years Creating Better in Australia Growing and Innovating in Health, Wellness & Beauty 2020 ANNUAL REPORT Celebrating 160 years OF CREATING BETTER IN AUSTR ALIA McPherson’s Limited OUR BUSINESS McPherson’s Limited, established in 1860, is a leading supplier of Health, Wellness and Beauty products in Australasia and increasingly China, with operations in Australia, New Zealand and Asia. McPherson’s markets and distributes beauty care, hair care, skin care and personal care items such as facial wipes, cotton pads and foot comfort products, as well as a range of kitchen essentials such as baking paper, cling wrap and aluminium foil. McPherson’s manages some significant brands for agency partners and via joint venture arrangements such as Kotia, however, the majority of revenue is derived from the company’s diversified portfolio of owned market-leading brands, including Dr. LeWinn’s, A’kin, Manicare, Lady Jayne, Swisspers, Multix, Moosehead and Maseur. Manufacturing is outsourced to various suppliers, predominantly in Asia and Australia. McPherson’s maintains a strong presence in Hong Kong and mainland China, focused on product sourcing and quality assurance. 2020 Annual Report CREATING BETTER IN Health, Wellness & Beauty McPherson’s Limited CONTENTS F I NAN C IAL H I G H LI G HTS K EY AC H I EVE M E NTS C HAI R MAN’S M ES SAG E MANAG I N G D I R ECTO R’S R E PO RT E N GAG I N G O U R C O M M U N ITY R EVI EW O F O P E R ATI O N S CATEG O RY OVE RVI EW STR ATEG I C I NVESTM E NTS B OAR D O F D I R ECTO R S C O R PO R ATE G OVE R NAN C E STATE M E NT D I R ECTO R S’ R E PO RT F I NAN C IAL R E PO RT C O N S O LI DATE D STATE M E NT O F C O M P R E H E N S IVE I N C O M E C O N S O LI DATE D BALAN C E S H E ET C O N S O LI DATE D STATE M E NT O F C HAN G ES I N EQ U ITY C O N S O LI DATE D STATE M E NT O F CAS H F LOWS S HAR E H O LD E R I N FO R MATI O N C O R PO R ATE D I R ECTO RY & F I NAN C IAL CALE N DAR 02 04 0 6 0 8 10 12 16 24 32 34 35 61 61 62 63 64 104 107 01 2020 Annual Report FINANCIAL Highlights +25% Increase +33% I N U N D E R LY I N G P R O F I T A F T E R TA X F R O M C O N T I N U I N G O P E R AT I O N S * (2020: $15.7 million; 2019: $12.5 million) Increase I N U N D E R LY I N G P R O F I T B E F O R E TA X F R O M C O N T I N U I N G O P E R AT I O N S * (2020: $23.0 million; 2019: $17.3 million) +24% Increase +11% I N U N D E R LY I N G E A R N I N G S P E R S H A R E F R O M C O N T I N U I N G O P E R AT I O N S * (2020: 14.7 cents per share; 2019: 11.9 cents per share) I N S A L E S R E V E N U E F R O M C O N T I N U I N G O P E R AT I O N S * (2020: $222.1 million; 2019: $199.3 million) Increase +18% Increase $9.2R E S U LT I N G I N A I N C R E A S E I N S A L E S R E V E N U E F R O M C O R E 6 B R A N D S (2020: $175.2 million; 2019: $149.1 million) L O W G E A R I N G O F 9 . 3 %* * (2020: $9.2 million; 2019: $7.5 million) million net debt ** 103% U N D E R LY I N G O P E R AT I N G C A S H C O N V E R S I O N * * * (2020: 103%; 2019: 117%) * Excluding significant items, Trilogy and Karen Murrell agency sales, and the favourable impact of AASB 16 Leases ** Excluding lease liabilities *** Excluding the favourable impact of AASB 16 Leases 02 McPherson’s Limited Dr. LeWinn's Line Smoothing Complex Triple Action Defence 03 2020 Annual Report KEY Achievements SAFETY & WELLBEING OF OUR EMPLOYEES Safeguards successfully established by our COVID-19 Rapid Response Team to minimise risk for our people across Asia Pacific and ensure the continuation of safe operations INCREASED MARKET SHARE With core portfolio supported by successful innovation programs, sustainable new products, marketing differentiation and strategic partnerships in pharmacy and grocery STRATEGIC JOINT VENTURE WITH ACCESS BRAND MANAGEMENT Strong China-facing business growing Dr. LeWinn’s sales from $16.0 million in FY19 to $37.2 million in FY20, jointly developing new products tailored for the China market with our partner ABM CONTINUED INVESTMENT IN INNOVATION & SUSTAINABILITY Over 200 products internally developed, resulting in $20.0 million incremental contribution over the last 4 years SUPPLY CHAIN CONTINUITY No material adverse disruption to our supply chain in Australia and China, thanks to the resilience of our Sydney & Hong Kong procurement teams and our manufacturing partner Aware Environmental INVESTMENT IN AWARE ENVIRONMENTAL $6.0m investment in our manufacturing partner to ensure supply chain continuity to fulfil strong demand from China for Dr. LeWinn’s SOULFUL JOINT VENTURE First meaningful move into the health and nutrition spaces for McPherson’s REFINANCING New three-year $47.5 million debt facility with Westpac and National Bank Australia to support our working capital and acquisition strategy 04 McPherson’s Limited A’kin Miracle Shine Conditioning Hair Mask range 05 2020 Annual Report Chairman's MESSAGE of 33% in this important area in FY20. Over 200 new products were developed to support the business’s brands, with an emphasis on the rapid growth skincare ranges. This innovation in our skincare product range has been successfully leveraged through our commercial partnership with Access Brand Management (ABM), which has continued to go from strength to strength in FY20, with sales increasing 133% from $16.0 million in FY19 to $37.2 million in FY20. In FY20 we continued to invest in medium to long term growth opportunities, with key strategic investments in the Aware Group ($3.0 million) and the Kotia, Soulful and SugarBaby joint ventures ($2.7 million). Despite these investments, net bank debt remains very low at $9.2 million, with the Group leverage ratio (Net bank debt / EBITDA) at 0.4 times. The Group is well placed with a very strong balance sheet to execute appropriate new merger and acquisition opportunities in the post COVID-19 environment. Management, supported by the Board, will continue to be disciplined in its assessment of merger and acquisition opportunities as they arise. The Group’s three 51% owned joint ventures (Kotia, Soulful and SugarBaby) with $2.7 million seed investments in FY20, are progressing at a rate which has been stifled by COVID-19 as key customers become increasingly focused on risk averse core ranging. Three of our brands have been adversely impacted by this change in consumer demand, consequently the A’kin and Moosehead brands and our investment in the Kotia joint venture have been fully impaired. DIVIDEND The Board’s dividend policy to distribute a minimum of 60 per cent of the Company’s underlying profit after tax to shareholders, subject to other cash requirements, remains unchanged. A final dividend of 7.0 cents per share fully franked, payable on 24 September 2020 to shareholders on the register at 7 September 2020, has been declared. This takes total dividends for the year to 11.0 cents per share, representing a 10% increase on the prior year’s ordinary dividend of 10.0 cents per share and an underlying payout ratio for FY20 of 72%. Given our strategy to pursue acquisitions the dividend reinvestment plan has been retained. STABLE AND EXPERIENCED BOARD OF DIRECTORS Having renewed the Board with the appointments of Alison Mew, Grant Peck and Geoff Pearce in fiscal 2018 and 2019 we are now very well placed, with depth of experience and diversity of skills, to assist and advise Management as it continues to execute its Strategic Plan. OUTLOOK While trading over the first two months of fiscal 2021 has been positive, the high level of uncertainty regarding progression of the COVID-19 pandemic and its impact on both the global and domestic economies make accurate forecasting of the FY21 year extremely difficult. A further operations update will be provided at the Annual General Meeting in early November 2020. As a leading participant in the Australian, New Zealand and export markets, with a very strong product innovation capability and deep customer relationships, particularly within the pharmacy, grocery and export channels, McPherson’s is well positioned to continue its current trajectory of capturing greater market share. The impressive financial results outlined in this Annual Report for the year ended 30 June 2020 are a reflection of the strength and experience of our management team and Board. In Laurie McAllister and his Executive Leadership Team, we have creative and capable leadership, along with a deep understanding of our various stakeholders and the markets in which we operate. The last financial year has presented a variety of significant challenges for all of us. During the COVID-19 pandemic the company has taken every practical step possible to safeguard all our employees in the Asia Pacific region. The ongoing well-being and support of our employees as they work in challenging circumstances is our highest priority. Maintaining the continuity of our supply chain has also been a major focus over the last six months, with the minimal level of disruption testament to the close and valued relationships with our suppliers and customers. FISCAL YEAR 2020 OPERATING RESULTS AND HIGHLIGHTS The Group’s success in FY20 was driven by our growth in market share across the majority of our core 6 brands – Manicare, Lady Jayne, Dr. LeWinn’s, A’kin, Multix and Swisspers – partly due to strong demand for Multix and Swisspers during the COVID-19 pandemic. Management’s commitment to the strategy we outlined three years ago is evidenced in FY20 by 16% growth in total owned brand sales, 20% growth in underlying profit before tax to $22.8 million and strong underlying operating cash conversion of 103%. A key element driving the growth of our owned brands is product innovation. To fuel differentiation, we have increased investment in our research and development capability with an increase in headcount 06 McPherson’s Limited The impressive financial results outlined in this Annual Report for the year ended 30 June 2020 are a reflection of the strength and experience of our management team and Board. GRA HA M CUBBI N Chairman As a leading participant in the Australian, New Zealand and export markets, with a very strong product innovation capability and deep customer relationships, particularly within the pharmacy, grocery and export channels, McPherson’s is well positioned to continue its current trajectory of capturing greater market share. Given the company’s strong financial performance and balance sheet, the team is devoting considerable effort and resources to identify and evaluate potential acquisition opportunities in line with our strategy so as to complement organic growth and leverage McPherson’s scale efficiencies. The Board would like to thank Laurie McAllister and his team for their enthusiasm and dedication to the evolution of our business as well as the values and behaviours that enable our success. On behalf of the Board, thank you to our loyal shareholders for your continued support of the company. ANNUAL GENERAL MEETING This year’s AGM will be held on 4 November 2020 on a fully virtual basis in the interests of shareholders’ health and safety, and given the social distancing requirements and relevant travel restrictions in place due to the COVID-19 pandemic. Shareholders are encouraged to participate in the AGM and your participation is important to us. Full details regarding the matters to be considered at the 2020 AGM and how to access the virtual AGM using your computer, mobile phone or other device will be contained in the AGM Notice of Meeting and related materials, which can also be accessed via the company’s website. GR AHAM C U BB I N Chairman Manicare NOVA FIT ® Face Massager 2020 Annual Report 07 Managing Director’s REPORT FISCAL YEAR 2020 OPERATING RESULTS We have continued to execute our strategic plan, leading to an outstanding performance during fiscal year 2020. Despite the challenges from the COVID-19 pandemic as a team we have generated significant positive momentum from the 10 strategic imperatives that we outlined three years ago, which were: 1. Refocus our business purely on Health, Wellness and Beauty 2. Revitalise our owned McPherson’s brands 3. Improve and maintain financial strength 4. Move from transactional to strategic partnerships with our top six customers 5. Integrate and grow acquired skincare brands: Dr. LeWinn’s and A’kin 6. Create a China facing business 7. Ensure we have our team fit for the future with appropriate expertise, capabilities and values 8. Improve performance in New Zealand and Singapore, and expand into Asia 9. Gain efficiencies and savings across the supply chain infrastructure 10. Create a New Business team focused on M&A and new ventures We are pleased to report positive results in FY20 with 20% growth in underlying profit before tax (PBT) to $22.8m, exceeding the guidance we provided early in FY20 of 10% growth in underlying PBT. Other key financial outcomes for FY20 were: > Underlying PBT of $23.0 million, 33% growth on the prior corresponding period (pcp) from continuing business excluding two discontinued distribution relationships; of $9.2m and underlying operating cash conversion rate of 103%; and > Strong balance sheet with net bank debt > 75% growth in Dr. LeWinn’s sales revenue on pcp through our strategic and exclusive China facing partner ABM and strong domestic growth. 08 Amidst our broad portfolio of brands, two have been adversely impacted by a change in consumer demand during the COVID-19 pandemic, consequently the A’kin and Moosehead brands have been fully impaired. While I am proud of the outstanding fiscal year 2020 performance, I am even more excited about our continued positive momentum in fiscal year 2021, despite the uncertain external environment. To complement the strength of our existing brands, we are now very well placed, with a strong balance sheet and significant operational capacity, to assess and execute appropriate opportunities as they arise. The transformational opportunity of an acquisition in the Health, Wellness and Beauty space is no better illustrated than the Group’s acquisition of the Dr. LeWinn’s brand in 2014 for approximately $20.0 million. This brand has generated revenue of $57.6 million in FY20 and is on a remarkable growth trajectory, with sales to ABM increasing from $0.5 million in FY17 to $37.2 million in FY20, with 133% growth in FY20. Our stellar growth in the Dr. LeWinn’s brand over the last four years will now be accentuated through our new joint venture with ABM. The earnings from our 49% share in this joint venture, which commences in FY21, will be incremental to our existing and highly successful Dr. LeWinn’s marketing, distribution and innovation capability. FOCUS ON INNOVATION, SUSTAINABILITY AND GROWTH IN OWNED BRANDS McPherson’s has continued to invest in its research and development capability with an increase in headcount of 33% in this important area in FY20. Over 200 new products were developed to support the business’s owned brands, with an emphasis on the rapid growth skincare ranges. Internally developed products have generated incremental contribution of approximately $20.0 million over the last 4 years and led to the reduction in our reliance on revenue from agency brands. The proportion of revenue from our own brands increased to 84% of total sales, compared with 76% in FY19 with the benefit from growing brands with better margins. We will continue to pursue growth of these brands in FY21. A sustainability agenda has been established and is gaining momentum with an elevated, broad focus on all elements of sustainability across the Group and relevant interactions with stakeholders. DEVELOPING A SUSTAINABLE SUPPLY CHAIN Having a capable and sustainable supplier base is fundamental to the success of the McPherson’s business model. The strength of the Group’s relationships with its suppliers has come to the fore through the challenges of the COVID-19 period, with our supply chain responding very well to the requirements of our customers through this period of unpredictable demand. Having