Kathmandu Holdings Ltd Annual Report 2020

Plain-text annual report

KATHMANDU HOLDINGS LIMITED Annual Report 2020 Who we are Kathmandu Holdings Limited (KHL) is a global outdoor, lifestyle and sports company, consisting of three iconic brands: Kathmandu, Rip Curl and Oboz, bringing to market technical products with a focus on sustainability. The Kathmandu brand was born in 1987. Kathmandu Holdings formed in 2009 as a publicly listed company. Together with the acquisition of Oboz (2018) and Rip Curl (2019), Kathmandu Holdings has transformed from a leading Australasian retailer to a brand-led global multi-channel business. 2 3 Global reach North America RC KMD Oboz Total Owned stores Licensed stores Online sites 30 10 1 Wholesale doors 1,206 - - 1 - - - - 30 10 2 1,500 2,706 Europe Owned stores Licensed stores Online sites RC KMD Oboz Total 20 17 1 - - 1 - - - 20 17 2 Wholesale doors 2,146 28 97 2,271 Asia RC Oboz Total Owned stores Licensed stores JV stores Online sites 2 54 20 1 - - - - Wholesale doors 565 152 2 54 20 1 717 TOTAL GROUP Owned stores Licensed stores JV stores Online sites RC KMD Oboz Total 160 207 26 6 165 - - 4 - - - - 325 207 26 10 Wholesale doors 5,786 28 1,749 7,563 Owned Regions Licensed Regions RC Rip Curl KMD Kathmandu Oboz Oboz South America Owned stores Licensed stores Online sites Wholesale doors RC 3 90 1 815 Australia and New Zealand RC KMD Total Africa / Middle East Owned stores 105 165 270 Licensed stores RC 21 Licensed stores JV stores Online sites 15 6 2 Wholesale doors 1,054 - - 2 - 15 6 4 1,054 ANNUAL REPORT 2020KATHMANDU HOLDINGS LTDINTRODUCTION4 5 Performance highlights RIP CURL ACQUISITION WAS TRANSFORMATIONAL Delivered diversification in geography, channel to market and seasonality. Strong cash generating brands with global reach. Three iconic, inspirational brands with loyal customers. GROUP SALES OPERATING CASH FLOW up 48.7% to $801.5m up 50.9% to $93.1m including 9 months of Rip Curl adjusted for impacts of adopting IFRS 16 RESPONSE TO COVID-19 WAS SWIFT AND STRONG Decisive action to: Raise capital and suspend dividends. Reduce costs and accelerate synergies. Balance sheet well positioned. CAPITAL RAISED CLOSING NET DEBT $207m in April 2020 $9.4m with over $350m debt facility headroom SALES AND PROFIT RESULTS REFLECT COVID-19 IMPACT COVID-19 revenue impact estimated at c. $135m. Enhanced online capacity and capability to rapidly scale up to meet demand. GROUP ONLINE SALES1 RETAIL SAME STORE SALES3 up 63% to $106.4m 15.7% of direct to consumer sales2 Growth stronger post-lockdown than pre-lockdown for both Rip Curl and Kathmandu. UNDERLYING EBITDA4 UNDERLYING EBIT4 down 15.3% to $83.4m down 32.5% to $56.2m UNDERLYING NET PROFIT AFTER TAX4 STATUTORY NET PROFIT AFTER TAX down 44.5% to $31.5m $8.9m includes $18.0m one-off transaction costs, $4.6m restructuring costs, and $2.6m impact from the implementation of IFRS 16 leasing standard (in total $22.6m impact net of tax). Includes full financial years of Rip Curl sales for comparability, including $3.7m Rip Curl online sales for the three months pre-acquisition. Sales from Rip Curl and Kathmandu retail stores and direct online sites and marketplaces. 1 2 3 Adjusted to remove stores that were not able to open for a comparable week because of COVID-19 lockdowns. 4 Excluding the impacts of IFRS 16 and one-off transaction and abnormal costs. ANNUAL REPORT 2020KATHMANDU HOLDINGS LTDINTRODUCTION6 CONTENTS 7 Contents 7 10 12 16 19 20 21 23 78 88 94 Chairman and CEO’s Letter Sustainability highlights Rip Curl Kathmandu Oboz The Board Management team Financial statements Corporate governance Statutory information Directory Notice of Annual Meeting 2020 11.00am Wednesday 25 November 2020 www.virtualmeeting.co.nz/kmd20 Chairman and CEO’s letter COVID-19 response This was a transformational year for the business and our team, with the successful acquisition and integration of Rip Curl, the Group’s swift and strong response to COVID-19, and the strength of our three brands clearly evident. Sales and profit results for Rip Curl, Kathmandu, and Oboz in FY20 reflect the global impact of the COVID-19 pandemic. The Group responded quickly by raising capital to strengthen its balance sheet, reduced costs and adjusted its operating structure. As initial lockdowns and social distancing measures eased, strong sales recovery and cash generation allowed the Group to end the financial year well placed both financially and operationally. Rip Curl acquisition We are very pleased with the successful acquisition and integration of Rip Curl over the last nine months. Rip Curl is an iconic global surf brand and action sports company, with a vision to be regarded as “the Ultimate Surfing Company”. The Group now comprises three iconic, inspirational brands with loyal customers. The acquisition of Rip Curl allowed the Group to considerably diversify its geographic footprint, channels to market and seasonality profile. We are now a truly global outdoor, lifestyle and sports company. Kathmandu, Oboz, and Rip Curl are very culturally aligned with a shared focus on brand differentiation, technical innovation, quality, customer engagement and sustainability. David Kirk Chairman Xavier Simonet Managing Director and Chief Executive Officer The Group acted quickly and decisively in reponse to COVID-19. Protecting the safety and wellbeing of employees and customers has always been paramount, and even more so throughout our COVID-19 response. In accordance with Government directives, all of the Group’s global retail stores were closed for varying lengths of time from late March. At the beginning of April, the Group moved quickly, raising $207 million of equity to provide balance sheet strength and enabling investment for the future. We also took decisive action early to reduce costs, adjusting the operating structure of the business and accelerating synergies following the Rip Curl acquisition. Consumer preference for online increased during the initial lockdowns. The Group’s onmi-channel capability and infrastructure capacity allowed both Kathmandu and Rip Curl to rapidly scale up to meet the surge in online demand. As retail stores reopened following the initial lockdowns, sales rebounded strongly, reducing inventory significantly, and generating strong cashflow. As a result, the Group finished the financial year with a robust balance sheet and healthy inventory level, positioning the Group well for the future. Growth strategy We are a global outdoor, lifestyle and sports company, underpinned by iconic brands and technical products, with ANNUAL REPORT 2020KATHMANDU HOLDINGS LTD8 9 channel capabilities also allow us to quickly respond to shifts in consumer habits and strong growth in online demand. Risk to consumer sentiment remains, given the potential economic impact of COVID-19. However, the Group is well positioned with a robust balance sheet, low net debt, healthy inventory, and strong cash generation. In Kathmandu, Oboz, and Rip Curl, the Group has authentic and inspirational brands that will continue to attract loyal consumers for the long-term. David Kirk Chairman Xavier Simonet Managing Director and Chief Executive Officer a focus on sustainability and customer engagement . The Group’s long-term strategy has not changed throughout this challenging period and, in fact, it has been further reinforced. The Group has now built a portfolio of brands that provide diversification across geography, channel, product and seasonality. These brands allow us to meet global year-round needs of customers in the outdoor, sports and lifestyle categories. We are now starting to leverage this portfolio of brands, with plans to deliver operational excellence in sourcing, supply chain and systems. We will continue accelerating digital transformation and driving margin expansion through synergies, and leveraging the complementary expertise and core capabilities of our brands. We plan to grow each brand by maintaining a relentless focus on core customers, delivering solutions to their needs, and enhancing customer loyalty. Each brand will continue to bring to market technical, differentiated and sustainable products, and accelerate expansion of the direct-to-consumer business. Throughout this journey, we will remain true to our values. Sustainability is ingrained in everything we do. We also embrace diversity and inclusion in the workplace and build strong ties with local communities. Sustainability highlights A key priority for the Group is to provide industry leadership in sustainability, particularly on circular economy principles across all aspects of our business. An ongoing goal for the Kathmandu brand is to achieve net zero environmental harm by 2025, and we are tracking well to achieve this. In addition, we aim for all direct suppliers to meet our minimum expectations on social and environmental impacts. Rip Curl has scored a B+ in the Ethical Fashion Report for the second year running, and will continue to strive towards improvement along with Kathmandu and Oboz. We have focused on using recycled materials across our brands. Kathmandu uses 100% sustainable cotton, recycles plastic bottles through the Repreve product ranges, and has moved to solution dyed fabrics to save water. Rip Curl uses 30% recycled plastic in packaging, and uses Forest Stewardship Council certified recycled paper swing tags. Oboz launched the Sypes and Bozeman collections containing recycled materials and algae bloom insoles. People The Board would like to thank management and their worldwide teams for outstanding resilience, flexibility, commitment and passion over the past year. The teams met the significant unexpected challenges of COVID-19, and the Group ended the financial year well positioned for the future. Outlook The Group’s brands are well positioned to capitalise on increased participation in outdoor, beach and surfing activities following the end of COVID-19 lockdowns. Omni ANNUAL REPORT 2020KATHMANDU HOLDINGS LTDINTRODUCTION10 SUSTAINABILITY 11 Sustainability highlights As our family of brands has grown, we have new opportunities and face new challenges. We can leverage each of our strengths to work together for an even greater positive impact. We are excited to launch our first combined sustainability report with all three brands. Here are some of our highlights from the last year. Bottles worth of fresh water saved by moving to solution dyed fabrics (2017 - 2020) Plastic bottles recycled through our Repreve product ranges (2015 - 2020) 100% Sustainable Cotton in our range Obtained the Rainbow Tick Certification in New Zealand for embracing diversity and inclusion First solar panel store in Australia Launched the Sypes and Bozeman collections containing recycled materials and algae bloom insoles Trees planted since the company started Improved gender diversity in our team now with Scored a B+ in the Ethical Fashion Report two years running Recycled plastic in our polybags 20th year anniversary of Rip Curl Planet Day Collaborated with Kathmandu on developing our sustainability journey Recycled paper swing tags on products ANNUAL REPORT 2020KATHMANDU HOLDINGS LTD12 RIP CURL 13 Founded in 1969 by Brian “Sing Ding” Singer and Doug “Claw” Warbrick, Rip Curl is one of the world’s most recognised and respected brands. It has been at the forefront of the surf and snow scenes since its creation. Made by surfers for surfers, Rip Curl’s vision is to be regarded as the Ultimate Surfing Company in all that we do. Rip Curl is a company for, and about, the crew on The Search. The Search is the driving force that led to the creation of Rip Curl, and it lives in the spirit of everything the Rip Curl crew do. It's what makes Rip Curl unique. It defines who we are. The products we make, the events we run, the riders we support and the people we reach globally, are all a part of that Search that Rip Curl is on. TOTAL SALES NZD $315.7m (in the last 12 months, including $3.7m ONLINE SALES NZD$25.5m for the three months pre-acquisition) • 52% growth year on year • 10.6% of direct to consumer sales 9 months since acquisition CHANNELS 160 owned stores 207 licensed stores 26 JV stores 6 direct to consumer websites 5,786 wholesale doors RIP CURL SALES MIX (LAST 12 MONTHS) BY CHANNEL BY REGION Retail Stores 50% Online 6% Wholesale 43% Other 1% AUS & NZ 48% North America 23% Europe 16% ROW* 13% RIP CURL GROSS PROFIT $ MIX (LAST 12 MONTHS) BY CHANNEL BY REGION Retail Stores 55% Online 8% Wholesale 36% Other 1% AUS & NZ 50% North America 21% Europe 15% ROW* 14% *Rest of the World ANNUAL REPORT 2020KATHMANDU HOLDINGS LTD14 15 E-Bomb E7 limited edition Rip Curl launched the Limited Edition E-Bomb E7 Wetsuit in July 2020. This product is the latest in a long line of world’s first wetsuit technology for Rip Curl and was the culmination of a 3 year project from the Rip Curl wetsuit development team involving the expertise of Rip Curl World Champion surfers Tyler Wright, Mick Fanning and Gabriel Medina. The E-Bomb was designed for ultimate performance and features Rip Curl’s latest breakthrough in high stretch neoprene in the upper body. This single one-piece panel stretches from wrist to wrist and with no seams provides the full stretch performance benefits of E7. The body of the suit features E6 neoprene and the entire suit has internal Thermo Lining for stretch, comfort and warmth. The success of the E-Bomb has been incredible with the limited edition wetsuit selling strongly in core markets. The E-Bomb demonstrates Rip Curl’s dedication to delivering leading-edge innovation and technical performance across its product range. Rip Curl continues to connect with surf, snow and beach going customers across the world through content based on its world class pro surf team, World Surf League and grassroots events programs and its range of core and fashionable surfing products which can be found in use at every beach on the planet. MICK FANNING - 3X WORLD SURFING CHAMPION MADE BY WORLD CHAMPIONS ANNUAL REPORT 2020KATHMANDU HOLDINGS LTDRIP CURL16 17 Kathmandu opened its first store along Melbourne’s iconic Hardware Lane in 1987. With a focus on producing original, adaptive, sustainable and expertly engineered gear and apparel, Kathmandu has been inspiring adventure for over 30 years to become Australia and New Zealand’s largest outdoor adventure brand. Kathmandu has 165 retail stores in Australia, New Zealand, and an online and a wholesale presence the United Kingdom, and the United States of America. Sustainability lies at the heart of everything Kathmandu does, and in 2019 it became the first outdoor apparel and equipment brand in Australasia to become a certified B Corp, meeting the highest standards of social and environmental performance. TOTAL SALES ONLINE SALES NZD NZD$80.9m $426.4m • 67% growth year on year • 18.5% of direct to consumer sales CHANNELS 165 retail stores 4 direct to consumer websites 28 wholesale doors KATHMANDU SALES MIX FY20 KATHMANDU GROSS PROFIT $ MIX FY20 BY CHANNEL BY CHANNEL Retail Stores 81% Online 19% Retail Stores 82% Online 18% ANNUAL REPORT 2020KATHMANDU HOLDINGS LTDKATHMANDU18 KATHMANDU HOLDINGS LTD ANNUAL REPORT 2020 19 Kathmandu partners with Uber Inspired by our customer-centric approach and innovative thinking, Kathmandu teamed up with Uber to launch same-day delivery in Sydney and Melbourne in response to COVID-19 postage delays. This made it possible for customers to place an order online by 3pm and receive delivery of goods to their doorstep the very same day. The Australian-first partnership drove significant media coverage for Kathmandu, with the brand front and centre across print and news outlets nationwide. After a successful trial, the service was rolled out across a wider area including addresses within a 10km radius of key stores in Adelaide, Canberra, Perth, Hobart and Queensland. With the resurgence of cases in some Australian states, and increased restrictions, same-day delivery has become an important additional offering which has proved popular with customers. Whilst bricks-and-mortar stores continue to offer personalised experiences and expertise, same-day delivery via Uber gives customers increased flexibility during uncertain times. For Kathmandu, it was important to provide an alternative method to get product to customers as quickly as possible using contactless delivery. As pressure increased on traditional transport networks, we welcomed the opportunity to partner with Uber’s ride-sharing platform to utilise their large pool of drivers. The flexibility provided by the Uber delivery service also enabled Kathmandu to make use of its bricks and mortar store teams to help relieve some of the pressure placed on our hard-working Distribution Centre as online orders surged. This partnership is also a long-term strategy, addressing the predicted changes in consumer behaviour following COVID-19, including potentially less foot fall in stores, expectations around contactless service and a boom in online sales. Moving forward, Kathmandu hopes to continue to work with Uber to expand the service across further parts of our store network. X Oboz began in 2007 in the small town of Bozeman, Montana (Outside + Bozeman = Oboz) and has quickly grown to be a leading North American brand of handmade outdoor footwear. Oboz continues to differentiate itself by pairing a focus on expertly designed and constructed footwear with strong corporate responsibility. Bozeman, Montana. It's where it all started. It's what inspired the Oboz name. And it's what motivates us to lace up daily and explore the 18 million acres of Greater Yellowstone Ecosystem that surround us. A vast and breathtaking landscape of peaks, valleys and rivers just waiting to be explored on two feet. A vision that began over ten years ago in Bozeman, Montana now has roots around the world. Our “True To The Trail®” philosophy is the compass heading that guides everything we do. From building great fitting footwear to how we give back to our community and the way we treat each other and our planet. It's a mindset that grounds us in what's most important - doing things the right way, having fun, and exploring our path in life. Because any other way, just wouldn't be true to the trail. TOTAL SALES NZD $59.4m CHANNELS 1,749 wholesale doors Direct to Consumer online trading site to be launched during FY21 KATHMANDU20 21 The Board Management team 1 David Kirk Chairman 4 Philip Bowman Non-executive Director David is the Co-founder and Managing Partner of Bailador Investment Management and is Chairman of Bailador Technology Investments, Forsyth Barr Group, and the NZ Rugby Players Association. He sits on the Board of various Bailador portfolio companies and charitable organisations including KiwiHarvest and the Sydney Festival. David’s Executive Management career included roles as the CEO of Fairfax Media and CEO and Managing Director of PMP. David was Chief Policy Advisor to the Prime Minister of New Zealand from 1992 to 1994 and was a management consultant with McKinsey & Company in London prior to that. David’s past roles include the Chairman of Trade Me Group. David is a Rhodes Scholar with degrees in Medicine from Otago University and Philosophy, Politics and Economics from Oxford University. 2 Xavier Simonet Managing Director and Group Chief Executive Officer Xavier joined Kathmandu in July 2015 with over 20 years international experience in building brands and developing successful retail businesses in fashion, apparel, accessories and related products. Prior roles include CEO of Radley (London), VP & GM International of DB Apparel, 11 years at LVMH (primarily Asia-Pacific) and International Director of Seafolly. 3 Brent Scrimshaw Non-executive Director Brent has extensive experience leading and growing consumer brands around the world including an 18-year career with Nike Inc across Marketing, Commerce and General Management in three continents. He led Brand marketing for Nike Pacific, was the Regional GM for Nike North America in New York, was also the Chief Marketing Officer for Nike EMEA. Brent also served as Vice President and Chief Executive of Nike Western Europe leading Nike's European operations from Amsterdam. Brent subsequently founded Unscriptd, a sports technology and media business sold to The Players’ Tribune (a large USA media company) in 2019. He was previously a director of action sports company Fox Head Inc in Irvine California. Brent currently holds Non-Executive Director roles with ASX listed Rhinomed (RNO) and Catapult International (CAT). Brent is currently the CEO of Enero Group (EGG). Philip has extensive experience in in retail, brands and international, including 15 years as a director of Burberry. Other past roles include CFO of Bass, CEO of Bass Taverns, Executive Chairman of Liberty PLC, CEO of Allied Domecq, CEO of Scottish Power, CEO of Smiths Group and Chairman of Coral Eurobet and Miller Group. He has also held office as an independent director of BSkyB, Scottish & Newcastle Group and Berry Bros. & Rudd. He currently sits on the boards of Ferrovial SA, Better Capital PCC and is Chairman of Sky Network Television, Majid al Futtaim Properties and Tegel Group Holdings. 5 John Harvey Non-executive Director John is a professional Director with a background in accounting and professional services. He has over 35 years professional experience, including 23 years as a partner of PricewaterhouseCoopers where he also held a number of leadership and governance roles. John retired from PwC in 2009. John has extensive experience in ﬁnancial reporting, governance, information systems and processes, initial public offerings, business evaluation, acquisitions and mergers. John is currently a non-Executive Director of Stride Property, Investore Property, Heartland Bank and Napier Port Holdings. Former non- Executive director roles include HT&E (formerly APN News & Media), Port Otago, Ballance Agri-Nutrients and New Zealand Opera. 6 Andrea Martens Non-executive Director (appointed 1 August 2019) Andrea has extensive executive leadership experience having spent over 20 years working with some of the world’s best known- brands and organisations. She is currently the CEO of ADMA and has previously held roles as the Global Chief Marketing Officer for Jurlique International, and Managing Director and VP Marketing, Home and Personal Care for Unilever Australia and New Zealand. Andrea is also a member of the Australian Institute of Company Directors and named as one of the top 50 CMOs in Australia by CMO Magazine. 1 2 3 4 5 6 Xavier Simonet Group Chief Executive Officer Chris Kinraid Group Chief Financial Officer Reuben Casey Kathmandu Chief Executive Officer Michael Daly Rip Curl Chief Executive Officer Jolann Van Dyk Group Chief Information Officer Tony Roberts Group Legal Counsel Amy Beck President Oboz ANNUAL REPORT 2020KATHMANDU HOLDINGS LTDTHE BOARD AND MANAGEMENT TEAM 22 FINANCIAL STATEMENTS KATHMANDU HOLDINGS LTD ANNUAL REPORT 2020 23 Financial statements For the Year Ended 31 July 2020 In this section... The consolidated financial statements have been presented in a style which attempts to make them less complex and more relevant to shareholders. We have grouped the note disclosures into six sections: ‘Basis of Preparation’, ‘Results for the Year’, ‘Operating Assets and Liabilities’, ‘Capital Structure and Financing Costs’, ‘Group Structure’ and ‘Other Notes’. Each section sets out the accounting policies applied in producing the relevant notes. The purpose of this format is to provide readers with a clearer understanding of what drives financial performance of the Group. The aim of the text boxes is to provide commentary on each section or note, in plain English. Keeping it simple... Notes to the consolidated financial statements provide information required by accounting standards or Listing Rules to explain a particular feature of the financial statements. The notes which follow will also provide explanations and additional disclosures to assist readers’ understanding and interpretation of the annual report and the financial statements. Table of Contents Directors’ Approval of Consolidated Financial Statements ...........................................24 Consolidated Statement of Comprehensive Income ...25 Consolidated Statement of Changes in Equity ..................26 Consolidated Balance Sheet ........................................................... 