 19,615 3,846 1,053,461 – – – 27% 13% 8% – – – 15,385 3,846 746,652 % of total actual remuneration % of total potential remuneration $ % of total actual remuneration $ – – 30% – – – 23% 13% 698,625 412,000 – 280,000 194,063 194,063 – – 19% 18% – 18% 16% 17% – – 534,759 319,277 – 222,458 159,467 152,725 – – 16% 15% – 16% 14% 14% – – 6% 1,778,751 14% 1,388,686 12% Performance based Share based payments Options VRP Shares Maximum Potential Actual Maximum Potential Actual % of total potential remuneration $ % of total actual remuneration $ % of total potential remuneration $ % of total actual remuneration $ 930,246 430,514 657,865 264,900 235,319 185,263 15,447 3,984 25% 19% 24% 17% 19% 16% 21% 13% 930,246 430,514 657,865 264,900 235,319 185,263 15,447 3,984 27% 20% 27% 19% 21% 17% 23% 13% 756,844 446,333 – 303,333 210,234 210,234 2,778 – 20% 19% – 20% 17% 18% 4% – 579,323 345,883 – 240,996 172,756 165,452 2,131 – 17% 16% – 17% 15% 15% 3% – 2,723,538 21% 2,723,538 23% 1,929,756 15% 1,506,541 13% 2019 Executives R. Murray C. Trainor T. Smart(i) N. Wells T. Carter J. Saretta S. Page(ii) L. Blakely(ii) 2019 Executives R. Murray C. Trainor T. Smart(i) N. Wells T. Carter J. Saretta S. Page(ii) L. Blakely(ii) (i) Given T. Smart received a one-off 3 year grant of LTI on re-joining the Group in April 2017, he did not participate in the VRP for FY2019. Instead, he was able to earn an STI in FY19. Further detail is set out on page 38. (ii) All amounts disclosed for S. Page and L. Blakely are for the period that they were classified as key management personnel (4 June 2019 to 30 June 2019). 45 For personal use only REMUNERATION REPORT (continued) The VRP Shares amounts included in the table above represent the FY2019 Maximum Potential accounting expense and Actual accounting expense recognised in accordance with Accounting Standards. The Maximum Potential VRP Shares available for each Group Executive, based on their remuneration package, and the Actual VRP Shares earned in FY2019 (to be issued in August 2019), is set out in the table below. 2019 Executives R. Murray C. Trainor T. Smart N. Wells T. Carter J. Saretta S. Page(i) L. Blakely(i) VRP Incentive Package VRP Incentive Achieved Maximum Potential Cash Maximum Potential Shares Total VRP Incentive Package Achieved $ $ $ % Actual Cash $ Actual Shares $ Total VRP achieved $ 698,625 2,095,875 2,794,500 412,000 1,236,000 1,648,000 – 280,000 194,063 194,063 – – – – 840,000 1,120,000 582,188 776,251 582,188 776,251 7,692 – 7,692 – 77% 78% – 79% 82% 79% 77% – 534,759 1,604,278 2,139,037 319,277 957,831 1,277,108 – 222,458 159,467 152,725 – – – – 667,373 889,831 478,402 637,869 458,174 610,899 5,902 – 5,902 – 1,778,751 5,343,943 7,122,694 78% 1,388,686 4,171,960 5,560,646 (i) All amounts disclosed for S. Page and L. Blakely are for the period that they were classified as key management personnel (4 June 2019 to 30 June 2019). 2018 Non-executive directors G. Richards B. Laughton W. Tang R. Uechtritz S. Goddard M. Powell Executives R. Murray C. Trainor T. Smart N. Wells T. Carter J. Saretta Short-term employee benefits Post- employ- ment benefits Share based payments Salary, fees & allowances $ 304,951 164,384 149,772 122,374 136,986 136,986 1,015,453 Total short-term employee benefits $ 304,951 164,384 149,772 122,374 136,986 136,986 1,015,453 Bonus(ii) $ – – – – – – – 1,274,058 999,622 2,273,680 925,770 960,527 572,981 523,942 523,750 580,114 1,505,884 602,904 1,563,431 349,992 320,826 323,662 922,973 844,768 847,412 Super- annuation $ 20,049 15,616 14,228 11,626 13,014 13,014 87,547 24,712 23,750 20,049 24,712 24,712 25,000 Options(i)(ii) $ – – – – – – – Total $ 325,000 180,000 164,000 134,000 150,000 150,000 1,103,000 1,063,151 3,361,543 497,240 2,026,874 657,865 2,241,345 287,171 1,234,856 266,947 1,136,427 170,343 1,042,755 4,781,028 3,177,120 7,958,148 142,935 2,942,717 11,043,800 5,796,481 3,177,120 8,973,601 230,482 2,942,717 12,146,800 (i) In accordance with Accounting Standards, remuneration includes the amortisation of the fair value of options issued under the Group share option plans that are expected to vest, less any write-back on options lapsed or expected to lapse as a result of actual or expected performance against non-market hurdles (“Option Accounting Value”). The fair value of options is measured at grant date in accordance with the relevant accounting standard and progressively allocated to profit and loss over the vesting period of the option. The amount included in remuneration above may not be indicative of the benefit (if any) that key management personnel may ultimately realise should the equity instruments vest. (ii) Performance based. 46 For personal use onlyPerformance based Short-term employee benefits Share based payments Maximum Potential STI Actual STI Maximum Potential LTI Bonus Bonus Options Actual LTI Options % of total potential remuneration $ % of total actual remuneration $ % of total potential remuneration $ % of total actual remuneration $ 1,300,000 712,500 1,000,000 450,000 412,500 412,500 35% 33% 38% 34% 34% 36% 999,622 580,114 602,904 349,992 320,826 323,662 4,287,500 35% 3,177,120 30% 1,063,151 29% 497,240 27% 28% 28% 657,865 287,171 266,947 31% 170,343 29% 2,942,717 29% 1,063,151 23% 25% 21% 22% 15% 497,240 657,865 287,171 266,947 170,343 24% 2,942,717 32% 25% 29% 23% 23% 16% 27% 2018 Executives R. Murray C. Trainor T. Smart N. Wells T. Carter J. Saretta All bonuses are paid in the financial year following the year in which they were earned, for example the 2019 financial year bonuses are paid in August 2019 (the 2020 financial year). 47 For personal use only REMUNERATION REPORT (continued) KEY MANAGEMENT PERSONNEL EQUITY/OPTIONS Fully paid ordinary shares of JB Hi-Fi Limited 2019 G. Richards B. Laughton W. Tang R. Uechtritz S. Goddard M. Powell R. Murray C. Trainor T. Smart N. Wells T. Carter J. Saretta S. Page(ii) L. Blakely Balance at 1 July 2018 No. Granted as compensation(i) No. Received on exercise of options No. Net other change No. Balance at 30 June 2019 No. 26,486 4,304 5,000 11,516 1,500 1,000 110,257 15,298 51,701 20,093 3,204 2,479 – – – – – – – – 7,818 4,537 4,715 2,737 2,509 2,531 – – – – – – – – 79,568 43,349 – 15,744 18,785 – – – – 1,500 – – 3,000 1,000 (87,521) (26,365) – (5,816) (7,636) – 5,802 – 26,486 5,804 5,000 11,516 4,500 2,000 110,122 36,819 56,416 32,758 16,862 5,010 5,802 – Balance held nominally No. 3,455 – – – – – – – – – – – – – 252,838 24,847 157,446 (116,036) 319,095 3,455 (i) Shares issued under the Company’s executive deferred STI Plan. (ii) The net other change for S. Page represents the shares held by him when he became a KMP on 4 June 2019. 2018 G. Richards B. Laughton W. Tang R. Uechtritz S. Goddard M. Powell R. Murray C. Trainor T. Smart N. Wells T. Carter J. Saretta Balance at 1 July 2017 No. Granted as compensation(i) No. Received on exercise of options No. Net other change No. Balance at 30 June 2018 No. 26,486 2,304 3,700 11,516 1,500 – 105,572 10,070 50,000 11,314 888 163 – – – – – – 7,953 5,228 1,701 2,316 2,316 2,316 – – – – – – 112,629 86,614 – 12,403 13,787 – – 2,000 1,300 – – 1,000 (115,897) (86,614) – (5,940) (13,787) – 26,486 4,304 5,000 11,516 1,500 1,000 110,257 15,298 51,701 20,093 3,204 2,479 Balance held nominally No. 3,455 – – – – – – – – – – – 223,513 21,830 225,433 (217,938) 252,838 3,455 (i) Shares issued under the Company’s executive deferred STI Plan. 48 For personal use onlyShare options of JB Hi-Fi Limited 2019 R. Murray C. Trainor T. Smart N. Wells T. Carter J. Saretta S. Page L. Blakely Balance at 1 July 2018 No. Granted as compensation No. 270,823 129,439 106,312 68,757 69,347 29,418 – – 674,096 – – – – – – – – – Exercised No. (79,568) (43,349) – (15,744) (18,785) – – – Net other change(i) No. Balance at 30 June 2019 No. Balance vested at 30 June 2019 No. Options vested during year No. – – – – – – 33,646 6,867 191,255 86,090 106,312 53,013 50,562 29,418 33,646 6,867 – – – – – 880 – – 79,568 43,349 – 15,744 18,785 – – – (157,446) 40,513 557,163 880 157,446 (i) Net other change represents the options held by S. Page and L. Blakely when they became a KMP on 4 June 2019. 2018 R. Murray C. Trainor T. Smart N. Wells T. Carter J. Saretta Balance at 1 July 2017 No. Granted as compensation No. 322,105 182,430 106,312 59,925 67,562 13,846 61,347 33,623 – 21,235 15,572 15,572 Exercised No. (112,629) (86,614) – (12,403) (13,787) – 752,180 147,349 (225,433) Net other change No. Balance at 30 June 2018 No. Balance vested at 30 June 2018 No. Options vested during year No. – – – – – – – 270,823 129,439 106,312 68,757 69,347 29,418 674,096 – – – – – – – 112,629 86,614 – 12,403 13,787 – 225,433 During the financial year 65,548 zero exercise price options (FY2018: 44,725) and 91,898 options with an exercise price (FY2018: 180,708) were exercised by key management personnel. The weighted average exercise price for options with an exercise price was $17.81 (FY2018: $13.89) per ordinary share in JB Hi-Fi Limited. 49 For personal use onlyREMUNERATION REPORT (continued) Key management personnel options granted and exercised during the ﬁ nancial year The following table summarises the value of options granted and exercised during the financial year to and by the key management personnel: 2019 R. Murray C. Trainor T. Smart N. Wells T. Carter J. Saretta S. Page(ii) L. Blakely(ii) Value of options granted – at the grant date(i) Value of options exercised – at the exercise date $ – – – – – – – – – $ 1,192,954 630,182 – 257,514 269,578 – – – 2,350,228 (i) The value of options granted during the period is recognised in remuneration over the vesting period of the option, in accordance with Accounting Standards. (ii) There were no options granted to or exercised by S. Page and L. Blakely since they became KMP’s on 4 June 2019. The value of options granted and exercised during the year is calculated based on the following: • • fair value of the option at grant date multiplied by the number of options granted; and fair value of the option at the time it is exercised multiplied by the number of options exercised. Options granted during the financial year There were no share options granted during the financial year to key management personal following the change in remuneration structure to the VRP as set out on pages 35 to 37. 50 For personal use onlyOptions exercised during the financial year The following table details the options exercised during the financial year by key management personnel. R. Murray C. Trainor N. Wells T. Carter Series 94.3 95.1 95.2 95.3 97 99 100 101 103.2 104.2 107 108 112 128 94.3 95.1 95.2 95.3 97 99 100 101 103.2 104.2 107 108 112 128 103.2 104.2 107 108 112 128 117.2 118.2 121 122 126 128 Number of options exercised Exercise date Number of shares issued Exercise price $ 8,964 23/08/2018 8,964 27 27 23/08/2018 23/08/2018 27 27 3,842 23/08/2018 3,842 $18.93 $18.93 $18.93 $18.93 7 7 23/08/2018 23/08/2018 2,286 23/08/2018 980 23/08/2018 23,692 23/08/2018 10,154 23/08/2018 5,227 23/08/2018 2,240 23/08/2018 3,734 23/08/2018 18,381 23/08/2018 79,568 7 7 2,286 980 23,692 10,154 5,227 2,240 3,734 18,381 79,568 – – – – $17.72 $17.72 – – – – 8,963 23/08/2018 8,963 27 27 23/08/2018 23/08/2018 27 27 3,842 23/08/2018 3,842 $18.93 $18.93 $18.93 $18.93 10 10 14/08/2018 14/08/2018 3,002 16/08/2018 1,286 16/08/2018 9,454 22/08/2018 4,052 22/08/2018 2,086 15/08/2018 894 15/08/2018 1,490 15/08/2018 8,206 14/08/2018 43,349 5,743 23/08/2018 2,461 23/08/2018 1,267 23/08/2018 543 23/08/2018 905 23/08/2018 4,825 23/08/2018 15,744 7,436 1/03/2019 3,187 1/03/2019 1,477 26/02/2019 633 26/02/2019 1,055 26/02/2019 4,997 20/08/2018 18,785 157,446 10 10 3,002 1,286 9,454 4,052 2,086 894 1,490 8,206 43,349 5,743 2,461 1,267 543 905 4,825 15,744 7,436 3,187 1,477 633 1,055 4,997 18,785 157,446 – – – – $17.72 $17.72 – – – – $17.72 $17.72 – – – – $15.58 $15.58 – – – – Share price at exercise date $ Performance condition – cumulative EPS growth per annum Performance condition – achieved $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $24.73 $24.73 $26.19 $26.19 $26.00 $26.00 $26.17 $26.17 $26.17 $24.73 $25.59 $25.59 $25.59 $25.59 $25.59 $25.59 $22.24 $22.24 $21.44 $21.44 $21.44 $26.21 5% 5%-10% 5%-10% 5%-10% 5%-10% 5%-10% 5% 5%-10% 5% 5%-10% 5% 5%-10% n/a 4%-8% 5% 5%-10% 5%-10% 5%-10% 5%-10% 5%-10% 5% 5%-10% 5% 5%-10% 5% 5%-10% n/a 4%-8% 5% 5%-10% 5% 5%-10% n/a 4%-8% 5% 5%-10% 5% 5%-10% n/a 4%-8% Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes n/a(i) Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes n/a(i) Yes Yes Yes Yes Yes n/a(i) Yes Yes Yes Yes Yes n/a(i) Yes (i) Options did not contain a performance condition as they are a one-off issue of retention options made in August 2014 to each of the executives at that time, as detailed in the Company’s 2015 Annual Report. 51 For personal use onlyREMUNERATION REPORT (continued) No options issued to T. Smart, J. Saretta, S. Page or L. Blakely were exercised during the financial year while they were key management personnel. Options lapsed during the financial year There were no options issued to the identified key management personnel that lapsed during the financial year. Key management personnel options granted, exercised and lapsed since the end of the ﬁ nancial year No options have been issued to key management personnel, and no options issued to key management personnel have been exercised or lapsed, since the end of the financial year. 52 For personal use onlySHARE OPTIONS Group share option plans The Group has share ownership-based remuneration schemes for executives and non-executive management (excluding non-executive directors). In accordance with the provisions of these schemes, executives and non-executive managers within the Group are granted options to purchase parcels of ordinary shares at various exercise prices or to acquire shares at a zero exercise price. Options issued from FY2013 to FY2019 (inclusive) have the features set out below. Group executives no longer receive options under these schemes and, instead, have the opportunity to earn share ownership-based remuneration under the Group’s Variable Reward Plan detailed on pages 35 to 37: • • • • no issue price is payable on the issue of an option; for some of the options issued to executives during the 2013, 2014 and 2015 ﬁ nancial years, an exercise price is payable on the exercise of an option. This exercise price was usually calculated as being the closing volume weighted average share price (“VWAP”) of JB Hi-Fi Limited shares over the 5 trading days post and including the date of release of the Group’s full year results, immediately prior to the grant of the option. This price may be calculated by reference to another date or time period, for example where a grant of options occurs other than following the release of results as a result of an executive or non-executive manager joining the Group or being promoted within the Group. For options that have an exercise price payable on exercise of the option, a share price condition provides that options will only vest if, during a trading window (as deﬁ ned in the Group’s Securities Trading Policy), the VWAP of the shares over 5 consecutive trading days exceeds the option exercise price (at a time when all other conditions have been satisﬁ ed); for some options issued before 30 June 2015 and all options issued after 30 June 2015, a zero exercise price; for options issued to Group executives in previous years, the majority of options are subject to performance conditions based on EPS growth. Some of the options issued to certain senior managers are also subject to performance