successfully transferred over 50 products from other suppliers and produced its one millionth individual product for McPherson’s in May 2020, the Australian manufacturer Aware Group is now McPherson’s key supplier of Dr. LeWinn’s product, with approximately 50% of all Dr. LeWinn’s product forecast to be sourced from Aware in FY21. In recognition of the importance of this relationship, McPherson’s converted $3.0 million in convertible notes in Aware to equity in October 2019 and made an additional $3.0 million equity investment in Aware in FY20, increasing the total equity investment to $6.0 million. McPherson’s now owns 10.7% of the Aware Group. JOINT VENTURES While the FY20 underlying combined loss of $1.9 million from the three incubation joint ventures Kotia, Soulful and SugarBaby was above expectations, the Group will continue to progress new product launches with key retail partners for each joint venture in FY21, with a substantial improvement in financial outcomes projected. The Kotia deer milk product range has received very McPherson’s Limited We have continued to execute our strategic plan, leading to an outstanding performance during fiscal year 2020. LAURENC E MCA LL ISTER Managing Director positive consumer feedback, however the Group’s investment in the Kotia joint venture ($2.1 million) has been fully impaired in FY20 as market traction has been difficult to realise in the current challenging retail environment. We are fully committed to these innovative and differentiated brands for the future. The Soulful brand, launching into the export channel in September 2020, is all about creating smart, wholesome nutrition and healthy living solutions accessible to everyone. Proudly Australian, and with a passion for health and wellbeing, the Soulful range has been developed for different stages of life offering milk powders with nutritional and immunity support via lactoferrin and probiotics for adults and children. OUR RESPONSE TO THE COVID-19 PANDEMIC The proactive actions taken by the Company since the COVID-19 pandemic was declared were promptly established to safeguard all our employees in Asia Pacific. The ongoing well-being and support of our employees as they work in challenging circumstances is our highest priority. To this end, we established consistent, clear and specific pandemic protocols that were implemented across the Company. I’m confident that our relentless focus on maintaining a safe and sustainable work environment will help strengthen our business continuity and ensure we can continue to produce products and serve our customers seamlessly. SUMMARY As we enter fiscal year 2021, we continue the path of driving a fundamental transformation in our company. We are creating and becoming an innovation focussed consumer goods company that strives to become a highly valued global partner for our customers. We continue to build capabilities and processes that leverage our core strengths to generate scale to deliver profitable growth. While we have taken important steps on this path, our fundamental transformation is ahead of us. We have significant work to do to achieve our goals. I look forward to building on the considerable momentum generated in fiscal year 2020 and to navigate effectively through the current crisis with a keen eye toward coming out of the crisis as an even stronger McPherson’s. To complement the strength of our existing brands, we are now very well placed, with a strong balance sheet and significant operational capacity, to assess and execute appropriate opportunities as they arise. +33% Increase I N U N D E R LY I N G P R O F I T B E F O R E TA X F R O M C O N T I N U I N G O P E R AT I O N S * (2020: $23.0 million; 2019: $17.3 million) $9.2R E S U LT I N G I N A L O W G E A R I N G O F 9 . 3 %* * million net debt ** (2020: $9.2 million; 2019: $7.5 million) 103% U N D E R LY I N G O P E R AT I N G C A S H C O N V E R S I O N * * * (2020: 103%; 2019: 117%) LAUR ENC E M CAL LI STER Managing Director * Excluding significant items, Trilogy and Karen Murrell agency sales, and the favourable impact of AASB 16 Leases ** Excluding lease liabilities *** Excluding the favourable impact of AASB 16 Leases 09 2020 Annual Report McPherson’s is committed to being socially responsible and dedicated to developing our community through innovation and collaboration. Our vision is to grow sustainably by enriching lives, inside and out, worldwide, so we foster and encourage our employees to participate in local programs and initiatives dedicated to supporting and inspiring others. Our brands are with people in their everyday life and in times of crisis we feel it is our responsibility to give back to the communities in which we live and work – it is who we are. SUPPORTING YOU WHEN YOU NEED US MOST In December 2019, we experienced the outbreak of the novel Coronavirus across the globe, with the significant disruption and restrictions that followed. Knowing that our partners needed us most during this time, the McPherson’s warehouse has remained fully operational to ensure essential stock has been delivered to our grocery and pharmacy customers. We have also donated stock to pharmacies across Australia who have experienced financial hardship due to the impacts of COVID-19 and we will continue to look for new ways of supporting our communities through this very challenging time. GIVING THE GIFT OF CONFIDENCE Being true to our vision at the beginning of October 2019, we announced Lady Jayne’s collaboration with the Variety Charity, Hair With Heart Initiative. The Variety Charity was established to support children who are sick, disadvantaged or have special needs by providing practical equipment, programs and experiences. Hair with Heart is Variety's National Hair Donation initiative, where hair contributions are processed into specialised wigs for those children who have lost their hair due to a medical condition. Money raised via this initiative is donated to Variety's grants and programs including providing funding to families for mobility equipment, communication devices, medical items and therapeutic treatments. This important collaboration will run for two years and McPherson’s has committed to donating 100% of profits raised through the sales of our popular Lady Jayne Double Bar Slide Accessories in Rose Gold to the Variety Charity. Lady Jayne Double Bar Slides 10 McPherson’s Limited CommunityENGAGING OUR PROVIDING ASSISTANCE FOR BUSHFIRE RELIEF Australia experienced some of the most devastating bush fires in our nation's history in January 2020. Loss of life, countless missing and thousands of homes burned to the ground. Committed to supporting our partners and community through crises, we donated gift baskets to pharmacies across Australia, filled with stock to assist with replenishment for those pharmacies that had been affected by the fires. We knew the devastation to our communities meant we needed to do more so we provided support and assistance through donations to the NSW Rural Fire Service and to the Country Fire Authority (CFA) as well as isolated a number of our products that addressed these charities' requirements. Throughout the devastation McPherson's continued to actively contact various government aligned agencies and charities to confirm their needs and coordinated the delivery of products they required. Our values underpin everything we do Be Bold Be Brave Create BetIer LENDING A HAND TO DISADVANTAGED CHILDREN McPherson’s volunteers lent a hand to Disadvantaged Children in December 2019 at the annual Variety Kid's Christmas Party where selflessly they assisted with set up and manning different stations from face painting, hat making, and helping children enjoy fun rides. The Variety Kid's Christmas Party is an annual event where 5,000 disadvantaged children, their parents and carers can enjoy the spirit of the holidays. Organised by the Ladies of Variety (LOVs), the party gives families a much-needed break from the stresses of financial hardship or caring for a child with a disability, chronic illness or in need of critical care. In addition, across June 2020 we supported the Bear Cottage, an initiative of The Children’s Hospital at Westmead through gift pack donations for their fundraising auctions. Bear Cottage is the only children’s hospice in NSW dedicated to caring for children with life-limiting conditions. 11 Sydney Children’s Hospitals Foundation2020 Annual Report REV IEW OF SALES ($M) 349.1 312.6 Operations NET DEBT* ($M) 77.2 279.5 255.8 222.2 210.3 49.9 36.4 GEARING* (%) 34.9 32.3 29.2 9.8 7.5 9.2 9.9 9.3 7.2 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 * Net debt excluding lease liabilities * 2016 2020 2015 Net debt excluding lease liabilities / (shareholders’ funds + net debt excluding lease liabilities) 2018 2019 2017 RESULTS FOR THE YEAR McPherson’s has reported sales of $222.2 million for the year ended 30 June 2020, a 6% increase on the previous year’s $210.3 million. The Group reported an 11% increase in total sales revenue from continuing operations (excluding two discontinued distribution relationships) to $222.1 million (FY19: $199.3 million). The strong result was primarily due to 75% growth in Dr. LeWinn’s sales revenue on prior corresponding period (pcp) through our strategic and exclusive China facing partner ABM and strong domestic growth, 4% growth in sales of Multix products and 3% growth in sales of Manicare products. Underlying EBIT (earnings before interest and tax) was $23.5 million, 18% above FY19 ($19.9 million), excluding the following significant items in FY20: (i) Impairment of A’kin brand ($7.3) million; (ii) Impairment of Moosehead brand ($1.2) million; (iii) Impairment of investment in the Kotia joint venture ($2.2) million; and (iv) favourable impact of AASB16 Leases $1.6 million. Underlying PBT (profit before tax) was $22.8 million, 20% above FY19 ($19.0 million), excluding the same significant items (i), (ii) and (iii) as noted above in relation to underlying EBIT and (iv) favourable impact of AASB16 Leases $1.1 million. Underlying earnings per share (EPS), excluding significant items, increased 12% from 13.0 cents in FY19 to 14.6 cents in FY20. Inclusive of the aforementioned significant items, McPherson’s reported a 56% decrease in statutory profit after tax of $6.1 million (FY19: $13.7 million). McPherson’s achieved strong underlying cash conversion of 103% in FY20 (FY19: 117%). Net debt remains low at $9.2 million (FY19: $7.5 million), despite key 12 strategic investments in the Aware Group ($3.0 million) and the Kotia, Soulful and SugarBaby joint ventures ($2.7 million in total) in FY20. The Group’s leverage ratio (net bank debt / EBITDA) is low at 0.4 times. The Company's gearing ratio (net bank debt / total funds employed) was 9.3% at 30 June 2020 (FY19: 7.2%). McPherson’s Directors declared a total ordinary dividend of 11.0 cents per share (cps) fully franked for the full year, 10% above the FY19 total ordinary dividend of 10.0 cents per share fully franked, noting that an interim, fully franked special dividend of 2.0 cps was also paid in March 2019. The ordinary dividend payout ratio for the year ended 30 June 2020 was 72% of underlying EPS. McPherson’s refers to its owned brands Dr. LeWinn’s, Manicare, A’kin, Swisspers, Lady Jayne and Multix as its “core six brands”. The majority of these brands are market leaders in their categories. In FY20, McPherson’s recorded 18% growth in sales revenue from its core six brands. STRATEGIC PARTNERSHIPS The progression in growth of Dr. LeWinn’s sales to ABM has been remarkable, with sales of $0.5 million in FY17, $3.1 million in FY18, $16.0 million in FY19 and now $37.2 million in FY20. ABM has now qualified for 51% ownership of the Dr. LeWinn’s Intellectual Property registered in China, exceeding the requisite sales threshold outlined in our Joint Venture agreement of $35.0 million in any 12-month period prior to 30 June 2022. ABM’s commercial partnership with McPherson’s continued to go from strength to strength in FY20, driven by new product innovations. Hero products in the Dr. LeWinn's range in FY20 included Triple Action Day Defence, Collagen Surge Plumping Gel and the Ageless Trinity Pack. CONTINUED INVESTMENT IN INNOVATION & SUSTAINABILITY McPherson’s has continued to invest in its research and development capability with an increase in headcount of 33% in FY20 and over 200 new products developed to support the business’ brands, with an emphasis on the rapid growth skincare ranges. Internally developed products have generated incremental contribution of approximately $20.0 million over the last 4 years. A sustainability agenda has been established and is gaining momentum with elevated, broad focus on all elements of sustainability across the Group, including interactions with key stakeholders. Having a capable and sustainable supplier base is fundamental to the success of the McPherson’s business model. The strength of the Group’s relationships with its suppliers has come to the fore through the challenges of the COVID-19 period, with the supply chain responding very well to the requirements of our customers through this period of unpredictable demand. Having successfully transferred over 50 product ranges from other suppliers and produced its one millionth product for McPherson’s in May 2020, the Aware Group is now McPherson’s key supplier of Dr. LeWinn’s products, with approximately 50% of all Dr. LeWinn’s product forecast to be sourced from Aware in FY21. In recognition of the importance of this relationship, McPherson’s converted $3.0 million in convertible notes to equity in Aware in October 2019 and made an additional $3.0 million in equity investment in Aware in October 2019. McPherson’s now owns 10.7% of the Aware Group. McPherson’s Limited Glam by Manicare Glam Pro Magnetising Eyeliner & Lash System RETURN ON AVERAGE SHAREHOLDERS’ FUNDS* (%) UNDERLYING EARNINGS & DIVIDENDS PER SHARE* (CENTS PER SHARE) 15.7 14.7 14.2 16.7 12.2 13.2 12.5 13.6 13.2 13.5 13.0 12.0** 14.6 11.0 8.0 8.0 8.0 8.5 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 * (Profit after tax excluding significant items and the favourable impact of AASB 16) / 2-year average shareholders' funds * Excluding significant items and the favourable impact of AASB 16 ** Includes a special dividend of 2.0 cents per share 2019 Earnings per share 2020 Dividends per share COVID-19 UPDATE The proactive actions taken by the Company since the COVID-19 pandemic was declared were promptly established to safeguard all our employees in Asia Pacific. The ongoing well-being and support of McPherson’s employees as they work in challenging circumstances is the highest priority. McPherson’s supply chain, managed by the Group’s teams in Hong Kong and Sydney, has operated without significant disruption over the COVID-19 period, with Management striving to increase safety stock levels as a precaution to protect against any future additional waves of pandemic disruption. Independent manufacturing facility Aware Group continues to positively support McPherson’s to ensure sustainable product supply. The recent second wave of COVID-19 restrictions imposed in Melbourne has not significantly impacted McPherson’s, with key Melbourne based suppliers remaining unaffected and sales orders from Victorian based retailers relatively stable. Management will continue to monitor the impact of COVID-19 closely. REFINANCING OF GROUP DEBT FACILITY The Group recently established a three- year debt facility with the support of its existing lenders, Westpac and National Australia Bank. The $47.5 million facility, expiring 30 June 2023, comprises a $35.0 million revolving working capital facility, $10.0 million acquisition facility and $2.5 million ancillary document facility. The Group has comfortable headroom within its covenant structure. NEW BUSINESS DEVELOPMENT Over the last twelve months, the Group’s New Business Development Team has applied rigorous