27 Consolidated Statement of Cash Flows ..................................28 Notes to the Consolidated Financial Statements Section 1: Basis of Preparation ........................................................30 Section 2: Results for the Year .........................................................33 Section 3: Operating Assets and Liabilities .......................... 40 Section 4: Capital Structure and Financing Costs ............51 Section 5: Group Structure .................................................................61 Section 6: Other Notes ......................................................................... 66 Auditors’ Report .......................................................................................... 71 24 25 Directors’ Approval of Consolidated Financial Statements For the Year Ended 31 July 2020 Consolidated Statement of Comprehensive Income For the Year Ended 31 July 2020 Authorisation for Issue The Board of Directors authorised the issue of these Consolidated Financial Statements on 23 September 2020. Approval by Directors The Directors are pleased to present the Consolidated Financial Statements of Kathmandu Holdings Limited for the year ended 31 July 2020 on pages 25 to 77. David Kirk Xavier Simonet For and on behalf of the Board of Directors 23 September 2020 Date 23 September 2020 Date Sales Cost of sales Gross profit Other income Selling expenses Administration and general expenses Earnings before interest, tax, depreciation and amortisation Depreciation and amortisation Earnings before interest and tax Finance income Finance expenses Finance costs - net Profit before income tax Income tax expense Profit after income tax Profit for the period attributable to: Shareholders of the company Non-controlling interest Section 2020 NZ$’000 2019 NZ$’000 2.2 801,524 538,855 (334,493) (206,362) 467,031 332,493) 2.2 2.2 2.2 27,369 (169,272) (176,237) (318,140) 148,891 3.2-3.4 (103,027) 45,864 449 (23,803) (23,354) 22,510 (13,631) 1,130) (160,581) (73,477) (232,928) 99,565) (15,272) 84,293 37) (2,952) (2,915) 81,378) (23,745) 4.1.1 2.3 4.3.2 4.3.2 4.3.2 2.4 2.4 2.4 2.4 8,879 57,633) 8,145 734 (9,259) 259 (61) 57,633) -) 620) (3,297) -) (9,061) (2,677) (182) 54,956) (920) 738 1.7cps 1.6cps 493,347 494,582 54,956) -) 16.0cps) 15.9cps) 359,600) 361,566 Other comprehensive income/(expense) that may be recycled through profit or loss: Movement in cash flow hedge reserve Movement in foreign currency translation reserve Movement in other reserves Other comprehensive expense for the year, net of tax Total comprehensive income/(expense) for the year Total comprehensive income/(expense) for the period attributable to: Shareholders of the company Non-controlling interest Basic earnings per share Diluted earnings per share Weighted average basic ordinary shares outstanding (‘000) Weighted average diluted ordinary shares outstanding (‘000) FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD 26 27 Consolidated Statement of Changes in Equity For the Year Ended 31 July 2020 Consolidated Balance Sheet As at 31 July 2020 Cash Flow Hedge Reserve NZ$’000 Foreign Currency Translation Reserve NZ$’000 Share Based Payments Reserve NZ$’000 Share Capital NZ$’000 249,882 3,498 (8,975) 2,760 - - - 1,231 - - - - 620 - (3,297) - - - - - - - - - - - - - (1,231) 721 (14) (253) 251,113 4,118 (12,272) 1,983 - - - 375,267 - - - - - - (9,259) - 255 - - - - - - - - - - - - - - - - - (1,666) 378 (87) - - - Other Reserves NZ$’000 Retained Earnings NZ$’000 Non- controlling Interest NZ$’000 Total Equity NZ$’000 420,521 57,633 (2,677) (33,883) - 721 - (253) 173,356 57,633 - (33,883) - - 14 - - - - - - - - - 197,120 - 442,062 8,145 - (27,209) - - - - - 734 8,879 4 - - - - (9,061) (27,209) 373,601 378 (87) 3,335 3,335 (66) (66) (12,630) - (12,630) - - - - - - - - - - (61) - - - - - - - 626,380 (5,141) (12,017) 608 (61) 165,426 4,007 779,202 Balance as at 31 July 2018 Profit after tax Other comprehensive income Dividends paid Issue of share capital Share based payment expense Lapsed share options Deferred tax on share-based payment transactions Balance as at 31 July 2019 Profit after tax Other comprehensive income Dividends paid Issue of share capital Share based payment expense Deferred tax on share-based payment transactions Non-controlling interest on acquisition Disposal of non-controlling interest Transition to NZ IFRS 16 Balance as at 31 July 2020 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Current tax asset Total current assets Non-current assets Trade and other receivables Property, plant and equipment Intangible assets Right-of-use assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Interest bearing liabilities Derivative financial instruments Current tax liabilities Current lease liabilities Total current liabilities Non-current liabilities Derivative financial instruments Non-current trade and other payables Interest bearing liabilities Deferred tax Non-current lease liabilities Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity - ordinary shares Reserves Retained earnings Non-controlling interest Total equity Section 2020 NZ$’000 2019 NZ$’000 3.1.2 3.1.3 3.1.1 4.2 3.1.3 3.2 3.3 3.4.1 3.1.5 4.1 4.2 3.4.2 4.2 3.1.5 4.1 2.3 3.4.2 4.3.1 4.3.2 231,885 73,668 228,793 53 3,790 6,230 14,206 122,773 4,964 - 538,189 148,173 3,945 90,722 682,578 257,998 1,035,243 1,573,432 - 60,319 386,061 - 446,380 594,553 143,698 74,560 - 7,414 8,060 77,579 - 113 6,458 - 236,751 81,131 - 14,413 241,270 81,452 220,344 557,479 794,230 9 - 25,500 45,851 - 71,360 152,491 779,202 442,062 626,380 (16,611) 165,426 4,007 779,202 251,113 (6,171) 197,120 - 442,062 FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD28 29 Consolidated Statement of Cash Flows For the Year Ended 31 July 2020 Reconciliation of net profit after taxation with cash inflow from operating activities Profit after taxation Movement in working capital: (Increase) / decrease in trade and other receivables (Increase) / decrease in inventories Increase / (decrease) in trade and other payables Increase / (decrease) in current tax liability Add non-cash items: Depreciation of property, plant and equipment Amortisation of intangibles Depreciation of right-of-use assets Impairment of right-of-use assets Foreign currency translation of working capital balances Increase / (decrease) in deferred taxation Employee share based remuneration Loss on sale of property, plant and equipment and intangibles Cash inflow from operating activities Section 2020 NZ$’000 2019 NZ$’000 8,879 57,633 24,027 20,305 9,732 1,526 55,590 19,653 7,539 75,835 2,050 215 (3,413) 378 3,069 (379) (13,042) 3,662 (3,260) (13,019) 11,920 3,352 - - (286) 539 721 814 105,326 17,060 169,795 61,674 3.2 3.3 3.4.1 3.4.1 6.3 3.2, 3.3 Cash flows from operating activities Cash was provided from: Receipts from customers Government grants received Interest received Income tax received Cash was applied to: Payments to suppliers and employees Income tax paid Interest paid Net cash inflow from operating activities Cash flows from investing activities Cash was provided from: Proceeds from sale of property, plant and equipment Proceeds from sale of non-controlling interest Proceeds from investment in other financial assets Cash was applied to: Purchase of property, plant and equipment Purchase of intangibles Acquisition of subsidiaries Section 2020 NZ$’000 2019 NZ$’000 823,951 21,266 449 1,379 847,045 638,393 16,897 21,960 677,250 546,499 - 621 207 547,327 455,743 26,673 3,237 485,653 169,795 61,674 61 141 - 202 15,399 4,463 376,121 395,983 1 - 22,321 22,322 11,345 4,351 22,321 38,017 3.2 3.3 5.1 Net cash (outflow) from investing activities (395,781) (15,695) Cash flows from financing activities Cash was provided from: Proceeds of loan advances Proceeds from share issues Cash was applied to: Dividends paid Repayment of loan advances Repayment of lease liabilities Net cash inflow / (outflow) from financing activities Net increase / (decrease) in cash and cash equivalents held Opening cash and cash equivalents Effect of foreign exchange rates Closing cash and cash equivalents 506,746 340,646 847,392 27,209 293,757 76,744 397,710 92,606 - 92,606 33,883 106,606 - 140,489 449,682 (47,883) 223,696 (1,904) 6,230 1,959 3.1.2 231,885 8,146 (12) 6,230 FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD30 31 Notes to the Consolidated Financial Statements Section 1 Basis of Preparation In this section This section sets out the Group’s accounting policies that relate to the consolidated financial statements as a whole. Where an accounting policy is specific to one note, the policy is described in the note to which it relates. 1.1 General information 1.2.1 Basis of preparation Kathmandu Holdings Limited (the Company) and its subsidiaries (together the Group) is a designer, marketer, retailer and wholesaler of apparel, footwear and equipment for surfing and the outdoors. It operates in New Zealand, Australia, North America, Europe, South East Asia and Brazil. The Company is a limited liability company incorporated and domiciled in New Zealand. Kathmandu Holdings Limited is a company registered under the Companies Act 1993 and is a FMC reporting entity under Part 7 of the Financial Markets Conduct Act 2013. The address of its registered office is 223 Tuam Street, Central Christchurch, Christchurch. The Company is listed on the NZX and ASX. The consolidated financial statements of the Group have been prepared in accordance with the requirements of Part 7 of the Financial Markets Conduct Act 2013 and the NZX Listing Rules. These audited consolidated financial statements have been approved for issue by the Board of Directors on 23 September 2020. 1.2 Summary of significant accounting policies These consolidated financial statements have been prepared in accordance with Generally Accepted Accounting Practice. They comply with the New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable Financial Reporting Standards, as appropriate for for-profit entities. The consolidated financial statements also comply with International Financial Reporting Standards (IFRS). The consolidated financial statements are presented in New Zealand dollars, which is the Group’s presentation currency. The principal accounting policies adopted in the preparation of the consolidated financial statements are set out below. These policies have been consistently applied to all periods presented, unless otherwise stated. Basis of consolidation The consolidated financial statements reported are for the consolidated “Group” which is the economic entity comprising Kathmandu Holdings Limited and its subsidiaries. The Group is designated as a for-profit entity for financial reporting purposes. Subsidiaries are consolidated from the date on which control is obtained to the date on which control is lost. Non-controlling interests are measured at their proportionate share of the acquiree’s identified net assets at the acquisition date. Changes in the Group’s interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions. In preparing the consolidated financial statements, all material intra-group transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated. When necessary, amounts reported by subsidiaries have been adjusted to conform to the Group’s accounting policies. Historical cost convention These consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of certain assets as identified in the specific accounting policies provided below. Critical accounting estimates Foreign currency translation The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Estimates and judgements are continually evaluated and are based on historical experience as adjusted for current market conditions and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Further explanation as to estimates and assumptions made by the Group can be found in the following notes to the consolidated financial statements: The results and financial position of all the Group entities (none of which has the currency of a hyper- inflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency as follows: • Assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that balance sheet; • Income and expenses for each statement of comprehensive income are translated at average exchange rates (unless this average 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 rate on the dates of the transactions); and Area of Estimation Business Combinations – purchase price allocation Goodwill and Brand – assumptions underlying recoverable value Inventory – estimates of obsolescence Leases – judgment applied to lease term Taxation – provision for tax payable • All resulting exchange differences are Section recognised in other comprehensive income. 5.1 3.3 3.1.1 3.4 2.3 On consolidation, exchange differences arising from the translation of the net investment in foreign operations, and of borrowings and other currency instruments designated as hedges of such investments, are taken to shareholders’ equity. Changes in accounting policies Details about changes in accounting policies applied during the period are included in the following notes to the financial statements: Operating segments Earnings per share restatement New standards and interpretations first applied in the period Section 2.1 2.4 6.8 FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD32 33 1.3 Going Concern and the impact of COVID-19 On 11 March 2020 the World Health Organisation declared a global pandemic as a result of the outbreak and spread of COVID-19. Global restrictions on movement, travel and gatherings resulted in significant footfall reduction and the closure of our entire store network in late March with gradual reopening commencing in early May in most markets. As a result, the Group took decisive action to manage its liquidity and profitability specifically: • Reduced operating expenditure; • Deferred non-essential capital projects; • Suspended dividend payments; • Raised capital; and • Accessed government subsidies. In addition, the Group obtained support from its bank syndicate in the form of a waiver of the current covenant measurements until 31 July 2021 measurement point. In April 2020 the Group completed a successful $207 million equity raising to strengthen its balance sheet and liquidity position in response to the COVID-19 pandemic. The capital raise, strong trading performance and cash generation in key markets has reduced net debt to $9.4 million (excluding lease liabilities) at balance date. There remains continued uncertainty over future economic conditions and further COVID-19 outbreaks however the Group has $377 million of liquidity to manage this uncertainty. Based on the additional capital secured, including an earlier reopening and a significantly stronger trading performance above our COVID-19 forecasts made in April, the Board considers that compliance with financial covenants will continue to be met for at least the next 12 months from approving these consolidated financial statements (refer note 4.1). The ongoing uncertainties discussed, and other economic effects of the pandemic have been considered in the Group’s key estimates and judgements as disclosed in the following notes: • Intangible assets - the ability to achieve future forecasts and the consequential impacts on the carrying value of goodwill and other finite life intangibles (refer note 3.3). • Receivables - the ability of wholesale customers to pay (refer note 3.1.3.) • Leases – certain landlords have provided the Group with rent concessions (refer note 2.2). Considering the above, the Board has reviewed the operating and cash flow forecasts for the three-year period to 2023. The Board is satisfied based on their review of these financial forecasts that during the period to at least 12 months from the approving of the consolidated financial statements there will be adequate cash flows generated from operating and financing activities to meet the obligations of the Group. Section 2 Results for the Year In this section This section focuses on the results and performance of the Group. On the following pages you will find disclosures explaining the Group’s results for the year, segmental information, taxation and earnings per share. 2.1 Segment information An operating segment is a component of an entity that engages in business activities which earns revenue and incurs expenses and where the chief decision maker reviews the operating results on a regular basis and makes decisions on resource allocation. Following the acquisition of Rip Curl Group Pty Limited in October 2019 the Group has three operating segments. These operating segments have been determined based on the reports reviewed by the Group Chief Executive Officer and Group Executive Management team. Outdoor – including the Kathmandu and Oboz brands. This segment designs, markets, retails and wholesales apparel, footwear and equipment for outdoor travel and adventure. Surf – including the Rip Curl brand. This segment designs, manufactures, wholesales and retails surfing equipment and apparel. The Corporate segment represents group costs, holding companies and consolidation eliminations and constitutes other business activities that do not fall within outdoor or surf segments. 31 July 2020 Sales from external customers EBITDA Depreciation and amortisation EBIT Income tax expense Total segment assets Total assets includes: Non-current assets Additions to non-current assets Total segment liabilities 31 July 2019 Sales from external customers EBITDA Depreciation and amortisation EBIT Income tax expense Total segment assets Total assets includes: Non-current assets Additions to non-current assets Total segment liabilities Outdoor NZ$’000 485,785 128,192 63,291 64,901 16,962 Surf NZ$’000 315,739 35,202 35,804 (602) 2,543 Corporate NZ$’000 - (14,503) 3,932 (18,435) (5,874) Total NZ$’000 801,524 148,891 103,027 45,864 13,631 750,026 388,222 435,184 1,573,432 503,162 43,446 309,539 Outdoor NZ$’000 538,855 102,542 15,088 87,454 24,188 483,038 337,441 15,696 152,006 396,691 1,035,243 135,390 14,279 243,655 Surf NZ$’000 Corporate NZ$’000 - 241,036 - (2,977) 184 (3,161) (443) 57,725 794,230 Total NZ$’000 538,855 99,565 15,272 84,293 23,745 111,515 594,553 108,939 - 485 446,380 15,696 152,491 - - - - - - - - - FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD34 35 EBITDA represents earnings before income taxes (a non-GAAP measure), excluding interest income, interest expense, depreciation and amortisation, as reported in the financial statements. EBIT represents EBITDA less depreciation and amortisation. EBITDA and EBIT are key measurement criteria on which operating segments are reviewed by the Group Chief Executive Officer and Group Executive Management team. Costs recharged between Group companies are calculated on an arms-length basis. The default basis of allocation is % of revenue with other bases being used where appropriate. Sales from external customers by geographical area Australia New Zealand North America UK and Europe Asia Rest of World 2020 NZ$’000 449,930 133,696 131,244 53,386 25,653 7,615 2019 NZ$’000 334,532 136,950 63,840 3,533 - - 801,524 538,855 Non-current assets by geographical area Australia New Zealand North America UK and Europe Asia Rest of World 2020 NZ$’000 695,389 171,075 143,618 16,425 7,057 1,679 2019 NZ$’000 230,827 105,523 110,024 6 - - 1,035,243 446,380 2.2 Profit before tax Revenue recognition The Group recognises revenue from the sale of footwear, clothing and equipment for surfing and the outdoors and brand licencing arrangements. Revenue comprises the fair value of the consideration received or receivable for the sale of goods and brand licences, excluding Goods and Services Tax and discounts, and after eliminating sales within the Group. Retail Sales Royalty Revenue Lease expense For sales of goods to retail customers, revenue is recognised when control of the goods has transferred, being at the point the customer purchases the goods at a retail outlet. Payment of the transaction price is due immediately at the point the customer purchases the goods. Online Sales For online sales, revenue is recognised when control of the goods has transferred to the customer, being at the point the goods are delivered to the customer. Delivery occurs when the goods have been shipped to the customer’s specific location. When the customer initially purchases the goods online, the transaction price received by the Group is recognised as a contract liability until the goods have been delivered to the customer. Wholesale Sales For sales to the wholesale market, revenue is recognised when control of the goods has transferred, being when the goods have been shipped to the wholesaler’s specific location (delivery). Following delivery, the wholesaler has full discretion over the manner of distribution and price to sell the goods, has the primary responsibility when onselling the goods and bears the risks of obsolescence and loss in relation to the goods. A receivable is recognised by the Group when the goods are delivered to the wholesaler as this represents the point in time at which the right to consideration becomes unconditional, as only the passage of time is required before payment is due. Sales Returns Under the Group’s standard contract terms, customers have a right of return within 30 days. At the point of sale, a refund liability and a corresponding adjustment to revenue is recognised for those products expected to be returned. The Group uses its accumulated historical experience to estimate the number of returns on a portfolio level using the expected value method. It is considered highly probable that a significant reversal in the cumulative revenue recognised will not occur given the consistent level of returns over previous years. Royalty revenue from brand license arrangements is recognised based on a right to access the license. Revenue is recognised over the contract period based on a fixed amount or reliable estimate of sales made by a licensee. The Group is a lessee. Refer to section 3.4 for further details around the group’s leases and lease accounting policies. Lease amounts recognised in the consolidated statement of comprehensive income: Sale of goods Royalty revenue Commission revenue 2020 NZ$’000 797,410 3,848 266 2019 NZ$’000 538,855 - - 801,524 538,855 Note 2.1 provides a breakdown of revenue by operating segment and geographical area. Other Income Government grants GST refund Other 2020 NZ$’000 26,781 - 588 27,369 - 1,107 23 1,130 Government grants that compensate the Group for expenses incurred are recognised as revenue in the statement of comprehensive income on a systematic basis in the same period in which the expenses are recognised. In the current period Government grants relate to wage and other subsidies received in response to the impact of COVID-19. Government grants of $5,615,016 relating to the current year are receivable at balance date and have been included in other receivables and prepayments in Note 3.1.3. GST refund relates to a refund received resulting from the treatment of GST on reward vouchers. Employee entitlements Wages, salaries and other short term benefits Post-employment benefits Employee share based remuneration 2020 NZ$’000 2019 NZ$’000 167,161 86,325 8,629 378 4,989 721 176,168 92,035 Rent expenses Short-term lease expense Low-value lease expense Variable lease expense Lease outgoings Depreciation right-of-use asset 2019 NZ$’000 Interest expense related to lease liabilities 2020 NZ$’000 2019 NZ$’000 - 69,187 3,872 1,277 532 16,480 75,835 8,855 - 211 - - - - 106,851 69,398 Some of the property leases in which the Group is the lessee contain variable lease payment terms that are linked to sales generated from the leased stores. Variable payment terms are used to link rental payments to store cash flows and reduce fixed cost. Overall the variable payments constitute up to 0.5% of the Group's entire lease payments. The variable payments depend on sales and consequently on the overall economic development over the next few years. Taking into account the development of sales expected over the next 3 years, variable rent expenses are expected to continue to present a similar proportion of store sales in future years. The Group has adopted the practical expedient in paragraph 46A of NZ IFRS 16 and elected not to account for any rent concessions granted as result of the COVID-19 pandemic as a lease modification. The amount recognised in profit or loss due to changes in lease payments arising from such concessions was $5 million which has been recognised within the selling, administration and general expenses in the consolidated statement of comprehensive income. The total cash outflow for leases amounts to NZ$95,892,000 (2019 NZ$68,986,000). FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD36 37 2.3 Taxation In order to understand how, in the consolidated statement of comprehensive income, a tax charge of $13,630,851 (2019: $23,744,580) arises on profit before income tax of $22,509,690 (2019: $81,377,631), the taxation charge that would arise at the standard rate of New Zealand corporate tax is reconciled to the actual tax charge as follows: Keeping it simple This section lays out the tax accounting policies, the current and deferred tax charges or credits in the year (which together make up the total tax charge or credit in the consolidated statement of comprehensive income), a reconciliation of profit before tax to the tax charge and the movements in deferred tax assets and liabilities. The Group is subject to income taxes in multiple jurisdictions. As result there is complexity and judgement involved in determining the worldwide provision for income taxes. Accounting policies Current and deferred income tax The tax expense for the period comprises current and deferred tax. Tax is recognised in the consolidated statement of comprehensive income, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is recognised in other comprehensive income or directly in equity, respectively. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet date in the countries where the Company and Company’s subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax liability is not recognised if it arises from the initial recognition of goodwill. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred income tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis. Goods and Services Tax (GST) The consolidated statement of comprehensive income and the consolidated statement of cash flows have been prepared so that all components are stated exclusive of GST. All items in the consolidated balance sheet are stated net of GST, with the exception of receivables and payables, which include GST invoiced. Taxation – Consolidated statement of comprehensive income The total taxation charge in the consolidated statement of comprehensive income is analysed as follows: 2020 NZ$’000 2019 NZ$’000 17,049 (3,418) 23,206 539 13,631 23,745 Current income tax charge Deferred income tax charge / (credit) Income tax charge reported in the consolidated statement of comprehensive income Profit before income tax Income tax calculated at 28% Adjustments to taxation: Adjustments due to different rate in different jurisdictions Non-taxable income Expenses not deductible for tax purposes Tax legislation enacted for employee share schemes Utilisation of tax losses by group companies Tax expense transferred to foreign currency translation reserve Adjustments in respect of prior years Tax losses not recognised Income tax charge reported in the consolidated statement of comprehensive income 2020 NZ$’000 22,510 6,303 (91) (1,015) 4,560 - (38) (13) 274 3,651 13,631 2019 NZ$’000 81,378 22,786 741 (327) 1,152 (506) - 2 (130) 27 23,745 Adjustments for prior periods primarily arise where an outcome is obtained on certain tax matters which differs from expectations held when the related provision was made. Where the outcome is more favourable than the provision made, the difference is released, lowering the current year tax charge. Where the outcome is less favourable than the provision, an additional charge to the current year tax will occur. The tax charge / (credit) relating to components of other comprehensive income is as follows: Movement in cash flow hedge reserve before tax Tax impact relating to cash flow hedge reserve Movement in cash flow hedge reserve after tax Foreign currency translation reserve before tax Tax credit / (charge) relating to foreign currency translation reserve Movement in foreign currency translation reserve after tax Other reserves before tax Tax credit / (charge) relating to other reserves Movement in other reserves after tax Total other comprehensive income/(expense) before tax Total tax credit / (charge) on other comprehensive income Total other comprehensive income/(expense) after tax Current tax Deferred tax Total tax credit / (charge) on other comprehensive income 2020 NZ$’000 (13,162) 3,903 (9,259) 259 - 259 (61) - (61) (12,964) 3,903 (9,061) - 3,903 3,903 2019 NZ$’000 13 607 620 (3,297) - (3,297) - - - (3,284) 607 (2,677) - 607 607 FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD38 39 Taxation – Balance sheet Unrecognised deferred tax assets 2.4 Earnings per share The following are the major deferred taxation liabilities and assets recognised by the Group and movements thereon during the current and prior year: Deferred tax assets have not been recognised in respect of the following items; As at 31 July 2018 Recognised in the consolidated statement of comprehensive income Recognised in other comprehensive income Recognised directly in equity Exchange differences As at 31 July 2019 Recognised in the consolidated statement of comprehensive income Recognised in other comprehensive income Recognised directly in equity Deferred tax on transition to NZ IFRS 16 Deferred tax on business combinations (Note 5.1) Exchange differences As at 31 July 2020 Tax depreciation NZ$’000 Employee obligations NZ$’000 Intangibles NZ$’000 Leases NZ$’000 205 16 - - (2) 219 3,123 (54,923) (523) 51 - (253) (68) - - 868 2,279 (54,004) - - - - - - Other temporary differences NZ$’000 Reserves NZ$’000 Total NZ$’000 6,965 (1,603) (46,233) (83) - (539) - - (231) 607 607 - - (253) 567 6,651 (996) (45,851) (2,356) (695) 1,402 422 4,645 - 3,418 - - - - (87) - - - - 4,053 1,963 (62,598) (33) 33 (687) - - 10,813 - 13 - - - 3,337 271 3,903 3,903 - - - - (87) 10,813 (53,245) (403) 1,883 3,493 (115,887) 11,248 14,904 2,907 (81,452) The deferred tax balance relates to: • Property, plant and equipment temporary differences arising on differences in accounting and tax depreciation rates • Employee benefit accruals • Brands and customer relationships • Unrealised foreign exchange gain/loss on intercompany loans • Realised gain/loss on foreign exchange contracts not yet charged in the consolidated statement of comprehensive income • • Lease accounting Inventory provisioning • Temporary differences on the unrealised gain/loss in hedge reserve • Employee share schemes • Other temporary differences on miscellaneous items Deductible temporary differences Tax losses 2020 NZ$’000 2,060 2019 NZ$’000 - 18,370 20,430 3,609 3,609 The deductible temporary differences do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of overseas subsidiaries where it is not yet probable that future taxable profit will be generated in those territories to utilise these benefits. Imputation credits 2020 NZ$’000 (6,743) 2019 NZ$’000 1,615 Imputation credits available for use in subsequent reporting periods based on a tax rate of 28% The above amounts represent the balance of the imputation account as at the end of July 2020, adjusted for: • • • Imputation credits that will arise from the payment of the amount of the provision for income tax; Imputation debits that will arise from the payment of dividends recognised as a liability at the reporting date; and Imputation credits that will arise from the receipt of dividends recognised as receivables at the reporting date. Tax payments of $6,808,421 have been financed at year end which once transferred to the Inland Revenue Department will result in a positive imputation balance. The balance of Australian franking credits able to be used by the Group in subsequent periods as at 31 July 2020 is A$2,691,472 (2019: A$6,513,756). Keeping it simple Earnings per share (‘EPS’) is the amount of post-tax profit attributable to each share. Basic EPS is calculated by dividing the profit after tax attributable to equity holders of the Company of NZ$8,144,784 (2019: NZ$57,633,052) by the weighted average number of ordinary shares in issue during the year of 493,346,733 (2019: 359,600,086). Diluted EPS reflects any commitments the Group has to issue shares in the future that would decrease EPS. In 2020, these are in the form of share options / performance rights. To calculate the impact it is assumed that all share options are exercised / performance rights taken, and therefore, adjusting the weighted average number of shares. Weighted average number of basic ordinary shares in issue Adjustment for: - Share options / performance rights 2020 ’000 Restated 2019 ’000 493,347 359,600 1,235 1,966 494,582 361,566 The Group has restated the prior year basic and diluted EPS to reflect the impact of the implied bonus element on shares issued during the year (Note 4.3.1). In October 2019 shares were issued as result of an institutional and retail entitlement offer and share placement at an issue price of NZ$2.55, representing a 14.4% discount to the NZ$2.98 volume weighted average price (ex-dividend) of Kathmandu’s shares traded on the NZX for the last five trading days prior to 1 October 2019, and a 13.6% discount to the theoretical ex-entitlement price of NZ$2.95. In April 2020 shares were issued as result of an institutional and retail entitlement offer and share placement at an issue price of NZ$0.50, representing a 51.0% discount to the NZ$1.02 NZX closing price on 30 March 2020, and a 30.6% discount to the theoretical ex-entitlement price of NZ$0.72. FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD40 41 Section 3 Operating Assets and Liabilities In this section This section shows the assets used to generate the Group’s trading performance and the liabilities incurred as a result. Liabilities relating to the Group’s financing activities are addressed in Section 4. Deferred tax assets and liabilities are shown in note 2.3. Keeping it simple Working capital represents the assets and liabilities the Group generates through its trading activity. The Group therefore defines working capital as inventory, cash, trade and other receivables, other financial assets, trade and other payables and other financial liabilities. 3.1 Working capital 3.1.1 Inventory Accounting policies Inventories are stated at the lower of cost and net realisable value. Cost is determined on a weighted average cost method and includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of production overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses. Inventory is considered in transit when the risk and rewards of ownership have transferred to the Group. The Group assesses the likely residual value of inventory. Stock provisions are recognised for inventory which is expected to sell for less than cost and also for the value of inventory likely to have been lost to the business through shrinkage between the date of the last applicable stocktake and balance sheet date. In recognising the provision for inventory, judgement has been applied by considering a range of factors including historical results, stock shrinkage trends and product lifecycle. Inventory is broken down into trading stock and goods in transit below: 2020 NZ$’000 2019 NZ$’000 Raw materials and consumables Work in progress Trading stock Goods in transit 2,528 2,397 - - 209,958 105,161 13,910 17,612 228,793 122,773 Inventory has been reviewed for obsolescence and a provision of $4,579,854 (2019: $294,742) has been made. The acquired inventory obsolescence provision recognised on acquisition of the Rip Curl entities was $1,997,523. 3.1.2 Cash and cash equivalents Cash on hand Cash at bank Short term investments convertible to cash 2020 NZ$’000 2019 NZ$’000 482 230,429 974 192 6,038 - 231,885 6,230 The carrying amount of the Group's cash and cash equivalents are denominated in the following currencies: NZD AUD USD EUR THB IDR BRL Other currencies 32,330 163,503 22,275 6,108 3,371 1,706 1,126 1,466 231,885 738 2,832 2,238 116 - - - 306 6,230 3.1.3 Trade and other receivables Accounting policies Trade and other receivables are recognised initially at the value of the invoice sent to the customer (fair value) and subsequently at the amounts considered recoverable (amortised cost). The collectability of trade and other receivables is reviewed on an on-going basis. An allowance for lifetime expected credit losses is recognised for trade and other receivables based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate. The expected credit loss is estimated as the difference between all contractual cash flows that are due to the Group in accordance with the contract and all the cash flows that the Group expects to receive, discounted at the original effective interest rate. NZD AUD USD EUR GBP CAD BRL THB IDR JPY Other currencies 3.1.4 Credit risk 2020 NZ$’000 2019 NZ$’000 5,101 20,853 22,466 13,258 1,650 2,326 2,991 4,406 1,997 2,246 319 2,097 1,935 9,326 - 140 708 - - - - - 77,613 14,206 Current Trade receivables Allowance for expected credit losses Other receivables and prepayments Non-current Other debtors 2020 NZ$’000 2019 NZ$’000 62,143 (10,329) 9,734 (115) 21,854 4,587 73,668 14,206 3,945 3,945 - - Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Risk Credit risk Exposure arising from Cash and cash equivalents Trade and other receivables Derivative financial instruments Monitoring Management Credit ratings, aging analysis and review of exposure within regular terms of trade Credit is given to customers following obtaining credit rating information, confirming references and setting appropriate credit limits The acquired allowance for expected credit losses recognised on acquisition of the Rip Curl entities was $5,638,857. Other non-current debtors includes debtors on extended credit terms and security deposits paid in relation to store leases. The carrying amount of the Group’s trade and other receivables are denominated in the following currencies: Exposure to credit risk The below balances are recorded at their carrying amount after any allowance for expected credit loss on these financial instruments. The maximum exposure to credit risk at reporting date was (carrying amount): Cash and cash equivalents Trade receivables Other receivables Derivative financial instruments 2020 NZ$’000 231,403 51,814 12,866 (7,361) 2019 NZ$’000 6,038 9,619 1,741 4,842 288,722 22,240 FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD42 43 As at balance sheet date the carrying amount is also considered to approximate fair value for each of the financial instruments. The credit quality of cash and cash equivalents can be assessed by reference to external credit ratings (if available) or to historical information about counterparty default rates: Cash and cash equivalents; Standard & Poors - AA- Standard & Poors - A+ Standard & Poors - A Standard & Poors - A- Standard & Poors - BBB+ Standard & Poors - BBB- Standard & Poors - BB Standard & Poors - BB- 2020 NZ$’000 2019 NZ$’000 207,811 3,783 14,008 1,567 - 3,822 1,790 1,282 1,123 - - 1,861 394 - - - Total cash and cash equivalents 231,403 6,038 Trade and other receivables consist of a large number of customers spread across diverse geographical areas. As at balance sheet date, trade and other receivables of NZ$27,495,000 (2019: NZ$848,000) were past due. A provision of NZ$10,329,000 (2019: NZ$115,000) is held against these overdue amounts. Interest is charged on overdue debtors in some instances. The ageing analysis of these past due trade receivables is: 0 to 30 days 30 to 60 days 60 to 90 days 90 days and over 2020 NZ$’000 2019 NZ$’000 4,825 3,503 7,394 11,773 27,495 548 217 73 10 848 payables are initially measured at fair value and subsequently measured at amortised cost, using the effective interest method. The carrying value of trade payables is considered to approximate fair value as amounts are unsecured and are usually paid by the 30th of the month following recognition. Employee entitlements relates to benefits accruing to employees in respect of wages and salaries, annual leave, and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Provisions made in respect of employee benefits expected to be settled within 12 months are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Provisions made in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to the reporting date. Current Trade payables Employee entitlements Sundry creditors and accruals Other Provisions Non-Current Employee entitlements Other Provisions 2020 NZ$’000 2019 NZ$’000 63,939 21,357 54,912 3,490 143,698 3,069 11,344 14,413 30,504 8,582 34,397 1,077 74,560 - - - The carrying amount of the Group's trade and other payables are denominated in the following currencies: Due to COVID-19 credit terms have been extended for some customers which has impacted the aging analysis above. 3.1.5 Trade and other payables Accounting policies NZD AUD USD EUR BRL THB IDR Trade payables, sundry creditors and accruals principally comprise amounts outstanding for trade purchases and ongoing costs. Trade and other Other currencies 2020 NZ$’000 2019 NZ$’000 19,351 83,997 30,046 14,944 3,041 3,523 2,052 1,156 11,227 40,475 22,042 137 - - - 679 158,110 74,560 Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. The warranties provision represents the present value of the estimated future outflow of economic benefits that will be required under the Group’s obligations for warranties under local sale of goods legislation. The provision relates to wetsuits, watches and footwear and is based on estimates made from historical warranty data associated with similar products and services. A restructuring provision is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly at balance date. Lease restoration provision represents the present value of the estimated cost to restore leased properties to their original condition upon expiry of the lease. Other provisions relate to other miscellaneous amounts that meet the definition of a provision but do not fall into any of the other categories. Warranties NZ$’000 Restructuring NZ$’000 Lease restoration NZ$’000 Other NZ$’000 Balance at 31 July 2018 Additional provisions recognised Provisions used during the year Provisions re-measured during the year Foreign exchange Balance at 31 July 2019 As at 31 July 2019 Current Non-current Balance at 31 July 2019 Provision recognised on acquisition (Note 5.1) Provisions recognised on adoption of NZ IFRS 16 Additional provisions recognised Provisions used during the year Provisions re-measured during the year Foreign exchange Balance at 31 July 2020 As at 31 July 2020 Current Non-current - - - - - - - - - - - - - - - - - - - - Total NZ$’000 1,153 174 (129) (97) (24) 535 - (129) - - 406 1,077 406 - 406 1,077 - 1,077 618 174 - (97) (24) 671 671 - 671 671 406 1,077 1,168 - 478 (296) (14) 13 2,541 - 1,367 (2,303) - 70 5,453 4,686 633 (191) (325) 121 1,349 1,675 11,048 1,349 - 1,349 1,675 - 1,675 193 10,855 11,048 - - 364 - - (8) 762 273 489 762 9,162 4,686 2,842 (2,790) (339) 196 14,834 3,490 11,344 14,834 FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD44 45 3.2 Property, plant and equipment Keeping it simple The following section shows the physical assets used by the Group to operate the business, generating revenues and profits. These assets include store and office fit-out, as well as equipment used in sales and support activities. Assets are recognised only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. Accounting policies Depreciation Property, plant and equipment All property, plant and equipment are stated at historical cost less depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Cost may also include transfers from equity of any gains/losses on qualifying cash flow hedges of foreign currency purchases of property, plant and equipment. The assets’ residual value and useful lives are reviewed and adjusted if appropriate at each balance sheet date. Capital work in progress is not depreciated until available for use. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Depreciation of property, plant and equipment is calculated using straight line and diminishing value methods so as to expense the cost of the assets over their useful lives. The rates are as follows: Buildings and leasehold improvements Office, plant and equipment Furniture and fittings Computer equipment 5 – 50% 5 – 50% 10 – 50% 10 – 60% Impairment of assets Property, plant and equipment is reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. Property, plant and equipment can be analysed as follows: Year ended 31 July 2019 Opening net book value Additions Disposals Depreciation charge Exchange differences Closing net book value As at 31 July 2019 Cost Accumulated depreciation Closing net book value Land and Buildings NZ$’000 Leasehold improvement NZ$’000 Office, plant and equipment NZ$’000 Furniture and fittings NZ$’000 Computer equipment NZ$’000 Total NZ$’000 - - - - - - - - - 29,949 5,690 (394) (6,962) (776) 12,332 554 (7) (930) (419) 19,101 4,447 (383) (3,394) (597) 2,132 654 (18) (634) (26) 63,514 11,345 (802) (11,920) (1,818) 27,507 11,530 19,174 2,108 60,319 67,974 (40,467) 27,507 17,936 (6,406) 41,726 (22,552) 11,530 19,174 9,633 (7,525) 2,108 137,269 (76,950) 60,319 Land and Buildings NZ$’000 Leasehold improvement NZ$’000 Office, plant and equipment NZ$’000 Furniture and fittings NZ$’000 Computer equipment NZ$’000 Total NZ$’000 - 15 6,475 (305) (370) - (188) 5,627 9,722 (4,095) 5,627 27,507 6,478 8,286 (621) (7,802) - 182 11,530 3,108 3,603 (474) (2,581) (289) 199 19,174 5,059 16,440 (1,632) (7,670) 289 123 2,108 739 2,725 60,319 15,399 37,529 (96) (3,128) (1,230) (19,653) - (60) - 256 34,030 15,096 31,783 4,186 90,722 97,400 45,612 99,855 20,251 272,840 (63,370) (30,516) (68,072) (16,065) (182,118) 34,030 15,096 31,783 4,186 90,722 Sale of property, plant and equipment Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the consolidated statement of comprehensive income. 2020 NZ$’000 2019 NZ$’000 370 7,802 2,581 7,670 1,230 - 6,962 930 3,394 634 19,653 11,920 Loss on sale of property, plant and equipment 2020 NZ$’000 3,069 2019 NZ$’000 801 Year ended 31 July 2020 Opening net book value Additions Acquisition of businesses (Note 5.1) Disposals Depreciation charge Transfers between categories Exchange differences Closing net book value As at 31 July 2020 Cost Accumulated depreciation Closing net book value Depreciation Land and buildings Leasehold improvement Office, plant and equipment Furniture and fittings Computer equipment Total property, plant and equipment depreciation Depreciation expenditure is excluded from administration and general expenses in the consolidated statement of comprehensive income. Capital commitments Capital commitments contracted for at balance sheet date include property, plant and equipment of NZ$974,531 (2019: NZ$1,877,276). FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD46 47 3.3 Intangible assets Keeping it simple The following section shows the non-physical assets used by the Group to operate the business, generating revenues and profits. These assets include brands, customer relationship, software development and goodwill. This section explains the accounting policies applied and the specific judgements and estimates made by the Directors in arriving at the net book value of these assets. Accounting policies Goodwill Goodwill arises on the acquisition of subsidiaries. Goodwill represents the excess of the cost of the acquisition over the Group’s interest in the net fair value of the assets and liabilities of the acquiree. Separately recognised goodwill is tested annually for impairment or more frequently if events or changes in circumstances indicate that it might be impaired. It is carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash- generating units that are expected to benefit from the business combination in which the goodwill arose. Brand Acquired brands are carried at original cost based on independent valuation obtained at the date of acquisition. The brand represents the price paid to acquire the rights to use the Kathmandu, Oboz or Rip Curl brand. The brand is not amortised. Instead the brand is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired and is carried at cost less accumulated impairment losses. Customer Relationship Acquired customer relationships are carried at original cost based on independent valuation obtained at the date of acquisition less accumulated amortisation. They are amortised on a straight line basis over a useful life of 5-10 years. The estimated useful life and amortisation period is reviewed at the end of each annual reporting period. Software costs Software costs have a finite useful life. Software costs are capitalised and written off over the useful economic life. Costs associated with developing or maintaining computer software programs are recognised as an expense when incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. Direct costs include the costs of software development employees. Software is amortised using straight line and diminishing value methods at rates of 20-67%. Other intangibles Other intangibles relate to lease rights expenditure associated with acquiring existing lease agreements for stores where there is an active market for key money. They are carried at original cost less accumulated impairment losses. Other intangibles have an indefinite useful life and are tested annually for impairment. Impairment Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Intangible assets that have an indefinite useful life, including goodwill, are not subject to amortisation and are tested annually for impairment irrespective of whether any circumstances identifying a possible impairment have been identified. 