hurdles. Options issued have been subject to performance hurdles which require compound annual earnings per share growth of between 4% and 15% per annum; • service based conditions – the options issued to executives in FY2013 to FY2017 (inclusive) vest a third each on the third, fourth and ﬁ fth anniversary of the grant date provided that the executive remains employed at that time. The only exception to this is for options issued to Terry Smart in April 2017, which vest one half each on each of the third and fourth anniversary of the grant date provided that he remains employed at that time. Options issued to executives in FY2018 also vest one half each on each of the third and fourth anniversary of the grant date, provided the relevant executive remains employed at that time. For all options issued to non-executive management, options vest a third each on the second, third and fourth anniversary of • • grant date provided that the non-executive manager remains employed at that time; all conditions must be satisﬁ ed for an option to vest; options issued to non-executive management since 1 July 2012 generally expire ﬁ ve years after they are issued. Options issued to executives between 1 July 2012 and 30 June 2017 generally expire six years after they are issued. Options issued to executives between 1 July 2017 and 30 June 2018 expire ﬁ ve years after they are issued. All unvested options generally expire immediately upon termination of employment although, depending upon the terms of issue, the Company may have discretion to allow the options to continue or waive vesting conditions in certain circumstances. Upon termination of employment, vested options either expire upon termination, 30 days after termination or continue in force depending upon the circumstances of the employee’s exit and the terms of issue; • to the extent that a performance condition is not achieved in one year, the hurdle is compounded and reassessed in each subsequent year, until the earlier of the condition being satisﬁ ed or the option expiring. However, no retesting takes place in the year of expiry; • options are valued using the Black-Scholes option pricing model, which takes into account the exercise price, term of the option, the expected exercise date based on prior years’ experience, the share price at grant date, the expected price volatility • • of the underlying share, the expected dividend yield and the risk-free interest rate; each option entitles the holder to one ordinary share in JB Hi-Fi Limited; holders of options do not have the right, under the options, to dividends or to participate in any share issue or interest issue of JB Hi-Fi Limited or of any other body corporate or registered scheme; • upon a change of control of the Company all vested and unvested options will automatically lapse unless the Company determines otherwise; and • other conditions including, amongst other things, treatment of the options in the event of a capital reorganisation. 53 For personal use onlyREMUNERATION REPORT (continued) As detailed in the Company’s 2015 Annual Report, in August 2014 the Company made a one-off issue of share options with a zero exercise price and specific service-based vesting conditions to each of the executives at that time. Shares under option Details of interests under option at the date of this report are set out below, 78,778 of the outstanding options are vested and exercisable. All options entitle the holder to ordinary shares in JB Hi-Fi Limited. Number of shares under option Option series Grant date (GD) Share Price at GD $ Expiry date Exercise price $ Weighted average expected volatility(i) Dividend yield at GD Risk-free interest rate at GD 103-104 63,777 15/08/2014 $17.66 14/08/2020 $17.72 109-113 21,111 15/08/2014 $17.66 14/08/2020 $0.00 117-118 10,624 27/11/2014 $15.56 26/11/2020 $15.58 123-127 3,165 27/11/2014 $15.56 26/11/2020 129-130 85,745 14/08/2015 $20.79 13/08/2021 133 48,550 14/08/2015 $20.79 13/08/2020 135-136 10,959 5/11/2015 $17.63 4/11/2021 139 747 18/12/2015 $18.36 17/12/2020 140-142 2,640 2/05/2016 $22.18 1/05/2022 144-145 74,829 22/08/2016 $29.50 21/08/2021 146-148 123,256 22/08/2016 $29.50 21/08/2022 153-154 156-157 983 983 19/10/2016 $28.79 18/10/2021 2/11/2016 $27.41 1/11/2021 158-159 106,312 18/04/2017 $24.46 17/04/2023 160-162 6,951 1/05/2017 $24.94 30/04/2022 163-167 417,790 29/08/2017 $23.56 28/08/2022 168-170 251,820 20/08/2018 $26.21 19/08/2023 171-173 7,595 3/12/2018 $23.40 2/12/2023 1,237,837 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 (i) The values shown are the weighted average for the relevant series listed. 30.7% 30.7% 30.9% 30.3% 31.2% 31.7% 31.1% 30.4% 30.1% 29.5% 30.1% 29.4% 29.4% 28.1% 28.3% 27.9% 27.3% 26.6% 4.6% 4.6% 5.3% 5.3% 4.3% 4.3% 4.9% 5.0% 4.2% 3.3% 3.4% 3.7% 3.7% 4.6% 4.0% 4.6% 5.0% 5.5% 2.9% 2.9% 2.6% 2.6% 2.2% 2.2% 2.2% 2.2% 2.1% 1.5% 1.5% 2.2% 2.2% 2.0% 2.1% 2.2% 2.2% 2.2% Weighted average fair value at GD(i) $ $3.25 $14.06 $2.51 $11.98 $17.06 $17.42 $14.26 $14.88 $18.19 $26.13 $25.70 $23.31 $23.31 $21.16 $21.58 $21.47 $22.03 $19.76 54 For personal use onlyThe following tables include all share options granted under the Group share option plans that were exercised during and since the end of the current financial year and during the previous financial year. All shares were ordinary shares issued by JB Hi-Fi Limited and no amounts remain unpaid. 2019 Option Series Grant date Number exercised Number of shares issued Amount paid per share $ 94-95 16/08/2013 33,399 33,399 $18.93 44 9,504 63,776 71,205 10,623 3,165 92,657 5,479 747 44 9,504 63,776 71,205 10,623 3,165 92,657 5,479 747 97-99 16/08/2013 100-101 16/08/2013 103-104 15/08/2014 107-116 15/08/2014 117-118 27/11/2014 121-126 27/11/2014 128-132 14/08/2015 5/11/2015 18/12/2015 134 138 143 152 155 22/08/2016 38,189 38,189 19/10/2016 2/11/2016 491 491 491 491 329,770 329,770 Share price at exercise date(i) $ $25.59 $24.73 to $25.59 $25.59 to $26.19 $25.59 to $26.00 $25.47 to $26.21 $22.24 $21.44 $24.73 to $26.21 $23.58 $22.98 $25.00 to $26.40 $22.48 $23.58 $0.00 $0.00 $17.72 $0.00 $15.58 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 (i) Where a range of prices are shown, options within the series were exercised on various dates throughout the period. The share prices shown are the maximum and minimum share prices on the exercise dates for the relevant series. 2018 Option Series Grant date Number exercised Number of shares issued Amount paid per share $ 80-81 17/08/2012 112,987 112,987 83-87 17/08/2012 93 16/08/2013 94-95 16/08/2013 97-99 16/08/2013 103-104 15/08/2014 105-115 15/08/2014 117-118 27/11/2014 119-125 27/11/2014 131 137 14/08/2015 18/12/2015 17,799 50,798 34,473 9,852 63,772 75,255 10,623 3,164 55,820 746 17,799 50,798 34,473 9,852 63,772 75,255 10,623 3,164 55,820 746 435,289 435,289 $9.75 $0.00 $0.00 $18.93 $0.00 $17.72 $0.00 $15.58 $0.00 $0.00 $0.00 Share price at exercise date(i) $ $23.56 to $24.83 $24.83 to $25.62 $21.89 to $27.66 $24.83 to $25.40 $24.83 to $25.02 $24.30 to $25.02 $21.89 to $27.66 $26.72 $26.72 $21.89 to $27.66 $27.66 (i) Where a range of prices are shown, options within the series were exercised on various dates throughout the period. The share prices shown are the maximum and minimum share prices on the exercise dates for the relevant series. 55 For personal use onlyREMUNERATION REPORT (continued) Long-term incentives subject to performance conditions Certain executives have been issued with options under the Group share option plans as part of the Company’s long-term incentive program. Details of the features and conditions of such options are included in the section of this report entitled “Group share option plans” on page 53. The following table details the options outstanding at the date of this report which feature performance hurdles: Option Series Grant Date Performance Hurdle(i)(ii)(iii) Date for first testing Relevant Financial Year Exercise Price $ Expiry Date Vested (time based service condition and performance hurdle achieved) 140 2/05/2016 4%-8% 2/05/2019 2018 $0.00 1/05/2022 Not vested (performance hurdle achieved but time based service condition not achieved) 103-104 109-110 117-118 123-124 129 135 146 15/08/2014 15/08/2014 27/11/2014 27/11/2014 14/08/2015 5/11/2015 22/08/2016 5%-10% 5%-10% 5%-10% 5%-10% 4%-8% 4%-8% 4%-8% 15/08/2019 15/08/2019 27/11/2019 27/11/2019 14/08/2019 5/11/2019 22/08/2019 2019 2019 2019 2019 2019 2019 2019 Not vested (time based service condition and performance hurdle not achieved) 130 136 141 142 147 148 158 159 163 164 14/08/2015 5/11/2015 2/05/2016 2/05/2016 22/08/2016 22/08/2016 18/04/2017 18/04/2017 29/08/2017 29/08/2017 4%-8% 4%-8% 4%-8% 4%-8% 4%-8% 4%-8% 9%-15% 9%-15% 9%-15% 9%-15% 14/08/2020 5/11/2020 2/05/2020 2/05/2021 22/08/2020 22/08/2021 18/04/2020 18/04/2021 10/08/2020 9/08/2021 2020 2020 2019 2020 2020 2021 2020 2021 2020 2021 $17.72 $0.00 $15.58 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 14/08/2020 14/08/2020 26/11/2020 26/11/2020 13/08/2021 4/11/2021 21/08/2022 13/08/2021 4/11/2021 1/05/2022 1/05/2022 21/08/2022 21/08/2022 17/04/2023 17/04/2023 28/08/2022 28/08/2022 (i) For options shown with a 5%-10% performance hurdle, 70% of the options vest where compound annual EPS growth is 5%, and where compound annual EPS growth is between 5% and 10% the remaining 30% of options vest on a linear basis. (ii) For options shown with a 4%-8% performance hurdle, options vest as follows: • where compound annual EPS growth of 4% is achieved 40% of the options vest; • where compound annual EPS growth is between 4% and 5% an additional 10% will vest on a linear basis; and • where compound annual EPS growth is between 5% and 8% the remaining 50% will vest on a linear basis. (iii) For options shown with a 9%-15% performance hurdle, 50% of the options vest where compound annual EPS growth is 9%, and where compound annual EPS growth is between 9% and 15% the remaining 50% of options vest on a linear basis. 56 For personal use onlyAUDITOR’S INDEPENDENCE DECLARATION Deloitte Touche Tohmatsu ABN 74 490 121 060 550 Bourke Street Melbourne, VIC, 3000 Australia Phone: +61 3 9671 7000 www.deloitte.com.au Board of Directors JB Hi-Fi Limited Podium Level, 60 City Road Southbank VIC 3006 12 August 2019 Dear Board Members JB Hi-Fi Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of JB Hi-Fi Limited. As lead audit partner for the audit of the ﬁ nancial statements of JB Hi-Fi Limited for the year ended 30 June 2019, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Travis Simkin Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Paciﬁ c Limited and the Deloitte Network. 57 For personal use onlyINDEPENDENT AUDITOR’S REPORT Deloitte Touche Tohmatsu ABN 74 490 121 060 550 Bourke Street Melbourne, VIC, 3000 Australia Phone: +61 3 9671 7000 www.deloitte.com.au INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF JB HI-FI LIMITED Report on the Audit of the Financial Report Opinion We have audited the financial report of JB Hi-Fi Limited (the “Company”) and its subsidiaries (the “Group”) which comprises the consolidated balance sheet as at 30 June 2019, the consolidated statement of profit or loss, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of cash flows and the consolidated statement of changes in equity for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2019 and of its financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most signiﬁ cance in our audit of the ﬁ nancial report for the current period. These matters were addressed in the context of our audit of the ﬁ nancial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Paciﬁ c Limited and the Deloitte Network. 58 For personal use onlyKey Audit Matter How the scope of our audit responded to the Key Audit Matter Carrying value of The Good Guys cash generating unit Our audit procedures included, but were not limited to: Refer to Note 11 Intangibles. • assessing the design and implementation of key controls The carrying value of The Good Guys cash generating unit relating to the preparation of the value-in-use model; contains $575.6 million of goodwill and $241.3 million of • agreeing forecast cash ﬂ ows to the latest Board indeﬁ nite useful life brand names, both of which are required approved budget and assessing the historical accuracy of to be assessed for impairment annually or where there is an management’s forecasting; indicator of impairment. As disclosed within Note 11 to the ﬁ nancial statements, management have assessed The Good Guys cash generating unit for impairment using a ‘value in use’ discounted cash ﬂ ow • with the assistance of our valuation specialists, we: • assessed the management’s value-in-use methodology; model. The impairment assessment incorporated signiﬁ cant • challenging key assumptions, including forecast judgments and estimates, speciﬁ cally concerning factors such as forecast cash ﬂ ows, discounts rates and terminal growth rates by comparing them to historical results and economic forecasts; growth rates. • evaluated the discount rate used by assessing the cost of capital for the cash generating unit by comparison to market data; • assessing the mathematical accuracy of the value-in- use model; and • assessed management’s sensitivity analyses around key assumptions used in the valuation model. We also assessed the appropriateness of the disclosures included in Note 11 to the ﬁ nancial statements. AASB 16 Leases: Presentation and disclosure Our audit procedures included, but were not limited to: Refer to Note 29(e) Signiﬁ cant accounting policies New • testing the completeness of the lease data captured by accounting standards. management by agreeing a sample of rent expense in the The Group is required to apply the requirements of AASB 16 ledger to the lease data; Leases from 1 July 2019, being the start of the financial year • testing the accuracy of the lease data captured by ending 30 June 2020. management, on a sample basis, by agreeing it to the As set out in Note 29(e), management has identified that the underlying lease documentation; adoption of AASB 16 Leases will have a significant impact on • with the assistance of our treasury specialists, assessing the presentation of the Group’s financial statements. the incremental borrowing rates used by management to The expected impact of adopting AASB 16 is reliant upon calculate the lease liability; a number of key estimates and judgements as set out in • evaluating the estimates and judgement applied by Note 29(e). Additionally, there is risk that the lease data is management in determining the lease period for each incomplete or inaccurate. lease, including the probability of exercising options and the lease term assigned to leases in ‘hold over’; and • recalculating the lease liability and right of use asset, on a sample basis, to test the mathematical accuracy of management’s calculations. We also assessed the appropriateness of the disclosures included in Note 29(e) to the ﬁ nancial statements. 59 For personal use onlyINDEPENDENT AUDITOR’S REPORT (continued) Other Information The directors are responsible for the other information. The other information comprises the Governance, Environmental and Social Statements, Directors’ Report, Operating and Financial Review and additional securities exchange information which we obtained prior to the date of this auditor’s report. The other information also includes the Chairman and Chief Executive Officer Report, which is expected to be made available to us after that date (but does not include the financial report and our auditor’s report thereon). Our opinion on the financial report does not cover the other information and we do 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 Chairman and Chief Executive Officer Report, 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. 