criteria to assess three significant acquisition opportunities and over twenty start up merger and acquisition opportunities. After careful consideration, none of these were progressed for a variety of reasons, including unrealistic vendor valuation expectations, unacceptable risk profiles and sub-optimal strategic alignment. Consequently, the Group is now well placed with a very strong balance sheet to execute appropriate new merger and acquisition opportunities in the post COVID-19 environment. The Group will continue to be disciplined in its assessment of merger and acquisition opportunities as they arise. JOINT VENTURES While the FY20 underlying loss of $1.9 million from the three incubation joint ventures (Kotia, Soulful and SugarBaby) was below expectation, the Group will continue to progress new product launches with key retail partners in FY21, with a substantial improvement in financial outcomes projected. The Kotia deer milk product has received very positive consumer feedback, however the Group’s investment in the Kotia Joint Venture ($2.1 million) has also been fully impaired in FY20, as market traction has been difficult to realise in the current challenging retail environment. We are fully committed to these innovative and differentiated brands for the future. OPERATIONS REVIEW The Group is currently undertaking a broad based review of its operations, including the efficiency and effectiveness of its supply chain and distribution network, which has known significant excess capacity, and the structure of its sales function. It is anticipated that material cost reductions, in the order of $1.0 million to $2.0 million per annum from FY22 will flow from these reviews. GEOGRAPHICAL SEGMENTATION OF SALES AUSTRALI A McPherson’s Australian operations’ sales revenue was $207.4 million, an increase of 7% on FY19 ($193.2 million). Sales from two now terminated agency brands reduced by $10.0 million in FY20, consequently the increase in sales excluding these discontinued agencies was 13%. This was driven by a 75% increase in Dr. LeWinn’s, a 4% increase in Multix and a 3% increase in Manicare sales. NEW ZEALAND McPherson’s New Zealand business offers a similar range of products to those sold in the Australian market and experienced a decline in sales revenue from A$9.6 million in FY19 to A$9.0 million in FY20 due to a A$1.3 million reduction in agency sales, largely due to the discontinuation of the Karen Murrell agency. Sales of owned brand products increased by 9% in FY20, largely due to a 77% increase in sales of Dr. LeWinn’s products. ASIA From its Asia sales headquarters in Singapore, McPherson’s markets an extensive range of Health, Wellness & Beauty products throughout the Asian region. Brands include the key Group- owned brands of Manicare, A’kin, Lady Jayne and Swisspers complemented by a number of licensed brands. Sales reduced by 22% to A$5.8 million in FY20, due to a 28% decrease in owned brand sales and a 74% decrease in private label sales due to the loss of the Watson’s Footcare supply contract. The Group also has a sourcing operation located in Hong Kong that manages many aspects of product procurement and quality assurance. 13 2020 Annual Report REV IEW OF Operations (Continued) CORPORATE STRATEGY In FY20, McPherson’s continued the execution of its 10 strategic imperatives, being: 1 2 3 4 5 6 7 8 9 Refocus our business purely on Health, Wellness and Beauty Revitalise our owned McPherson’s brands Improve and maintain financial strength Move from transactional to strategic partnerships with our top six customers Integrate and grow acquired skincare brands Create a China facing business Ensure we have our team fit for the future with appropriate expertise, capabilities and values Improve performance in New Zealand and Singapore, and expand into Asia Gain efficiencies and savings across the supply chain infrastructure 10 Create a New Business team focused on M&A and new ventures Execution of these strategic imperatives in FY20 provides a solid foundation for growth in FY21. RISK MANAGEMENT AND COMPLIANCE The Board has ultimate responsibility for the oversight of risk management and compliance across the Group. Risk is an integral part of the Group’s decision-making process and all risks and opportunities are adequately and appropriately assessed to ensure that significant risk exposures are minimised. The Group’s risk and compliance frameworks ensure that all risks and compliance obligations are properly identified and managed, that insurances are adequate and that processes are in place to ensure compliance with regulatory requirements. The Managing Director is accountable to the Board for the development and management of the Group’s risk and compliance frameworks and is supported by the Chief Financial Officer in terms of adopting appropriate risk management and compliance processes, including regular and transparent reporting to the Audit, Risk Management and Compliance Committee of the Board. The Senior Leadership Team of the Group is actively involved in the review, isolation and mitigation of key risks and each senior manager is responsible for the management of risk and compliance with relevant laws and regulations. The material risks that have potential to have an effect on the Group’s financial prospects, and how the Group manages these risks, include: 14 RED U CT ION IN CONSUMER D EMA ND Given McPherson’s reliance on consumer spending, adverse changes to the general economic landscape in Australasia or consumer sentiment for the Group’s products could impact its financial results. This risk is addressed through keeping abreast of economic and consumer data research, innovative product development and brand building. WO RKP LACE HEALTH AND SAFETY Given the physical nature of the Group’s operations, workplace health and safety are of paramount importance. Significant effort and attention have been placed on internal policies and processes to ensure that employees are aware of their legal obligations and the productivity benefits that come from working safely. A tone of safety first is set at the top of the organisation and is reinforced through commitment of resources, including a dedicated workplace health and safety officer. TH E IM PACT OF COVID-19 AND FUT U RE PANDEMICS The potential for significant disruption to the Group caused by a global pandemic has been illustrated by the current COVID-19 outbreak. While the potential impact on workplace health and safety, customer demand, continuity of supply and availability of capital has been anticipated and well managed by the Group, the potential for future disruption from COVID-19 or a future new pandemic is self-evident. FOREIGN CURRENCY AND INTEREST RATE FLUCTUATION The Group sources the majority of its inventory in currencies other than Australian dollars, with the US dollar the predominant sourcing currency. Consequently, significant fluctuations in the AUD / USD exchange rate can materially impact the Group’s results. The Board has established, and regularly reviews the Group’s foreign currency hedging policy with the objective of mitigating short to medium term foreign currency risk. Consistent with the policy, the Group continues to operate a comprehensive foreign exchange hedging program, which mitigates the impact of Australian dollar and US dollar movements. The Group’s foreign exchange hedging and the instruments used for foreign exchange hedging remain unchanged, being a combination of options and foreign exchange contracts on a rolling basis. In addition to this, the Group entered into an interest rate swap contract maturing in June 2023 to partially restrict the Group’s interest rate exposure under its new three-year facility of $47.5 million expiring in June 2023. McPherson’s Limited RAW MATERIAL PRICE FLUCTUATION A significant proportion of the Group’s inventory costs are influenced by movements in the price of commodities such as resin and aluminium. Such commodity prices are usually denominated in US dollars and historically are correlated with movements in the AUD / USD exchange rate. This correlation provides a degree of natural hedge against the profit impact of AUD / USD currency movements. Consequently, separate risk mitigation measures are not utilised to manage this risk. LOS S OF A MA JOR CU STO ME R OR DE RA NGI NG OF A MA JOR PROD U CT RANGE A significant proportion of the Group’s sales is related to a significant export customer and two domestic customers in the grocery channel. The deletion of a material product range by these customers could materially reduce McPherson’s profitability. In order to mitigate this risk, the Group strives to provide superior customer service, product innovation and competitive pricing. It is also pursuing a strategy of channel and customer diversification, as demonstrated by the recent joint venture activity in Health, Wellness and Beauty. EXPO S URE TO THE CHI NA MARKET An increasing portion of the Group's sales is generated directly and indirectly by demand from consumers based in China. Consequently, the Group has an exposure to any change in the Chinese market that may impact this demand, such as a change in government regulations that may impact sales of the Group's products to China based consumers. The Group seeks to mitigate this risk by attempting to understand and anticipate changes in the China market that may impact its sales. Additionally, the Group engages with business partners and advisors that are compliant with Chinese regulations and have a strong understanding of the Chinese market. KE Y SUPPLIER REDUNDANCY The Group has significant reliance on key suppliers of products. Many such suppliers are based in China, with key skincare suppliers predominantly based in Australia. Alternate suppliers have been isolated for all key suppliers. The potential for political instability to impact the Hong Kong sourcing team is being closely monitored. The capture of important supplier information on the Group’s ERP system has improved the ability of the Group to adapt to any future disruption to the Hong Kong sourcing team. The continued transition of significant Dr. LeWinn’s formulations and production to Aware Environmental will materially reduce the risk of disrupted skincare production and access to formulations. IN VESTMENT OF CAPITAL Given the strength of the Group’s balance sheet and the stated objective of deploying capital to merger and acquisition activity, the risk element is the deployment of capital to investments that do not present acceptable risk and reward outcomes for the Group’s shareholders. The following measures are being taken to manage this risk: opportunities under review to ensure appropriate focus and resourcing; > Restriction of the number of > Careful assessment of risk and return > In the case of recent joint ventures, de- metrics associated with opportunities; risking of return on investment outcomes by determining most consideration with reference to actual EBIT outcomes; and > Engagement of external assistance, such as due diligence expertise where deemed necessary for smaller investments and mandatory for investments in excess of $10 million. Dr. LeWinn’s Ultra R4 Collagen Surge Plumping Gel DEFICIENCY IN PRODUCT QUALITY As a supplier of branded consumer products to retailers, the Group has an exposure to product faults which could lead to liability claims and product recalls. To control this risk, the Group adopts stringent quality control and supplier verification procedures. In addition, it holds adequate product and public liability insurance and product recall insurance. COMPLIANCE WITH DEBT FACILITY UNDERTAKIN GS A portion of the Group’s capital requirement is in the form of debt facilities supplied by financial institutions that require the Group to comply with various undertakings, including specific financial ratios or covenants, in order for the Group to continue to access facilities. The Group seeks to adopt a debt structure that in both quantum and terms has sufficient capacity to withstand a short term decline in earnings or assets that may impact its ability to meet its various debt facility undertakings. CY BER S ECU RI TY The Group places significant reliance on its Information Technology (IT) systems to transact with customers and connect with consumers. The inability to utilise or access our IT systems through a successful denial of service, ransomware or other form of attack could materially impact the Group’s ability to transact and hence affect its earnings. The Group uses firewall monitoring software and anti-virus software to block potential cyber threats. Additionally, it has a network monitoring and alert tool that is designed to detect and signal unusual network behaviour. Ongoing external review and input are implemented to ensure the effectiveness of ‘cyber’ controls to meet ever evolving threats of this nature, including business continuity plans and disaster recovery testing. TALENT MANAGEMENT The loss of key management talent and potential underutilisation of key management talent represent a key risk to the business that is mitigated by Human Resources establishing talent development plans, well targeted incentive programs and succession plans. REGULATORY COMPL IANCE The general risk of compliance with changes in Australian Consumer Law and product standards, with related implications for supplier and inventory management, as well as penalties for non-conformance, is managed by the employment of appropriately knowledgeable employees accessing regular updates on changes in standards. Additionally, regular staff training is conducted by external legal experts in Australian Consumer Law. 2020 Annual Report 15 Category OV ERV IEW M C P H E R S O N ’ S H A S C O N T I N U E D TO I N V E S T I N I T S : > Market leading owned brands; > Strong reputable joint ventures that complement the Group's portfolio; and > Innovation program for the core six brands (Dr. LeWinn’s, A’kin, Manicare, Lady Jayne, Multix and Swisspers) leveraging key consumer macro trends and market leading business intelligence from Mintel. The growth in the core six brands was led by continued investment in: > Research & development to fuel differentiated superior innovation and leading edge sustainable new products; > Clinical and consumer user efficacy claims; > High impact in-store merchandising units; > Through the line brand campaigns; > Digital amplification and engagement initiatives; and > Market expansion plans. Research and development to support innovations across the brands core 6 brands Clinical trials and consumer user claims Integrated sales and marketing activation plans 16 McPherson’s Limited ENRICHING W ITH OUR People's lives Innovative Brands Manicare NOVA FIT ® Face Massager 17 2020 Annual Report Category OV ERV IEW (Continued) CORE 6Brands +75% growth D R . L E W I N N ’ S S A L E S R E V E N U E DR. LEWINN’S 2020 was another outstanding year for Dr. LeWinn’s with 75% growth in sales revenue year on year, across domestic and international markets. For over 30 years, Dr. LeWinn’s has been bringing innovative products to consumers and 2020 was no exception with the launch of: Cleansing Jelly; Multi-Action Toning Mist; > Ultra R4 Plumping Lip Mask; > Line Smoothing Complex Melting > Line Smoothing Complex > Line Smoothing Complex Hyaluronic Acid & > Line Smoothing Complex Hyaluronic Acid Caffeine Under Eye Recovery Mask; and Boosting Essence, a high potency treatment that tapped into the global growth of singular ampoules. In 1H20, Dr. LeWinn’s entered into the Dermo Solutions category with the launch of Recoverëderm™, a superior range scientifically proven and specifically developed for sensitive and irritated skin. This strategic initiative has helped to further strengthen the brand’s expertise in skincare for all skin types and ages. While domestic sales remain strong, the international success in China has fuelled brand growth exponentially with 133% growth in sales revenue year on year. By launching key products in the Line Smoothing Complex sub-range that help build the skincare regimen and continuing to support hero products in China, the sub-range continued to unlock sales prosperity. Looking ahead, Dr. LeWinn’s is set to reach new heights through building existing sub- ranges, introducing new products with advanced technologies and entering into new categories. The Dr. LeWinn's brand will continue to invest in through the line communication programs and retailer partnerships, as well as accelerate digital connections with consumers to ensure sustainable brand success. 