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 of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows e.g. cash generating units. Intangible assets Year ended 31 July 2019 Opening net book value Additions Disposals Amortisation Exchange differences Closing net book value As at 31 July 2019 Cost Accumulated amortisation/impairment Closing net book value Year ended 31 July 2020 Opening net book value Additions Acquisition of businesses (Note 5.1) Disposals Amortisation Exchange differences Closing net book value As at 31 July 2020 Cost Accumulated amortisation/impairment Closing net book value Goodwill NZ$’000 Brand NZ$’000 Customer Relationship NZ$’000 Software NZ$’000 Other Intangibles NZ$’000 Total NZ$’000 189,308 187,928 1,747 - - - - - - 7,923 4,351 (13) - - (184) (3,168) 1,013 (2,847) 55 (52) 190,321 185,081 1,618 9,041 191,592 185,081 1,868 33,206 (1,271) - (250) (24,165) 190,321 185,081 1,618 9,041 190,321 185,081 - - 84,274 169,687 - - - - 1,618 - 39,697 - 9,041 4,463 917 - (3,932) (3,607) (193) 2,355 (101) 17 - - - - - - - - - - - 386,906 4,351 (13) (3,352) (1,831) 386,061 411,747 (25,686) 386,061 386,061 4,463 2,883 297,458 - - 57 - (7,539) 2,135 274,402 357,123 37,282 10,831 2,940 682,578 275,673 357,123 41,495 58,943 4,552 737,786 (1,271) - (4,213) (48,112) (1,612) (55,208) 274,402 357,123 37,282 10,831 2,940 682,578 Sale of intangibles Impairment tests for goodwill and brand Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the consolidated statement of comprehensive income. Loss on sale of intangibles 2020 NZ$’000 2019 NZ$’000 - 13 The aggregate carrying amounts of goodwill and brand allocated to each unit for impairment testing are as follows: Goodwill Brand 2020 NZ$’000 2019 NZ$’000 2020 NZ$’000 2019 NZ$’000 45,484 45,484 51,000 51,000 76,496 75,564 99,140 96,034 68,239 69,273 37,479 38,047 84,183 - 169,504 - 274,402 190,321 357,123 185,081 Kathmandu New Zealand Kathmandu Australia Oboz Rip Curl FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD48 49 For the purposes of goodwill and brand impairment testing, the Group operates as four groups of cash generating units, Kathmandu New Zealand, Kathmandu Australia, Rip Curl and Oboz. The recoverable amount of each cash generating unit has been determined based on the fair value less cost of disposal (FVLCOD). Five year projected cash flows are used to determine the FVLCOD. The terminal growth rate assumption is based on a conservative estimate considering the current inflation targets and do not exceed the historical long-term average growth rate for each CGU. Pre- tax discount rates are calculated based on a market participant expected capital structure and cost of debt to derive a weighted average cost of capital. We note that while the sensitivity of key assumptions provided above would not result in an impairment in each case, it is possible that they could occur in a combination. Furthermore, the CGU with the lowest headroom is the Oboz CGU. Prior to COVID-19 the Oboz CGU achieved year on year double digit revenue and EBITDA growth percentages. For impairment testing purposes cash flows for FY21 are lower than those achieved in FY20 with an expected recovery in FY22 to levels similar to FY19. Beyond FY22 it is assumed that historical growth percentages resume. Oboz revenue is forecast to grow at an annual compound growth rate of approximately 15% through to the terminal year in FY25. Prior to the impact of COVID-19 the CGU achieved an annual compound growth rate of 29% from FY17-FY19. The calculations confirmed that there was no impairment of goodwill and brand during the year (2019: nil). The Board believes that any reasonably possible change in the key assumptions used in the calculations would not cause the carrying amount to exceed its recoverable amount. The expected continued promotion and marketing of the Kathmandu, Oboz and Rip Curl brands supports the assumption that the brand has an indefinite life. Capital commitments Capital commitments contracted for at balance sheet date include intangible assets of NZ$709,417 (2019: NZ$703,611). The discounted cash flow valuations were calculated using post tax cash flow projections based on financial budgets prepared by management and approved by the Board for the year ended 31 July 2021. Cash flows beyond July 2021 have been extrapolated based on historical results and a return to pre COVID-19 levels of sales and EBITDA margin over the near to medium term. The Group engaged an external valuer to perform the valuation of the Rip Curl CGU as at 31 July 2020 using the post tax cash flow projections approved to the Board for the year ending 31 July 2021 and the three year plan that extrapolates cash flows based on historic results and a return to pre-COVID-19 levels of sales and EBITDA margin over the near to medium term. The key assumption used: • The FVLCOD model assumes an economic downturn in the 2021 financial year and a return to more normalised trading conditions previously experienced in 2022 and beyond. The Group believes the assumptions used in cash flows reflect a combination of the Groups experience and uncertainty associated with COVID-19. • While temporary store and market closures may impact short term results, these are not expected to impact the long-term performance of each CGU. Several scenarios have been assessed where trading conditions do not normalise until the 2024 financial year, in each scenario the fair value for the CGU exceeds the carrying value. Other assumptions used: Pre tax discount rate 2020 2019 11.5% 11.2% Terminal growth rate 2020 1.0% 2019 1.0% 11.4% 10.5% 1.0% 1.0% 13.2% - 11.8% 12.7% 1.5% 1.0% - 1.0% Kathmandu New Zealand CGU Kathmandu Australia CGU Rip Curl CGU Oboz CGU 3.4 Leases Keeping it simple The following section shows the assets leased by the Group to operate the business, generating revenues and profits. These assets include the lease of retail stores. This section explains the accounting policies applied and the specific judgements and estimates made by the Directors in arriving at the carrying value of these assets and the corresponding lease liability. Accounting policies The Group assesses whether a contract is or contains a lease, at inception of a contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a term of 12 months or less) and leases of low value assets. For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Lease Liability The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the Group uses its incremental borrowing rate. The Group's incremental borrowing rate has been determined as the rate of interest that the Group would have to pay to borrow over a similar term and with a similar security the funds necessary to obtain an asset of a similar value to the right- of-use asset in a similar economic environment. Lease payments included in the measurement of the lease liability comprise: • fixed lease payments (including in-substance fixed payments), less any lease incentives; and • variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made. The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever; • • the lease term has changed in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate; the lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used); • a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. Right of Use Asset The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Whenever the Group incurs an obligation for costs to dismantle and remove a leased asset, restore the site on which it is located or restore the underlying asset to the condition required by the terms and conditions of the lease, a provision is recognised and measured under NZ IAS 37. The costs are included in the related right-of-use asset. Right-of-use assets are depreciated over the shorter period of the lease term and useful life of the underlying asset. The depreciation starts at the commencement date. FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD50 51 The Group applies NZ IAS 36 Impairment of Assets to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss. 3.4.2 Lease liabilities Reconciliation of operating lease commitments to lease liabilities recognised on initial application; Variable Rents Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognised as an expense in the period in which the event or condition that triggers those payments occurs and are included in the selling expenses line in the consolidated statement of comprehensive income. Group as a lessee The Group leases several assets including buildings and motor vehicles. Some of the existing lease arrangements have right of renewal options for varying terms. Renewal options are included within the lease liability if they are within 2 years and the Group is reasonably certain to take up the option. The average lease term including rights of renewal is 8 years. 3.4.1 Right-of-use assets Operating lease commitment as at 31 July 2019 Above discounted using incremental borrowing rate as of 1 August 2019 Recognition exemption for short term leases Adjustments as result of different treatment of renewal options Lease contracts committed to but not yet available for use Lease liabilities as at 1 August 2019 NZ$'000 206,476 193,682 (318) 28,281 (6,256) 215,389 The weighted average incremental borrowing rate applied to lease liabilities recognised in the consolidated balance sheet at 1 August 2019 is 3.05%. The movements in lease liabilities for the year ended 31 July 2020 were as follows: The movements in right of use assets for the year ended 31 July 2020 were as follows: Opening lease liabilities 1 August 2019 Opening carrying amount 1 August 2019 Movements on transition Additions Right-of-use assets recognised on acquisition (Note 5.1) Depreciation for the period Impairment of right-of-use assets Exchange differences Closing carrying amount 31 July 2020 Cost Accumulated depreciation and impairment Closing carrying amount 31 July 2020 NZ$'000 - 178,774 37,863 117,296 (75,835) (2,050) 1,950 257,998 335,692 (77,694) 257,998 Movements on transition Additions Lease liabilities recognised on acquisition (Note 5.1) Interest expense related to lease liabilities Repayment of lease liabilities (including interest) Exchange differences Closing lease liabilities 31 July 2020 Lease liability maturity analysis Within one year One to five years Beyond five years Total Current Non-current Total NZ$'000 - 215,389 37,811 118,564 8,855 (85,545) 2,849 297,923 NZ$’000 77,579 172,340 48,004 297,923 77,579 220,344 297,923 Section 4 Capital Structure and Financing Costs In this section This section outlines how the Group manages its capital structure and related financing costs, including its balance sheet liquidity and access to capital markets. Capital structure is how a company finances its overall operations and growth by using different sources of funds. The Directors determine and monitor the appropriate capital structure of the Group, specifically how much is raised from shareholders (equity) and how much is borrowed from financial institutions (debt) in order to finance the Group’s activities both now and in the future. The Directors consider the Group’s capital structure and dividend policy at least twice a year ahead of announcing results and do so in the context of its ability to continue as a going concern, to execute strategy and to deliver its business plan. 4.1 Interest bearing liabilities Accounting policies Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the consolidated statement of comprehensive income over the period of the borrowings using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. The covenants entered into by the Group require specified calculations of Group earnings (excluding one-off transaction costs) before interest, tax, depreciation and amortisation (EBITDA) plus lease rental costs to exceed total fixed charges (net interest expense and lease rental costs) at the end of each half during the financial year. Similarly EBITDA (excluding one-off transaction costs) must be no less than a specified proportion of total net debt at the end of each six month interim period. The calculations of these covenants are specified in the bank facility agreement of 25 October 2019. The Group has obtained a waiver from its banking syndicate of the current covenants until the 31 July 2021 measurement point. The table below separates borrowings into current and non-current liabilities: The current interest rates, prior to hedging, on the term loans ranged between 1.00% - 1.25% (2019: 2.31% - 2.47%). Current portion Non-current portion Total term loans 2020 NZ$’000 2019 NZ$’000 - 241,270 241,270 - 25,500 25,500 Group Facility Agreement The Group has a multi-option syndicated facility agreement, with a term loan facility of A$220 million, a revolving cash advances facility of NZ$58 million and A$37 million, a trade finance sub-facility of A$30 million and NZ$10 million, and instruments sub-facility of A$20 million. All facilities are repayable in full on 30 November 2022. Interest is payable based on the BKBM rate (NZD borrowings), the BBSY rate (AUD borrowings), or the applicable short term rate for interest periods less than 30 days, plus a margin of up to 1.05%. The debt is secured by the assets of the guaranteeing group in accordance with the Security Trust Deed dated 25 October 2019. Paycheck Protection Program (PPP) loans As part of the US government response to COVID-19 the Group’s US resident companies applied for Paycheck Protection Program (PPP) loans of $4,200,632 (US $2,814,423). The Group believes that these entities met the criteria to qualify for the loans at the date of the application. The eligibility is subject to a possible audit by the federal government at which time the entities may be deemed not to be eligible. In the event of an unfavourable outcome of the forgiveness application the group would be required to repay the PPP loan as well as 1% interest on that loan from the period it was received until the date it was repaid. The Group believes that the US resident entities meet the criteria to qualify for the loan and future forgiveness. The PPP loan was initially received as a loan and once various criteria are met the Group can apply for forgiveness of that loan. Once forgiveness of the loan has been approved it will be recognised in the consolidated statement of comprehensive income, until that time it is recognised as a loan. FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD52 53 Reconciliation of movement in term loans Balance 31 July 2019 Net cash flow movement Foreign exchange movement Balance 31 July 2020 The principal of interest bearing liabilities is: Payable within 1 year Payable 1 to 2 years Payable 2 to 3 years Payable 3 to 4 years 4.1.1 Finance costs Interest income Interest expense on term debt Interest on lease liabilities Other finance costs Net exchange loss/(gain) on foreign currency NZ$’000 25,500 212,989 2,781 241,270 2020 NZ$’000 2019 NZ$’000 - 4,201 237,069 - 241,270 2020 NZ$’000 (449) 4,780 8,855 9,246 922 - - 15,000 10,500 25,500 2019 NZ$’000 (37) 1,877 - 886 189 Other finance costs relate to facility fees on banking arrangements and debt underwriting costs. 4.1.2 Cash flow and fair value interest rate risk Interest rate risk is the risk that fluctuations in interest rates impact the Group’s financial performance. Risk Exposure arising from Monitoring Management Interest rate risk Interest bearing liabilities at floating rates Cash flow forecasting Sensitivity analysis Interest rate swaps Refer to section 4.2 for notional principal amounts and valuations of interest rate swaps outstanding at balance sheet date. A sensitivity analysis of interest rate risk on the Group’s financial assets and liabilities is provided in the table below. At the reporting date the interest rate profile of the Group's banking facilities was (carrying amount): Total secured loans less Principal covered by interest rate swaps Net Principal subject to floating interest rates 2020 NZ$’000 241,270 (5,000) 236,270 2019 NZ$’000 25,500 (23,263) 2,237 Interest rate swaps have the economic effect of converting borrowings from floating to fixed rates. The cash flow hedge loss on interest rate swaps at balance sheet date was NZ$54,106 (2019: NZ$111,252). Summarised sensitivity analysis The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to interest rate risk. A sensitivity of 1% (2019: 1%) has been selected for interest rate risk. The 1% is based on reasonably possible changes over a financial year, using the observed range of historical data for the preceding five year period. Amounts are shown net of income tax. All variables other than applicable interest rates are held constant. The impact on equity is presented exclusive of the impact on retained earnings. 31 July 2020 Derivative financial instruments (asset) / liability Financial assets Cash Financial liabilities Borrowings Lease liabilities Total increase / (decrease) Financial assets Cash Financial liabilities Borrowings Total increase / (decrease) 4.1.3 Liquidity Risk Carrying amount NZ$’000 7,361 231,885 241,270 297,923 Carrying amount NZ$’000 (4,842) 6,230 25,500 -1% +1% Profit NZ$’000 (50) Equity NZ$’000 38 Profit NZ$’000 50 Equity NZ$’000 (37) (1,670) (1,670) 2,413 2,979 5,392 3,672 - - - - - 38 1,670 1,670 (2,413) (2,979) (5,392) (3,672) - - - - - (37) -1% +1% Profit NZ$’000 (235) Equity NZ$’000 154 Profit NZ$’000 235 Equity NZ$’000 (151) (45) (45) 255 255 (25) - - - - 154 45 45 (255) (255) 25 - - - - (151) Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Risk Liquidity risk Exposure arising from Monitoring Management Interest bearing and other liabilities Forecast and actual cash flows Active working capital management and flexibility in funding arrangements The Group has borrowing facilities of NZD $398,818,966 / AUD $370,104,000 (2019: NZD $140,729,053 AUD $132,060,000) and operates well within this facility. This includes short term bank overdraft requirements, and at balance sheet date no bank accounts were in overdraft. 23,354 2,915 31 July 2019 Derivative financial instruments (asset) / liability FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD54 55 Keeping it simple The table below analyses the Group’s financial liabilities and net-settled derivative financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows, so will not always reconcile with the amounts disclosed on the balance sheet. Group 2020 Trade and other payables Borrowings Group 2019 Trade and other payables Borrowings Less than 1 year NZ$’000 Between 1 and 2 years NZ$’000 Between 2 and 5 years NZ$’000 Over 5 years NZ$’000 109,643 3,007 112,650 62,075 600 62,675 - 7,197 7,197 - 599 599 - 238,060 238,060 - 25,751 25,751 - - - - - - The Group enters into forward exchange contracts to manage the risks associated with the purchase of foreign currency denominated products. The table below analyses the Group’s derivative financial instruments that will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. They are expected to occur and affect the profit or loss at various dates between balance sheet dates and the following five years. At 31 July 2020 Forward foreign exchange contracts - Inflow - Outflow Net Inflow / (Outflow) Net settled derivatives – interest rate swaps Net Inflow / (Outflow) At 31 July 2019 Forward foreign exchange contracts - Inflow - Outflow Net Inflow / (Outflow) Net settled derivatives – interest rate swaps Net Inflow / (Outflow) Less than 1 year NZ$’000 Between 1 and 2 years NZ$’000 Between 2 and 5 years NZ$’000 179,857 (187,164) (7,307) (51) 118,968 (114,015) 4,953 (46) - - - - - - - 9 - - - - - - - - 4.2 Derivative financial instruments Keeping it simple A derivative is a type of financial instrument typically used to manage risk. A derivative’s value changes over time in response to underlying variables such as exchange rates or interest rates and is entered into for a fixed period. A hedge is where a derivative is used to manage an underlying exposure. The Group is exposed to changes in interest rates on its borrowings and to changes in foreign exchange rates on its foreign currency (largely USD) purchases. The Group uses derivatives to hedge these underlying exposures. Derivative financial instruments are initially included in the balance sheet at their fair value, either as assets or liabilities, and are subsequently re-measured at fair value at each reporting date. An interest rate swap is an instrument to exchange a fixed rate of interest for a floating rate, or vice versa, or one type of floating rate for another. Accounting policies Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently re-measured to their fair value. The method of recognising the resulting gain or loss 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 hedges of highly probable forecast transactions (cash flow hedges). At inception of the hedging relationship, the Group documents the economic relationship between hedging instruments and hedged items, including whether changes in the cash flows of the hedging instruments are expected to offset changes in the cash flows of the hedged items. The Group also documents its risk management objectives and strategy for undertaking its hedge transactions. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in equity in the hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in the consolidated statement of comprehensive income. Amounts accumulated in equity are recycled in the consolidated statement of comprehensive income in the periods when the hedged item will affect profit or loss. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory) or a non-financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset or liability. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the consolidated statement of comprehensive income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the consolidated statement of comprehensive income. Foreign currency transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of comprehensive income, except when deferred in other comprehensive income. Translation differences on monetary financial assets and liabilities are reported as part of the fair value gain or loss. FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD56 57 Derivative financial instruments Summarised sensitivity analysis 2020 NZ$’000 2019 NZ$’000 The following table summarises the sensitivity of the Group’s financial assets and financial liabilities to foreign exchange risk. Foreign exchange contracts Current asset Current liability Net foreign exchange contracts – cash flow hedge (asset / (liability)) Interest rate swaps Current liability Non-current liability Net interest rate swaps – cash flow hedge (asset / (liability)) 53 (7,360) (7,307) (54) - (54) 4,964 (11) 4,953 (102) (9) (111) Total derivative financial instruments (7,361) 4,842 The above table shows the Group’s financial derivative holdings at year end. Interest rate swaps - cash flow hedge Interest rate swaps are to exchange a floating rate of interest for a fixed rate of interest. The objective of the transaction is to hedge the core floating rate borrowings of the business to minimise the impact of interest rate volatility within acceptable levels of risk thereby limiting the volatility on the Group's financial results. The notional amount of interest rate swaps at balance sheet date was NZ$5,000,000 (2019: NZ$23,263,048). The fixed interest rate is 1.32% (2019: range from 1.32% and 2.63%). Refer section 4.1.3 for timing of contractual cash flows relating to interest rate swaps. Foreign exchange contracts - cash flow hedge The objective of these contracts is to hedge highly probable anticipated foreign currency purchases against currency fluctuations. These contracts are timed to mature when import purchases are scheduled for payment. The notional amount of foreign exchange contracts amount to US$114,460,000 NZ$179,802,938 (2019: US$79,350,000, NZ$115,606,572). No material hedge ineffectiveness for interest rate swaps or foreign exchange contracts exists as at balance sheet date (2019: nil). Refer to section 4.2.1 for a sensitivity analysis of foreign exchange risk associated with derivative financial instruments. 