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 this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the director’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. 60 For personal use only• Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group’s audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 32 to 56 of the Directors’ report for the year ended 30 June 2019. In our opinion, the Remuneration Report of JB Hi-Fi Limited, for the year ended 30 June 2019, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU Travis Simkin Partner Chartered Accountants Melbourne 12 August 2019 61 For personal use onlyDIRECTORS’ DECLARATION The directors declare that: (a) in the directors’ opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; (b) the attached financial statements are in compliance with International Financial Reporting Standards, as stated in note 1 to the financial statements; (c) in the directors’ opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity; and (d) the directors have been given the declarations required by s.295A of the Corporations Act 2001. At the date of this declaration, the Company is within the class of companies affected by ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. The nature of the deed of cross guarantee is such that each company which is party to the deed guarantees to each creditor payment in full of any debt in accordance with the deed of cross guarantee. In the directors’ opinion, there are reasonable grounds to believe that the Company and the companies to which the ASIC Class Order applies, as detailed in note 22 to the financial statements will, as a group, be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee. Signed in accordance with a resolution of the directors made pursuant to s.295(5) of the Corporations Act 2001. On behalf of the Directors Greg Richards Chairman Melbourne 12 August 2019 Richard Murray Group Chief Executive Officer 62 For personal use only STATEMENT OF PROFIT OR LOSS for the ﬁ nancial year ended 30 June 2019 Revenue Cost of sales Gross proﬁ t Other income Sales and marketing expenses Occupancy expenses Administration expenses Other expenses Finance costs Proﬁ t before tax Income tax expense Proﬁ t for the year attributable to Owners of the Company Earnings per share Basic (cents per share) Diluted (cents per share) Notes Consolidated 2019 $m 2018 $m 7,095.3 6,854.3 (5,568.2) (5,384.1) 1,527.1 1,470.2 2.4 (731.0) (306.4) (44.5) (74.0) (14.3) 359.3 (109.5) 249.8 1.1 (695.1) (299.7) (48.2) (77.2) (16.6) 334.5 (101.3) 233.2 Cents Cents 217.44 215.27 203.09 201.11 5 6 3 3 The above statement of proﬁ t or loss should be read in conjunction with the accompanying notes. 63 For personal use onlySTATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME for the ﬁ nancial year ended 30 June 2019 Proﬁ t for the year Other comprehensive income Items that may be reclassiﬁ ed subsequently to proﬁ t or loss Changes in the fair value of cash ﬂ ow hedges (net of tax) Exchange differences on translation of foreign operations Other comprehensive income for the year (net of tax) Consolidated 2019 $m 249.8 (1.1) 1.4 0.3 2018 $m 233.2 1.9 (1.3) 0.6 Total comprehensive income for the year attributable to Owners of the Company 250.1 233.8 The above statement of proﬁ t or loss and other comprehensive income should be read in conjunction with the accompanying notes. 64 For personal use onlyBALANCE SHEET as at 30 June 2019 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Total current assets Non-current assets Plant and equipment Deferred tax assets Intangible assets Other non-current assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Deferred revenue Provisions Other current liabilities Current tax liabilities Total current liabilities Non-current liabilities Borrowings Deferred revenue Deferred tax liabilities Provisions Other non-current liabilities Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained earnings Total equity Consolidated 2019 $m 2018 $m Notes 8 7 9 10 6 11 9 12 13 14 15 17 13 6 14 15 18 19 119.2 236.0 886.7 34.6 72.0 204.7 891.1 42.7 1,276.5 1,210.5 191.5 2.7 198.0 – 1,037.3 1,037.3 40.8 1,272.3 2,548.8 45.9 1,281.2 2,491.7 656.9 163.2 93.9 8.0 5.1 665.3 150.5 83.5 8.3 9.6 927.1 917.2 439.1 90.1 – 15.2 33.2 577.6 1,504.7 1,044.1 434.8 53.7 555.6 1,044.1 469.4 103.7 5.7 12.5 35.6 626.9 1,544.1 947.6 441.7 42.7 463.2 947.6 The above balance sheet should be read in conjunction with the accompanying notes. 65 For personal use onlySTATEMENT OF CHANGES IN EQUITY for the ﬁ nancial year ended 30 June 2019 Consolidated Notes Balance at 1 July 2017 Contributed equity $m 438.7 Proﬁ t for the year Cash ﬂ ow hedges (net of tax) Exchange difference on translation of foreign operations Total comprehensive income for the year Issue of shares under share option plans Dividends provided for or paid Share-based payments - expense Share-based payments - income tax 18 4 – – – – 3.0 – – – Balance at 30 June 2018 441.7 Equity settled beneﬁ ts reserve $m 34.6 – – – – – – 7.8 1.1 43.5 Balance at 1 July 2018 441.7 43.5 Proﬁ t for the year Cash ﬂ ow hedges (net of tax) Exchange difference on translation of foreign operations Total comprehensive income for the year Issue of shares under share option plans Dividends provided for or paid Acquisition of shares by employee share trust Share-based payments - expense Share-based payments - income tax 18 4 18 – – – – 1.9 – (8.8) – – Balance at 30 June 2019 434.8 – – – – – – – 10.2 0.5 54.2 Foreign currency translation reserve $m Hedging reserves $m 4.9 – – (1.3) (1.3) – – – – 3.6 3.6 – – 1.4 1.4 – – – – – (0.2) – 1.9 – 1.9 – – – – 1.7 1.7 – (1.1) – (1.1) – – – – – Common control reserve $m (6.1) – – – – – – – – Retained earnings $m 381.6 233.2 – – Total equity $m 853.5 233.2 1.9 (1.3) 233.2 233.8 – 3.0 (151.6) (151.6) – – 7.8 1.1 (6.1) 463.2 947.6 (6.1) – – – – – – – – – 463.2 249.8 – – 947.6 249.8 (1.1) 1.4 249.8 250.1 – 1.9 (157.4) (157.4) – – – (8.8) 10.2 0.5 5.0 0.6 (6.1) 555.6 1,044.1 The above statement of changes in equity should be read in conjunction with the accompanying notes. 66 For personal use onlySTATEMENT OF CASH FLOWS for the ﬁ nancial year ended 30 June 2019 Cash ﬂ ows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest and other ﬁ nance costs paid Income taxes paid Net cash inﬂ ow from operating activities Cash ﬂ ows from investing activities Payments for plant and equipment Proceeds from sale of plant and equipment Net cash (outﬂ ow) from investing activities Cash ﬂ ows from ﬁ nancing activities Proceeds from issues of shares Payments for shares acquired by the employee share trust Repayment of borrowings Payments for debt issue costs Dividends paid to owners of the Company Net cash (outﬂ ow) from ﬁ nancing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the ﬁ nancial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at end of year Consolidated 2019 $m 2018 $m Notes 7,804.9 7,551.9 (7,373.8) (7,130.5) 16 10 18 18 4 0.7 (13.8) (116.4) 301.6 (59.3) 0.2 (59.1) 1.9 (8.8) (30.5) (0.6) (157.4) (195.4) 47.1 72.0 0.1 119.2 0.5 (15.0) (114.8) 292.1 (54.4) 0.4 (54.0) 3.0 – (89.7) (0.8) (151.6) (239.1) (1.0) 72.8 0.2 72.0 The above statement of cash ﬂ ows should be read in conjunction with the accompanying notes. 67 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS for the ﬁ nancial year ended 30 June 2019 Contents of the notes to the consolidated ﬁ nancial statements Page 1 About this report ................................................................................................................................................................69 Group Performance .....................................................................................................................................................................70 2 3 4 5 6 Segment information ..........................................................................................................................................................70 Earnings per share .............................................................................................................................................................71 Dividends ...........................................................................................................................................................................72 Expenses ...........................................................................................................................................................................73 Taxation .............................................................................................................................................................................73 Operating Assets and Liabilities ................................................................................................................................................76 7 8 9 10 11 12 13 14 15 Inventories .........................................................................................................................................................................76 Trade and other receivables ...............................................................................................................................................76 Other assets ......................................................................................................................................................................77 Plant and equipment ..........................................................................................................................................................78 Intangible assets ................................................................................................................................................................79 Trade and other payables ...................................................................................................................................................80 Deferred revenue ...............................................................................................................................................................80 Provisions ..........................................................................................................................................................................81 Other liabilities ....................................................................................................................................................................82 Capital Structure and Risk Management ..................................................................................................................................83 16 17 18 19 20 21 Notes to the cash ﬂ ow statement .......................................................................................................................................83 Borrowings ........................................................................................................................................................................83 Contributed equity .............................................................................................................................................................84 Reserves............................................................................................................................................................................85 Financial risk management .................................................................................................................................................86 Commitments ....................................................................................................................................................................90 Group Structure ...........................................................................................................................................................................91 22 23 24 25 Subsidiaries .......................................................................................................................................................................91 Deed of cross guarantee ....................................................................................................................................................92 Parent entity ......................................................................................................................................................................94 Related party transactions .................................................................................................................................................94 Other Disclosures ........................................................................................................................................................................95 26 27 28 29 30 Key management personnel disclosures ............................................................................................................................95 Share-based payments ......................................................................................................................................................95 Remuneration of auditors ...................................................................................................................................................96 Summary of other signiﬁ cant accounting policies ...............................................................................................................97 Events occurring after the reporting period .......................................................................................................................102 68 For personal use only1 ABOUT THIS REPORT These are the consolidated ﬁ nancial statements of JB Hi-Fi Limited (Company or parent entity) and its controlled entities. JB Hi-Fi Limited and its controlled entities together are referred to in this ﬁ nancial report as the Group. For the purposes of preparing the consolidated ﬁ nancial statements the Company is a for-proﬁ t entity. (a) Basis of preparation These general purpose ﬁ nancial statements have been prepared in accordance with Australian Accounting Standards and interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. (i) Compliance with IFRS The consolidated ﬁ nancial statements of JB Hi-Fi Limited also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (ii) Historical cost convention These ﬁ nancial statements have been prepared under the historical cost convention, except for ﬁ nancial assets and liabilities (including derivative instruments), and certain classes of plant and equipment which are measured at fair value. (iii) Corporation information JB Hi-Fi Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered ofﬁ ce and principal place of business is Podium Level, 60 City Road, Southbank, Victoria. The ﬁ nancial statements were authorised for issue by the directors on 12 August 2019. (b) Rounding off of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument, amounts in the ﬁ nancial report are rounded off to the nearest hundred thousand dollars, unless otherwise stated. (c) Sections The notes in these ﬁ nancial statements have been organised into the following sections to help users ﬁ nd and understand the information they need to know: (i) Group Performance: focuses on the results and performance of the Group; (ii) Operating Assets and Liabilities: provides information on the assets and liabilities used to generate the Group’s performance; (iii) Capital Structure and Risk Management: outlines how the Group manages its capital and various ﬁ nancial risks; (iv) Group Structure: explains aspects of the group structure and how any changes have affected the ﬁ nancial position and performance of the Group; and (v) Other Disclosures: provides information on items which require disclosure to comply with Australian Accounting Standards and other regulatory pronouncements. (d) Critical accounting estimates and assumptions Estimates and judgements used in the preparation of these ﬁ nancial statements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a ﬁ nancial impact on the Group and that are believed to be reasonable under the circumstances. The estimates and assumptions that have a signiﬁ cant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next ﬁ nancial year are included in the following notes: Judgement Area Impairment of goodwill and other intangible assets Note 11 69 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 GROUP PERFORMANCE 2 SEGMENT INFORMATION (a) Description of segments Management has determined the operating segments based on the reports reviewed by the Group Chief Executive Ofﬁ cer that are used to make strategic and operating decisions. The Group Chief Executive Ofﬁ cer considers the business primarily from a brand and geographic perspective. On this basis, management has identiﬁ ed three reportable segments, JB Hi-Fi Australia (JB Aust), JB Hi-Fi New Zealand (JB NZ) and The Good Guys (TGG). The Group Chief Executive Ofﬁ cer monitors the performance of these three segments separately. The Group does not operate any other brand or in any other geographic segment. (b) Segment information provided to the Group Chief Executive Ofﬁ cer The segment information provided to the Group Chief Executive Ofﬁ cer for the reportable segments for the year ended 30 June 2019 is as follows: 2019 Revenue from external customers EBITDA Total segment assets Additions to plant and equipment Depreciation and impairment Total segment liabilities 2018 Revenue from external customers EBITDA Total segment assets Additions to plant and equipment Depreciation and impairment Total segment liabilities (i) EBITDA JB Aust $m 4,726.0 342.3 1,224.9 30.7 40.6 1,058.5 JB Aust $m 4,539.7 333.6 1,152.5 30.9 41.3 1,033.2 JB NZ $m 221.4 1.3 50.2 0.3 3.0 15.7 JB NZ $m 213.3 0.8 51.6 1.2 3.4 17.1 TGG $m 2,147.9 85.5 1,326.0 28.3 12.6 Total $m 7,095.3 429.1 2,601.1 59.3 56.2 482.8 1,557.0 TGG $m 2,101.3 77.3 1,346.4 22.3 16.4 Total $m 6,854.3 411.7 2,550.5 54.4 61.1 552.6 1,602.9 The Group Chief Executive Ofﬁ cer assesses the performance of the operating segments based on a measure of EBITDA. This measurement basis excludes the effects of interest revenue, ﬁ nance costs, income tax, depreciation, amortisation, impairment, and non-operating intercompany charges. A reconciliation of EBITDA to proﬁ t before income tax is provided as follows: EBITDA Interest revenue Finance costs Depreciation and impairment Proﬁ t before income tax from continuing operations Consolidated 2019 $m 429.1 0.7 (14.3) (56.2) 359.3 2018 $m 411.7 0.5 (16.6) (61.1) 334.5 70 For personal use only2 SEGMENT INFORMATION (continued) (b) Segment information provided to the Group Chief Executive Ofﬁ cer (continued) (ii) Segment assets and liabilities The amounts provided to the Group Chief Executive Ofﬁ cer with respect to total assets and liabilities are measured in a manner consistent with that of the ﬁ nancial statements. These assets and liabilities are allocated based on the operations of the segment or the physical location of the asset. Reportable segments’ assets and liabilities are reconciled to total assets and liabilities as follows: Segment assets Intersegment eliminations Total assets as per the balance sheet Segment liabilities Intersegment eliminations Consolidated 2019 $m 2,601.1 (52.3) 2,548.8 1,557.0 (52.3) 2018 $m 2,550.5 (58.8) 2,491.7 1,602.9 (58.8) Total liabilities as per the balance sheet 1,504.7 1,544.1 (c) Product information The Group operates in one product and services segment, being the sale of consumer electronics products and services, including televisions, audio equipment, computers, cameras, telecommunications products and services, software, musical instruments, whitegoods, cooking products, heating and cooling products, small appliances, kitchen accessories and information technology and consulting services. The Group’s revenue is primarily generated on a point in time basis. The amount of revenue recognised by the Group on an ‘over time’ basis is not material in the context of the Group’s total revenue. 3 EARNINGS PER SHARE Basic (cents per share) Diluted (cents per share) Consolidated 2019 Cents 2018 Cents 217.44 215.27 203.09 201.11 Consolidated 2019 $m 2018 $m (a) Reconciliation of earnings used in calculating earnings per share Basic earnings per share Proﬁ t for the year attributable to owners of the Company 249.8 233.2 Diluted earnings per share Proﬁ t for the year attributable to owners of the Company 249.8 233.2 71 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 3 EARNINGS PER SHARE (continued) (b) 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 Adjustments for calculation of diluted earnings per share: Options Consolidated 2019 Number m 2018 Number m 114.9 114.8 1.2 1.1 Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share 116.1 115.9 (c) Information concerning the classiﬁ cation of securities Options Options granted under the Company’s share option plans are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive (1,159,578 options are considered dilutive (2018: 1,131,023), 53,746 are considered anti-dilutive (2018: 130,453)). The options have not been included in the determination of basic earnings per share. Details relating to the options are set out in note 27. 4 DIVIDENDS Recognised amounts Final Dividend - previous ﬁ nancial year Interim Dividend - current ﬁ nancial year Unrecognised amounts 2019 Cents per share 2018 $m Cents per share 46.00 91.00 137.00 52.8 104.6 157.4 46.00 86.00 132.00 $m 52.8 98.8 151.6 Final Dividend - current ﬁ nancial year 51.00 58.6 46.00 52.8 In respect of the ﬁ nancial year ended 30 June 2019, the directors have recommended the payment of a ﬁ nal dividend of 51.0 cents per share. The record date is 23 August 2019. All dividends declared and subsequently paid by the Company are franked to 100% at the 30% corporate income tax rate. Consolidated 2019 $m 2018 $m (a) Franking account balance Franking credits available for subsequent reporting periods based on a tax rate of 30.0% (2018: 30.0%) 312.7 270.6 The above amounts represent the balance of the franking account as at the end of the ﬁ nancial year, adjusted for franking credits that will arise from the payment of the amount of the provision for income tax. The impact on the franking account of the dividend recommended by the directors since year end, but not recognised as a liability at year end, will be a reduction in the franking account of $25.1 million (2018: $22.6 million). 72 For personal use only5 EXPENSES Proﬁ t before income tax includes the following speciﬁ c expenses: Finance costs Interest on loans Fair value loss on interest swaps designated as cash ﬂ ow hedges - transfer from equity Other interest expense Rental expense relating to operating leases Minimum lease payments Employee beneﬁ ts expenses Share-based payments - expense Deﬁ ned contribution superannuation expense Other employee beneﬁ ts 6 TAXATION (a) Income tax expense Current tax Deferred tax (b) Numerical reconciliation of income tax expense to prima facie tax payable Proﬁ t from continuing operations before income tax expense Tax at the Australian tax rate of 30.0% (2018: 30.0%) Effect of expenses that are not deductible in determining taxable proﬁ t Effect of different tax rates of subsidiaries operating in other jurisdictions Effect of other deductibles in determining taxable proﬁ t Other Tax expense (c) Amounts recognised directly in equity The following current and deferred amounts were charged directly to equity during the period: Current tax Tax effect of employee share options in reserves Deferred tax Tax effect of hedge gains/(loss) in reserves Consolidated 2019 $m 2018 $m 13.3 0.3 0.7 14.3 15.0 0.5 1.1 16.6 203.6 193.1 10.2 57.4 661.6 729.2 7.8 53.9 634.0 695.7 Consolidated 2019 $m 2018 $m 117.9 (8.4) 109.5 359.3 107.8 3.2 0.1 (1.6) – 111.7 (10.4) 101.3 334.5 100.4 2.3 0.1 (1.4) (0.1) 109.5 101.3 (0.5) – (0.5) (1.1) 0.8 (0.3) 73 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 6 TAXATION (continued) (d) Deferred tax The balance comprises temporary differences attributable to: Deferred tax assets Provisions Inventories Deferred revenue Other Deferred tax liabilities Brand names Prepayments Net deferred tax assets/(liabilities) All movements in the above temporary differences have been charged to income. (e) Recognition and measurement Current tax Consolidated 2019 $m 2018 $m 42.6 9.6 40.7 13.6 106.5 (85.2) (18.6) (103.8) 2.7 35.6 8.1 45.0 10.7 99.4 (85.2) (19.9) (105.1) (5.7) Current tax represents the amount expected to be paid to taxation authorities on taxable income for the period, using tax rates enacted or substantively enacted at the reporting date and any adjustment to tax payable in respect of previous years. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). Deferred tax Deferred tax is accounted for using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities under ﬁ nancial reporting and taxation purposes. Deferred tax is measured at the rates that are expected to apply in the period in which the liability is settled or asset realised, based on tax rates enacted or substantively enacted at the reporting date. Deferred tax assets and liabilities are not recognised if the temporary difference arises from the initial recognition (other than in a business combination) of assets and liabilities in a transaction that affects neither the taxable proﬁ t nor the accounting proﬁ t or in relation to the initial recognition of goodwill. A deferred tax asset is recognised only to the extent that it is probable that future taxable proﬁ ts will be available against which the deductible temporary differences or unused tax losses and tax offsets can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax beneﬁ t will be realised. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Income tax is recognised in the statement of proﬁ t or loss except to the extent that it relates to items recognised directly in equity, in which case, the tax is also recognised directly in equity. 74 For personal use only6 TAXATION (continued) (f) Tax consolidation legislation The Company and its wholly owned Australian resident entities are part of a tax consolidated group and are therefore taxed as a single entity. The head entity within the tax consolidated group is JB Hi-Fi Limited. The members of the tax consolidated group are identiﬁ ed at note 22. Tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax consolidated group are recognised in the separate ﬁ nancial statements of the members of the tax consolidated group using the ‘separate taxpayer within group’ approach by reference to the carrying amounts in the separate ﬁ nancial statements of each entity and the tax values applying under tax consolidation. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and relevant tax credits of the members of the tax consolidated group are recognised by the Company (as head entity in the tax consolidated group). Where the tax contribution amount recognised by each member of the tax consolidated group for a particular period is different to the aggregate of the current tax liability or asset and any deferred tax asset arising from unused tax losses and tax credits in respect of that period, the difference is recognised as a contribution from (or distribution to) equity participants. (g) Nature of tax funding and tax sharing agreements Entities within the tax consolidated group have entered into a tax funding arrangement and a tax sharing agreement with the head entity. Under the terms of the tax funding arrangement, JB Hi-Fi Limited and each of the entities in the tax consolidated group have agreed to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the entity. Such amounts are reﬂ ected in amounts receivable from or payable to other entities in the tax consolidated group. The tax sharing agreement entered into between members of the tax consolidated group provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations or if an entity should leave the tax consolidated group. The effect of the tax sharing agreement is that each member’s liability for tax payable by the tax consolidated group is limited to the amount payable to the head entity under the tax funding agreement. JB Hi-Fi calculates deferred taxes in relation to investments within the tax consolidated group using the ‘change in tax status’ view. This view results in no deferred tax being recognised until such time as an entity leaves the tax consolidated group. 75 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 OPERATING ASSETS AND LIABILITIES 7 INVENTORIES Finished goods (a) Recognition and measurement Consolidated 2019 $m 2018 $m 886.7 891.1 Inventories are stated at the lower of cost and net realisable value. Costs are assigned to individual items of inventory on the basis of weighted average costs. Costs of inventories are determined after deducting rebates and discounts. Net realisable value represents the estimated selling price less all estimated costs necessary to make the sale. Determining the net realisable value of inventories relies on key assumptions that require the use of management judgement. These key assumptions are the variables affecting the expected selling price and are reviewed annually. Any reassessment of the selling price in a particular year will affect the cost of goods sold. 8 TRADE AND OTHER RECEIVABLES Trade receivables Allowance for expected credit losses Non-trade receivables (a) Terms and conditions Trade receivables Consolidated 2019 $m 66.3 (1.4) 64.9 171.1 236.0 2018 $m 56.6 (1.1) 55.5 149.2 204.7 The average credit period on account sales of goods is 30 days. No interest is charged on trade receivables. An allowance has been made for expected credit losses using a provision matrix based on historical credit loss rates. Credit insurance is carried for most commercial debtor accounts. Trade receivables are recognised at amortised cost less allowance for expected credit losses. Non-trade receivables Non-trade receivables principally represent rebates receivable from suppliers for purchases of inventories and contributions from landlords. Rebates associated with the purchases of inventory are recorded as a reduction in the cost of inventory on hand until the inventory is sold. No amount is considered irrecoverable from suppliers and therefore no allowance has been made. (b) Ageing of trade receivables (net of allowance for expected credit losses) Not past due Past due but not impaired: 0 - 30 days 31 - 60 days 61 - 90 days 91+ days 76 Consolidated 2019 $m 61.0 2.0 1.9 – – 64.9 2018 $m 50.8 3.7 1.0 – – 55.5 For personal use only8 TRADE AND OTHER RECEIVABLES (continued) (c) Movements in allowance for expected credit losses Balance at the beginning of the year Remeasurement of loss allowance Receivables written off during the year as uncollectable Consolidated 2019 $m 1.1 0.4 (0.1) 1.4 2018 $m 0.7 0.5 (0.1) 1.1 (d) Collectability of trade receivables An allowance has been made for expected credit losses (ECL) calculated by using a simpliﬁ ed provision matrix that is based on historical credit loss rates. The historical loss rates are adjusted to reﬂ ect current and forward-looking information speciﬁ c to the economic environment and affecting customers’ ability to settle their receivables. Trade receivables are written off against the allowance account where there is no reasonable expectation of recovery. The amount of the ECL is recognised in proﬁ t or loss within other expenses. Subsequent recoveries of amounts previously written off are credited against the same line item. 9 OTHER ASSETS Current Prepayments Other Non-current Prepayments Consolidated 2019 $m 30.0 4.6 34.6 40.8 40.8 2018 $m 31.8 10.9 42.7 45.9 45.9 Prepayments includes payments made in relation to The Goods Guys Gold Service Extras program and general prepaid expenses. 