18 Dr. LeWinn's Recoverëderm™ range McPherson’s Limited A’kin Natural Face Sheet Mask range A’ K I N M A S KS S A LE S R A N K E D I N TH E 5 natural sheet mask category A’kin Natural Deodorant range Top A’KIN A’kin has continued to build on its clinically proven credentials and attract new users to the brand, despite tough trading conditions. In 2020 A'kin: following the successful relaunch with clinically proven efficacy claims; > Continued +68% growth momentum for the Age Defy range > Expanded the range of clinically proven natural deodorants made without aluminium with 2 enticing scents (Rose & Australian Sandalwood and Australian Desert Lime & Sweet Orange), which propelled growth for this sub segment by +155% versus last year; consumers to A’kin with the launch of brightening, age defy and hydrating new products made with A-Beauty ingredients; and > Leveraged the popularity of natural face masks to attract new > Introduced the scientifically proven Miracle Shine Conditioning Hair Mask in a larger pack format to capitalise on increased consumer demand for at home salon treatments. Moving forward, A’kin will leverage growing macro trends to strategically launch innovative new products, based on its haircare foundations, whilst focusing on channel distribution in Australia and international expansion. 2020 Annual Report 19 Category OV ERV IEW (Continued) MANICARE In 2020, Manicare further strengthened its leadership in Beauty Tools in the pharmacy and grocery channels, driven by accelerated new product development in “Smart Tech Beauty” and the consumer surge in at home do-it-yourself beauty during COVID-19 restrictions. The launch of the premium pediPRO range of foot tools delivered strong results in pharmacy, accelerated by consumer desire for salon quality products and do-it-yourself pedicures when beauty salons were closed. The launch of NOVA FIT® positioned Manicare as the market leader of skincare tools launched in 2020. Using salon grade Electronic Muscle Stimulation Technology (EMS), Manicare® NOVA FIT® face massager, delivers clinically proven skin firmness with beauty salon grade technology. After the successful launch of the innovative Magnetising Eyeliner and Lash System in 2019, Glam by Manicare released Glam Xpress® in April 2020, a tech smart all-in-one eyeliner with lash adhesive for effortless and instant lash application. With innovation being a strategic pillar, the comprehensive Glam By Manicare lash portfolio, including Core, Luxe and New Tech styles, boosted Glam’s market share in the eye lashes category in pharmacies. Glam by Manicare Glam Xpress® Adhesive Eyeliner & Lashes S M A R T I N N O VAT I O N beauty accounts for56% of Manicare's sales revenue growth in FY20 Manicare NOVA FIT ® Face Massager 20 McPherson’s Limited Lady Jayne Premium Brush LADY JAYNE Lady Jayne continued to lead the market with innovative and superior new products and premium craftsmanship, with a focus on developing the top tier brush range offer in 2020. The launch of the Premium Brush in 2020 and the strong sales performance of the Salon Pro Brush range have cemented the brand as the category beacon within the pharmacy channel. In the grocery channel, further incremental ranging in October 2020 on a select range of Lady Jayne’s popular Detangling Brush range has expanded brand accessibility and connection with consumers. As a part of the Group’s Corporate Social Responsibility strategy, Lady Jayne commenced a national partnership with Variety's Hair With Heart initiative. Variety - The Children's Charity, was established to support children who are sick, disadvantaged or have special needs by providing practical equipment, programs and experiences. Hair with Heart is Variety’s national hair donation initiative. Hair contributions are processed into specialist wigs for children who have lost their hair due to a medical condition. Money raised via the initiative goes to Variety’s grants and programs, such as providing funding to families for mobility equipment, communication devices, medical items and therapeutic treatments. Lady Jayne has been committed to raising awareness for this cause by donating 100% of profits from the sales of Gold Double Bar slides in 2020 ($25,000 donation). No. 1Hair Tool and Accessories brand in Australia Source: IRI Scan, Hair Tools and Accessories, Pharmacy, MAT To 02/08/20 21 2020 Annual Report Category OV ERV IEW (Continued) Swisspers Biodegradable Facial Wipes Swisspers Paper Stem Cotton Tips biodegradable 100% plant-based facial cleansing wipes, made from a mix of cotton and renewable plant fibres designed to appeal to eco-conscious consumers. Moving forward, Swisspers will continue to win the hearts of more consumers through a commitment towards sustainable product innovation and entry into new categories. Strengthening consumer engagement with a refined, more natural brand essence, will further reinforce Swisspers as the choice for pure, soft cotton care… caring for our skin and our environment. I N T R O D U C T I O N O F E C O B I O D E G R A D A B L E 1 0 0% plant-based facial cleansing wipes SWISSPERS Swisspers, an iconic Australian brand trusted and loved by Australian families, had a strong year in 2020, fuelling category growth and strengthening market leadership with impressive market share gains. Sustainable innovation across the cotton and wipes portfolio was instrumental to the brand’s success in 2020. Earth Kind™ cotton tips with paper stems, made from a mix of sustainably grown wood and recycled paper, was a key performer which contributed to the incremental sales growth across Pharmacy and Grocery channels. In March 2020, following the market success of Earth Kind™ paper stems, Swisspers introduced its first Eco 22 McPherson’s Limited MULTIX The Multix brand maintained its leading market position in 2020 within the bags, wraps and foils category, driven by sustainable innovation and a surge of in-home consumption due to COVID-19 restrictions. Multix experienced a strong start to FY20 with the expansion of its sustainable offer through the launch of Multix Greener Plant Based and Recycled Plastic garbage bag range. Multix was first to market with this sustainable innovation in the category and cemented its leadership in sustainability with a double digit growth and a higher portfolio share in sustainable offers than the category. The COVID-19 lockdowns in 2H20 boosted sales, driven by panic buying and increased in-home consumption of garbage bags, baking paper and freezer bags. McPherson’s Supply Chain team worked tirelessly to deliver stock to retail partners, who were challenged to fill shelves stripped bare as a result of panic buying. Looking forward, further innovation in sustainable products is planned for 2021 with the expansion of the Greener range into cling, snack and sandwich bags with plant based and compostable products. Staying close to consumer trends, sustainable technology and speed to market will enable Multix to continue launching consumer relevant and sustainable innovation first to market. M A R K E T L E A D E R I N sustainability innovation in the bags, wraps and foil segments Multix Greener Brown Baking Paper Multix Greener Alfoil Multix Greener Plant Based Cling Wrap 23 2020 Annual Report STR ATEGIC Investments JOINT VENTURE WITH The successful relationship between McPherson’s and Access Brand Management (ABM) was formalised through the establishment of the joint venture Dr. LeWinn’s China Limited in November 2019. This joint venture will develop new brands and products tailored for the China market and sell them to ABM, which will be incremental to the continued strong McPherson’s sales of Dr. LeWinn’s products to ABM. Key business decisions for the joint venture such as new product development, intellectual property, marketing, supply chain and pricing require the unanimous approval from the joint venture’s Board, which comprises an equal number of Directors from McPherson’s and ABM. ABM is a trusted distributor in the People’s Republic of China market, with a successful track record of brand management and market expansion. Dr. LeWinn’s was one of the first brands to partner with ABM in China, and has grown and firmly established itself as a top 5 brand within the ABM portfolio. R E M A R K A B L E G R O W T H I N D R . L E W I N N ’ S S A L E S F R O M M C P H E R S O N ' S T O A B M , from $0.5 million in FY17 to $37.2 million in FY20 24 McPherson’s Limited AUSTRALIA Trusted Partnerships Speed to Market Agreed Business Model Flexibility to React to Change Appropriate Pricing Corridors Rigorous Processes Continuity of Supply Adaptable to Market Dynamics CHINA T H E D R . L E W I N N ’ S R E C O V E R Ë D E R M™ R A N G E W A S L A U N C H E D O N T H E A B M A P P O N 2 1 A U G U S T 2 0 2 0 . all Within 16 minutes, 98,000 products were sold out. Dr. LeWinn's Recoverëderm™ range 2020 Annual Report 25 STR ATEGIC Investments (Continued) McPherson’s commenced its partnership with the Aware Group in April 2019 with the production of the Dr. Lewinn’s number one SKU Triple Action Day Defence. In May 2020, Aware reached the milestone of manufacturing the millionth product for Access Brand Management, our China joint venture partner. Dr. Lewinn’s is now one of the top 3 brands manufactured by Aware. McPherson's increased its equity stake in the Aware Group to 10.7% in October 2019 as a strategic manufacturing partner to deliver on the high-quality standards expected from Australian and Chinese beauty consumers, as well as to ensure continuity of supply for the fast growing China market. Approximately 25% of all Dr. LeWinn’s production for domestic and export took place with the Aware Group in FY20 with plans to accelerate this to 50% in FY21. Aware has been an integral part of establishing the credibility benchmark for the Dr. LeWinn’s brand and provides important engagement opportunities to support the growth in China. In October 2019, Aware hosted the first ever Dr. LeWinn’s Brand Day celebration. The event was attended by 250 top tier ABM resellers who enjoyed a panel discussion, a formal address by Laurie McAllister, McPherson's Managing Director, new product launches and private tours of the Aware facility and laboratories. The amplification of this event was supported by 15 influencers and media, including live streaming during the event. In November 2019, Aware supported Dr. LeWinn’s with an exclusive event to congratulate the top 10 ABM resellers for Dr. LeWinn’s. Special awards were presented by Laurie McAllister, McPherson's Managing Director. The 10 ABM resellers then enjoyed a personalised tour of the Aware facility, including a special opportunity to mix one of the most famous Dr. LeWinn’s products in the laboratory. As McPherson’s continues its strategic partnership with Aware, the manufacturing of more brands is being transitioned over to Aware. To date, over 50 SKUs across our two leading skincare brands have successfully achieved a technical transfer to Aware. A W A R E R E A C H E D T H E M I L E S T O N E O F M A N U F A C T U R I N G T H E millionth product for ABM in FY20 26 McPherson’s Limited Hammond Road facility Dandenong (VIC) Kotia New Zealand Deer Milk Skincare T H E W O R L D ’ S F I R S T S K I N C A R E M A D E W I T H 100% pureNew Zealand deer milk Kotia launched in February 2019 into a category with over 1,500 competitors achieving 5% brand awareness, a strong purchase intent score of 54% amongst Beauty enthusiasts and was recognised with 11 Beauty Industry Awards. Initially ranged exclusively in 340 Priceline stores and online in Australia, and 134 Life Pharmacy and UniChem stores in New Zealand, the brand has expanded into a number of new distribution channels including independent and banner pharmacy groups such as Health 2000 across Australia and New Zealand. The impacts of COVID-19 on the premium skin care category during the later half of FY20 have been significant for both sales and distribution growth as well as brand momentum. With many pharmacies in Australia and New Zealand being unable to open or placing their focus on essential healthcare items, the category has seen a 22% decline in sales. The post COVID-19 consumer is expected to behave very differently, overly cautious about their health and their spending. With unemployment forecast to rise significantly, the brand is taking a cautious strategy towards future growth and will target online sales as well as expanded ranging into specialist online beauty retailers and low cost retailers. FY21 will see the launch of three new products into the fast growing facial skin care mask category to drive a new entry point into the brand. 27 2020 Annual Report STR ATEGIC Investments (Continued) The COVID-19 outbreak has seen major social and economic changes across the globe. As well as the changes to everyday life, there have also been drastic changes in consumer behaviour, one of these being the major increase in purchases surrounding immunity and immune system health. Food and beverage products, which provide immune benefits, are predicted to see strong demand well beyond the COVID-19 pandemic. With Soulful milk formulas offering functional immune health benefits, this presents a great opportunity to grow the brand throughout the current situation and well into the future. Soulful, a brand of the My Kart joint venture, is all about creating smart, wholesome nutrition and healthy living solutions accessible to everyone. Proudly Australian, and with a passion for health and wellbeing, the Soulful product range has been developed for different stages of life to make staying healthy both easy and effective. Offering nutritional support for adults and children, Soulful also provides immunity support with added lactoferrin and probiotics. First shipments to China commenced in September 2020 to support a flagship store launch on the Alibaba Tmall platform. This Cross-Border E-Commerce platform sees over 700 million Chinese consumers visits annually. Across Australia and New Zealand, Soulful will focus on ranging in Independent Grocery, Pharmacy & Health stores prioritising Daigou shoppers and community health, as well as e-commerce sales via the Soulful website. With a goal to help individuals achieve and maintain healthy and wholesome lifestyles, Soulful marketing initiatives are scheduled to activate via online and social media engaging a range of nutritionists and health experts, who will develop and share blogs and recipes with a focus on all aspects of health and wellbeing. 28 Soulful Junior Lactoferrin Immunity Milk Formula 4 8 % O F A S I A PA C I F I C C O N S U M E R S A R E M A K I N G C H A N G E S I N T H E I R D I E T S T O improve immunity in the past year alone (source: FMCG Gurus 2020 report) McPherson’s Limited Happy Flora Cleanse Plant-Based Digestive Block Promoting healthy digestion to support optimal wellbeing, Happy Flora, a brand of the My Kart joint venture, takes a light-hearted approach to keeping healthy and regular. Gut health is becoming an increasingly important category within the health products market with 2 in 3 Australians reporting to have conditions related to microbiome imbalance and 1 in 3 Australians buying products targeting improved microbiome and digestive health in the past 12 months. Happy Flora will go to market in November 2020 with a range of fruit based natural digestive aids and will support a flagship store launch on the Alibaba Tmall. which sees over 700 million Chinese consumers visit annually and is the #1 Cross-Border E-Commerce platform. Across Australia and New Zealand, Happy Flora will focus on ranging in Independent Grocery, Pharmacy & Health stores prioritising Daigou shoppers and community health, as well as e-commerce sales via the Soulful website. The Happy Flora marketing approach of Making Health Easy across social, digital, influencers & key opinion leaders will be used to drive discovery and purchase of Happy Flora, using trustworthy information for consumers. 