4.2.1 Foreign exchange risk Foreign exchange risk is the risk that fluctuations in exchange rates will impact the Group’s financial performance. The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the NZD, USD and EUR. Risk Exposure arising from Monitoring Management Foreign exchange risk Foreign currency purchases – over 90% of purchases are in USD Forecast purchases Reviewing exchange rate movements USD foreign exchange derivatives The Group is exposed to currency risk on any cash remitted between entities in different jurisdictions. The Group does not hedge for such remittances. Interest on borrowings is denominated in either New Zealand dollars or Australian dollars and is paid for out of surplus operating cashflows generated in New Zealand or Australia. A sensitivity of -10% / +10% (2019: -10% / +10%) for foreign exchange risk has been selected. While it is unlikely that an equal movement of the New Zealand dollar would be observed against all currencies, an overall sensitivity of -10% / +10% (2019: -10% / +10%) is reasonable given the exchange rate volatility observed on a historic basis for the preceding five year period and market expectation for potential future movements. Amounts are shown net of income tax. All variables other than applicable exchange rates are held constant. The impact on equity is presented exclusive of the impact on retained earnings. 31 July 2020 Derivative financial instruments (asset) / liability Financial assets Cash Trade receivables and other receivables Financial liabilities Trade and other payables Borrowings Total increase / (decrease) 31 July 2019 Derivative financial instruments (asset) / liability Financial assets Cash Trade receivables and other receivables Financial liabilities Trade and other payables Borrowings Carrying amount NZ$’000 7,361 231,885 64,680 158,111 241,270 Carrying amount NZ$’000 (4,842) 6,230 11,360 74,560 25,500 -10% +10% Profit NZ$’000 Equity NZ$’000 Profit NZ$’000 Equity NZ$’000 - (19,160) - 15,676 15,964 (5,063) 10,901 (11,101) 19,302 8,201 - - - - - - (13,062) 4,143 (8,919) 9,082 (15,792) (6,710) - - - - - - 19,102 (19,160) (15,629) 15,676 -10% +10% Profit NZ$’000 Equity NZ$’000 Profit NZ$’000 Equity NZ$’000 - (13,339) - 10,915 439 (806) (367) (5,067) - (5,067) - - - - - - (359) 706 347 4,145 - 4,145 4,492 - - - - - - 10,915 Total increase / (decrease) (5,434) (13,339) FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD58 4.3 Equity Keeping it simple This section explains material movements recorded in shareholders’ equity that are not explained elsewhere in the financial statements. The movements in equity and the balance at 31 July 2020 are presented in the consolidated statement of changes in equity. Accounting policies Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Dividends Dividends are recognised through equity following the approval by the Company’s directors. 4.3.1 Contributed equity - ordinary shares Ordinary shares fully paid ($) Balance at beginning of year Issue of shares under Executive and Senior Management Long Term Incentive Plan Shares issued under share entitlement offers and share placement Shares issued as consideration on a business combination (Note 5.1) Balance at end of year Number of issued shares Ordinary shares issued at beginning of the year Shares issued under Executive and Senior Management Long Term Incentive Plan Shares issued under share entitlement offers and share placement Shares issued as consideration on a business combination (Note 5.1) Ordinary shares issued at end of the year 2020 NZ$’000 626,380 2019 NZ$’000 251,113 251,113 1,666 340,646 32,955 626,380 2020 226,189 927 470,612 11,273 709,001 249,882 1,231 - - 251,113 2019 225,315 874 - - 226,189 59 4.3.2 Reserves and retained earnings Cash flow hedging reserve The hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised directly in other comprehensive income, as described in the accounting policy in section 4.2. The amounts are recognised in profit or loss when the associated hedged transaction affects profit or loss. Foreign currency translation reserve The FCTR is used to record foreign currency translation differences arising on the translation of the Group entities results and financial position. The amounts are accumulated in other comprehensive income and recognised in profit or loss when the foreign operation is partially disposed of or sold. Share based payments reserve The share based payments reserve is used to recognise the fair value of share options and performance rights granted but not exercised or lapsed. Amounts are transferred to share capital when vested options are exercised by the employee or performance rights are vested. Reserves Cash flow hedging reserve Opening balance Revaluation - gross Deferred taxation on revaluation Transfer to hedged asset Transfer to net profit - gross Closing balance Foreign currency translation reserve Opening balance Currency translation differences – Gross Currency translation differences – Taxation Closing balance Share based payments reserve Opening balance Current year amortisation Deferred taxation on share options 2020 NZ$’000 2019 NZ$’000 4,118 (3,799) 3,903 (9,255) (108) (5,141) (12,272) 255 - 3,498 (9,772) 607 9,579 206 4,118 (8,975) (3,297) - (12,017) (12,272) 1,983 378 (87) (1,666) - 608 - (61) - (61) 2,760 721 (253) (1,231) (14) 1,983 - - - - (16,611) (6,171) 2.3 2.3 2.3 2.3 As at 31 July 2020 there were 709,001,384 ordinary issued shares in Kathmandu Holdings Limited and these are classified as equity. 926,996 shares (2019: 873,712) were issued under the “Executive and Senior Management Long Term Incentive Plan 24 November 2010” during the year. Closing balance Other Reserves Opening balance During the year 470,613,096 shares were issued in relation to a share placement and share entitlement offers. Total capital raised of $351,510,652 is net of directly attributable share issue costs of $10,864,686. Current year expense recognised in other comprehensive income Deferred taxation on other comprehensive income All ordinary shares carry equal rights in respect of voting and the receipt of dividends. Ordinary shares do not have a par value. Refer to section 6.3 for Employee share-based remuneration plans. Closing balance Total Reserves Transfer to Share Capital on vesting of shares to Employees Share Options / Performance Rights lapsed FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD60 61 4.3.3 Dividends Prior year final dividend paid Current year interim dividend paid Dividends paid (NZ$0.12 per share (2019: NZ$0.15)) 2020 NZ$’000 27,209 - 27,209 2019 NZ$’000 24,836 9,047 33,883 4.3.4 Capital risk management The Group’s capital includes contributed equity, reserves and retained earnings. The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt or draw down more debt. Section 5 Group Structure Keeping it simple This section provides information about the entities that make up the Kathmandu Group and how they affect the financial performance and position of the Group. 5.1 Acquisition of Rip Curl Group Pty Ltd Goodwill arising on acquisition On 31 October 2019 Kathmandu Holdings Limited through its wholly-owned subsidiary Barrel Wave Holdings Pty Limited acquired 100% of the equity interests in Rip Curl Group Pty Limited and its controlled entities based out of Australia. The total purchase price was A$350,000,000. The non-controlling interest on acquisition relates to the interest acquired by the Group in Rip Curl joint ventures in New Zealand, Thailand and Europe. Rip Curl is a designer, wholesaler, manufacturer and retailer of surfing equipment and apparel, and has a global presence across Australia, New Zealand, North America, Europe, South East Asia and Brazil. The acquisition creates a global outdoor and action sports company anchored by two iconic Australasian brands and provides the opportunity for Kathmandu to considerably diversify its geographic footprint, channels to market and seasonality profile. At the time the financial statements were authorised for issue, the Group had not yet finalised the purchase price allocation for the acquisition of Rip Curl. Fair values of the assets and liabilities disclosed below are determined provisionally as management is in process of reviewing the details of independent valuations. In segment information (Note 2.1), management temporarily allocates related assets and liabilities of the acquired business in the "Surf" segment. The Group expects to finalise the purchase price allocation in the next few months and will record any allocation adjustments in next financial period. On completion of the purchase price allocation, goodwill may be recognised on the acquisition of Rip Curl because of the established workforce and control premiums paid. This is not recognised separately from goodwill as the expected future economic benefits arising cannot be reliably measured and they do not meet the definition of identifiable intangible assets. Acquisition costs Acquisition related costs of $11,895,000 have been excluded from the consideration transferred and are included in administration and general expenses in the statement of comprehensive income and in operating cash flows in the statement of cash flows in the current year. Impact of the acquisition on the results of the Group Group revenue for the year includes $315,739,000 in respect of Rip Curl. Had the Rip Curl acquisition been effective from 1 August 2019, the unaudited revenue of the Group would have been $922,635,000 and the unaudited profit for the year would have been $14,910,000. FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD62 63 Provisional Purchase Price Allocation Purchase price Less net indebtedness adjustment Plus working capital settlement adjustments Total net consideration Carrying amounts of identifiable assets acquired and liabilities assumed; Current assets Cash and cash equivalents Trade and other receivables (net) Inventories (net) Derivative financial instruments Current tax asset Non-current assets Other receivables Property, plant and equipment Brand Customer relationships Other intangibles Right-of-use assets Current liabilities Trade and other payables Current tax liability Current lease liabilities Non-current liabilities Non-current trade and other payables Non-current lease liabilities Interest bearing liabilities Deferred tax Less non-controlling interest acquired Net assets acquired Goodwill on acquisition Total net consideration Less cash and cash equivalents acquired Less consideration paid as shares Plus indebtedness settled on acquisition Net cash outflow on acquisition NZ$’000 377,562 (78,147) 23,437 322,852 29,142 83,361 124,675 990 6,216 4,496 37,529 169,687 39,697 3,800 117,296 (78,006) (2,224) (33,167) (7,571) (85,397) (115,366) (53,245) (3,335) 238,578 84,274 322,852 (29,142) (32,955) 115,366 376,121 5.2 Subsidiary Companies Subsidiaries are all entities over which the Group has control. Control is achieved when the Group: • has power over the entity; • • can use its power to affect returns. is exposed to, or has rights to, variable returns from its involvement with the entity; and Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. The following entities comprise the significant trading and holding companies of the Group; Companies Parent entity: Kathmandu Holdings Limited Subsidiaries: Milford Group Holdings Limited Kathmandu Limited Kathmandu Pty Limited Kathmandu (U.K.) Limited Kathmandu US Holdings LLC Oboz Footwear LLC Barrel Wave Holdings Pty Ltd Rip Curl Group Pty Ltd Rip Curl International Pty Ltd PT Jarosite Rip Curl Pty Ltd Onsmooth Thai Co Ltd Rip Curl Investments Pty Ltd Blue Surf Pty Ltd RC Surf Pty Ltd Rip Curl Airport and Tourist Stores Pty Ltd JRRC Rundle Mall Pty Ltd Rip Curl (Thailand) Ltd RC Airports Pty Ltd Ozmosis Pty Ltd RC Chermside Pty Ltd Bondi Rip Pty Ltd Rip Curl Japan Curl Retail No 1. Pty Ltd RC Surf Sydney Pty Ltd RC Surf South Pty Ltd RC Surf NZ Limited Rip Curl Finance Pty Ltd Rip Curl Europe S.A.S Rip Curl Spain S.A.U Rip Curl Suisse S.A.R.L Surf Odyssey S.A.R.L (70% share sold in July 2020) Rip Surf LDA Rip Curl UK Ltd Rip Curl Germany GMBH Rip Curl Italy SRL Rip Curl Nordic AB Rip Curl Inc Ultra Manufacturing Inc (in liquidation) Rip Curl Canada Inc Rip Curl Brazil LTDA Parties to Deed of Cross Guarantee Country of Incorporation Holding 2020 2019 √ √ √ √ √ √ √ √ √ New Zealand - - New Zealand New Zealand Australia United Kingdom United States of America United States of America Australia Australia Australia Indonesia Australia Thailand Australia Australia Australia Australia Australia Thailand Australia Australia Australia Australia Japan Australia Australia Australia New Zealand Australia France Spain Switzerland France Portugal United Kingdom Germany Italy Sweden United States of America Mexico Canada Brazil 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 50% 100% 100% 100% 100% 100% 100% 100% 100% 50% 100% 100% 100% 100% 0% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - All subsidiaries have a balance date of 31 July except for RC Surf NZ Limited which has a 31 March balance date. FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD64 65 5.3 Deed of Cross Guarantee Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785, the Australian- incorporated wholly owned subsidiaries listed in Note 5.2 as parties to the Deed of Cross Guarantee are relived from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports and directors’ reports in Australia. It is a condition of the ASIC Corporations Instrument that the Company and each of the subsidiaries listed enter a Deed of Cross Guarantee. The effect of the Deed is that each party guarantees to each creditor of each other party payment in full of any debt in the event of winding up of the other party under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the guarantee will only apply if after six months after a resolution or order winding up any creditor has not been paid in full. A consolidated statement of comprehensive income and balance sheet, comprising the Company and controlled entities which are parties to the Deed of Cross Guarantee, after eliminating all transactions between parties to the Deed of Cross Guarantee, at 31 July 2020, are set out as follows: Consolidated Statement of Comprehensive Income and Retained Earnings for the year ended 31 July 2020 Sales Expenses Finance costs - net Profit before income tax Income tax expense Profit after income tax Other comprehensive income Total comprehensive income for the year Retained Earnings at beginning of the year Profit for the year after income tax Dividends paid Lapsed share options Adoption of NZ IFRS 16 Retained Earnings at the end of the year 2020 NZ$’000 457,884 2019 NZ$’000 339,671 (425,853) (292,303) (16,234) 15,797 (7,903) 7,894 2,036 9,930 (34,571) 7,894 (27,209) - (6,855) (60,741) (279) 47,089 (14,141) 32,948 (4,995) 27,953 (33,650) 32,948 (33,883) 14 - (34,571) Consolidated Balance Sheet as at 31 July 2020 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Current tax asset Total current assets Non-current assets Trade and other receivables Investments Property, plant and equipment Intangible assets Right-of-use assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Derivative financial instruments Current tax liabilities Current lease liabilities Total current liabilities Non-current liabilities Non-current trade and other payables Interest bearing liabilities Loans with related parties Deferred tax Non-current lease liabilities Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity - ordinary shares Reserves Retained earnings Total equity 2020 NZ$’000 2019 NZ$’000 204,918 23,748 106,825 4 3,490 3,206 2,160 67,407 3,373 2,344 338,985 78,490 78,460 349,911 53,010 467,138 156,400 1,104,919 1,443,904 78,316 5,364 7,923 56,245 38,277 175,183 41,389 172,607 - 427,456 505,946 46,790 36 6,378 - 147,848 53,204 7,726 237,069 295,614 65,651 128,777 734,837 882,685 - - 220,237 21,044 - 241,281 294,485 561,219 211,461 626,380 (4,420) (60,741) 561,219 251,113 (5,081) (34,571) 211,461 FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD66 67 Section 6 Other Notes 6.1 Related parties All transactions with related parties were in the normal course of business and provided on commercial terms. No amounts owed to related parties have been written off or forgiven during the period. Key Management Personnel Salaries Other short-term employee benefits Post-employment benefits Employee performance rights 2020 NZ$’000 3,147 55 58 378 2019 NZ$’000 3,414 457 117 491 3,638 4,479 6.2 Fair values The following methods and assumptions were used to estimate the fair values for each class of financial instrument: Trade debtors, trade creditors and bank balances The carrying value of these items is equivalent to their fair value. Term liabilities The fair value of the Group's term liabilities is estimated based on current market rates available to the Group for debt of similar maturity. The fair value of term liabilities equates to their current carrying value. Foreign exchange contracts and interest rate swaps The fair value of these instruments is determined using valuation techniques (as they are not traded in an active market). These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. Specific valuation techniques used to value financial instruments include the fair value of interest rate swaps. These are calculated at the present value of the estimated future cash flows, based on observable yield curves and the fair value of forward foreign exchange contracts, as determined using forward exchange rates at the balance sheet date, with the resulting value discounted back to present value. These derivatives have all been determined to be within level 2 (for the purposes of NZ IFRS 13) of the fair value hierarchy as all significant inputs required to ascertain the fair value of these derivatives are observable. Guarantees and overdraft facilities The fair value of these instruments is estimated on the basis that management do not expect settlement at face value to arise. The carrying value and fair value of these instruments are approximately nil. All guarantees are payable on demand. 6.3 Employee share-based remuneration Accounting policy Equity settled long term incentive plan The Executive and Senior Management Long Term Incentive plan grants Group employee’s performance rights subject to performance hurdles being met. The fair value of rights granted is recognised as an employee expense in the consolidated statement of comprehensive income with a corresponding increase in the employee share-based payments reserve. The fair value is measured at grant date and amortised over the vesting periods. The fair value of the rights granted is measured using the Kathmandu Holdings Limited share price as at the grant date less the present value of the dividends forecast to be paid prior to each vesting date. When performance rights vest, the amount in the share-based payments reserve relating to those rights are transferred to share capital. When any vested performance rights lapse upon employee termination, the amount in the share-based payments reserve relating to those rights is transferred to retained earnings. Executive and Senior Management Long Term Incentive Plan On 20 November 2013, shareholders approved at the Annual General Meeting the continuation of an Employee Long Term Incentive Plan (LTI) (previously established 24 November 2010) to grant performance rights to Executive Directors, Senior Managers, Other Key Management Personnel and Wider Leadership Management. Executive Directors and Senior Managers Performance rights granted to Executive Directors and Senior Managers are summarised below: Grant Date 9 Jul 2020 20 Dec 2018 20 Dec 2017 19 Dec 2016 Balance at start of year number Granted during the year number Vested during the year number Lapsed during the year number Balance at the end of year number - 261,388 374,437 375,810 597,731 - - - 1,011,635 597,731 - - - (375,810) (375,810) - - - - - 597,731 261,388 374,437 - 1,233,556 The performance rights granted on 9 July 2020 are Long Term Incentive components only. The TSR performance is calculated for the following performance periods: Long Term Incentive performance rights vest in equal tranches. In each tranche the rights are subject to a combination of a relative Total Shareholder Return (TSR) hurdle and/or an EPS growth hurdle. The relative weighting and number of tranches for each grant date are shown in the table below: Grant Date Tranches EPS Weighting TSR Weighting 9 Jul 2020 20 Dec 2018 20 Dec 2017 1 1 1 0% 50% 50% 100% 50% 50% Tranche Tranche 1 2020 2019 36 months to 1 December 2022 36 months to 1 December 2021 The fair value of the TSR rights have been valued under a Monte Carlo simulation approach predicting Kathmandu Holdings Limited’s TSR relative to the comparable group of companies at the respective vesting dates for each tranche. The fair value of TSR rights, along with the assumptions used to simulate the future share prices using a random-walk process are shown below: The proportion of rights subject to the relative TSR hurdle is dependent on Kathmandu Holdings Limited’s TSR performance relative to a defined comparable group of companies in New Zealand and Australia listed on either the ASX or NZX. The percentage of TSR related rights vest according to the following performance criteria: Kathmandu Holdings Limited relative TSR ranking % Vesting Fair value of TSR rights Current price at grant date Risk free interest rate Expected life (years) Expected share volatility 2020 2019 $119,546 $205,190 $1.14 0.34% 3 $2.77 1.76% 3 69.5% 28.9% Below the 50th percentile 50th percentile 51st – 74th percentile 75th percentile or above 100% 50% + 2% for each percentile above the 50th 0% 50% The estimated fair value for each tranche of rights issued is amortised over the vesting period from the grant date. The proportion of rights subject to the EPS growth hurdle is dependent on the compound average annual growth in Kathmandu Holdings Limited’s EPS relative to the year ending 31 July 2020. The applicable performance periods are: FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD68 Tranche Tranche 1 2020 Performance Period 2019 Performance Period Not applicable FY21 EPS relative to FY18 EPS Expenses arising from equity settled share based payments transactions 6.7 Supplementary information 69 The percentage of the 2019 EPS growth related rights scales according to the compound average annual EPS growth achieved as follows: EPS Growth < 7% >=7%, < 8% >=8%, < 9% >=9%, < 10% >=10%, < 11% >=11%, < 12% >=12% 2019 % Rights Vesting 0% 50% 60% 70% 80% 90% 100% The fair value of the EPS rights have been assessed as the Kathmandu Holdings Limited share price as at the grant date less the present value of the dividends forecast to be paid prior to each vesting date. The estimated fair value for each tranche of options issued is amortised over the vesting period from the grant date. Vesting of Long Term Incentive performance rights also require remaining in employment with the Company during the performance period. Other Key Management Personnel and Wider Leadership Management Performance rights granted to Other Key Management Personnel and Wider Leadership Management are all Short Term Incentives under the shareholder approved Employee Long Term Incentive Plan, and are summarised below: Grant Date 20 Dec 2019 11 Dec 2017 Balance at start of year number Granted during the year number Vested during the year number Lapsed during the year number Balance at the end of year number - 551,186 654,836 - - (551,186) - - 654,836 - Short Term Incentive performance rights vest: • upon the Company achieving non-market performance hurdles; and • the employee remaining in employment with the Company until the vesting date. The performance period and vesting dates are summarised below: Grant Date Performance period (year ending) 2020 2019 20 Dec 2019 18 Dec 2018 31 Jul 2020 31 Jul 2019 Executive Director and Senior Managers Key Management Personnel and Wider Leadership Management 2020 NZ$’000 2019 NZ$’000 378 - 228 493 Directors fees Directors' fees 2020 NZ$’000 2019 NZ$’000 779 790 378 721 Directors fees for the Parent company were paid to the following: 6.4 Contingent liabilities There are no contingent liabilities in 2020 (2019: nil). 