77 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 10 PLANT AND EQUIPMENT At 1 July 2017 Cost Accumulated depreciation and impairment Net book amount Year ended 30 June 2018 Opening net book amount Exchange differences Additions Disposals Depreciation charge Impairment charge Closing net book amount At 30 June 2018 Cost Accumulated depreciation and impairment Net book amount Year ended 30 June 2019 Opening net book amount Exchange differences Additions Disposals Depreciation charge Impairment charge Closing net book amount At 30 June 2019 Cost Accumulated depreciation and impairment Net book amount (a) Recognition and measurement Plant and equipment $m Leasehold improvements $m 310.6 (162.4) 148.2 148.2 (0.4) 35.9 (2.2) (40.8) (0.6) 140.1 336.4 (196.3) 140.1 140.1 0.4 39.2 (9.8) (36.1) (1.5) 132.3 354.1 (221.8) 132.3 173.9 (113.9) 60.0 60.0 (0.2) 18.5 (0.7) (19.6) (0.1) 57.9 188.1 (130.2) 57.9 57.9 0.1 20.1 (0.3) (18.6) – 59.2 201.0 (141.8) 59.2 Total $m 484.5 (276.3) 208.2 208.2 (0.6) 54.4 (2.9) (60.4) (0.7) 198.0 524.5 (326.5) 198.0 198.0 0.5 59.3 (10.1) (54.7) (1.5) 191.5 555.1 (363.6) 191.5 Plant and equipment and leasehold improvements are stated at cost less accumulated depreciation and impairment (if any). Cost includes expenditure that is directly attributable to the acquisition of the item. Depreciation is provided on plant and equipment and leasehold improvements. Depreciation is calculated on a straight line basis so as to write off the net cost of each asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period, with the effect of any changes recognised on a prospective basis. The following estimated useful lives are used in the calculation of depreciation: • • Leasehold improvements 1 to 15 years Plant and equipment 1.5 to 15 years Plant and equipment and leasehold improvements are tested 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 identiﬁ able cash inﬂ ows which are largely independent of the cash inﬂ ows from other assets or groups of assets (cash-generating units). An item of plant and equipment is derecognised upon disposal or when no future economic beneﬁ ts are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset, and is recognised in other expenses in the proﬁ t or loss. 78 For personal use only 11 INTANGIBLE ASSETS Year ended 30 June 2018 Opening net book amount Impairment charge Closing net book amount Year ended 30 June 2019 Opening net book amount Impairment charge Closing net book amount (a) Recognition and measurement Goodwill $m Brand names $m Location premiums $m Rights to proﬁ t share $m Total $m 747.0 – 747.0 747.0 – 747.0 284.4 – 284.4 284.4 – 284.4 2.4 – 2.4 2.4 – 2.4 3.5 – 3.5 3.5 – 3.5 1,037.3 – 1,037.3 1,037.3 – 1,037.3 Goodwill represents the excess of the cost of an acquisition over the fair value of the Company’s share of the net identiﬁ able assets acquired at the date of acquisition. Brand names, location premiums and rights to proﬁ t share are assessed as having indeﬁ nite useful lives. This assessment reﬂ ects management’s intention to continue to utilise these intangible assets into the foreseeable future. Each period, the useful life of these assets are reviewed to determine whether events and circumstances continue to support an indeﬁ nite useful life assessment for the assets. Intangible assets that have an indeﬁ nite useful life are carried at cost less accumulated impairment losses. (b) Impairment testing Intangible assets that have an indeﬁ nite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. 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 identiﬁ able cash inﬂ ows which are largely independent of the cash inﬂ ows from other assets or groups of assets (cash-generating units). Non-ﬁ nancial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period. For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (‘CGUs’), or groups of CGUs, expected to beneﬁ t from the synergies of the business combination. If the recoverable amount of the CGU (or groups of CGUs) is less than the carrying amount of the CGU (or groups of CGUs), the impairment loss is allocated ﬁ rst to reduce the carrying amount of any goodwill allocated to the CGU (or groups of CGUs) and then to the other assets in the CGU (or groups of CGUs) pro rata on the basis of the carrying amount of each asset in the CGU (or groups of CGUs). An impairment loss recognised for goodwill is recognised immediately in proﬁ t or loss. On disposal of an operation within a CGU, the attributable amount of goodwill is included in the determination of the proﬁ t or loss on disposal of the operation. The carrying amount of goodwill and brand names is allocated to the following cash-generating units (CGUs) or groups of CGUs for impairment testing purposes: Goodwill The Good Guys JB Hi-Fi Australia Impact Records (store acquisition) JB Solutions division (Commercial) JB Hi-Fi New Zealand Consolidated 2019 $m 575.6 163.3 1.7 6.4 – 2018 $m 575.6 163.3 1.7 6.4 – 747.0 747.0 79 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 11 INTANGIBLE ASSETS (continued) (b) Impairment testing (continued) Brand names The Good Guys JB Hi-Fi Australia Consolidated 2019 $m 2018 $m 241.3 43.1 284.4 241.3 43.1 284.4 The recoverable amount of each CGU (or group of CGUs) has been determined based on value in use calculations which use cash ﬂ ow projections from ﬁ nancial budgets approved by the Board. The cash ﬂ ows beyond the budget period have been extrapolated using a steady 2.5% long term growth rate (2018: 2.5%) which is consistent with the projected long term average growth rate for the consumer products market. The discount rate used in the calculations is 10.0% for JB Hi-Fi Australia, Impact Records and JB Solutions division (2018: 10.0%) and 10.0% for The Good Guys (2018: 10.5%). The key assumptions used in the value in use calculations include sales growth, gross margin, cost of doing business (CODB) and the discount rate. The assumptions are based on past experience and the Company’s forecast operating and ﬁ nancial performance for each CGU (or group of CGUs) taking into account current market and economic conditions, risks, uncertainties and opportunities for improvement for each CGU (or groups of CGUs). The discount rate is derived from the Group’s weighted average cost of capital, adjusted for varying risk proﬁ les. The Group has concluded that no impairment is required based on expected performance and current market and economic conditions. A material change in market and economic conditions may increase the risk of impairment for The Good Guys in future periods, however there is no reasonably possible change in key assumptions that could result in an impairment for JB Hi-Fi Australia. 12 TRADE AND OTHER PAYABLES Trade payables Goods and services tax (GST) payable Other creditors and accruals Consolidated 2019 $m 570.0 47.8 39.1 656.9 2018 $m 582.0 37.3 46.0 665.3 Trade payables and other creditors and accruals represent liabilities for goods and services provided to the Group prior to the end of ﬁ nancial year which are unpaid. Trade and other payables are stated at amortised cost. The amounts are unsecured and are usually settled within 45 days of recognition. 13 DEFERRED REVENUE Current Deferred revenue Non-current Deferred revenue Consolidated 2019 $m 2018 $m 163.2 163.2 90.1 90.1 150.5 150.5 103.7 103.7 Deferred revenue relates to unfulﬁ lled services to be performed under The Good Guys Gold Service Extras program, unredeemed gift cards and customer deposits. Refer to note 29(a) for revenue recognition accounting policy. Management expects that 83% of Non-Current Deferred Revenue will be recognised in the 2021 & 2022 ﬁ nancial years and the remaining 17% recognised in the following 3 years. 80 For personal use only14 PROVISIONS Current Employee beneﬁ ts Lease provision Non-current Employee beneﬁ ts Lease provision Consolidated 2019 $m 86.5 7.4 93.9 7.5 7.7 15.2 2018 $m 78.2 5.3 83.5 7.3 5.2 12.5 (a) Recognition and measurement Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash ﬂ ows estimated to settle the present obligation, its carrying amount is the present value of those cash ﬂ ows. (i) Employee beneﬁ ts Liabilities for wages and salaries, including non-monetary beneﬁ ts, are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave and unpaid bonuses are recognised in the provision for employee beneﬁ ts. All other short-term employee beneﬁ t obligations are presented as payables. Contributions to deﬁ ned contribution superannuation plans are expensed when employees have rendered services entitling them to the contributions. The liability for long service leave is recognised in the provision for employee beneﬁ ts and measured as the present value of expected future payments to be made in respect of services provided by employees, up to the end of the reporting period. Expected future payments are discounted using the Australian corporate bond discount rate curve as published by Milliman with terms to maturity and currency that match, as closely as possible, the estimated future cash outﬂ ows. Management judgement is applied in determining the following key assumptions used in the calculation of long service leave at balance date: • • • future increases in wages and salaries; future on cost rates; and experience of employee departures and period of service. (ii) Lease provision The lease provision includes the Group’s best estimate of the amount required to return the Group’s leased premises to their original condition, taking into account due consideration of the Group’s past history of vacating stores and the Group’s best estimate of onerous lease obligations. 81 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 15 OTHER LIABILITIES Current Lease accrual Lease incentive Other ﬁ nancial liabilities Non-current Lease accrual Lease incentive (a) Lease accrual Consolidated 2019 $m 2018 $m 2.6 5.2 0.2 8.0 15.2 18.0 33.2 2.8 5.2 0.3 8.3 15.0 20.6 35.6 Leases in which a signiﬁ cant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classiﬁ ed as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the statement of proﬁ t or loss on a straight line basis over the period of the lease. The lease accrual represents the difference between the expense incurred and the payments made. (b) Lease incentives In the event that lease incentives (for example rent free periods and upfront capital contributions) are received to enter into operating leases, such incentives are recognised as a liability. The aggregate beneﬁ ts of incentives are recognised as a reduction of rental expense on a straight line basis over the period of the lease. 82 For personal use onlyCAPITAL STRUCTURE AND RISK MANAGEMENT 16 NOTES TO THE CASH FLOW STATEMENT For the purposes of the cash ﬂ ow statement, cash and cash equivalents includes cash on hand and in banks, net of outstanding bank overdrafts and trade ﬁ nance facilities. (a) Reconciliation of cash and cash equivalents Cash and cash equivalents at the end of the ﬁ nancial year as shown in the cash ﬂ ow statement is reconciled as follows: Consolidated Cash Trade ﬁ nance facility Cash and cash equivalents (b) Reconciliation of net cash inﬂ ow from operating activities to proﬁ t Proﬁ t for the year Depreciation and amortisation Impairment of plant and equipment Non-cash employee beneﬁ ts expense - share-based payments Net loss on disposal of non-current assets Fair value adjustment to derivatives Change in operating assets and liabilities net of effects from acquisition of businesses: (Increase) decrease in inventories (Increase) decrease in current receivables (Increase) decrease in other current assets (Increase) decrease in deferred tax liabilities (Decrease) increase in current payables (Decrease) increase in current provisions (Decrease) increase in other current liabilities (Decrease) increase in deferred revenue (Decrease) increase in non-current provisions (Decrease) increase in other non-current liabilities (Decrease) increase in current tax liabilities Net cash inﬂ ow from operating activities 17 BORROWINGS Unsecured non-current Bank loans Reconciliation of liabilities arising from ﬁ nancing activities Opening borrowings Repayment of borrowings Debt issue costs paid Amortisation of debt issue costs 2019 $m 136.4 (17.2) 119.2 249.8 54.7 1.5 10.2 9.9 (1.1) 5.9 (28.9) 13.1 (8.4) (11.1) 12.3 (0.2) (0.9) 2.7 (4.2) (3.7) 301.6 2018 $m 72.0 – 72.0 233.2 60.4 0.7 7.8 2.5 1.9 (33.0) (10.7) (0.4) (10.4) 22.4 7.3 (0.7) 12.8 0.7 0.7 (3.1) 292.1 Consolidated 2019 $m 2018 $m 439.1 469.4 469.4 (30.5) (0.6) 0.8 439.1 558.8 (89.7) (0.8) 1.1 469.4 83 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 17 BORROWINGS (continued) In June 2019, the Group restructured its multi-tranche term debt facilities, resulting in a reduction in its multi-tranche term debt facilities by $110.0 million to $440.0 million. In conjunction with the restructure of the term debt facilities, the Group also increased its trade ﬁ nance facility by $110.0 million to $140.0 million and reduced its overdraft facility by $30 million to $59.6 million. Refer to note 20(b) for further details on the Group’s ﬁ nancing facilities. In line with the Group’s ﬁ nancial risk management policy, the Group has utilised an interest rate swap and interest rate cap over approximately 50% of the Group’s borrowings to mitigate the risk of changing interest rates on the variable rate debt held. (a) Recognition and measurement Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Borrowings are classiﬁ ed as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date, and intends to do so. The Group monitors compliance with its ﬁ nancial covenants on a monthly basis and reports compliance on a semi-annual basis to the banks. The Group has complied with all such requirements during the current and previous year. 18 CONTRIBUTED EQUITY (a) Share capital Ordinary shares - fully paid Parent entity Parent entity 2019 Shares 2018 Shares 2019 $m 2018 $m 114,883,372 114,883,372 434.8 441.7 Ordinary shares issued are classiﬁ ed as equity and are fully paid, have no par value and carry one vote per share and the right to dividends. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. If the entity reacquires its own equity instruments, for example, as the result of a share buy-back, those instruments are deducted from equity and the associated shares are cancelled. No gain or loss is recognised in the proﬁ t or loss and the consideration paid, including any directly attributable incremental costs (net of income taxes), is recognised directly in equity. (b) Movements in ordinary share capital Date Details 1 July 2017 Opening balance Issue of shares under share option and deferred STI plans 30 June 2018 Closing balance 1 July 2018 Opening balance Shares acquired by employee share trust Allocation of shares under share option and deferred STI plans 30 June 2019 Closing balance (c) Share options Number of shares 114,421,403 461,969 114,883,372 114,883,372 (354,617) 354,617 114,883,372 $m 438.7 3.0 441.7 441.7 (8.8) 1.9 434.8 In accordance with the provisions of the Company’s share option plans, as at 30 June 2019, executives and non-executive management have options over 1,252,931 ordinary shares (of which 3,197 were vested), in aggregate, with various expiry dates. As at 30 June 2018, executives and non-executive management had options over 1,333,919 ordinary shares (which were all unvested), in aggregate, with various expiry dates. Share options granted under the Company’s share option plans carry no rights to dividends and no voting rights. 84 For personal use only18 CONTRIBUTED EQUITY (continued) (d) Capital management The Board reviews the capital structure on an ongoing basis. The Group’s objective is to maintain an optimal capital structure which seeks to reduce the cost of capital and to ensure the Group has access to adequate capital to sustain the future development of the business. In order to maintain or adjust the capital structure, the Group may adjust the level of dividends paid to shareholders, return capital to shareholders, buy back shares, issue new shares or sell assets to reduce debt. As part of its capital management program, the Group monitors the return on invested capital and the gearing ratio. The Group deﬁ nes return on invested capital as earnings before interest and tax (EBIT) divided by the sum of total equity plus net debt and the gearing ratio as term debt excluding capitalised borrowing costs, plus bank overdrafts, divided by earnings before interest, taxation, depreciation, amortisation and impairment (EBITDA). The Board has adopted a policy of monitoring the dividend payout ratio and targeting a payout ratio of 65% of net proﬁ t after tax as it seeks to strike a balance between shareholder returns and ensuring adequate capital is retained for the growth of the business so as to maximise long term shareholder returns. There were no changes in the Group’s approach to capital management during the year. The Group’s return on invested capital and gearing ratios as at 30 June 2019 and 30 June 2018 were as follows: Return on invested capital Proﬁ t before tax Net ﬁ nance costs EBIT Borrowings Cash and cash equivalents Net debt Total equity Invested capital Consolidated 2019 $m 359.3 13.6 372.9 439.1 (119.2) 319.9 1,044.1 1,364.0 2018 $m 334.5 16.1 350.6 469.4 (72.0) 397.4 947.6 1,345.0 Return on invested capital 27.3% 26.1% Gearing Term debt EBIT Depreciation and impairment EBITDA Gearing 19 RESERVES Equity-settled beneﬁ ts Common control reserve Hedging reserves Foreign currency translation reserve 440.0 470.3 372.9 56.2 429.1 350.6 61.1 411.7 1.03 1.14 Consolidated 2019 $m 54.2 (6.1) 0.6 5.0 53.7 2018 $m 43.5 (6.1) 1.7 3.6 42.7 85 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 19 RESERVES (continued) (a) Nature and purpose of reserves (i) Equity-settled beneﬁ ts The equity-settled beneﬁ ts reserve arises on the grant of share options and restricted shares to executives and non-executive management under the Company’s share option plans and variable reward plan. Further information about share based payments is in note 27 to the ﬁ nancial statements. (ii) Common control reserve The common control reserve represents the excess of the purchase consideration over the balance of a non-controlling interest at the date a change in ownership of a subsidiary occurs. (iii) Hedging reserves Hedging reserves include gains and losses recognised on the effective portion of cash ﬂ ow hedges with respect to the Group’s interest rate swaps, caps and forward foreign exchange contracts as described in note 29(b), in addition to gains and losses recognised on the effective portion of foreign currency loans in previous periods designated as net investment hedges. The cumulative deferred gain or loss on the interest rate swaps, caps and forward foreign exchange contracts is recognised in the proﬁ t or loss when the hedged transaction impacts the proﬁ t or loss. The gains and losses deferred due to the net investment hedge are recognised in the proﬁ t or loss when the foreign operation is disposed. (iv) Foreign currency translation Exchange differences relating to the translation of the Group’s foreign controlled entities from their functional currencies into Australian dollars are brought to account directly to the foreign currency translation reserve, as described in note 29(c). 20 FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of ﬁ nancial risks, including market risk (foreign currency and interest rate risk), liquidity risk and credit risk. The Group seeks to minimise the effects of these risks, by using various ﬁ nancial instruments, including derivative ﬁ nancial instruments. The Group does not enter into or trade ﬁ nancial instruments, including derivative ﬁ nancial instruments, for speculative purposes. The use of ﬁ nancial derivatives is governed by the Group’s policies approved by the Board of directors, which provide written principles on the use of ﬁ nancial derivatives. The Group is exposed to some foreign currency risk as The Good Guys purchase some private label product denominated in foreign currencies. In order to minimise this risk, the Group holds forward foreign exchange contracts. The Group holds the following ﬁ nancial assets and liabilities at reporting date: Financial assets Cash and cash equivalents Trade and other receivables Forward foreign exchange contracts Financial liabilities Trade and other payables Bank loans Interest rate swaps and caps (net settled) 86 Consolidated 2019 $m 119.2 236.0 – 355.2 656.9 439.1 0.2 2018 $m 72.0 204.7 1.0 277.7 665.3 469.4 0.3 1,096.2 1,135.0 For personal use only20 FINANCIAL RISK MANAGEMENT (continued) (a) Market risk (i) Foreign exchange risk management The majority of the Group’s operations are denominated in the functional currency of the country of operation therefore minimising the impact of further foreign currency risk. That is, transactions and balances related to the Australian operations are denominated in Australian dollars and transactions and balances related to the New Zealand operations are denominated in New Zealand dollars. The Group undertakes some transactions denominated in foreign currencies; consequently, exposures to exchange rate ﬂ uctuations arise. Exchange rate exposures are managed within approved policy parameters utilising forward foreign exchange contracts. Forward foreign exchange contracts It is the policy of the Group to enter into forward foreign exchange contracts to cover speciﬁ c foreign currency payments (normally USD or EUR) for future purchases. The following table details the forward foreign exchange contracts outstanding at the end of the reporting period: Consolidated Forward exchange contracts - buy USD (cash ﬂ ow hedges) - buy Euro (cash ﬂ ow hedges) 30 June 2019 30 June 2018 Weighted average exchange rate Foreign currency m Notional value A$m Weighted average exchange rate Foreign currency m Notional value A$m – – – – – – 0.78 0.64 14.1 2.4 18.1 3.8 (ii) Cash ﬂ ow and fair value interest rate risk The Group is exposed to interest rate risk as it borrows funds at ﬂ oating interest rates. The risk is managed by the Group by maintaining an appropriate mix between ﬁ xed and ﬂ oating rate borrowings through the use of interest rate swap and cap contracts. Hedging activities are evaluated regularly to align with interest rate views and deﬁ ned risk appetite, ensuring optimal hedging strategies are applied, by either positioning the balance sheet or protecting interest expense through different interest rate cycles. Interest rate swap and interest rate cap contracts Under interest rate swap and cap contracts, the Group agrees to exchange the difference between ﬁ xed and ﬂ oating rate interest amounts calculated on agreed notional principal amounts. Such contracts enable the Group to mitigate the risk of changing interest rates on the cash ﬂ ow exposures on the issued variable rate debt held. The fair value of interest rate swaps and caps at the reporting date is determined by discounting the future cash ﬂ ows using the forward interest rate curves at reporting date and the credit risk inherent in the contract. The following tables detail the notional principal amounts and interest rate swap and cap contracts outstanding as at reporting date and weighted average interest rates based on the outstanding balances and applicable interest rates throughout the ﬁ nancial year: Consolidated Bank loans Interest rate swaps and caps (notional principal amount) Net exposure to cash ﬂ ow interest rate risk 30 June 2019 30 June 2018 Weighted average interest rate % 2.85% 3.18% Weighted average interest rate % 3.01% 3.15% Balance $m 440.0 203.4 643.4 Balance $m 470.3 228.4 698.7 The interest rate swaps and caps settle on a monthly basis and the Group settles the difference on a net basis. The interest rate swap and cap contracts are designated as cash ﬂ ow hedges in order to reduce the Group’s cash ﬂ ow exposure resulting from variable interest rates on borrowings. The interest rate swaps, caps and the interest payments on the loan occur simultaneously and the amount deferred in equity is recognised in proﬁ t or loss over the period that the ﬂ oating interest payments impact proﬁ t or loss. 87 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 20 FINANCIAL RISK MANAGEMENT (continued) (a) Market risk (continued) Summarised sensitivity analysis The carrying value of interest rate swap and caps was $0.2m (2018: $0.3m) and borrowings was $439.1m (2018: $469.4m). Using a sensitivity of 50 basis points results in an immaterial impact on the carrying values. (b) Liquidity risk Ultimate responsibility for liquidity risk management rests with the Board of directors, who assess the Group’s short, medium and long term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities and by continuously monitoring forecast and actual cash ﬂ ows. Financing arrangements The Group had access to the following undrawn borrowing facilities at the end of the reporting period: Unsecured bank overdraft facility: amount used amount unused Unsecured trade ﬁ nance facility: amount used amount unused Unsecured indemnity guarantees: amount used amount unused Unsecured bank loan facilities (term debt): amount used(i) amount unused Headroom in total borrowing facilities (excluding security indemnity guarantees) (i) Face value of term debt (excluding capitalised borrowing costs). Consolidated 2019 $m – 59.6 59.6 17.2 122.8 140.0 3.7 2.6 6.3 440.0 – 440.0 182.4 2018 $m 16.7 72.5 89.2 – 30.0 30.0 4.9 4.0 8.9 470.3 79.7 550.0 182.2 88 For personal use only20 FINANCIAL RISK MANAGEMENT (continued) (b) Liquidity risk (continued) Maturities of ﬁ nancial liabilities The following tables detail the Group’s remaining contractual maturity for its ﬁ nancial liabilities. The tables have been drawn up based on the undiscounted cash ﬂ ows of ﬁ nancial liabilities based on the earliest date on which the Group can be required to pay. The table includes both principal and estimated interest cash ﬂ ows. Cash ﬂ ows for ﬁ nancial liabilities without ﬁ xed amount or timing are based on the conditions existing at the reporting date. 2019 Financial liabilities Trade and other payables Bank loans Interest rate swaps and caps (net settled) Less than 6 months 6 - 12 months $m $m Between 1 and 2 years $m Between 2 and 5 years $m Over 5 years $m 656.9 6.3 0.2 663.4 – 6.3 – 6.3 – 12.5 – 12.5 – 442.7 – 442.7 – – – – Less than 6 months 6 - 12 months $m $m Between 1 and 2 years $m Between 2 and 5 years $m Over 5 years $m 665.3 7.1 0.1 672.5 – 7.1 0.2 7.3 – – 205.4 281.6 – – 205.4 281.6 – – – – 2018 Financial liabilities Trade and other payables Bank loans Interest rate swaps and caps (net settled) (c) Credit risk management Weighted average effective interest rate % – 2.85% Total $m 656.9 467.8 0.2 3.18% 1,124.9 Weighted average effective interest rate % – 3.01% Total $m 665.3 501.2 0.3 3.15% 1,166.8 Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in ﬁ nancial loss to the Group. The Group has endeavoured to minimise its credit risk by dealing with creditworthy counterparties. The Group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. The Group does not have any signiﬁ cant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The carrying amount of ﬁ nancial assets recorded in the ﬁ nancial statements, net of any allowance for impairment, represents the Group’s maximum exposure to credit risk. 89 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 20 FINANCIAL RISK MANAGEMENT (continued) (d) Fair value of ﬁ nancial instruments The only ﬁ nancial assets or ﬁ nancial liabilities carried at fair value in the current ﬁ nancial year are interest rate swaps and interest rate caps. All these instruments are considered to be Level 2 ﬁ nancial instruments because, unlike Level 1 ﬁ nancial instruments, their measurement is derived from inputs other than quoted prices that are observable for the assets or liabilities, either directly (as prices) or indirectly (derived from prices). The interest rate swaps and caps fair value was obtained from third party valuations derived from discounted cash ﬂ ow forecasts of interest rates from observable yield curves at the end of the reporting period and contract interest rates. The foreign currency forward contracts fair value presented in the prior year was obtained from third party valuations derived from discounted cash ﬂ ow forecasts of forward exchange rates at the end of the reporting period and contract exchange rates. There were no transfers between levels 1, 2 and 3 for recurring fair value measurements during the ﬁ nancial year. The carrying amount of other ﬁ nancial assets and ﬁ nancial liabilities recorded in the ﬁ nancial statements approximate their fair values. 21 COMMITMENTS (a) Non-cancellable operating leases The Group has entered into operating lease agreements in relation to its stores and some minor operating leases in relation to plant and equipment. Store leases have terms of between ﬁ ve to ﬁ fteen years, with, in some cases, an option to extend. Operating lease contracts generally contain market review clauses in the event that the Group exercises its option to renew. The Group does not have an option to purchase the leased asset at the expiry of the lease period. Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: Within one year Later than one year but not later than ﬁ ve years Later than ﬁ ve years Consolidated 2019 $m 2018 $m 153.4 407.6 118.8 679.8 157.5 405.3 121.6 684.4 90 For personal use onlyGROUP STRUCTURE 22 SUBSIDIARIES The consolidated ﬁ nancial statements incorporate the assets, liabilities and results of the following principal subsidiaries in accordance with the accounting policy described below: Name of entity Parent entity JB Hi-Fi Limited ^ Subsidiaries JB Hi-Fi Group Pty Ltd ^ Clive Anthonys Pty Ltd JB Hi-Fi (A) Pty Ltd ^ Rocket Replacements Pty Ltd JB Hi-Fi Education Solutions Pty Ltd ^ JB Hi-Fi Group (NZ) Limited JB Hi-Fi NZ Limited JB Hi-Fi (B) Pty Ltd ^ The Muir Electrical Company Pty Ltd ^ The Muir Electrical Service Co Pty Ltd ^ The Good Guys Discount Warehouses (Australia) Pty Ltd ^ Muir Group Employee Share Plan Pty Ltd ^ The Muir Finance Company Pty Ltd ^ M.E.W. (Australia) Pty Ltd ^ The Muir Electrical Company Pty Ltd as Trustee of the Muir Investment Unit Trust ^ The Good Guys Discount Warehouses (Australia) Pty Ltd as Trustee of the various store Trusts Home Services Network Pty Ltd ^ Notes: (i) (ii) JB Hi-Fi Limited is the head entity within the tax consolidated group. All Australian entities are members of the tax consolidated group. (iii) Entities identiﬁ ed with ‘^’ are party to a deed of cross guarantee. Ownership interest Country of incorporation 2019 % 2018 % Australia - - Australia Australia Australia Australia Australia New Zealand New Zealand Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 (iv) The Company has a trust to administer the Company’s share options plans and variable reward plan. This trust is consolidated, as the substance of the relationship is that the trust is controlled by the Company. (a) Principles of consolidation (i) Subsidiaries Subsidiaries are all entities which are controlled by the Company. Control is achieved when the Company: • • • has power over the investee; is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated ﬁ nancial statements. Investments in subsidiaries are accounted for at cost, less any impairment, in the separate ﬁ nancial statements of JB Hi-Fi Limited. 91 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 22 SUBSIDIARIES (continued) (a) Principles of consolidation (continued) (ii) Changes in ownership interests The Company treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Company. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reﬂ ect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate reserve within equity attributable to owners of JB Hi-Fi Limited (the common control reserve). 23 DEED OF CROSS GUARANTEE The subsidiaries identiﬁ ed with a ‘^’ in note 22 are parties to a deed of cross guarantee under which each Company guarantees to each creditor payment in full of any debt in accordance with the deed of cross guarantee. By entering into the deed, the subsidiaries who are party to the deed have been relieved from the requirement to prepare and lodge an audited ﬁ nancial report under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. The consolidated statement of proﬁ t or loss, statement of proﬁ t or loss and other comprehensive income and balance sheet of the entities party to the deed of cross guarantee are provided as follows: (a) Consolidated statement of proﬁ t or loss, statement of proﬁ t or loss and other comprehensive income Statement of proﬁ t or loss Revenue Cost of sales Gross proﬁ t Other income Sales and marketing expenses Occupancy expenses Administration expenses Finance costs Other expenses Proﬁ t before income tax Income tax expense Proﬁ t for the year Statement of proﬁ t or loss and other comprehensive income Proﬁ t for the year Other comprehensive income Items that may be reclassiﬁ ed to proﬁ t or loss Changes in the fair value of cash ﬂ ow hedges (net of tax) Other comprehensive income for the year (net of tax) Total comprehensive income for the year 2019 $m 2018 $m 5,083.9 4,895.6 (3,978.1) (3,845.0) 1,105.8 1,050.6 118.7 (543.6) (207.1) (35.4) (14.2) (63.4) 360.8 (110.0) 250.8 114.2 (503.2) (205.0) (34.0) (16.4) (68.9) 337.3 (102.1) 235.2 250.8 235.2 (1.1) (1.1) 249.7 1.9 1.9 237.1 92 For personal use only23 DEED OF CROSS GUARANTEE (continued) (b) Balance sheet Current assets Cash and cash equivalents Trade and other receivables Inventories Other current assets Total current assets Non-current assets Plant and equipment Deferred tax assets Intangible assets Investments in subsidiaries Other non-current assets Total non-current assets Total assets Current liabilities Trade and other payables Deferred revenue Current tax liabilities Provisions Other current liabilities Other ﬁ nancial liabilities Total current liabilities Non-current liabilities Borrowings Deferred revenue Provisions Other non-current liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity 2019 $m 2018 $m 119.5 396.7 595.5 36.5 1,148.2 148.6 71.3 83.8 911.7 213.5 1,428.9 2,577.1 628.4 119.1 5.1 98.4 7.3 0.3 69.3 295.9 606.6 13.2 985.0 161.1 63.5 83.8 911.7 173.0 1,393.1 2,378.1 644.9 60.3 9.6 89.8 7.2 – 858.6 811.8 439.1 90.2 14.2 30.0 573.5 1,432.1 1,145.0 454.9 41.2 648.9 462.1 6.2 12.4 32.5 513.2 1,325.0 1,053.1 453.0 44.6 555.5 1,145.0 1,053.1 93 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 24 PARENT ENTITY Assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Shareholders’ equity Contributed equity Reserves Retained earnings Proﬁ t for the year Total comprehensive income 25 RELATED PARTY TRANSACTIONS (a) Parent entity and equity interests in related parties The parent entity of the Group is JB Hi-Fi Limited, a listed public company, incorporated in Australia. (b) Equity interests in related parties Details of the percentage of ordinary shares held in subsidiaries are disclosed in note 22. (c) Key management personnel Disclosures relating to key management personnel are set out in the Directors’ report. Parent Entity 2019 $m 2018 $m 526.4 526.4 517.7 517.7 8.9 0.1 9.0 - 434.8 54.2 28.4 517.4 167.4 167.4 14.1 – 14.1 - 441.7 43.5 18.4 503.6 161.8 161.8 (d) Terms and conditions of transactions with related parties other than key management personnel or entities related to them Sales to, and purchases from, related parties for goods and services are made in arm’s length transactions at normal prices and on normal commercial terms. 94 For personal use onlyOTHER DISCLOSURES 26 KEY MANAGEMENT PERSONNEL DISCLOSURES The aggregate compensation of the key management personnel of the Group is set out below: Short-term employee beneﬁ ts Post-employment beneﬁ ts Share-based payments expense Consolidated 2019 $’000 - 8,310 239 4,230 2018 $’000 8,974 230 2,943 12,779 12,147 Detailed remuneration disclosures are provided in the remuneration report on pages 32 to 56. 27 SHARE-BASED PAYMENTS (a) Group share option plans The Group has ownership-based remuneration schemes for executives and non-executive management (excluding non-executive directors). In accordance with the provisions of these schemes, executives and non-executive managers within the Group are granted options to purchase parcels of ordinary shares at various issue prices or to acquire shares at a zero exercise price. Details of the features of outstanding share options are provided in the remuneration report on pages 53 to 56. The following reconciles the outstanding share options granted under the Group’s share option plans at the beginning and end of the ﬁ nancial year: 2019 Balance at start of the year Number Granted during the year Number Exercised/ lapsed during the year Number Balance at end of the year Number Vested and exercisable at end of the year Number Outstanding Share Options with an exercise price 182,199 – (107,798) 74,401 Outstanding Zero Exercise Price Options 1,151,720 1,333,919 275,588 275,588 (248,778) 1,178,530 (356,576) 1,252,931 – 3,197 3,197 Weighted average exercise price of those with an exercise price $17.69 – $17.88 $17.41 – Balance at start of the year Number Granted during the year Number Exercised/ lapsed during the year Number Balance at end of the year Number Vested and exercisable at end of the year Number 2018 Outstanding Share Options with an exercise price 404,054 – (221,855) 182,199 Outstanding Zero Exercise Price Options 955,145 1,359,199 464,840 464,840 (268,265) 1,151,720 (490,120) 1,333,919 Weighted average exercise price of those with an exercise price $15.53 – $13.75 $17.69 – – – – The weighted average remaining contractual life of share options outstanding at the end of the period was 1,112 days (2018: 1,222 days). 95 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 27 SHARE-BASED PAYMENTS (continued) (a) Group share option plans (continued) Fair value of options granted Equity settled share based payments with employees are measured at the fair value of the equity instrument at grant date. The weighted average fair value of options granted during the year ended 30 June 2019 was $21.97 (2018: $21.48). The fair value at grant date is determined using a Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the expected exercise date based on prior years’ experience, the share price at grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The expected price volatility for options granted during the year ended 30 June 2019 is based on the daily closing share price for the number of years preceding the issue of the series, that matches the years to vesting as all of these options are expected to be exercised as soon as they vest. Detailed share option disclosures for all options series granted and exercised during the year are provided in the remuneration report on pages 32 to 56. Share based payments expense The fair value determined at the grant date of the equity-settled share based payments is expensed on a straight line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest, with a corresponding increase in equity. At each reporting date the Group estimates the number of equity instruments expected to vest. The number of equity instruments that are expected to vest is based on management’s assessment of the likelihood of the vesting conditions attached to the equity instruments being satisﬁ ed. The key vesting conditions that are assessed are earnings per share targets and required service periods. The impact of any revision in the number of equity instruments that are expected to vest is recognised as an adjustment to the share based payments expense with the corresponding adjustment to the equity-settled beneﬁ ts reserve in the reporting period that the revision is made. b) Variable reward plan In the 2019 ﬁ nancial year, the Group introduced a Variable Reward Plan (VRP) for Group Executives which replaces their previous short term and long term incentives. Under the VRP, performance is assessed at the end of each ﬁ nancial year against a scorecard of robust measures and awards under the VRP are delivered: • • 25% in cash at the end of the one-year performance period; and 75% in restricted shares, to be released progressively in equal tranches over years 2, 3 and 4. There are also certain non-Group executives who receive a VRP in addition to their existing short term and long term incentives, however the whole amount is delivered in restricted shares that are released progressively in equal tranches over years 2, 3 and 4. Further details on the VRP are set out in the remuneration report on page 35. The component of the VRP that is paid in cash is treated as a bonus and is expensed to the proﬁ t and loss in the period the bonus is earned. The component of the VRP that is delivered in shares is expensed on a straight line basis over the restriction period of each tranche, with the expense recorded as part of the share based payments expense and a corresponding increase in equity. 28 REMUNERATION OF AUDITORS Audit and other services Audit and review of group ﬁ nancial statements Audit and review of subsidiary ﬁ nancial statements Audit of accounting for the acquisition of The Good Guys Total remuneration for audit and other services The auditor of the Group is Deloitte Touche Tohmatsu. 96 Consolidated 2019 $’000 2018 $’000 625 33 – 658 607 44 10 661 For personal use only29 SUMMARY OF OTHER SIGNIFICANT ACCOUNTING POLICIES The remaining principal accounting policies adopted in the preparation of these ﬁ nancial statements that have not already been disclosed are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances, rebates and amounts collected on behalf of third parties. The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic beneﬁ ts will ﬂ ow to the entity and speciﬁ c criteria have been met for each of the Group’s activities as described below. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the speciﬁ cs of each arrangement. Revenue is recognised for the major business activities as follows: (i) Sale of goods Revenue associated with the sale of goods is recognised when the performance obligation of the sale has been fulﬁ lled and control of the goods has transferred to the customer, which occurs at the point of sale when the goods are collected/delivered. Gift cards and store credits are considered a prepayment for goods and services to be delivered in the future. The Group has an obligation to transfer the goods or services in the future - creating a performance obligation. The Group recognises deferred revenue for the amount of the prepayment and recognises revenue when the customer redeems the gift card or store credit and the Group fulﬁ ls the performance obligation related to the transaction or likelihood of the gift card being redeemed by the customer is deemed remote. In recognising revenue from the sale of goods, the Group considers its historical experience with sales returns to determine if its ‘highly probable’ that a signiﬁ cant reversal of revenue will arise in the future. (ii) Commissions The Group acts as an agent in the sale of various products and services to customers such as telecommunication contracts. Commissions associated with agency sales are recognised on a point in time basis when all performance obligations have been completed to entitle the Group to the commission. (iii) Rendering of services The Group generates revenue from the provision of various services including installation, customer delivery, IT services and extended care and customer support services. Revenue relating to installation, customer delivery and IT services is principally recognised on a point in time basis, which occurs upon completion of the service given the short time period over which the services are provided. Revenue relating to extended care and customer support services is recognised over the period of cover where the Group retains the responsibility for the performance obligations associated with the services and at point of sale when a third party assumes responsibility for the performance obligations associated with the services. Amounts collected for services not yet provided are recorded as deferred revenue in the balance sheet. (b) Derivatives and hedging activities 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 the end of each reporting period. 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 particular risk associated with the cash ﬂ ows of recognised assets and liabilities and highly probable forecast transactions (cash ﬂ ow hedges); or • hedges of a net investment in a foreign operation (net investment hedges). The Group documents at the inception of the hedging transaction 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, both at hedge inception and on an ongoing basis, 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 ﬂ ows of hedged items. 97 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 29 SUMMARY OF OTHER SIGNIFICANT ACCOUNTING POLICIES (continued) (b) Derivatives and hedging activities (continued) The fair values of various derivative ﬁ nancial instruments used for hedging purposes are disclosed in note 20. Movements in the hedging reserve in shareholder’s equity are shown in the statement of changes in equity. (i) Cash ﬂ ow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash ﬂ ow hedges is recognised in the cash ﬂ ow hedge reserve within equity. The gain or loss relating to the ineffective portion is recognised immediately in proﬁ t or loss within other income or other expenses. Amounts accumulated in equity are reclassiﬁ ed to proﬁ t or loss in the periods when the hedged item affects proﬁ t or loss. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in proﬁ t or loss within ‘ﬁ nance costs’. When a hedging instrument expires, or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss and deferred costs of hedging in equity at that time remains in equity until the forecast transaction occurs, resulting in the recognition of a non-ﬁ nancial asset such as inventory. When the forecast transaction is no longer expected to occur, the cumulative gain or loss and deferred costs of hedging that were reported in equity are immediately reclassiﬁ ed to proﬁ t or loss. (ii) Net investment hedges Hedges of net investments in foreign operations are accounted for similarly to cash ﬂ ow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in proﬁ t or loss within other income or other expenses. Gains and losses accumulated in equity are reclassiﬁ ed to proﬁ t or loss when the foreign operation is partially disposed of or sold. (c) Foreign currency translation (i) Functional and presentation currency Items included in the ﬁ nancial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The ﬁ nancial statements are presented in Australian dollars, which is JB Hi-Fi 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 proﬁ t or loss, except when they are deferred in equity as qualifying cash ﬂ ow hedges and qualifying net investment hedges, or are attributable to part of the net investment in a foreign operation. (iii) Group companies The results and ﬁ nancial position of foreign operations (none of which has the currency of a hyperinﬂ ationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • • assets and liabilities presented are translated at the closing rate at the date of that balance sheet; income and expenses 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. 98 For personal use only29 SUMMARY OF OTHER SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Foreign currency translation (continued) (iii) Group companies (continued) On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other ﬁ nancial 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, the associated exchange differences are reclassiﬁ ed to proﬁ t or loss, as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. (d) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash ﬂ ows are presented on a gross basis. The GST components of cash ﬂ ows arising from investing or ﬁ nancing activities which are recoverable from, or payable, to the taxation authority, are presented as operating cash ﬂ ows. (e) New accounting standards and interpretations In the current year, the Group has adopted all of the following new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to its operations and effective for the current annual reporting period: (i) AASB 9 Financial Instruments and related amending Standards The Group has adopted AASB 9 Financial Instruments from 1 July 2018 which replaces AASB 139 Financial Instruments: Recognition and Measurement. AASB 9 introduces new requirements for the classiﬁ cation and measurement of ﬁ nancial assets and ﬁ nancial liabilities, a new model for calculating the provision for doubtful debts (now termed the credit loss allowance), and new hedge accounting requirements. Credit losses on trade receivables The Group has elected to apply the simpliﬁ ed approach to measuring expected credit losses, using the lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. A provision matrix is then determined based on the historic credit loss rate for each group, adjusted for any material expected changes to the future credit risk for that group. The difference between the credit loss allowances calculated under AASB 9 compared to the incurred loss calculated under AASB 139 is not material to the Group. Hedge accounting In accordance with the transition provisions of AASB 9 for hedge accounting, the Group has applied the AASB 9 hedge accounting requirements prospectively from the date of initial application on 1 July 2018. There has been no change in the Groups transactions that are subject to hedge accounting from the adoption of AASB 9, being the interest rate swaps, caps and forward foreign currency exchange contracts. Accordingly, there has been no impact on the hedging reserve from the adoption of AASB 9. (ii) AASB 15 Revenue from Contracts with Customers and related amending Standards The Group has adopted AASB 15 Revenue from Contracts with Customers from 1 July 2018, which replaces AASB 118 Revenue, using the modiﬁ ed retrospective approach. AASB 15 establishes a principles-based approach for revenue recognition whereby revenue is recognised when performance obligations are satisﬁ ed and the control of goods or services is transferred. The standard applies a ﬁ ve-step approach to the timing of revenue recognition and is applicable to all contracts with customers, except those in the scope of other standards, replacing the separate models for goods, services and construction contracts under the previous accounting standards. 99 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 29 SUMMARY OF OTHER SIGNIFICANT ACCOUNTING POLICIES (continued) (e) New accounting standards and interpretations (continued) The major sources of the Group’s revenue are from the sale of goods, commissions and rendering of services, which are each considered below. Sale of goods The adoption of AASB 15 has not impacted the timing of revenue recognition on the sale of goods, which continues to be recognised on a point in time basis. In previous reporting periods, revenue from the sale of goods was recognised when the customer accepted the risks and rewards of ownership, which occurred at the point in sale or when the goods were collected/delivered. In applying AASB 15, revenue associated with the sale of goods is recognised when the performance obligation of the sale has been fulﬁ lled and control of the goods has transferred to the customer, which continues to occur at the point of sale when the goods are collected/delivered. Gift cards and store credits are considered a prepayment for goods and services to be delivered in the future. The Group has an obligation to transfer the goods or services in the future - creating a performance obligation. The Group recognises deferred revenue for the amount of the prepayment and recognises revenue when the customer redeems the gift card or store credit and the Group fulﬁ ls the performance obligation related to the transaction or likelihood of the gift card being redeemed by the customer is deemed remote. In recognising revenue from the sale of goods, the Group considers its historical experience with sales returns to determine if its ‘highly probable’ that a signiﬁ cant reversal of revenue will arise in the future. Commissions The Group acts as an agent in the sale of various products and services to customers such as telecommunication contracts. Under AASB 15, commissions associated with agency sales are recognised on a point in time basis when all performance obligations have been completed to entitle the Group to the commission. There has been no change in the point of revenue recognition for commissions arising from the adoption of AASB 15. Rendering of services The Group generates revenue from the provision of various services including installation, customer delivery, IT services and extended care and customer support services. Under AASB 15, revenue relating to installation, customer delivery and IT services is principally recognised on a point in time basis, which occurs upon completion of the service given the short time period over which the services are provided. Revenue relating to extended care and customer support services is recognised over the period of cover where the Group retains the responsibility for the performance obligations associated with the services and at point of sale when a third party assumes responsibility for the performance obligations associated with the services. Amounts collected for services not yet provided are recorded as deferred revenue in the balance sheet. The adoption of AASB 15 has not impacted the timing revenue recognition for services revenue. Timing of revenue recognition As described above, the Group’s revenue is principally generated on a ‘point in time’ basis, the amount of revenue recognised by the Group on an ‘over-time’ basis is not material in the context of the Group’s total revenue. (iii) AASB 2016-5 Amendments to Australian Accounting Standards - Classiﬁ cation and Measurement of Share-based Payment Transactions The adoption of this amending Standard did not have any impact on the disclosures or the amounts recognised in the Group’s condensed consolidated ﬁ nancial statements. At the date of authorisation of the ﬁ nancial report, the following relevant Standards and Interpretations were issued but not yet effective. 100 For personal use only29 SUMMARY OF OTHER SIGNIFICANT ACCOUNTING POLICIES (continued) (e) New accounting standards and interpretations (continued) The effects of the following Standards that are issued but not yet effective are still being determined: (i) AASB 16 Leases (effective 1 January 2019) AASB 16 Leases is effective for the Group from 1 July 2019 and will have a signiﬁ cant impact on the Group’s consolidated ﬁ nancial statements for the year ended 30 June 2020. The Group has identiﬁ ed all arrangements that will be subject to the new standard, which are predominately the leases for the Group’s retail stores along with warehouses and support ofﬁ ces. The Group has elected to transition to the new standard using the modiﬁ ed retrospective approach, therefore the cumulative effect of adopting AASB 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 July 2019, with no restatement of comparative information. The Group expects to be able to provide supplementary information in investor presentations during the transition period to bridge the ﬁ nancial statements between the new and old standard. When applying the modiﬁ ed retrospective approach, the Group has elected to apply a number of practical expedients including: • • the use of hindsight in determining the lease term where the contract contains options to extend the lease; and non-lease components will not be separated out from lease components of a lease. The treatment of lease options available to the Group will be assessed on a lease by lease basis and will be added to the lease term as appropriate, taking into consideration the current and future performance of the speciﬁ c location and any planned relocations. The Group has substantially completed its implementation assessment of the new standard, however certain technical and judgemental aspects of the revised accounting policy remain open, including the determination of lease terms for leases with options and leases in holdover, which could have a material impact on the outcomes under the new standard. An indicative range of the ﬁ nancial impacts from adoption of the new standard is set out below allowing for these uncertainties. The actual ﬁ nancial impact on the results for the 30 June 2020 ﬁ nancial year will also be contingent on any new leases that are entered into during the ﬁ nancial year. Estimated impact on the Balance sheet at 1 July 2019 Recognition of right of use asset Recognition of lease liability De-recognition of lease accrual/incentive Increase in deferred tax asset Reduction in net assets Estimated impact on Proﬁ t & Loss for year ending 30 June 2020 Increase in EBITDA Increase in EBIT Reduction in net proﬁ t before tax Reduction in net proﬁ t after tax Estimated impact on Cash Flows for the year ending 30 June 2020 Increase in operating cash ﬂ ows Decrease in ﬁ nancing cash ﬂ ows Net cash ﬂ ows Estimated impact $m $675.0 - $775.0 ($775.0) - ($875.0) $41.0 $17.7 - $20.7 ($38.3) - ($41.3) $150.0 - $175.0 $16.0 - $18.0 ($7.0) - ($9.0) ($4.9) - ($6.3) $135.0 - $185.0 ($135.0) - ($185.0) $0.0 The effects of the followings Standards and Interpretations are not expected to be material: (i) AASB 2018-1 Amendments to Australian Accounting Standards - Annual Improvements 2015 - 2017 Cycle (effective 1 January 2019) (ii) AASB 2018-2 Amendments to Australian Accounting Standards - Plan Amendment, Curtailment or Settlement (effective 1 January 2019) (iii) Interpretation 23 Uncertainty over Income Tax Treatments (effective 1 January 2019) 101 For personal use onlyNOTES TO THE FINANCIAL STATEMENTS (continued) for the ﬁ nancial year ended 30 June 2019 30 EVENTS OCCURRING AFTER THE REPORTING PERIOD There have been no matters or circumstances occurring subsequent to the end of the ﬁ nancial year end, that have signiﬁ cantly affected, or may signiﬁ cantly affect, the operations of the Group, the results of those operations or the state of affairs of the Group or economic entity in future ﬁ nancial years. 102 For personal use onlyADDITIONAL SECURITIES EXCHANGE INFORMATION The shareholder information set out below was applicable as at 5 August 2019. A. Distribution of equity securities Analysis of numbers of equity security holders by size of holding: Holding 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Ordinary shares Total Holders Units % Issued Capital 16,085 5,449,413 4,016 8,128,442 306 156 21 2,103,149 3,870,937 95,331,431 20,584 114,883,372 4.74 7.08 1.83 3.37 82.98 100.00 There were 272 holders of less than a marketable parcel of ordinary shares. B. Equity security holders Twenty largest quoted equity security holders The names of the twenty largest holders of quoted equity securities are listed below: Ordinary shares Name 1. J P MORGAN NOMINEES AUSTRALIA PTY LIMITED 2. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 3. CITICORP NOMINEES PTY LIMITED 4. BNP PARIBAS NOMINEES PTY LTD 5. NATIONAL NOMINEES LIMITED Number held 28,792,775 28,100,358 15,522,642 7,653,711 6,621,147 6. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED 2,261,306 7. BNP PARIBAS NOMS PTY LTD 8. CITICORP NOMINEES PTY LIMITED 9. NATIONAL NOMINEES LIMITED 10. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 11. AMP LIFE LIMITED 12. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED-GSCO ECA 13. 3RD WAVE INVESTORS LTD 14. SCCASP HOLDINGS PTY LTD 15. CS THIRD NOMINEES PTY LIMITED 16. POWERWRAP LIMITED 17. NETWEALTH INVESTMENTS LIMITED 18. FULLFIELD PTY LTD 19. ASTRASET PTY LTD 20. BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD DRP 2,099,128 963,822 775,000 456,482 376,217 371,072 300,000 175,400 173,654 163,740 153,247 150,000 113,211 108,519 % of issued shares 25.06 24.46 13.51 6.66 5.76 1.97 1.83 0.84 0.67 0.40 0.33 0.32 0.26 0.15 0.15 0.14 0.13 0.13 0.10 0.09 95,331,431 82.96 103 For personal use onlyADDITIONAL SECURITIES EXCHANGE INFORMATION (continued) C. Substantial holders Substantial holders in the Company are set out below: Ordinary shares AustralianSuper Pty Ltd Legg Mason Asset Management Australia Limited Ausbil Investment Management Limited The Vanguard Group Mitsubishi UFJ Financial Group Inc. Number held Voting Power % 11,515,044 10,682,309 5,881,121 5,804,822 5,751,639 10.02 9.30 5.12 5.05 5.01 Number on issue Number of holders D. Unquoted equity securities Employee share options issued under the Company’s share option plans 1,237,837 149 104 For personal use onlyCORPORATE INFORMATION ABN 80 093 220 136 COMPANY SECRETARY Doug Smith PRINCIPAL REGISTERED OFFICE IN AUSTRALIA Podium Level 60 City Road, Southbank VIC 3006 Phone: +61 3 8530 7333 SHARE REGISTRY Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street, Abbotsford, Victoria, 3067, Australia Phone: 1300 302 417 (Australia) Phone: +61 3 9415 4136 For personal use onlyjbhiﬁ .com.au For personal use only

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