29 A $ 9 M C H I N A D I G E S T I V E H E A LT H M A R K E T expected to double within 5 years (source Euromonitor July 2020) 2020 Annual Report STR ATEGIC Investments (Continued) SugarBaby is an Australian made and owned beauty brand which has delivered effective and functional skincare, treatments and tanning solutions since 1998. 2020 has seen SugarBaby undergo a strategic rebrand and repositioning with new and improved formulas to target a fresh demographic of beauty consumers. SugarBaby's new key messaging of Clean + Kind + Vegan commits the brand to remain at the forefront of environmentally friendly beauty products, with both eco-friendly packaging and innovative products that are kind to both the Earth and skin. SugarBaby has partnered with the Great Barrier Reef Foundation to show our commitment to our products doing good as well as feeling good. The SugarBaby rebrand not only marks a change in the look and feel of the brand, but also the retail strategy. With over 100,000 loyal followers on Instagram, e-commerce is a natural channel selection for SugarBaby, whose e-commerce site will launch in September 2020. SugarBaby also seeks to partner with select beauty retailers who understand modern beauty customer needs and share their vision for premium, sustainable and ethical products that are as individual as they are. The relaunch will be backed by a strong marketing campaign in FY21 which includes digital, social, influencer and sampling elements. W E ’ R E C L E A N + K I N D + V E G A N and serious about keeping beauty fun! 30 McPherson’s Limited SugarBaby Australian Skincare range 31 2020 Annual Report BOARD OF Directors GRAHAM A. CUBBIN B.Econ. (Hons) LAURENCE MCALLISTER Independent Non‑Executive Director and Chairman of the Board Managing Director and Chief Executive Officer GRANT W. PECK B. Bus, CA Independent Non‑Executive Director EXPERTISE AND E XP ERI EN CE Mr. Cubbin is the Chairman of the McPherson’s Limited Board. He was appointed an Independent Non- Executive Director of the Company on 28 September 2010 and was appointed Chairman of McPherson’s Limited on 1 July 2015. Mr. Cubbin was a senior executive with Consolidated Press Holdings Limited (CPH) from 1990 until September 2005, including Chief Financial Officer for 13 years. Prior to joining CPH, Mr. Cubbin held senior finance positions with a number of major companies, including Capita Financial Group and Ford Motor Company. Mr. Cubbin has over 20 years experience as a Director and Audit Committee member of public companies in Australia and the United States. SPEC IA L RESPON SIBILIT IES > Chairman of the Board > Member of the Nomination and > Member of the Audit, Risk Management and Compliance Committee Remuneration Committee OTHER CURRE NT DI REC TORSH IP S IN ASX L ISTED C OMPAN IE S > Director of WPP AUNZ Ltd, Bell Financial Group Limited and White Energy Company Limited FORME R DI R EC TO RSH IPS IN AS X LISTED COMPA N IES IN LAST TH RE E YE ARS INT ERESTS IN S HA RE S A ND PERFORMA NC E RIGH TS > Director of Challenger Limited > 270,000 ordinary shares in > No performance rights held McPherson’s Limited E XP ER IEN CE AND E XP ERT ISE Mr. McAllister was appointed Managing Director and Chief Executive Officer of McPherson's Limited on 21 November 2016. Mr. McAllister is an experienced international senior executive with strong consumer marketing and dynamic commercial experience. Prior to this role, Mr. McAllister worked for over 23 years with the Coca-Cola Company, managing New Product Development, M&A, Innovation and the Research and Development function across Europe, Eurasia and the Middle East. Mr. McAllister was also the President of Nordics and the Chief Commercial & Marketing Officer for Japan for the Coca- Cola Company. Throughout this tenure, Mr. McAllister represented the Coca-Cola Company on Boards in Germany, Sweden, Norway, Denmark and Finland. More recently at Sanofi, Mr. McAllister was the Managing Director of the ANZ Affiliate, responsible for six business units with a turnover of $1.0 billion and $0.5 billion in profit before tax. In addition to this, Mr. McAllister was on the Board of Medicines Australia for 2 years representing the $18 billion Pharmaceutical Industry and led a significant turnaround of Sanofi's Consumer Health Care business in Australia and New Zealand. SP ECIAL RE SP ONSIBILIT IES > Managing Director and Chief Executive Officer OT HE R CUR RENT D IRE CTORSHIPS IN ASX LISTE D COMPANIE S > Non-Executive Director of Medlab Clinical Ltd FORME R D IRE CTORSH IPS IN ASX LISTE D COM PA NIES IN LAST THREE YE ARS IN TE RESTS IN SHARE S AND PE RFORMANCE RIGH TS > None > Nil ordinary shares in > 2,541,000 performance rights McPherson's Limited 32 EXPERTISE AND EXPERIENCE Mr. Peck was appointed an Independent Non-Executive Director of McPherson’s Limited on 14 December 2017. With effect from 20 February 2018, Mr. Peck was appointed a member and Chairman of the Board’s Audit, Risk Management and Compliance Committee, and a member of the Board’s Nomination and Remuneration Committee. Mr. Peck has more than 27 years of branded consumer goods experience both domestically and internationally, including leading the finance and supply chain functions in both large and mid-sized FMCG (fast moving consumer goods) organisations. He has a strong record of delivering improved performance outcomes across varied functions, business sectors and geographies. Previously, Mr. Peck was the CEO of Sunny Ridge Farms and the Chief Financial Officer of Carlton & United Breweries and the Group Managing Director of Supply for CUB with the Fosters Group. Mr. Peck has also held senior general management roles in the food industry with McCormick & Co, where he was responsible for the industrial products business in Australia, and also Chief Financial Officer for the Asia Pacific region with responsibility for operations in China, Singapore and joint ventures throughout Asia. Mr. Peck holds a Bachelor of Business and is a Chartered Accountant. SPECIAL RESPONSIBILITIES Management and Compliance Committee > Chairman of the Audit, Risk > Member of the Nomination and Remuneration Committee OTHER CURRENT DIRECTORSHIPS IN ASX LISTED CO MPANIES > None FORMER DIRECTORSHIPS IN ASX LISTED COMPANIES IN LAST THREE YEARS INTER ESTS IN SHAR ES AND PERFORMANCE RIGHTS > None > 14,400 ordinary shares in > No performance rights held McPherson’s Limited JANE M. MCKELLAR MA (Hons) Independent Non‑Executive Director EXPERTI SE AND EXPERI ENCE Ms. McKellar was appointed an Independent Non-Executive Director of McPherson's Limited on 23 February 2015. With effect from 24 March 2015, Ms. McKellar was appointed a member of the Board’s Nomination and Remuneration Committee, and was appointed Chairman of that committee on 27 April 2015. She was also appointed a member of the Board’s Audit, Risk Management and Compliance Committee on 20 February 2018. Ms. McKellar is an experienced international senior executive with extensive customer-focused, brand, marketing and digital experience across a number of high-profile global brands. Ms. McKellar commenced her career at Unilever in London and her subsequent roles have included global CEO of Stila Corporation, Managing Director of Elizabeth Arden Australia, Founding CEO of Excite.com Asia Pacific, Director of Sales and Marketing for Microsoft (MSN), and Founding Director of Ninemsn. Ms. McKellar holds a Master of Arts (Hons) from the University of Aberdeen and is a Graduate of the Australian Institute of Company Directors. SPECIAL RESPONSI BILITIES Remuneration Committee > Chairman of the Nomination and > Member of the Audit, Risk Management and Compliance Committee OTHER CURRENT DIRECTORSHIPS IN ASX LISTED COMPANIES > Director of GWA Group, Freedom Foods Group Limited and NRMA FOR MER DIRECTORSHIPS IN ASX LISTED COMPANIES IN LAST THREE YEARS > Director of Automotive Holdings Group Limited INTERESTS IN SHARES AND PERFOR MANCE RIGHTS McPherson’s Limited > 6,357 ordinary shares in > No performance rights held McPherson’s Limited COMPAN Y Secretaries PHILIP R. BENNETT B.Com, CA PAUL WITHERIDGE B.Com, CA Joint Company Secretary EXPERTI SE AND EXPERI ENCE Mr. Bennett was appointed Company Secretary of McPherson’s Limited on 2 February 2012. Mr. Bennett had previously held the position of Chief Financial Officer of McPherson’s Limited since 2000, and Company Secretary from 1995, and stepped down from both these positions in November 2011. Mr. Bennett holds a Bachelor of Commerce from the University of Melbourne and is a Chartered Accountant. Before joining McPherson’s, Mr. Bennett held senior financial and company secretarial positions with another listed company, and prior to that was a senior manager with a major Australian chartered accounting firm. Chief Financial Officer and Joint Company Secretary EXPERTISE AND EXPERIENCE In May 2010, Mr. Witheridge was appointed the Chief Financial Officer of McPherson’s Consumer Products Pty Ltd. Mr. Witheridge was appointed Chief Financial Officer and Joint Company Secretary of McPherson’s Limited on 1 December 2011. Mr. Witheridge holds a Bachelor of Commerce and is a Chartered Accountant. Before joining McPherson’s, Mr. Witheridge held senior financial and company secretarial positions with a number of listed companies in the retail sector including Angus and Coote Limited and OPSM Limited. Prior to that, Mr. Witheridge spent six years within KPMG’s Audit and Assurance Practice. ALISON J. MEW MSc (Hons) Independent Non‑Executive Director E XP ERTIS E AND E XP ERI ENCE Ms. Mew was appointed an Independent Non-Executive Director of McPherson’s Limited on 24 July 2018. Ms. Mew has more than 30 years of leadership and executive management experience in Australasia across a diverse range of functions within the biopharmaceutical and health services sectors. Her experience includes product manufacturing, quality systems, logistics, sales and marketing, as well as research and development. Ms. Mew is also familiar with the regulatory environment that governs the healthcare market. In addition to these technical and operational activities, Ms. Mew has been involved in corporate acquisitions and divestments as well as the strategic planning process. Ms. Mew has recently held the positions of Chief Operating Officer and then Chief Executive Officer of Genetic Technologies Limited, an ASX and NASDAQ listed leading edge genetic testing services business. Ms. Mew holds a Bachelor of Science and a Master of Science (Microbiology), has undertaken the Executive Development Programme at Melbourne Business School and is a Graduate of the Australian Institute of Company Directors. SP ECIAL RE SP ONSIBILIT IES OT HE R CUR RENT D IRE CTORSHIPS IN ASX LISTE D COMPANI ES > None > None FORME R D IRE CTORSH IPS IN ASX L IST ED COMPAN IES IN LAST T HRE E YEARS IN TE RESTS IN SHARE S AND PE RFORMANCE RIGH TS > None > 12,000 ordinary shares in > No performance rights held McPherson's Limited GEOFFREY R. PEARCE Non‑Independent Non‑Executive Director EXP ERTISE AN D EXP ERI EN CE Mr. Pearce was appointed a Non- Executive Director of McPherson's Limited on 20 February 2018. Mr. Pearce has more than 40 years of experience in the pharmaceutical, cosmetic and personal care industries. He has extensive experience in pharmaceutical and cosmetic manufacturing as well as raw material sourcing and product distribution, having established, operated and grown a number of personal care businesses in these industries. Mr. Pearce is the Chairman of Aware Environmental Ltd, a key supplier of McPherson's Limited. Given the increasing importance and materiality of the Aware supplier relationship, the Board does not consider Mr. Pearce to be an independent Director. SPE CI AL RES PON SI BILIT IES > None > Non-Executive Director of Cann OT H ER CU RRENT DI RECTORSH IPS IN AS X LI ST ED COMPAN IE S Group Limited FORMER DIR ECTO RSH IPS IN ASX LISTE D C OMPANIES IN LAST THR EE YEA RS of Probiotec Limited > Non-Executive Director and Chairman > Executive Director of BWX Limited > 695,939 ordinary shares in > No performance rights held INTER ESTS IN S H ARE S AN D PE RFO RMANC E RIGH TS McPherson's Limited 33 2020 Annual Report Corporate Governance Statement The Corporate Governance Statement sets out key aspects of the McPherson’s Limited Group’s (“Company” or “Group”) corporate governance framework and main governance practices. The Board of Directors is committed to achieving and demonstrating the highest standards of corporate governance, which is considered to be essential for the long term performance and sustainability of the Group and to protect and enhance the interests of shareholders and other key stakeholders. The Company and Board regularly review the Group’s governance arrangements, as well as developments in market practice, stakeholder expectations and regulations. The Company has undertaken a comprehensive review of its corporate governance arrangements during the year ended 30 June 2020, including with reference to the 4th Edition of the Corporate Governance Principles and Recommendations (“Corporate Governance Principles”) issued by the ASX Corporate Governance Council in February 2019, and the Board has made a number of changes to key Board charters and policies following that review. The amended charters and policies were approved and came into effect from 27 May 2020. The Group’s corporate governance arrangements have conformed to: a) The 3rd Edition ASX Corporate Governance Principles for the whole of the year ended 30 June 2020 and to the date of the statement; and b) The 4th Edition ASX Corporate Governance Principles from 27 May 2020 until the date of the statement. The Company’s Corporate Governance Statement for FY20 has been approved by the Board and is current as at 18 August 2020. The statement outlines the Group’s main corporate governance practices in place during the financial year ended 30 June 2020, and currently. The Corporate Governance Statement for FY20, and copies or summaries of the other governance documents referred to in the statement, can be found in the Corporate Governance section of the McPherson’s Limited website which is located at the following address: https://www.mcphersons.com.au/corporate-governance 34 McPherson’s Limited Directors’ Report The Board of Directors presents its report on the consolidated entity (referred to hereafter as McPherson’s or the Group) consisting of McPherson’s Limited and the entities it controlled at the end of, or during, the year ended 30 June 2020. A) DIRECTORS The following persons were Directors of McPherson’s Limited from the beginning of the financial year to the date of this report except as indicated: > G.A. Cubbin (Chairman) > L. McAllister (Managing Director) > G.W. Peck (Chairman of the Audit, Risk Management and Compliance Committee) > J.M. McKellar (Chairman of the Nomination and Remuneration Committee) > G.R. Pearce > A.J. Mew B) PRINCIPAL ACTIVITIES McPherson’s, established in 1860, is a leading supplier of Health, Wellness and Beauty products in Australasia and increasingly China, with operations in Australia, New Zealand and Asia. McPherson’s markets and distributes beauty care, hair care, skin care and personal care items such as facial wipes, cotton pads and foot comfort products, as well as a range of