6.5 Contingent assets • David Kirk (Chairman) • John Harvey • Philip Bowman • Brent Scrimshaw There are no contingent assets in 2020 (2019: nil). • Andrea Martens (appointed 1 August 2019) 6.6 Events occurring after balance sheet date • Sandra McPhee (retired 27 September 2019) Audit fees There are no events after balance sheet date which materially affect the information within the consolidated financial statements. During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and other network audit firms: Audit services - PricewaterhouseCoopers Group audit – PwC New Zealand Acquired balance sheet – PwC New Zealand UK Statutory audit – PwC UK Half year review – PwC New Zealand Total remuneration for PricewaterhouseCoopers audit services Audit services – other audit firms Non-audit services - PricewaterhouseCoopers Taxation Services – PwC France Revenue Certificates – PwC New Zealand Banking compliance certificates – PwC New Zealand 2020 NZ$’000 2019 NZ$’000 434 85 20 115 654 138 118 11 3 132 186 - 20 36 242 - - 12 3 15 Vesting Date – Other Key Management Personnel and Wider Leadership Management 31 Jul 2021 31 Jul 2020 Total remuneration for PricewaterhouseCoopers non-audit services The fair value of the rights were assessed as the Kathmandu Holdings Limited share price as at the grant date less the present value of the dividends forecast to be paid prior to the vesting date. The non-market performance hurdles set for the year ending 31 July 2020 were not met and accordingly no expense has been recognised in the consolidated statement of comprehensive income. FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD70 71 6.8 New accounting standards and interpretations New standards and interpretations first applied in the period Independent auditor’s report To the shareholders of Kathmandu Holdings Limited New Accounting Standard NZ IFRS 16 Leases Effective Date Applicable to the Group 1 August 2019 Summary of Changes Group Impact Introduces a single lessee accounting model requiring a lessee to recognise assets and liabilities for all leases with a term of more than 12 months where they are not considered low value. A right-of-use asset is recognised representing the right to use the underlying leased asset and a lease liability representing the obligations to make lease payments. As a consequence, a lessee recognises depreciation of the right-of-use asset and interest on the lease liability. The Group has applied NZ IFRS 16 using a modified retrospective transition method. Comparative figures have not been restated and the cumulative effect of initially applying IFRS 16 has been recognised as an opening retained earnings adjustment. NZ IFRS 16 changes how the Group accounts for leases previously classified as operating leases under NZ IAS 17, which were off- balance-sheet. Applying NZ IFRS 16, for all leases (except as noted below), the Group has: a) recognised lease liabilities and right-of-use assets in the consolidated balance sheet. Lease liabilities have been initially measured at the present value of the remaining lease payments, discounted using the incremental borrowing rate at 1 August 2019. Right-of-use assets have been initially measured at carrying amount as if NZ IFRS 16 had always applied since the lease commencement date, using a discount rate based on the incremental borrowing rate at 1 August 2019; b) recognised depreciation of right-of-use assets and interest on lease liabilities in the consolidated statement of comprehensive income; and c) separated the total amount of cash paid into a principal portion (presented within financing activities) and interest (presented within operating activities) in the consolidated statement of cash flows. Lease incentives (eg rent free periods) are recognised as part of the measurement of the right-of-use assets and lease liabilities whereas under NZ IAS 17 they resulted in the recognition of a lease liability, amortised as a reduction of rental expense on a straight-line basis. Under NZ IFRS 16, right-of-use assets are tested for impairment in accordance with NZ IAS 36 Impairment of Assets. This replaces the previous requirement to recognise a provision for onerous lease contracts. For short-term leases (lease term of 12 months or less) and leases of low-value assets (such as office equipment), the Group has opted to recognise a lease expense on a straight-line basis as permitted by NZ IFRS 16. This expense is presented within selling expenses and administration and general expenses within the consolidated statement of comprehensive income. The Group has used the following practical expedients on initial application of NZ IFRS 16; - whether an existing contract is, or contains, a lease has not been reassessed; - applied a single discount rate to a portfolio of leases with reasonably similar characteristics; - relied on its assessment of whether leases are onerous applying NZ IAS 37 Provisions, Contingent Liabilities and Contingent Assets immediately before 1 August 2019 as an alternative to performing an impairment review; - excluded initial direct costs from the measurement of the right-of-use asset at 1 August 2019; - used hindsight in determining the lease term if the contract contains options to extend or terminate the lease. the consolidated statement of comprehensive income for the year then ended; the consolidated balance sheet as at 31 July 2020; We have audited the consolidated financial statements which comprise: • • • • • the consolidated statement of cash flows for the year then ended; and the consolidated statement of changes in equity for the year then ended; the notes to the consolidated financial statements, which include a summary of significant accounting policies. Our opinion In our opinion, the accompanying consolidated financial statements of Kathmandu Holdings Limited (the Company), including its subsidiaries (the Group), present fairly, in all material respects, the financial position of the Group as at 31 July 2020, its financial performance and its cash flows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and International Financial Reporting Standards (IFRS). Basis for opinion We conducted our audit in accordance with International Standards on Auditing (New Zealand) (ISAs (NZ)) and International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We are independent of the Group in accordance with Professional and Ethical Standard 1 International Code of Ethics for Assurance Practitioners (including International Independence Standards) (New Zealand) (PES 1) issued by the New Zealand Auditing and Assurance Standards Board and the International Code of Ethics for Professional Accountants (including International Independence Standards) issued by the International Ethics Standards Board for Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements. Our firm carries out other services for the Group in the areas of assurance compliance engagement in respect of bank covenant compliance, agreed upon procedures for store turnover certificates and tax advisory. The provision of these other services has not impaired our independence as auditor of the Group. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements of the current year. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Standards, interpretations and amendments to published standards that are not yet effective There are no standards or amendments published but not yet effective that are expected to have a significant impact on the group. PricewaterhouseCoopers PwC Centre, Level 4, 60 Cashel Street, Christchurch Central, PO Box 13244, Christchurch 8141, New Zealand T: +64 3 374 3000, F: +64 3 374 3001, pwc.co.nz 54 FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD 72 73 Description of the key audit matter Acquisition of Rip Curl Group As disclosed in note 5.1 of the consolidated financial statements, the Group acquired 100% of the shares of Rip Curl Group Pty Limited (Rip Curl), on 31 October 2019, for base consideration of A$350m. The purchase price included identifiable tangible and intangible assets acquired and liabilities assumed. At the time the consolidated financial statements were authorised for issue, management had not yet completed the purchase price allocation. Management have completed a provisional assessment of the fair value of the assets and liabilities that were acquired. This process included engaging a third party valuation expert to assist in the process to identify and determine the fair value of the intangible assets. The full valuation process has not yet been finalised and management’s expert has not yet issued their final report. It is therefore possible that changes in the acquisition accounting may still occur. Intangible assets have been identified in relation to brand and customer relationships provisionally held by Rip Curl at NZ$169.7m and $39.7m respectively, in addition to the provisional goodwill of $84.3m. Our audit focused on this area because the acquisition of Rip Curl was a major transaction and significant judgements and assumptions are involved in identifying and determining fair value of the acquired assets and liabilities, particularly the identified intangible assets. How our audit addressed the key audit matter In responding to the significant judgements involved in identifying and valuing the identifiable intangible assets we: • obtained an understanding of the acquisition by reading the sale and purchase agreement, other relevant contractual agreements and documents; • confirmed the fair value of the consideration paid to the sale and purchase agreement; • obtained the provisional valuation undertaken by management’s expert to determine the purchase price allocations and tested the mathematical accuracy of the models; • held discussions with Group management and their valuation expert to obtain an understanding of the business process undertaken to identify and value of the assets acquired and liabilities assumed; • we engaged our own internal valuation specialist to assess the appropriateness of assets identified, evaluate the valuation methodology and consider the key judgements and assumptions as provisionally determined by management and management’s expert; • considered whether the identification and recognition of intangible assets was consistent with the requirements of the accounting standards; and • considered whether the relevant disclosures were appropriate. Description of the key audit matter Impairment testing over indefinite life intangibles, including the impact of COVID-19 The risk that the Group’s indefinite life assets may be materially impaired is considered a key audit matter, due to the material nature of these assets and the significant judgement exercised by management to: • assess the appropriate cash generating units (CGU) to consider for testing; • estimate the future results of the CGUs; • include the impact of COVID-19, revenue and margins; • allocate shared costs to CGUs; and • assess the discount rates and terminal growth rates. As disclosed in note 3.3, the Group assessed the recoverable amount of each CGU as at 31 July 2020 using discounted cash flow valuations on a fair value less cost of disposal (FVLCD) basis. For Kathmandu New Zealand, Australia and Oboz management performed their own calculation and engaged a third party valuation expert to: • provide expert advice on the appropriate discount rate for each CGU; • provide macro-economic analysis for each CGU; • provide advice on the appropriate valuation multiples for alternative valuation cross checks; and • perform sensitivity analyses. For Rip Curl, management engaged the third party valuation expert to perform a full year- end valuation. Based on the testing performed for each CGU the Group concluded that there was no impairment of goodwill and brand as at 31 July 2020. The key assumptions used in the impairment testing has been disclosed in note 3.3. How our audit addressed the key audit matter Our audit procedures in assessing the indefinite life intangible assets included the following: For all brands and goodwill we: • obtained the calculations performed by management and considered the assumptions used in light of the current and forecast outlook for the business; • reviewed management’s assessment of CGUs and compared this to our knowledge and understanding of the Group’s operations and reporting structure; • engaged our auditor’s expert to independently consider the appropriateness of the discount and long- term growth rates; • assessed the reasonableness of management's cash flow assumptions by considering external market forecasts, historical performance and other available information; • considered the allocation of shared costs to each CGU; • performed look back tested on historical accuracy of management forecasts; and • performed sensitivity testing for each CGU. For Rip Curl we also: • used our auditor’s expert to review and challenge the appropriateness of the assumptions used by management expert’s in the valuation of Rip Curl and assess the appropriateness of the valuation methodology employed by management’s expert. We audited the disclosures in the financial statements to ensure they are compliant with the requirements of the relevant accounting standards. PwC 55 PwC 56 FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD 74 75 Description of the key audit matter Inventory existence and valuation including the impact of COVID-19 At 31 July 2020, the Group held inventories of $228.8m. Inventory valuation and existence was an audit focus area due to the number of locations that the inventory was held at and the judgement applied in the valuation of inventory on hand. As described in note 3.1.1 of the consolidated financial statements, inventories are carried at the lower of cost and net realisable value on a weighted average basis. The Group has systems and processes, including a barcode inventory management system, to accurately record inventory movements. Management perform full stocktakes at each store twice a year, with annual full stocktakes taking place at Rip Curl distribution centres. Daily cycle counts are performed at the Kathmandu New Zealand and Australian distribution centres. For Rip Curl US and Oboz management keep stock at third party warehouses who provide inventory management services. How our audit addressed the key audit matter We performed a number of audit procedures over inventory existence and valuation at year end. We: • observed the stocktake process at selected store locations near period end and undertook our own test counts; • attended the year end distribution centre count and performed independent test counts for Rip Curl; • observed the daily stocktake process at the Christchurch and Melbourne Kathmandu distribution centres near period end and undertook our own test counts. We also tested that the daily counts occurred by selecting a sample of days at each location and inspected the count records throughout the year; • confirmed the level of inventory held at year end directly with third party warehouses for inventory in the United States; • assessed the inventory shrinkage provision by reviewing the level of inventory write downs during the period. We tested the shrinkage rate used to calculate the provision for each store since the last stocktake by comparing it to the actual shrinkage rate in prior periods; • assessed store inventory counts performed post year end to ensure the actual level of shrinkage was consistent with the year end provisioning; • evaluated the assumptions made by management, and particularly the key assumption that current shrinkage levels are consistent with historical levels, in assessing inventory obsolescence provisions through an analysis of inventory items by category and age and the level of inventory write downs in these categories during the period including the potential impact of COVID-19; and • tested that inventory on hand at the end of the period was recorded at the lower of cost and net realisable value by testing a sample of inventory items to the most recent retail price which includes the impact of COVID-19. Description of the key audit matter Adoption of the accounting standard NZ IFRS 16 Leases The Group adopted NZ IFRS 16 Leases on 1 August 2019. The standard requires the recognition of a right of use asset and lease liability on the balance sheet for all leases. Previously operating leases were not recognised on the balance sheet. The adoption of the standard has resulted in the recognition of a right of use asset of $178.8m and a lease liability of $206.5m. As outlined in note 3.4 and 6.8, a number of judgements and estimates have been made by management in establishing these opening values. These comprise of the: ● incremental borrowing rates at the time of adoption; lease terms, including any rights of renewals expected to be exercised; ● application of practical expedients in ● respect of short term lease exemptions; and ● recognition of abatements received from landlords. This was considered an area of focus for our audit due to the number of leases and the significant judgements and estimates inherent in the calculation. How our audit addressed the key audit matter We have performed the following audit procedures in relation to the adoption of the new accounting standard for leases. We: ● held discussions with management to understand the implementation process including the basis for key assumptions used in the calculation of opening balances and management's process; ● performed testing, on a sample basis, of the accuracy of information included in the calculations by comparing them to the terms in the underlying lease contracts; ● tested completeness of the identified lease contracts by checking that leased stores and other major leased assets were included in the calculation through reconciliation to the audited lease commitments schedule at 1 August 2019; ● on a sample basis, recalculated the right of use asset and lease liability for individual leases; ● ● reviewed assumptions used to determine the lease term including rights of renewal and assessed whether they were supported by past practice and current business plans; reviewed the appropriateness of practical expedients applied for exclusion of low value and short term lease exemptions; ● on a sample basis, assessed the appropriate treatment of rent abatements received from landlords; and ● reviewed the appropriateness of disclosures in the financial statements. In relation to the incremental borrowing rates, we engaged our auditor's valuation expert to assess the appropriateness of the discount rates used. PwC 57 PwC 58 FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD 76 77 Our audit approach Overview An audit is designed to obtain reasonable assurance whether the financial statements are free from material misstatement. Overall Group materiality: $3.7m, which represents approximately 5% of weighted average of last three years’ annualised profit before tax, excluding the acquisition cost in relation to Rip Curl. Given the volatility in profit before tax due to the impacts of COVID-19 we chose a weighted average of the last three years’ annualised profit before tax adjusted for the acquisition cost, as the appropriate benchmark for the year ended 31 July 2020. In order to appropriately reflect the current brand profile of the Kathmandu Group, we have annualised the past financial performance by incorporating Rip Curl Group’s audited profit before tax in our calculation. This ensured the historical profits reflects the financial performance of all brands within the Group. Further, we have excluded the acquisition cost in relation to the acquisition of Rip Curl which, due to its size, causes unusual fluctuation in profit before tax due to its infrequent occurrence. As reported above, we have four key audit matters, being: • • • • Acquisition of Rip Curl Group Impairment testing over indefinite life intangibles, including the impact of COVID-19 Inventory existence and valuation, including the impact of COVID-19 Adoption of the accounting standard NZ IFRS 16 Leases Materiality The scope of our audit was influenced by our application of materiality. Based on our professional judgement, we determined certain quantitative thresholds for materiality, including the overall Group materiality for the consolidated financial statements as a whole as set out above. These, together with qualitative considerations, helped us to determine the scope of our audit, the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and in aggregate on the consolidated financial statements as a whole. Audit scope We designed our audit by assessing the risks of material misstatement in the consolidated financial statements and our application of materiality. As in all of our audits, we also addressed the risk of management override of internal controls including among other matters, consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the accounting processes and controls, and the industry in which the Group operates. Information other than the consolidated financial statements and auditor’s report The Directors are responsible for the annual report. Prior to the date of our auditor’s report, we received a first draft of the corporate governance section of the annual report, but we have not received any of the other components of the annual report, which is expected to be made available to us at a later date. Our opinion on the consolidated financial statements does not cover the other information included in the annual report and we do not and will not express any form of assurance conclusion on the other information. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements 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, except that not all other information was available to us at the date of our signing. Responsibilities of the Directors for the consolidated financial statements The Directors are responsible, on behalf of the Company, for the preparation and fair presentation of the consolidated financial statements in accordance with NZ IFRS and IFRS, and for such internal control as the Directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, the Directors are responsible for assessing the Group’s ability 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 have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements, as a whole, are 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 ISAs (NZ) and ISAs 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 these consolidated financial statements. A further description of our responsibilities for the audit of the consolidated financial statements is located at the External Reporting Board’s website at: https://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-report-1/ This description forms part of our auditor’s report. Who we report to This report is made solely to the Company’s shareholders, as a body. Our audit work has been undertaken so that we might state those matters which we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our audit work, for this report or for the opinions we have formed. The engagement partner on the audit resulting in this independent auditor’s report is Leopino Foliaki. The Group audit was conducted by a New Zealand based team, with support from component auditors in France and Thailand. For and on behalf of: PwC 59 PwC 60 Chartered Accountants 23 September 2020 Christchurch FINANCIAL STATEMENTSANNUAL REPORT 2020KATHMANDU HOLDINGS LTD 78 79 Corporate governance This corporate governance statement has been approved by the Board. The Board and management of Kathmandu Holdings Limited (the “Company”) and its related companies (“the Group”) are committed to adhering to best practice governance principles and maintaining the highest ethical standards. The Board is responsible for the overall governance of the Group, including adopting the appropriate policies and procedures and guiding Directors, management and employees of the Group’s businesses to fulfil their functions effectively and responsibly. The Company regularly examines its governance arrangements against national and international standards. The Company has developed its corporate governance policies and practices in line with the principles and recommendations set out in the New Zealand Stock Exchange (NZX) Corporate Governance Code (NZX Code). The structure of the Company’s FY20 Annual Report and Corporate Governance statement aligns to NZX reporting requirements to reflect the change to Foreign Exempt Listing status on the ASX. This corporate governance statement details the Company’s key corporate governance arrangements. Where the Company’s governance arrangements differ from a recommendation in the NZX Code, the relevant recommendation is separately identified and accompanied by an explanation for the reasons why the recommendation has not been followed and a summary of the alternative governance arrangements in place for the Company. For the duration of the reporting period, the Company has followed the recommendations set out in the NZX Code where appropriate, having regard to the size of the Group and the Board, the resources available and the activities of the Group’s businesses. After due consideration, the Board considers that the only departures of the Company’s corporate governance practices from the recommendations set out in the NZX Code during the reporting period are in relation to the recommendation to provide notice of meeting at least 20 working days prior to any special meeting.1 Information about the Company’s approach in this area is separately identified in this corporate governance statement. The Company’s relevant charters and policies are available in the Governance section of the Company’s Investor Website https://www.kathmanduholdings. com/investor-relations/governance/ Principle 1 – Code of ethical behaviour One of the Group’s core values is integrity: to conduct the Group’s businesses in an ethical and honest manner, and to always strive to do the right thing. The Company is committed to promoting a culture of best practice and ethical behaviour and therefore expects the members of its Board and all employees to act in accordance with the Company’s values, policies and legal obligations. All Directors and employees joining the Group are provided with information on the Group’s values, and the following policies, and updates and refreshers are provided on a regular basis. Code of Conduct The Board recognises the need to observe the highest standards of ethical corporate practice and business conduct. Accordingly, the Board has a formal code of conduct, to be followed by all Directors and employees. Any material breaches of the Code of Conduct are reported to the Board. The key aspects of the Code of Conduct are to: • act with honesty, integrity and fairness and in the best interests of the Company; • declare conflicts of interest and proactively advise of any conflicts of interest; • act in accordance with all applicable laws, regulations, policies and procedures; • follow procedures around the receiving of gifts; • adhere to any procedures about whistleblowing; and • use Group resources and property properly. The Group maintains formal whistleblowing policies in New Zealand and Australia, recognising that the protection of whistle-blowers is integral to fostering transparency, promoting integrity and detecting misconduct. The best way to fulfil this commitment is to create an environment in which employees who have genuine concerns about improper conduct, unacceptable behaviour or wrong-doing feel safe to report it without fear of reprisal. Securities trading policy The information in this statement is current as at 31 July 2020 (except where otherwise specified). The Company has a policy for dealing in the Company’s securities by Directors and employees, 1. NZX Code Recommendation 8.5 which provides transparency about expectations and requirements. The policy is not designed to prohibit Directors and employees from investing in the Company’s securities, but recognises that there are times when Directors or employees cannot, or should not, deal in those securities. Subject to the overriding restriction that persons may not deal in the Company’s securities while they are in possession of non-public material information, Directors, senior executives and key management personnel are only permitted to deal in securities during certain ‘window periods’; being the periods immediately following the release of the Company’s full and half year financial results or the release of a disclosure document offering securities in Kathmandu Holdings Limited. All other employees are strongly encouraged to deal in securities only during these ‘window periods’. Directors, senior executives and key management personnel must receive clearance from the Chairperson of the board before any proposed dealing in Company securities in each instance. Where a Director or senior executive is subject to exceptional circumstances (such as severe financial hardship), written approval may be granted by the independent Directors for the disposal of Company securities, provided the individual concerned is not in possession of any non-public material information. The policy prohibits Directors, senior executives, key management personnel and all other employees from entering into hedging or other arrangements that have the effect of limiting the economic risk in connection with unvested securities issued pursuant to any employee option or share plan. Principle 2 – Board Composition and Performance Roles and Responsibilities The Board is responsible for the overall supervision and governance of the Group. A framework for the effective operation of the Board is set out in the Board Charter, which includes the following responsibilities: • the long-term growth and profitability of the Company; • developing the strategic and financial objectives for the Company; • approving and monitoring the progress of major capital expenditure, capital management and acquisitions and divestitures; • • identifying the principal risks of the Company’s business; reviewing and ratifying the Company’s systems of internal compliance and control, risk management, legal compliance, corporate governance practices, financial and other reporting; • appointing and removing the Group Chief Executive Officer (“CEO”); • ratifying the appointment, and where appropriate, the removal of the senior executives of the Group; • approving the remuneration framework for the Group; and • monitoring and reviewing board succession planning. The Board delegates the responsibility for day to day management and operation of the Group to the Group CEO, who in turn delegates parts of these functions to senior group executive and management personnel. Matters reserved for the Board and the scope and limitations of delegations to the Group CEO, group executives and management personnel are set out in a Group delegated authority policy approved by the Board on an annual basis. Board Composition At present, the Board is comprised of six Directors, namely David Kirk, John Harvey, Xavier Simonet, Philip Bowman, Brent Scrimshaw and Andrea Martens. The Chairperson of the Board is David Kirk. Five out of the six Directors are non-executive Directors. Xavier Simonet (managing Director and Group CEO) is the only executive Director on the Board. The Board assesses the independence of its Directors in accordance with the requirements set out in the Board Charter and the NZX Listing Rules. Xavier Simonet, as managing Director, is employed by the Company in an executive capacity and is not considered to be an independent Director. David Kirk, John Harvey, Philip Bowman, Brent Scrimshaw and Andrea Martens are considered independent Directors having regard to the factors set out in the NZX Code. • monitoring management’s implementation of key policies, strategies and financial objectives; • directing, monitoring and assessing the Company’s performance against strategic business plans; A brief biography of each Board member is set out on page 20 of this Annual Report and can also be found in the “Board of Directors” section of the Company’s Investor Website. CORPORATE GOVERNANCEANNUAL REPORT 2020KATHMANDU HOLDINGS LTD80 81 Nomination and Appointment New Directors are selected through a nomination and appointment procedure administered by the Board, as outlined in the Board Charter. The Board has systems in place which require that appropriate checks are conducted before appointing any new Director or putting a candidate forward to the Company’s shareholders for election as a Director. The Company enters into written agreements with each newly appointed Director or senior executive establishing the terms of their appointment. Skills Matrix The Board benefits from a combination of the different skills, experiences and expertise that the Company’s Directors bring to the Board and the insights that result from this diversity. The Board is satisfied that the current composition of the Board reflects an appropriate range of the skills, experience, knowledge and diversity needed to discharge the Board’s functions and responsibilities and to achieve the strategic aims of the Group. The Board continues to monitor and review Board composition. The Board has developed a skills matrix which it uses to assist in developing plans for long-term succession to identify current and future skills gaps. The following chart summarises the skills, attributes and experience held by the Directors of the Company during the reporting period. Percentages are determined as at the date of this statement. Executive Leadership: Experienced and successful leadership at a senior executive level of large organisations. International Business Development: Experienced in multi-national, complex environments, including multi- channel business development. Capital Projects, Mergers and Acquisitions: Experience in evaluating and implementing projects involving large-scale financial commitments, investment horizons and major transactions. Retail and Consumer Experience: Experienced in retail and consumer sectors, understanding multi-channel retailing and brand development. Remuneration: Experience in remuneration design to drive business success. Governance: Knowledge and experience of high standards of corporate governance, including NZX Listing Rules and practices. Strategy: Expertise in the development and implementation of strategic plans and risk management to deliver investor returns over time. Financial acumen: Expertise in understanding financial accounting and reporting, corporate finance and internal financial controls, including an ability to probe the adequacies of financial and risk controls. Marketing and product development: Expertise and senior executive experience in marketing and new media marketing metrics and tools. Technology and data: Expertise and experience in the adoption of new technology and use of data analytics in a consumer environment. Executive Leadership International Business Capital Projects, Mergers and Acquisitions Retail and Consumer Experience Remuneration Governance Strategy Financial Acumen Marketing and Product Development Technology and Data 0% 20% 40% 60% 80% 100% Tenure Directors are appointed and retire by rotation in accordance with the Company’s constitution and the NZX Listing Rule requirements. Director tenure is taken into account by the Board when considering the independence of each Director. The average tenure for non-executive Directors is 4 years with the following tenure mix: 40% 20% 40% <2 Years 2 - 5 Years 6+ Years The tenure of appointment of the Board as at 31 July 2020 is set out below: Name David Kirk (Chairperson) Xavier Simonet John Harvey Originally appointed Last reappointed/ elected 21 November 2013 23 November 2018 29 June 2015 22 November 2019 16 October 2009 24 November 2017 Brent Scrimshaw 2 October 2017 24 November 2017 Philip Bowman 2 October 2017 24 November 2017 Andrea Martens 1 August 2019 22 November 2019 Measuring Board performance The Board undertakes an annual evaluation of its performance against the requirements and expectations of the Board Charter. The performance of the Board’s committees and each individual Director is also reviewed on an annual basis, alongside the goals and objectives for the Board for the upcoming year. This review also identifies any changes needed to the Board Charter. The Board approves the criteria for assessing annual performance of the Group CEO. The Board has undertaken a review of its performance in respect of the reporting period by individual interviews of Directors with the Chairperson. The Board makes appropriate training available to all Directors to enable them to remain current on how best to discharge their responsibilities and to keep up to date on changes in areas relevant to their roles. Diversity The Group embraces and encourages a diverse workplace culture. This enriches collaborative and creative thinking to provide innovative products and world class customer service to an equally diverse global community. The Group seeks out the best talent from around the world to join its brands and is proud to have over 75 Nationalities, a diverse cross-generational team ranging from 18 years – 76 years and 59% women representation across the Group. The Company’s commitment to diversity and inclusion goes beyond championing gender equality. Improving and evolving its inclusive and collaborative workplace culture is a shared passion across all brands that enhances the Group’s competitive advantage. The Company maintains a written diversity policy in accordance with the NZX Code, which affirms the Group’s commitment to harnessing differences to encourage an innovative, responsive and productive workplace, creating value and rewards for customers, the team, shareholders and the community. As part of its diversity policy, the Remuneration Committee sets measurable objectives for achieving diversity across the Group. The Remuneration Committee carries out an annual assessment of its diversity objectives and measures its progress towards achieving these objectives. Following this review, the Board considers that the principles of the Group’s diversity policy are currently well-reflected in the variety of cultures, unique experiences, perspectives, and beliefs represented by its teams. More information about the Group’s approach to diversity can be found in our Sustainability Report, a copy of which is available through the Investor Website. CORPORATE GOVERNANCEANNUAL REPORT 2020KATHMANDU HOLDINGS LTD82 83 Roles and responsibilities • Overseeing the process of • Overseeing the development and Audit and Risk Committee Remuneration Committee Current Group gender composition As at 31 July 2020, the gender composition of the Company’s Board, Executive and Management team, and across the entire Group, is: Directors Officers (Group Executive) Kathmandu and Oboz Brand Management Rip Curl Brand Management Total Organisation FY19 FY20 FY19 FY20* FY19 FY20^ FY19 FY20^^ FY19** Male Female Total 5 1 6 5 1 6 - - - 5 0 5 - - - 4 5 9 - - - 7 3 10 42% 58% FY20 41% 59% 100% 100% Principle 3 - Board committees The Board has established and maintains two committees of the Board to assist with discharging the Board’s responsibilities: the Audit and Risk Committee and the Remuneration Committee. The Board may establish other committees as and when required based on the needs of the Group. Each Committee is governed by its own Charter, which has been adopted by the Board, and is reviewed periodically. The Committee charters are available in the “Governance” section of the Company’s Investor Website. Membership of each Committee is based on the needs of the Company, relevant legislative and other requirements and the skills and experience of individual Directors. Meetings of the Committees are scheduled to coincide with the Board meeting timetable. Each Committee makes recommendations to the full Board for consideration and decision-making as and when required. The Company does not have a nomination committee. Due to the size of the Company’s Board, the Board as a whole retains the responsibility for recommending new Director appointments. The Board considers that it is able to deal efficiently and effectively with the processes of appointment and reappointment of Directors to the Board and considerations of Board composition and succession planning. The Board draws on the experience and advice of external recruitment specialists for assistance when required. The Board will continue to review the needs of the Group in relation to the Director nomination process and whether a change of approach in this area is needed. A summary of the roles, responsibilities and membership of these two Committees (as at 31 July 2020) is set out on the next page. Membership financial reporting, internal control, continuous disclosure, financial and non-financial risk management, compliance and external audit; • Monitoring the Group’s compliance with laws and regulations and the Company’s Code of Conduct; • • Encouraging effective relationships with, and communication between, the Board, management and the Company’s external auditor; and Evaluating the adequacy of processes and controls established to identify and manage areas of potential risk and to seek to safeguard the Company’s assets. At least three members, a majority of whom must be independent Directors and all of whom must be non-executive Directors. At least one member must have an accounting or financial background. The Chair is to be an independent non-executive Director, who is not the Chair of the Board. Current members: John Harvey (Chair) David Kirk Philip Bowman Brent Scrimshaw Andrea Martens application of the Group Human Resources strategy, the remuneration framework and associated policies; • Assisting the Board in relation to matters concerning remuneration of senior executives, and Directors; • Providing effective remuneration policies and programmes to motivate high performance from all employees; and • Confirming that appropriate and effective policies for managing the performance and development of employees at all levels are in place. At least three members, a majority of whom must be independent Directors and all of whom must be non-executive Directors. The Chair is to be an independent, non-executive Director. Current members: Andrea Martens (Chair) David Kirk John Harvey Philip Bowman Brent Scrimshaw * A new Group Executive structure was established following the acquisition of the Rip Curl Group. ** Kathmandu and Oboz brands only. ^ Direct reports to Kathmandu Chief Executive Officer. ^^ Direct reports to Rip Curl Chief Executive Officer. Attendance The number of meetings of the Board of Directors and the Board Committees held during the year ended 31 July 2020 and the numbers of meetings attended by each Director were: Board Audit and Risk Committee Remuneration Committee Attended Eligible to attend Attended Eligible to attend Attended Eligible to attend David Kirk Xavier Simonet John Harvey Andrea Martens Brent Scrimshaw Philip Bowman Sandra McPhee* 12 12 12 12 12 12 2 12 12 12 12 12 12 2 * Sandra McPhee retired effective 27 August 2019 6 0 6 6 6 6 2 6 0 6 6 6 6 2 5 0 5 5 5 5 2 5 0 5 5 5 5 2 CORPORATE GOVERNANCEANNUAL REPORT 2020KATHMANDU HOLDINGS LTD84 85 Takeover protocols The Board has appropriate protocols in place that set out the procedure to be followed if there is a takeover offer for the Company. A committee of independent Directors would be formed who would have responsibility for managing the takeover process in accordance with the Board protocols and the New Zealand Takeovers Code. Principle 4 – Reporting and Disclosure The Company is committed to promoting investor confidence by providing all stakeholders with timely, accurate and balanced disclosure of information regarding its financial and operational matters. The Company’s Code of Conduct, Board and Committee Charters and other key governance policies and documents are available on its Investor Website at https://www.kathmanduholdings. com/investor-centre/corporate-governance/ Continuous disclosure policy The Company’s Continuous disclosure policy provides that all Directors, executives and employees are required to be aware of and fulfil their obligations in relation to the timely disclosure of material information. The policy explains the respective roles and responsibilities, procedures and processes in place to ensure the Company observes its continuous disclosure obligations under the NZX Listing Rules. The policy is available and accessible to all Group employees and training on its contents is provided regularly. Financial Reporting The Audit and Risk Committee oversees the quality of external financial reporting including the veracity, comprehensiveness and timeliness of financial statements. The Company seeks to provide clear, concise financial statements. Before the Board approves financial statements for the Group for a financial period, it receives from the Group CEO and Group CFO a declaration that, in their opinion: • • • the financial records of the Group have been properly maintained; the financial statements comply with the appropriate accounting standards and other applicable laws and regulations; the financial statements give a true and fair view of the financial position and performance of the Group; and • that the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. Economic, Environmental and Social Sustainability The Company recognises the importance of sharing information about its journey to becoming a more sustainable business. Across the Group, the Company is committed to protecting workers’ rights, minimising waste and lowering the environmental impacts of the Group’s business operations through understanding its supply chain. The Company prepares a separate sustainability report in accordance with the Global Reporting Initiative (GRI) Standards framework. It is available online at https://www.kathmanduholdings. com/about-us/corporate-responsibility/ Principle 5 – Remuneration The Remuneration Committee is responsible for reviewing remuneration packages for the Group CEO and senior executives and making recommendations to shareholders in relation to non-executive Director’s remuneration. The Remuneration Committee adopts a series of principles in determining remuneration related decisions. The principles used are: • The remuneration structure should reward those employees who can influence the achievement of the Group’s strategic objectives and business plans to enhance shareholder value for successful Group performance outcomes and their contribution to these; • Executive remuneration should be market competitive, and generally account for market practice including consideration of employee place of domicile; • Executives’ remuneration packages should have: - a substantial portion of their total remuneration that is “at risk” and aligned with reward for creating shareholder value, - an appropriate balance between short and long-term performance focus and outcomes, - a mix of cash and equity-based remuneration; • Due to the Group CEO’s leadership role in establishing and delivering achievement of medium and long term Group strategic objectives and business plans, and increasing shareholder value over that period, the Group CEO, relative to other Executives, should have: - a greater proportion of total remuneration (at least 50%) that is “at risk”, i.e. contingent upon the achievement of performance hurdles, and - a greater proportion of “at risk” remuneration weighted towards equity- based rewards rather than cash; • Short term incentives determined on the basis of achievement of specific targets and outcomes relating to annual Group financial performance, and individual value adding performance objectives; and • Long term incentives via participation in the Company’s Long Term Incentive plan. • Non-executive Directors’ remuneration should Short Term Incentives (STI) enable the Company to attract and retain high quality Directors with the relevant experience. In order to maintain independence and impartiality, non-Executive Directors should not receive performance-based remuneration; and • The Board uses discretion when setting remuneration levels, taking