kitchen essentials such as baking paper, cling wrap and aluminium foil. McPherson’s manages some significant brands for agency partners and via joint venture arrangements such as Kotia, however, the majority of revenue is derived from the company’s diversified portfolio of owned market-leading brands, including Dr. LeWinn’s, A’kin, Manicare, Lady Jayne, Swisspers, Multix, Moosehead and Maseur. Manufacturing is outsourced to various suppliers, predominantly in Asia and Australia. McPherson’s maintains a strong presence in Hong Kong and mainland China, focused on product sourcing and quality assurance. C) DIVIDENDS Details of dividends paid or declared in respect of the current financial year are as follows: Interim ordinary dividend of 4.0 cents per fully paid ordinary share paid on 19 March 2020 (fully franked) Final ordinary dividend of 7.0 cents per fully paid ordinary share declared by the Directors (fully franked) and payable on 24 September 2020 but not recognised as a liability at year end Total dividends in respect of the financial year $’000 4,274 7,509 11,783 The 2019 final ordinary dividend of $6,387,000 (6.0 cents per fully paid ordinary share) was paid on 26 September 2019. D) CONSOLIDATED RESULTS The consolidated profit after tax of the Group for the financial year ended 30 June 2020 was $6,062,000 (2019: $13,721,000). The current year profit after tax is inclusive of significant items amounting to a net expense after tax of $10,274,000 (2019: nil). The consolidated profit after tax for the year ended 30 June 2020, excluding significant non-recurring items, was $16,336,000. Refer to Note 3 Significant Items for further information. E) REVIEW OF OPERATIONS The review of operations of the Group is set out on pages 12 to 15 of the Annual Report and forms part of the Directors’ Report. F) SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS There were no significant changes in the state of affairs of the Group during the financial year. 35 2020 Annual Report Directors’ Report continued G) EVENTS SUBSEQUENT TO BALANCE DATE The recent second wave of COVID-19 restrictions imposed in Victoria and New Zealand has not significantly impacted McPherson’s, with key Melbourne based suppliers remaining unaffected and sales orders from Victorian and New Zealand based retailers remaining relatively stable. No other matter or circumstance, other than what has been noted above, has arisen since 30 June 2020 that has significantly affected the Group’s operations, results or state of affairs, or may do so in future financial years. H) LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS In the opinion of the Directors, it would prejudice the interests of the Group to include additional information, except as noted above, and as reported elsewhere in the Directors’ Report and the financial statements, which relates to likely developments in the operations of the Group and the expected results of these operations in financial periods subsequent to 30 June 2020. INFORMATION ON DIRECTORS I) The following information is up to date at the date of this report. Particulars of the qualifications, experience and special responsibilities of each Director as at the date of this report are set out on pages 32 to 33 of the Annual Report and form part of the Directors’ Report. The interests of Directors in the share capital of the parent entity and/or in a related entity are contained in the register of Directors’ shareholdings of the Company as at the date of this report, are set out on pages 32 to 33 of the Annual Report and form part of the Directors’ Report. Meeting of Directors The number of Board, Audit, Risk Management and Compliance Committee, and Nomination and Remuneration Committee meetings held during the year ended 30 June 2020, and the number of meetings attended during that period by each Director, are set out below: Board Meetings Audit, Risk Management and Compliance Committee Meetings Nomination and Remuneration Committee Meetings Director Held Attended Held Attended Held Attended Graham A. Cubbin Laurence McAllister Jane M. McKellar Grant W. Peck Geoffrey R. Pearce Alison J. Mew 10 10 10 10 10 10 10 10 10 10 9 10 4 n/a 4 4 n/a n/a 4 n/a 4 4 n/a n/a 4 n/a 4 4 n/a n/a 4 n/a 4 4 n/a n/a J) COMPANY SECRETARIES Particulars of the qualifications and experience of the Company Secretaries are set out on page 33 of the Annual Report and form part of the Directors’ Report. 36 McPherson’s Limited Directors’ Report continued K) REMUNERATION REPORT Letter from the Chairman of the Nomination and Remuneration Committee Dear Shareholders, The Board is pleased to present McPherson’s Remuneration Report for the year ended 30 June 2020. Our Remuneration Report provides shareholders with a clear and transparent explanation of how we aligned our remuneration policies and outcomes with business performance, reflecting principles which require remuneration to be market competitive, performance based and equitable, and aligned with shareholders’ returns. 2020 remuneration structure Oversight of executive remuneration is a fundamental responsibility of the Board. The Board, through its Nomination and Remuneration Committee, regularly reviews and tests McPherson’s remuneration approach to ensure that it remains strongly aligned with shareholder interests, reflects current industry best practice, is underpinned by robust risk management, and attracts and retains the best talent. 2020 remuneration outcomes Application of our remuneration framework has ensured that remuneration outcomes for key management personnel (KMP) and other senior executives in 2020 were strongly aligned with shareholder interests. One fundamental principle is the link between the realisation of long term incentives (LTI), total shareholder returns (TSR) and earnings per share (EPS). The execution of the Group’s strategy by KMP resulted in an annual increase of 24% in underlying EPS in 2020, excluding the profit impact of Trilogy and Karen Murrell agency sales. Over the three years to 30 June 2020, TSR has increased at a compound annual growth rate (CAGR) of 40.3%. It is very pleasing to report that consistent with the very strong financial outcomes of the company in 2020, executive key management personnel have achieved an overall STI outcome equivalent to 96.2% of the maximum STI opportunity. Overall, the performance for the year demonstrated strong momentum, exceeding the Group’s underlying EBIT target and resulting in a total variable remuneration for 2020 higher than the prior period. This demonstrates our commitment to performance-based rewards. 2021 remuneration structure and response to COVID-19 2021 short-term incentives The high level of uncertainty regarding progression of the COVID-19 pandemic and its impact on both the global and domestic economies make accurate forecasting of the 2021 financial year extremely difficult. Consequently, a decision has been taken to have standalone financial targets for the first and second halves of 2021. The Nomination and Remuneration Committee has approved the following short term incentive structure (STI) for 2021, with a maximum STI opportunity of 40% to 50% of fixed remuneration for senior leadership team members, which will reflect: > Flexibility to consider events beyond the control of management at the Board’s discretion; > Higher consideration of non-financial outcomes in a period of increased financial uncertainty arising from the COVID-19 pandemic; > Separate non-financial KPIs for the two halves; > Shorter time frames for the assessment of financial and non-financial targets (6-month periods); > A challenging 2H21 forecast will be determined by the Board based on prevailing conditions at the end of December 2020; and > STI eligibility being subject to the ongoing financial strength and capacity of the Group to fund incentives. 2021 long-term incentives The Nomination and Remuneration Committee has also considered the structure and vesting criteria of the 2021 long-term incentives (LTI) and Performance Rights Plan, including the following relevant factors: > Prevailing and likely forward macro-economic conditions; > The CEO’s Exceptional Level Performance (ELP) rights being designed to reward exceptional performance outcomes; > Alignment with shareholder expectations; and > Shareholder approved performance rights vesting parameters. 37 2020 Annual Report Directors’ Report continued K) REMUNERATION REPORT (continued) Letter from the Chairman of the Nomination and Remuneration Committee continued Following consideration, the Nomination and Remuneration Committee has approved the following terms in relation to performance rights to be granted in 2021: KMP Chief Executive Officer LTI attributes Maximum LTI HLP vesting hurdles Description The CEO’s total maximum LTI opportunity of $1 million is allocated as follows: > HLP rights: 40% of the LTI opportunity with vesting based on EPS CAGR; and > ELP rights: 60% of the LTI opportunity with vesting based on TSR CAGR The minimum vesting criteria applicable to the HLP rights over a three year performance period is 3.0% EPS CAGR, with the number of rights vesting determined on a straight line basis from zero vesting at +3.0% EPS CAGR to 100% vesting at +8.0% (or higher) EPS CAGR Other KMP and senior executives ELP vesting hurdles The minimum vesting criteria applicable to the ELP rights over a four year performance period is 10.0% TSR CAGR, with the number of rights vesting determined on a straight line basis from 25% vesting at +10.0% TSR CAGR to 100% vesting at +20.0% (or higher) TSR CAGR Maximum LTI The maximum total LTI opportunity is 40% of fixed remuneration Performance rights The performance rights granted are split equally between those with EPS CAGR and TSR CAGR vesting criteria, in each case measured over a three year performance period EPS CAGR vesting hurdles TSR CAGR vesting hurdles The minimum vesting criteria applicable to the EPS CAGR rights over a three year performance period is 3.0%, with the number of rights vesting determined on a straight line basis from zero vesting at +3.0% EPS CAGR to 100% vesting at +8.0% (or higher) EPS CAGR The minimum vesting criteria applicable to the TSR CAGR rights over a three year performance period is 8.0%, with the number of rights vesting determined on a straight line basis from 25% vesting at +8.0% TSR CAGR to 100% vesting at +13.0% (or higher) TSR CAGR Base Remuneration Remuneration consultants will potentially be engaged to evaluate our proposed remuneration levels and structure for the FY22 in the context of McPhersons’ business strategy, stakeholder feedback, community expectations, relevant market standards and COVID-19 challenges. We hope you find this report informative and a clear demonstration of our commitment to responsible and effective remuneration practices. Jane McKellar Chairman of the Nomination and Remuneration Committee 38 McPherson’s Limited Directors’ Report continued K) REMUNERATION REPORT (continued) The McPherson’s Limited 2020 remuneration report sets out key aspects of the Group’s remuneration policy and framework, and provides details of the remuneration awarded to the Group’s non-executive Directors, Managing Director and other key management personnel. The remuneration report contains the following sections: > Key Management Personnel (KMP) > Principles used to determine the nature and amount of remuneration > Details of remuneration > Contractual arrangements for executive KMP > Share-based compensation > Additional information The information provided in this remuneration report has been audited as required by section 308(3C) of the Corporations Act 2001. Key Management Personnel Directors The following persons were Directors of McPherson’s Limited during the financial year: Name G.A. Cubbin L. McAllister J.M. McKellar G.W. Peck G.R. Pearce A.J. Mew Role Term as KMP in 2020 Chairman (Non-executive) Executive Director & Managing Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Full year Full year Full year Full year Full year Full year Other key management personnel In addition to the Directors noted above, the following Group executives were also considered to be key management personnel during the financial year: Name P. Witheridge L. Pirozzi Role Chief Financial Officer and Company Secretary National Accounts Director Term as KMP in 2020 Full year Full year Changes since the end of the reporting period There have been no changes in KMP since the end of the reporting period. Remuneration structure for key management personnel McPherson’s remuneration structure is as follows. It is designed to support the Board’s remuneration strategy and is consistently applied to all key executive management personnel. On Boarding Attract Key Talent into inclusive environment Inspire High Performing Winning Culture FR Fixed Remuneration Base plus superannuation Salary based on market and internal relativities, performance, qualifications and experience Market Competitive Remuneration Package Career Succession Planning Develop Talent Management STI Short Term Incentive (at risk) Cash Reward for in-year performance STI outcome paid in August after the financial year end STI outcome based on the Group’s financial, divisional and individual performance Reward and Recognition for High Performing Key Talent against determined organisational and individual targets Retain Reward & Recognition LTI Long Term Incentive (at risk) Equity Performance Rights subject to performance conditions Performance is measured over 3 and 4 years Alignment to long term shareholder value across strategy supporting executive retention 39 2020 Annual Report Directors’ Report continued K) REMUNERATION REPORT (continued) Key Management Personnel (continued) Remuneration Governance framework The illustration below summarises the Group’s remuneration governance framework: Remuneration principles Benchmarking Nomination and Remuneration Committee McPherson’s Limited Board > Align and contribute to the Group’s key strategic business objectives and desired business outcomes > Align executives’ remuneration with the interests of shareholders > Assist the Group in attracting executives and retaining the best talent required to execute the business strategy > Support the Group’s performance based culture against business plans and shareholder returns > Be fair, equitable and easy to understand > Remuneration consultants provide independent advice, information and recommendations relevant to remuneration decisions, with the next review to potentially take place in FY21 in relation to the FY22 salary structure > The Nomination & Remuneration Committee receives information from remuneration consultants in relation to remuneration market data and analysis for the annual executive fixed remuneration review > Reviews, evaluates and makes recommendations to the Board in relation to the following remuneration matters: > Overall responsibility for the remuneration strategy and outcomes for executives and Non-Executive Directors > Reviews and approves recommendations from the Nomination & Remuneration Committee > Executive remuneration and incentive policies and schemes Non-Executive Directors > Remuneration framework for > Managing Director and other executives’ remuneration packages and performance objectives performance > Managing Director’s > Managing Director and other > Recruitment, retention executives’ development plans and termination policies and procedures > Superannuation arrangements > Diversity policy and assessing progress against objectives Principles used to determine the nature and amount of remuneration The Group’s remuneration strategy is focused on the alignment between performance, prudent risk management and reward outcomes. In a practical context the remuneration strategy is designed to support the attraction, retention and reward of the high performing talent required to deliver superior and sustained returns to shareholders. The remuneration strategy is underpinned by the guiding principles outlined below: McPherson’s business strategy. > Attract and retain KMP and employees with the necessary capabilities and experience to deliver > Remuneration structure and quantum benchmarked to the external market applying applicable > Independent review of KMP remuneration benchmark data by McPherson’s remuneration consultants. > A blend of fixed and variable remuneration (both short and long-term) based on the responsibilities remuneration surveys and publicly disclosed data. of each role. and its shareholders. McPherson’s performance. > Performance and reward aligned to motivate management to deliver long-term growth for McPherson’s > Differentiation of remuneration outcomes based on superior individual contribution to > Demonstration of McPherson’s values and associated behaviours assessed in the performance > Rigorous annual calibration of performance and reward recommendations to ensure internal equity, management process and accordingly linked to remuneration outcomes. fairness and transparency. (TSR) and earnings per share (EPS) performance targets and time-based vesting conditions. > Long-term share-based awards, with vesting subject to the achievement of total shareholder return > Remuneration processes and governance in place to ensure that remuneration arrangements encourage prudent risk management. Market-competitive Performance-based and equitable Aligned with shareholders and underpinned by sound risk management 40 McPherson’s Limited Directors’ Report continued K) REMUNERATION REPORT (continued) Principles used to determine the nature and amount of remuneration (continued) The overall level of executive reward takes into account the performance of the Group over a number of years, with greater emphasis given to the current year. The following table summarises the performance of the Group over the last five years: 2020 2019 2018 2017 1 2016 1 Profit / (loss) after tax for the year from continuing operations ($’000) 6,062 13,721 11,359 (387) 9,330 Profit after tax from continuing operations, excluding significant items ($’000) 16,336 13,721 12,944 11,384 11,277 Basic earnings / (loss) per share (cents) from continuing operations 5.7 Basic earnings per share (cents), excluding significant items from continuing operations 15.3 13.0 13.0 10.9 12.4 (0.4) 11.0 9.4 11.4 Dividends declared for the relevant financial year ($’000) 11,783 12,688 8,866 8,288 7,926 Dividend payout ratio as a percentage of profit / (loss) after tax for the year from continuing operations (%) Dividend payout ratio as a percentage of profit from continuing operations excluding significant items (%) Increase / (decrease) in period end share price (%) Total KMP incentives as percentage of profit / (loss) from continuing operations for the year (%) Total KMP incentives as percentage of profit after tax from continuing operations excluding significant items (%) 194.4 92.5 78.1 n/m 2 84.9 72.1 92.5 129.9 (29.3) 68.5 31.2 72.8 48.6 11.5 2.7 5.8 (139.1) 4.3 2.7 5.1 4.7 70.3 54.9 1.0 0.8 1) The comparative numbers of the Group have been restated to show the discontinued operations separately from the continuing operations. 2) Ratio not considered meaningful due to loss after tax recognised for the year. Executive remuneration The executive remuneration and reward framework has three components: > Fixed Remuneration, including superannuation and benefits; > Short-term performance incentives (STI); and > Long-term incentives (LTI). The Remuneration Framework for 2020 is summarised in the following table: Element Purpose Performance Metrics Potential Value Fixed Remuneration Nil. Provide competitive market salary which may be delivered as cash, prescribed non-cash financial benefits including motor vehicles and superannuation contributions. STI LTI Reward for current year performance available when value has been created for shareholders and when profit and other outcomes are consistent with or exceed financial targets for the business plan. Group or divisional earnings before interest and tax (EBIT) together with pre-determined significant role specific objectives. Short-term cash bonuses in relation to the achievement of specific outcomes associated with certain significant events. Alignment to long-term shareholder returns via the Performance Rights plan. Participants benefit from the vesting of Performance Rights if performance objectives are met. Managing Director: i. High Level Performance Rights (HLP) – Compound annual growth rate (CAGR) in earnings per share (EPS) over three years. ii. Exceptional Level Performance Rights (ELP) – CAGR in total shareholder return (TSR) over four years. Other senior executives: 50% of vesting determined with reference to CAGR in EPS and 50% with reference to CAGR in TSR, each over three years. Market rate. Reviewed annually to reflect increases in responsibility and to ensure it remains market competitive. Increases are not guaranteed in the executives’ contracts. 50% of fixed remuneration. New members of the senior leadership team will have an STI target of 40% of fixed remuneration. At the discretion of the Nomination and Remuneration Committee. Managing Director: $1 million per annum in total comprising: i. HLP – 40% of fixed remuneration. ii. ELP – remaining balance of $1 million per annum. Other senior executives: 40% of fixed remuneration. 41 2020 Annual Report Directors’ Report continued K) REMUNERATION REPORT (continued) Principles used to determine the nature and amount of remuneration (continued) Short-term incentives (STI) Each year the Nomination and Remuneration Committee considers the appropriate targets and key performance indicators together with the level of payout if targets are met or exceeded. The 2020 STI targets for the Managing Director and senior executives were structured as follows: STI element target Criteria i) Financial target 35% of fixed remuneration Group underlying earnings before interest and tax (EBIT) outcomes for the financial year, excluding significant items and compared with the prior year, adjusted for actual funds employed outcomes compared with budget ii) Non-financial target 1 15% of fixed remuneration Achievement of specific role based key performance indicators, subject to the Group achieving at least 80% of its 2020 EBIT budget 1) Or higher at the discretion of the Nomination and Remuneration Committee in order to recognise the achievement of strategic initiatives. Assessment Eligibility for a cash bonus is made by reference to actual performance outcomes when these are known following the conclusion of the financial year. Short-term incentives are normally payable in late August following the end of the financial year to which the incentive relates. STI financial target Based on the Group’s profit performance in 2020, the Nomination and Remuneration Committee has determined that the Managing Director, KMPs and other senior executives are eligible for the maximum target STI in relation to element (i) as the Group underlying EBIT outcome in 2020 was above that reported in 2019 by 18%. STI non-financial target Based on the Group’s achievement of pre-determined objectives in 2020 and the significant steps taken to position the business well for 2021, the Nomination and Remuneration Committee has determined that the Managing Director, KMPs and other senior executives are eligible for an STI in relation to element (ii) above in 2020. From time to time additional short-term cash bonuses are paid to senior executives in relation to the achievement of specific outcomes associated with certain significant events. Examples of such events may include, among others, completing a significant acquisition or investment, achieving a required divestment outcome, completing a significant restructure project or completing a refinancing of the business. The Nomination and Remuneration Committee is responsible for determining when such bonus payments are applicable and the amount to be paid. Specific STI performance metrics and outcomes for each KMP in 2020 are summarised in the table below: KMP Metrics Potential STI outcomes 2020 Outcomes Managing Director Financial i) If <100% of prior year underlying EBIT with reference to Group EBIT: No STI payable Chief Financial Officer and Company Secretary ii) If between 100% and 110% of prior year underlying EBIT with reference to Group EBIT: Pro-rata STI payable National Accounts Director iii) If 110% and above prior year underlying EBIT with reference to Group EBIT: Maximum target STI payable Non-Financial Achievement of role specific pre-determined objectives providing at least 80% of budget Group EBIT is achieved Financial Pro-rata to target 35% of fixed remuneration Financial $259,000 Non-Financial 15% of fixed remuneration 1 Non-Financial $83,250 Financial Pro-rata to target 35% of fixed remuneration Financial $138,478 Non-Financial 15% of fixed remuneration 1 Non-Financial $59,347 Financial Pro-rata to target 35% of fixed remuneration Financial $112,000 Non-Financial 15% of fixed remuneration 1 Non-Financial $48,000 1) Or higher at the discretion of the Nomination and Remuneration Committee in order to recognise the achievement of strategic initiatives. 42 McPherson’s Limited Directors’ Report continued K) REMUNERATION REPORT (continued) Principles used to determine the nature and amount of remuneration (continued) Long-term incentives (LTI) Purpose Performance Rights Plan Long-term incentives are provided to executives to align this element of compensation with the objective of improving long-term shareholder returns. During the current year, the Group continued with its Performance Rights plan (the McPherson’s Limited Performance Rights Plan) to provide long-term incentives to executives. Participants are granted Performance Rights which only vest if certain performance conditions (relating to compound annual growth in earnings per share and total shareholder return – refer to page 47 for further information) are met and the executive is still employed by the Group at the end of the vesting period, or where not employed at the end of the vesting period is deemed to be a “good leaver” by the Board. Participation At the discretion of the Nomination and Remuneration Committee and no individual has a contractual right to receive any guaranteed benefits. Maximum LTI Managing Director – $1 million per annum; Other senior executives – 40% of fixed remuneration. Subject to the ASX Listing Rules, the Board may determine that a Right will become a Vested Right and may be exercised, whether or not any or all applicable exercise conditions have been satisfied if, in the Board’s opinion, one of the following events has occurred or is likely to occur: LTI outcomes in particular events discretion determines exercise to be appropriate; > The merger or consolidation of the Group into another entity occurs; > A takeover bid is made in respect of the Group and the Board recommends acceptance to shareholders; > A scheme of arrangement is made or undertaken in respect of the Group, and the Board in its absolute > Any event similar to those described above involving a change in ownership or control of the Group or > Any other event as determined by the Board in its absolute discretion. all or substantial part of the assets of the Group; or Further information regarding share-based compensation in the form of Performance Rights is contained later in the Remuneration Report on page 47. The graph below shows the structure of the 2020 remuneration opportunity mix for KMP, compared to 2019. Managing Director 2020 2019 37% 37% Chief Financial Officer 2020 2019 National Accounts Director 2020 2019 Fixed remuneration STI LTI 1 53% 53% 53% 53% 17% 17% 46% 46% 26% 26% 26% 26% 21% 21% 21% 21% 1) The LTI is an unvested calculation in accordance with AASB 2 Share Based Payments and reflects the impact of the share based payment transaction on the profit and loss statement. 43 2020 Annual Report Directors’ Report continued K) REMUNERATION REPORT (continued) Principles used to determine the nature and amount of remuneration (continued) Voting and comments made at the Company’s 2019 Annual General Meeting (AGM) Of the total votes cast in relation to the adoption of the 2019 remuneration report by shareholders present at the AGM and by proxy, 97.9% voted in favour of the resolution. Several general questions relating to remuneration and the 2019 remuneration report were asked by shareholders at the 2019 AGM, which were appropriately responded to by the Chairman and other Non-Executive Directors at the meeting. Details of remuneration Amounts of remuneration Details of the remuneration of the Directors of McPherson’s Limited and the other KMP of McPherson’s Limited and the McPherson’s Limited Group for the current and previous financial years are set out in the following tables. Short-term Benefits Post employment Benefits Long- term Benefits Share- based Payments Total Directors' Remuneration 2020 1,186,531 342,250 58,404 2020 Directors of McPherson’s Limited G.A. Cubbin (Chairman) L. McAllister (Managing Director) J.M. McKellar G.W. Peck G.R. Pearce A.J. Mew Other Group Key Management Personnel P. Witheridge L. Pirozzi 4 Total Other Key Management Personnel Remuneration 2020 Cash Salary & Fees 1 $ Non- Cash monetary Termination Super- Bonus 2 Benefits 3 Benefits annuation $ $ $ $ Long- Perform- ance Rights $ Service Leave $ Total $ 150,247 — — 708,121 342,250 58,404 91,354 85,349 75,730 75,730 — — — — — — — — 372,999 197,825 20,472 292,114 160,000 — — — — — — — — — — 14,274 — — 164,521 25,000 12,777 267,462 1,414,014 8,679 8,108 7,194 7,194 — — — — — 100,033 — — — 93,457 82,924 82,924 70,449 12,777 267,462 1,937,873 24,996 25,000 6,190 4,434 38,143 660,625 32,344 513,892 Total Remuneration 2020 – Group 1,851,644 700,075 78,876 — 120,445 23,401 337,949 3,112,390 665,113 357,825 20,472 — 49,996 10,624 70,487 1,174,517 2019 Directors of McPherson’s Limited G.A. Cubbin (Chairman) L. McAllister (Managing Director) J.M. McKellar G.W. Peck G.R. Pearce A.J. Mew 150,247 — — 727,747 185,000 58,404 91,354 85,349 75,730 71,167 — — — — — — — — Total Directors' Remuneration 2019 1,201,594 185,000 58,404 Other Group Key Management Personnel P. Witheridge L. Pirozzi 4 Total Other Key Management Personnel Remuneration 2019 323,617 100,000 20,472 193,892 80,000 — — — — — — — — — — 14,274 — — 164,521 25,000 13,781 95,399 1,105,331 8,679 8,108 7,194 6,761 — — — — — 100,033 — — — 93,457 82,924 77,928 70,016 13,781 95,399 1,624,194 24,996 10,253 (28,293) 451,045 15,976 2,932 4,121 296,921 517,509 180,000 20,472 — 40,972 13,185 (24,172) 747,966 Total Remuneration 2019 – Group 1,719,103 365,000 78,876 — 110,988 26,966 71,227 2,372,160 1) Cash salary and fees includes movements in the annual leave provision relating to the Managing Director and other executive key management personnel. 2) Excludes, where relevant, any part of the awarded bonus amount that was paid as a superannuation contribution. Refer to pages 45 and 46 for further information on bonuses awarded. 3) Non-monetary benefits comprise salary sacrificed components of remuneration packages including motor vehicles and related fringe benefits tax and allowances. 4) Ms Pirozzi was on maternity leave from 1 August 2018 to 26 October 2018 which explains the relatively low outcome in 2019. Amounts disclosed as remuneration of Directors and executives exclude premiums paid by the Group in respect of Directors’ and Officers’ liability insurance contracts. Further information relating to these insurance contracts is set out in paragraph (m) of the Directors’ Report. 