into account interests of shareholders, the current market environment and Group performance. The current approved pool of remuneration available for payment to non-executive Directors is AUD $1,000,000 in aggregate. This was approved by shareholders at the Annual Meeting on 26 November 2018. In the year ended 31 July 2020, total fees paid to non-executive Directors amounted to NZD$778,780.81. Details of the total remuneration and value of other benefits received by each director from the Company during the reporting period is set out on page 89 of this Annual Report. Remuneration policy The Company maintains a remuneration policy in relation to its Directors, executives and employees which provides for remuneration at fair and reasonable levels throughout the Group. The purpose of the policy is to provide for coherent remuneration practices which enable the attraction and retention of high calibre individuals who contribute positively to the achievement of the Group’s strategy and objectives, and ultimately create value for the Company’s shareholders. The remuneration of executive and non- executive Directors is clearly differentiated in the policy. The Board, through the Remuneration Committee, undertakes its governance role in setting Group executive remuneration including, where required, use of external independent remuneration consultants and/or available market information. The Group executive remuneration structure has three components: • Base salary and benefits (reviewed annually to assess appropriateness to the position and competitiveness within the market); Group executives are eligible to participate in an annual STI that delivers rewards by way of cash and/ or deferred equity. Group Earnings before interest and tax (EBIT), has been determined as the appropriate financial performance target to trigger payment of STI. The amount of any STI paid in a year is dependent upon: a) the level of performance achieved against the Group’s financial performance target (EBIT) for the year; and b) the outcome of individual value adding performance, measured by achievement of individual KPI’s, subject to a minimum level of performance achieved by the Group relative to the financial performance target (EBIT) for the year. For Executives where a short-term equity incentive is earned, vesting is subject to ongoing employment by the Group for a period of one year following the end of the financial year in which the incentive is earned. Long Term Incentive Plan (LTI) Performance Rights under the Group’s Long-Term Incentive Plan have been offered each year since the plan was originally implemented in 2010. The plan is intended to focus performance on achievement of key long-term performance metrics. The selected performance measures provide an appropriate balance between relative and absolute Company performance. The Board continues to reassess the plan and its structure to confirm it will best support and facilitate the growth in shareholder value over the long term relative to current business plans and strategies. Performance rights granted to the Group executive during the reporting period are dependent upon the Company achieving relative TSR targets over the 36 months from 1 December 2019. TSR is measured on a relative basis against a comparator group of ASX listed companies (other than metal and mining stocks) ranked 101 to 200 in the S&P/ASX200 as at the date of the grant. Performance rights are granted at nil cost. Performance measurement is at the end of the applicable performance period with no ability to re-test. In respect of rights granted during the reporting period, the relevant portion of the award CORPORATE GOVERNANCEANNUAL REPORT 2020KATHMANDU HOLDINGS LTD86 87 that will vest is determined based on the percentile ranking of the Company against the comparator group at the end of the performance period. Group CEO Remuneration Group CEO remuneration comprises a mixture of base salary, STI and LTI: Group CEO 2020 Remuneration package Fixed (Base salary, superannuation) STI (60% of fixed) (not achieved for FY20) LTI (70% of fixed)* Maximum potential remuneration A$ $951,510 $570,906 $666,057 $2,188,473 Risk management policy The purpose of the Company’s risk management policy is to highlight the risks relevant to the Group’s operations, and the Company’s commitment to designing and implementing systems and methods appropriate to minimise and control its risks. The Audit and Risk Committee assists the Board in discharging its responsibility for monitoring risk management. The Committee is responsible for establishing procedures which seek to provide assurance that major business risks are identified, consistently assessed and appropriately addressed. This Committee oversees the implementation of the risk management framework, monitors its ongoing effectiveness and regularly reports to the Board. The Audit and Risk Committee undertook a formal review of the risk management framework during the reporting period. * Vesting is dependent on achievement of performance hurdles measured over a three-year period. Vesting date 1 December 2022 Health and Safety • More than half (57%) the total remuneration for the Group CEO is at risk; • Over 85% of the at-risk remuneration (all except for the STI KPI’s) is solely dependent on outcomes of Group financial performance against short and long term targets, and • All long-term incentive (70% of Fixed Annual Remuneration) will be measured on a single 3-year performance period. FY20 STI outcomes For the year ended 31 July 2020 the Group financial performance targets were not met and as a result, no short-term cash incentives were paid to the Group CEO or the Group executive. Principle 6 – Risk Management The identification and proper management of the Group’s material risks is an important priority of the Board. The Company has a central risk management framework in place to identify, oversee, manage and control risks. During the reporting period, work commenced to bring the Rip Curl brand within the Group framework. The Board regularly reviews this framework and the assessments of how the material risks are impacting its business. The Board recognises that some element of risk is inherently necessary in order to achieve the strategic aims for the Group’s businesses and deliver value to shareholders. The Company is dedicated to cultivating a strong safety culture and awareness of health and safety risks, performance and management within the Group. The Company has adopted an integrated approach to safety and wellbeing across the Group, which recognises that workplace safety, health and mental health all contribute to an employee’s overall wellbeing. During the reporting period, work began to bring Rip Curl within the Group’s existing health and safety reporting framework and initiatives were commenced to drive process improvements and education throughout the regions where the business operates. The Board receives and reviews detailed reports on health and safety matters at each Board meeting from the Brand CEOs. More information on Health, Safety and Wellbeing in the Group can be found in the Company’s sustainability report, a copy of which is available through the Investor Website. Principle 7 - Auditors The Audit and Risk Committee is responsible for making recommendations to the Board about the appointment or replacement of, and for monitoring the effectiveness and independence of, the Group’s external auditor. The Committee Charter requires that the external auditor or lead audit partner is changed at least every five years. The Committee reviews and assesses the independence of the external auditor on an annual basis. The Company’s external auditor is PwC. The audit partner responsible was appointed in 2018. The Company does not currently have an internal audit function. To date, the Company has considered that the external advisors it currently engages provide a sufficient system for evaluating and continually improving the effectiveness of risk management for the Group and delivers appropriate objective assurance on risk management. Given the increased size of the Group following the Rip Curl acquisition, the Company is currently developing an internal audit function to be formalised during FY21. The Company’s external auditor attends the annual meetings of the Company and is available to answer any questions from investors relevant to the audit. Principle 8 – Shareholder Rights and Relations The Company is committed to keeping its stakeholders and owners effectively and comprehensively informed of all relevant information affecting the Group in accordance with all applicable laws and the Company’s communication strategy. Information is communicated to investors through the lodgement of all relevant financial and other information with NZX and ASX, publishing information on the Company’s Investor Website, annual shareholder meetings, annual and interim reporting, analyst and investor briefings and roadshows. Investor Website The Company’s Investor Website (www. kathmanduholdings.com) contains all key communications concerning the Company and information about its brands: Kathmandu, Rip Curl and Oboz. Shareholders can also view profiles of the Company’s Board and Group Executive Management team on the Investor Website, along with its key governance policies, the Charters of the Board Committees, copies of current and past annual reports and transcripts of annual shareholder meetings. All relevant announcements made to the market are shown on the Company’s Investor Website as soon as they have been released to NZX and ASX. Investors can subscribe through the Investor Website to receive an email alert when a new announcement is lodged. Communication The Board encourages investors to communicate with the Company electronically. Investors can contact the Company through the Investor Website at www.kathmanduholdings.com/ contact/. Investors have the option of receiving their communications, which includes the annual report, from the Company electronically. The Company actively engages with its investors through annual shareholder meetings, its investor briefings and roadshows, and meeting with stakeholders on request. Approach to seeking additional equity capital The Board acknowledges Recommendation 8.4 of the NZX Code which suggests that where the Company requires additional equity capital, where practical, the Board should favour capital raising methods that provide existing equity security holders with an opportunity to participate in the offer on a pro-rata basis. The Board has taken Recommendation 8.4 into account, along with a number of other factors when considering options for the capital raisings undertaken during the reporting period. The Company raised capital via a 1 for 4 pro-rata accelerated entitlement offer and vendor placement in October 2019, and a 1.2 for 1 pro-rata accelerated entitlement offer and institutional placement in April 2020. Ultimately the Board will choose methods to raise equity, when needed, which are necessary and desirable to achieve the best outcomes for the Company in the context of any anticipated transaction or proposal for which additional equity capital may be required. Meetings and voting Where voting by shareholders on a matter concerning the Company is required, the Board encourages investors to attend the shareholders’ meeting or to send in a proxy vote. All voting at the Company’s annual shareholder meeting is conducted by way of poll on the basis of one share, one vote. The Company’s annual shareholder meeting is held primarily in New Zealand, and periodically in Australia, in order to maximise the opportunity for shareholders to participate. In 2019, the Company began using a virtual meeting platform for its shareholder meetings to allow participation where a shareholder is unable to attend in person. The Company’s notice of meeting will be available at least 20 working days prior to the meeting at www.kathmanduholdings. com/investor-relations/nzx-announcements/ In 2019, the Company held a special meeting to approve the acquisition of Rip Curl. As a result of the overall transaction timetable, the Company was unable to provide 20 working days’ notice to shareholders. However, the Company provided as much notice as was practicable in the circumstances, and more than the minimum period prescribed under the Companies Act 1993. CORPORATE GOVERNANCEANNUAL REPORT 2020KATHMANDU HOLDINGS LTD88 89 Statutory information Disclosure of Interests by Directors In accordance with Section 140(2) of the Companies Act 1993, the Directors named below have made a general disclosure of interest, by a general notice disclosed to the Board and entered in the Company’s interests register. General notices given by Directors which remain current as at 31 July 2020 are as follows: DAVID KIRK NZ Rugby Players Association Forsyth Barr Group Limited and Forsyth Barr Limited Bailador Investment Management Pty Limited Bailador Technology Investments Limited (including investee companies) NZ Performance Horses Limited Kiwi Harvest Limited Sydney Festival Lord Howe Island Board JOHN HARVEY Stride Holdings Limited Stride Investment Management Limited Stride Property Limited Investore Property Limited Heartland Bank Limited Pomare Investments Limited Napier Port Holdings Limited Port of Napier Limited Chairman Chairman / Director Managing Partner Chairman Director Chairman Chairman Director Director Director Director Director Director Director Director Director Resource Coordination Partnership Limited Advisor to the Board ANDREA MARTENS ADMA – Australian Data Driven Marketing Association CEO PHILIP BOWMAN Sky Network Television Limited (effective 1 September 2019) Majid al Futtaim Properties LLC Tegel Group Holdings Limited Ferrovial SA Atropos SCI Better Capital PCC Limited Vinula Pty Ltd Vinula Superfund Pty Ltd Tom Tom Holdings Inc Majid al Futtaim Capital LLC Majid al Futtaim Holdings LLC BRENT SCRIMSHAW Enero Group Limited (effective 1 July 2020) Rhinomed Limited Catapault Group International Limited Melbourne International Festival of the Arts Limited Chairman Chairman Chairman Director President Directeur Generale Director Director Director Director Director Director CEO Director Director Director Directors’ Remuneration and Other Benefits During the year, the Directors and former Directors of the Company received the following remuneration and other benefits, which were approved by the Board: Director David Kirk Philip Bowman John Harvey Andrea Martens Brent Scrimshaw Sandra McPhee (retired) Xavier Simonet Total Remuneration Other benefits NZD $237,980 NZD $131,333 NZD $124,706 NZD $131,333 NZD $131,333 NZD $22,096 None None None None None None NZD $931,773.95 $22,956 (superannuation) Employee Remuneration During the year ended 31 July 2020 a number of employees or former employees, not being Directors of the Company, received remuneration and other benefits that exceeded NZ$100,000 in value as follows: Remuneration Number of Employees Remuneration Number of Employees NZD$ 100,000 110,000 120,000 130,000 140,000 150,000 160,000 170,000 180,000 190,000 200,000 210,000 220,000 230,000 250,000 260,000 270,000 280,000 300,000 NZD$ 110,000 120,000 130,000 140,000 150,000 160,000 170,000 180,000 190,000 200,000 210,000 220,000 230,000 240,000 260,000 270,000 280,000 290,000 310,000 - - - - - - - - - - - - - - - - - - - NZD$ 310,000 320,000 330,000 340,000 350,000 360,000 370,000 380,000 400,000 440,000 450,000 470,000 480,000 510,000 590,000 630,000 680,000 790,000 880,000 1,080,000 - - - - - - - - - - - - - - - - - - - - NZD$ 320,000 330,000 340,000 350,000 360,000 370,000 380,000 390,000 410,000 450,000 460,000 480,000 490,000 520,000 600,000 640,000 690,000 800,000 890,000 1,090,000 23 16 22 9 15 16 6 2 5 7 4 6 2 2 1 1 1 3 2 1 2 4 2 2 2 1 1 1 2 1 2 1 1 1 1 1 1 1 1 Donations During the year, the Group has made total donations of NZD$159,938. STATUTORY INFORMATIONANNUAL REPORT 2020KATHMANDU HOLDINGS LTD90 91 Directors’ Details Principal Shareholders David Kirk Chairman, Non-Executive Director Xavier Simonet Managing Director and Group Chief Executive Officer The names and holdings of the twenty largest shareholders as at 7 September 2020 were: John Harvey Non-Executive Director Philip Bowman Non-Executive Director Brent Scrimshaw Non-Executive Director Andrea Martens Non-Executive Director Sandra McPhee Non-Executive Director (retired 27 September 2019) Subsidiary Company Directors Section 211(2) of the Companies Act 1993 requires the Company to disclose, in relation to its subsidiaries, the total remuneration and value of other benefits received by Directors and former Directors, and particulars of entries in the interests registers made during the year ended 31 July 2020. No subsidiary has Directors who are not full-time employees of the Group. The remuneration and other benefits of such employees (received as employees) totalling $100,000 or more during the year ended 31 July 2020, are included in the relevant bandings for remuneration disclosed on the previous page. No employee of the Group appointed as a Director of Kathmandu Holdings Limited or its subsidiaries receives or retains any remuneration or other benefits in their capacity as a Director. The persons who held office as Directors (or the legal equivalent in various jurisdictions) of subsidiary companies at 31 July 2020, and those who ceased to hold office during the year ended 31 July 2020, are as follows: Company Director / Office Holder Company Director / Office Holder Milford Group Holdings Limited Kathmandu Limited Kathmandu (U.K.) Limited Reuben Casey, Xavier Simonet, Chris Kinraid Rip Curl Canada Inc Anthony Roberts and Nick Russell Rip Curl Japan Ietoshi Ueda Kathmandu Pty Limited Barrel Wave Holdings Pty Limited Reuben Casey, Xavier Simonet, Chris Kinraid, Anthony Roberts (appointed 3rd February 2020) Onsmooth Thai Co Ltd PT Jarosite Kathmandu US Holdings LLC Xavier Simonet, Reuben Casey Oboz Footwear LLC Amy Beck Rip Curl Europe S.A.S Michael Daly and Anthony Roberts Rip Curl Spain SA Unipersonal Rip Curl UK Ltd Rip Surf Artigos De Desporto Unipessoal LDA Rip Curl Germany GmbH Rip Curl Italy SRL Rip Curl Suisse S.A.R.L Anthony Roberts Rip Curl Nordic AB Rip Curl, Inc Rip Curl International Pty Ltd Rip Curl Proprietary Limited RC Airports Pty Ltd Rip Curl Finance Pty Ltd Rip Curl Group Pty Ltd Rip Curl Investments Pty Ltd Bondi Rip Pty Ltd Bluesurf Pty Ltd Curl Retail No 1 Pty Ltd JRRC Rundle Mall Pty Ltd Ozmosis Pty Ltd RC Chermside Pty Ltd RC Surf Sydney Pty Ltd RC Surf Pty Ltd RC Surf South Pty Ltd Rip Curl Airport and Tourist Stores Pty Ltd Surf Odyssey SARL Xavier Barjou 50% subsidiary interests: RC Surf NZ Limited Paul Pedersen and Anthony Roberts Rip Curl Brazil LTDA Carla Trindade Rip Curl (Thailand) Co. Ltd Sermchai Putamadilok Anthony Roberts, Duncan Stewart, Michael Daly James Hendy, Anthony John Roberts, Jeffry Robert Anderson, Francois Jean Payot Mathieu Lefin and Isabelle Espil Mathieu Lefin Mathieu Lefin and Julien Haueter Mathieu Lefin, Alois Bersan and Isabelle Espil Name NEW ZEALAND CENTRAL SECURITIES DEPOSITORY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED BRISCOE GROUP LIMITED CITICORP NOMINEES PTY LIMITED NEW ZEALAND DEPOSITORY NOMINEE NATIONAL NOMINEES LIMITED BNP PARIBAS NOMINEES PTY LTD FNZ CUSTODIANS LIMITED PT BOOSTER INVESTMENTS NOMINEES LIMITED BNP PARIBAS NOMS PTY LTD JASMINE INVESTMENT HOLDINGS NO 6 LIMITED FORSYTH BARR CUSTODIANS LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 LONDEE PTY LIMITED BUTTONWOOD NOMINEES PTY LTD HAILONG INVESTMENTS PTE LIMITED CITICORP NOMINEES PTY LIMITED BNP PARIBAS NOMINEES PTY LTD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 LONEE PTY LIMITED Directors’ Shareholdings Ordinary Shares % 228,533,369 32.23 54,401,647 50,167,446 48,007,465 39,058,166 26,814,538 17,304,888 15,062,444 11,625,195 7,063,307 6,912,263 6,476,481 5,950,629 4,517,995 4,434,704 3,744,000 3,696,339 3,582,136 3,119,924 2,956,845 7.67 7.08 6.77 5.51 3.78 2.44 2.12 1.64 1.00 0.97 0.91 0.84 0.64 0.63 0.53 0.52 0.51 0.44 0.42 Directors held interests in the following ordinary shares of the Company at 31 July 2020: Director Nature of interest Number held at 31 July 2019 Acquired Disposed David Kirk Philip Bowman John Harvey Xavier Simonet Beneficially owned Beneficially owned Beneficially owned Beneficially owned 68,955 0 58,508 423,725 674,381 150,000 102,389 889,008 - - - - Total held at 31 July 2020 743,336 150,000 160,897 1,312,733 STATUTORY INFORMATIONANNUAL REPORT 2020KATHMANDU HOLDINGS LTD92 93 Xavier Simonet held the following interests in convertible financial products in the Company at 31 July 2020 due to his participation in the Kathmandu Holdings Limited Long Term Incentive Plan for Employees in his capacity as Group Chief Executive Officer. Executive Director – Xavier Simonet Nature of interest Number granted Grant Date Vesting Period Vesting Date Total Fair Value of Performance Rights at Grant Date $ NZX Class Waivers Relied on During the year, the Company relied on the Class Rulings and Waivers granted by NZX Regulation on 19 March 2020 and 26 March 2020 from the NZX Listing Rules in relation to accelerated non- renounceable entitlement offers and placements. In addition, the Company was granted a waiver by NZX Regulation on 27 March 2020 that permitted it to release its half year results for the six months ended 31 January 2020 no later than 75 days after the end of the half year period. Directors’ and Officers’ Insurance and Indemnity The Group has arranged, as provided for under the Company’s Constitution, policies of Directors’ and Officers’ Liability Insurance which, with a Deed of Indemnity entered into with all Directors, provides that generally Directors will incur no monetary loss as a result of actions undertaken by them as Directors. Certain actions are specifically excluded, for example, the incurring of penalties and fines which may be imposed in respect of breaches of the law. Performance Rights Performance Rights Performance Rights 276,372 9 Jul 20 204,739 20 Dec 18 292,809 20 Dec 17 3 years 3 years 3 years 1 Dec 22 1 Dec 21 1 Dec 20 No other directors held interests in convertible financial products of the Company at 31 July 2020. Performance rights granted will, subject to satisfaction of performance conditions, vest on the basis of one ordinary share for each performance right which vests, at the end of each performance period. Distribution of Shareholders and Holdings 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total Number of Holders % Number of Ordinary Shares 4,419 6,113 2,174 2,760 203 15,669 28.2% 39.0% 13.9% 17.6% 1.3% 100% 2,851,120 16,063,941 16,829,809 76,581,995 596,674,519 709,001,384 666,057 387,736 488,420 % 0.4% 2.3% 2.4% 10.8% 84.2% 100% The details set out above were as at 7 September 2020. Substantial Product Holders The substantial product holders of ordinary shares (being the only class of quoted voting products) of the Company and their relevant interests as at 31 July 2020, were as follows: Yarra Capital Management Harbour Asset Management Limited Briscoe Group Limited Accident Compensation Corporation New Zealand Superannuation Fund Nominees Limited As at 31 July 2020, the Company had 709,001,384 ordinary shares on issue. Ordinary Shares 72,436,067 50,329,611 48,007,465 44,673,660 35,858,935 % 10.22 7.10 6.77 6.30 5.06 STATUTORY INFORMATIONANNUAL REPORT 2020KATHMANDU HOLDINGS LTD 94 Directory The details of the Company’s principal administrative and registered office in New Zealand is: 223 Tuam Street Christchurch Central PO Box 1234 Christchurch 8011 Share Registry In New Zealand: Link Market Services (LINK) Physical Address: Postal Address: Level 11, Deloitte Centre, 80 Queen Street, Auckland 1010 New Zealand PO Box 91976, Auckland, 1142 New Zealand Telephone: Investor enquiries: Facsimile: Internet address: +64 9 375 5999 +64 9 375 5998 +64 9 375 5990 www.linkmarketservices.co.nz In Australia: Link Market Services (LINK) Physical Address: Postal Address: Level 1, 333 Collins Street Melbourne, VIC 3000 Australia Locked Bag A14 Sydney, South NSW 1235 Australia Telephone: Investor enquiries: Facsimile: Internet address: +61 2 8280 7111 +61 2 8280 7111 +61 2 9287 0303 www.linkmarketservices.com.au Stock Exchanges The Company’s shares are listed on the NZX and the ASX. Incorporation The Company is incorporated in New Zealand. STATUTORY INFORMATION kathmanduholdings.com

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