44 McPherson’s Limited Directors’ Report continued K) REMUNERATION REPORT (continued) Details of remuneration (continued) Relative proportions of remuneration The relative proportions of remuneration that are linked to performance and those that are fixed are set out in the table below. Long term incentives relating to Performance Rights form part of the remuneration amounts as disclosed in this report. There were no other option related amounts included in the current or prior year remuneration. The table below illustrates the relative proportions of remuneration paid out in 2020 and 2019, except in relation to the LTI element which is determined in accordance with AASB 2 Share-based Payments. Fixed Remuneration At Risk – STI At Risk – LTI Name 2020 2019 2020 2019 2020 2019 Executive Director of McPherson’s L. McAllister Other key management personnel of the Group P. Witheridge L. Pirozzi 57% 75% 24% 16% 19% 9% 64% 63% 84% 72% 30% 31% 22% 27% 6% 6% (6%) 1% Performance based remuneration granted and forfeited during the year The following table shows for each KMP how much of their 2020 STI cash bonus was awarded and how much was forfeited. The table also shows the value of Performance Rights granted during the year. The Performance Rights are valued in accordance with AASB 2 Share-based Payments. Name Executive Director of McPherson’s L. McAllister STI Cash Bonus LTI Performance Rights Target Awarded as Opportunity % of Target $ Opportunity Forfeited % Value Granted $ Value Exercised $ Value Forfeited $ 370,000 93% 7% 819,000 134,676 270,656 Other key management personnel of the Group P. Witheridge L. Pirozzi 197,825 160,000 100% 100% — — 133,920 107,880 — — 56,128 — 45 2020 Annual Report Directors’ Report continued K) REMUNERATION REPORT (continued) Details of remuneration (continued) Summary of KMP Remuneration and KPI Objectives for 2020 KMP Fixed Remuneration STI LTI KPI Objectives L. McAllister Managing Director $740,000 including super $50,000 motor vehicle allowance $395,650 including super P. Witheridge Chief Financial Officer and Company Secretary L. Pirozzi National Accounts Director $290,000 including super $30,000 motor vehicle allowance 46 Rights under the Performance Rights plan as follows: Rights to be granted as a long term incentive on an annual basis with a face value of up to a maximum of $1 million per annum: i) High Level Performance Rights (HLP) Rights with a face value of 40% of the maximum LTI opportunity subject to a target earnings per share compound annual growth rate hurdle, measured over a 3 year performance period; and ii) Exceptional Level Performance Rights (ELP) Balance of the maximum LTI opportunity were subject to an absolute “total shareholder return” hurdle of at least 15% per annum, measured on a compound basis over a 4 year performance period Rights under the Performance Rights Plan equal to 40% of fixed remuneration with: i) 50% of the maximum opportunity subject to a target earnings per share compound annual growth rate hurdle, measured over a 3 year performance period; and ii) 50% subject to an absolute “total shareholder return” hurdle of at least 10% per annum, measured on a compound basis over a 3 year performance period Rights under the Performance Rights Plan equal to 40% of fixed remuneration (including motor vehicle allowance) with: i) 50% of the maximum opportunity subject to a target earnings per share compound annual growth rate hurdle, measured over a 3 year performance period; and ii) 50% subject to an absolute “total shareholder return” hurdle of at least 10% per annum, measured on a compound basis over a 3 year performance period Target cash bonus of 50% of fixed remuneration (excluding motor vehicle allowance), comprising 35% of fixed remuneration based on a financial metric and 15% of fixed remuneration based on role specific pre-determined KPI objectives Target cash bonus of 50% of fixed remuneration, comprising 35% of fixed remuneration based on a financial metric and 15% of fixed remuneration based on role specific pre-determined KPI objectives Target cash bonus of 50% of fixed remuneration (including motor vehicle allowance), comprising 35% of fixed remuneration based on a financial metric and 15% of fixed remuneration based on role specific pre-determined KPI objectives > Maintain and enhance culture > Grow market share across the McPherson’s core 6 brands focused on Australia and China growth across Asia > Deliver compelling capabilities and results > Progress McPherson’s repositioning as a clear Health, Wellness and Beauty player debt position before 30 June 2020 > Coordinate the refinancing of the Group’s > Drive financial modelling for consideration of the commercial feasibility of potential acquisition targets acquisitions, as they arise > Oversee due diligence of any material > Coordinate equity capital raise to part fund > Maintain and continue to develop close relationships with existing external analyst and investor base a material acquisition and IT functions > Drive improved efficiency of the Finance > Improve the identification, management and reporting of business risks to the Group Audit, Risk Management and Compliance Committee and practices > Implement and embed forecasting processes > Lead expansion strategy in new domestic > Develop and implement integrated customer channels in Australia and New Zealand plans to support the growth of our Health, Wellness & Beauty business, driving growth for the MCP portfolio and category share > Continue to optimise the MCP investment strategy via review of activity and ROI, Trading Terms & Execution across Key Accounts strategy and growth > Build Key Account capabilities to support > Develop and implement a commercial model to market supported by a defendable price architecture McPherson’s Limited Directors’ Report continued K) REMUNERATION REPORT (continued) Details of remuneration (continued) Contractual arrangements for executive KMP Remuneration and other terms of employment for the Managing Director and other senior executives are formalised in employment agreements. Each of these agreements set out details of the base package amount, inclusive of superannuation and other benefits, and provide for performance incentives. The agreements also provide for participation, when eligible, in the McPherson’s Limited Performance Rights Plan. The agreements do not normally reflect a fixed term of employment or nominate a specified amount to be paid on termination of employment. The agreements normally provide that the termination notice period may be paid out by the Group. The major provisions of the employment agreements relating to remuneration for the executives considered to be key management personnel are set out below. Name L. McAllister Managing Director P. Witheridge Chief Financial Officer and Company Secretary Term of agreement On-going On-going Fixed remuneration including superannuation and motor vehicle benefits 1 Termination $790,000 Contract may be terminated on 6 months’ notice by either the Company or executive. $395,650 Contract may be terminated on 6 months’ notice by the Company and on 3 months’ notice by the executive. L. Pirozzi National Accounts Director On-going $320,000 Contract may be terminated on 1 months’ notice by either the Company or executive. 1) The annual fixed remuneration amounts quoted are as at 30 June 2020. They are reviewed annually by the Nomination and Remuneration Committee. Share-based compensation Performance Rights Each Performance Right carries an entitlement to acquire one ordinary share in the Company for no consideration subject to the satisfaction of the vesting conditions, which are based on performance and time related conditions. The Performance Rights carry no dividend or voting rights. Approval for the issue of Performance Rights granted to the Managing Director for the years from 2019 to 2021 was obtained, under ASX Listing Rule 10.14, at the Company’s 2019 Annual General Meeting. The number of Rights that will vest will be determined proportionately on a straight line basis as follows: Type of Rights KMP Commencement Rights High Level Performance Rights (HLP) and Performance Rights Managing Director HLP – Managing Director Performance Rights – Chief Financial Officer (and Company Secretary) and National Accounts Director HLP Managing Director Performance Rights Chief Financial Officer (and Company Secretary) and National Accounts Director Exceptional Level Performance Rights (ELP) Managing Director Year of Grant 2017 2017 2018 Vesting Hurdles To continue to be the Managing Director of the Company until 1 November 2019. These rights vested in 2020. Zero Rights vesting at +3.0% (or less) Underlying EPS CAGR, to 100% of Rights vesting at +8.0% (or higher) Underlying EPS CAGR Zero Rights vesting at +5.0% (or less) Underlying EPS CAGR, to 100% of Rights vesting at +10.0% (or higher) Underlying EPS CAGR 2019 & 2020 Zero Rights vesting at +5.0% (or less) Underlying EPS CAGR, to 100% of Rights vesting at +10.0% (or higher) Underlying EPS CAGR First 50% of Rights Zero Rights vesting at +5.0% Underlying EPS CAGR (or less), to 100% of Rights vesting at +10.0% (or higher) Underlying EPS CAGR Remaining 50% of Rights 25% of Rights vesting at +10.0% TSR CAGR (at least), to 100% of Rights vesting at +15.0% (or higher) TSR CAGR 25% of Rights vesting at +15.0% TSR CAGR (at least), to 100% of Rights vesting at +25.0% TSR CAGR (or higher) 25% of Rights vesting at +15.0% TSR CAGR (at least), to 100% of Rights vesting at +20.0% TSR CAGR (or higher) 2019 & 2020 2017 & 2018 2019 & 2020 Vesting Period 3 years 3 years 3 years 3 years 3 years 3 years 4 years 4 years 47 2020 Annual Report Directors’ Report continued K) REMUNERATION REPORT (continued) Share-based compensation (continued) Performance Rights (continued) The base year EPS to be used in determining whether the vesting conditions have been satisfied is the reported Underlying EPS for the 30 June financial year immediately prior to when the rights were issued. Subject to the ASX Listing Rules, the Underlying EPS is subject to further adjustment at the discretion of the Nomination and Remuneration Committee when considered appropriate. TSR is calculated based on movements in the Company’s share price and total dividends paid by the Company during the relevant performance period. The base share price to be used in determining whether the vesting conditions have been satisfied for the Managing Director’s ELP Rights and the 50% of other KMP’s rights which are assessed on TSR CAGR outcomes, is the volume weighted average share price for the 20 trading days ending on 30 June immediately prior to when the rights were issued. Details of LTI awards are set out in the following table: Financial year in which rights may vest Financial year of grant Number of rights granted Fair value of rights at grant date 1 Face value of rights at grant date 2 Number of rights vested during the year Vested % Number of rights forfeited during the year Forfeited % Name L. McAllister Commencement Performance rights HLP ELP P. Witheridge L. Pirozzi 2017 2017 2018 2019 2020 2017 2018 2019 2020 2017 2018 2019 2020 2018 2019 2020 2020 263,000 $222,235 $300,000 263,000 100 — 2020 2021 2022 2023 2021 2022 2023 2024 2020 2021 2022 2023 2021 2022 2023 318,000 $270,656 $350,000 235,000 $294,410 $350,000 214,000 $276,060 $350,000 182,000 $404,040 $400,000 590,000 $212,990 $650,000 436,000 $245,468 $650,000 398,000 $172,060 $650,000 273,000 $414,960 $600,000 64,000 49,000 89,000 $56,128 $61,446 $71,000 $73,129 $82,058 $146,258 72,000 $133,920 $158,260 43,000 78,000 $53,922 $64,035 $71,916 $128,070 58,000 $107,880 $128,070 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 318,000 — — — — — — — — 100 — — — — — — — 64,000 100 — — — — — — — — — — — — 1) The fair value at grant date is calculated in accordance with AASB 2 Share-based Payments. 2) The face value at grant date is calculated using the 20 day VWAP preceding the date of grant. 48 McPherson’s Limited Directors’ Report continued K) REMUNERATION REPORT (continued) Share-based compensation (continued) Performance Rights (continued) The fair value of the Performance Rights issued were valued as follows: Performance Rights Commencement Rights and HLP Fair Value Independently valued at grant date, applying a discounted cash flow methodology, using the market price of the related shares at the commencement date or grant date less the present value of expected dividends forgone prior to vesting ELP Independently valued at grant date using the assumptions underlying the Black-Scholes methodology to produce a simulation model which allows for the incorporation of the Total Shareholder Return (TSR) hurdle that must be met before these rights vest Consequently, in addition to being sensitive to the dividend yield, the ELP Rights are also sensitive to market volatility and the initial TSR, with the risk free rate as a further valuation input Other Performance Rights Financial year of grant before 2019 Independently valued at grant date, applying a discounted cash flow methodology, using the market price of the related shares at the grant date less the present value of expected dividends forgone prior to vesting Financial year of grant 2019 onwards EPS CAGR element independently valued at grant date, applying a discounted cash flow methodology, using the market price of the related shares at the grant date less the present value of expected dividends forgone prior to vesting TSR CAGR element independently valued at grant date using the assumptions underlying the Black- Scholes methodology to produce a simulation model which allows for the incorporation of the Total Shareholder Return (TSR) hurdle that must be met before these rights vest. Consequently, in addition to being sensitive to the dividend yield, the Performance Rights are also sensitive to market volatility and the initial TSR, with the risk free rate as a further valuation input Restriction on removing the ‘at risk’ aspect of any instruments granted as part of remuneration The Group’s Securities Trading Policy contains a restriction on removing the ‘at risk’ aspect of any instruments granted to executives as part of their remuneration package. Performance Rights Plan participants may not enter into any transaction designed to remove any ‘at risk’ aspect before the instruments vest. Performance Rights (units) held by KMP Name L. McAllister Commencement Performance rights HLP ELP P. Witheridge Performance rights L. Pirozzi Performance rights Balance at start of the year Granted as compensation Vested and exercised rights Cancelled Balance at the end of the year Vested and exercisable Unvested 263,000 — (50,000) — 213,000 213,000 — 767,000 182,000 1,424,000 273,000 202,000 72,000 121,000 58,000 — — — — (318,000) 631,000 — 1,697,000 (64,000) 210,000 — 179,000 — — — — 631,000 1,697,000 210,000 179,000 49 2020 Annual Report Directors’ Report continued K) REMUNERATION REPORT (continued) Share-based compensation (continued) Shares held by key management personnel Name Directors of McPherson’s Limited G.A. Cubbin L. McAllister 1 J.M. McKellar G.W. Peck G.R. Pearce A.J. Mew Other key management personnel P. Witheridge L. Pirozzi Balance at the start of the year Other non-remuneration changes during the year Balance at the end of the year 200,000 — 6,277 14,400 690,939 12,000 100,000 — 70,000 — 80 — 5,000 — (80,000) — 270,000 — 6,357 14,400 695,939 12,000 20,000 — 1) During the year, Mr. McAllister exercised 50,000 commencement performance rights. The 50,000 shares issued to him were subsequently sold on market. Employee share schemes Under the McPherson’s Employee Share Scheme, approved by the Board of Directors, shares with up to $1,000 value may be issued by the Company to certain employees for no cash consideration. The purpose of this scheme is to improve employee engagement, reward our employees for service and provide employees with an ownership interest in the company, thereby improving the alignment of investor and employee objectives. Eligibility Shares All employees, excluding the Managing Director and other members of the Senior Leadership Team who are entitled to a long term incentive, who have been continuously employed by the Group for a period of at least one year, at the discretion of the Board of Directors. Employees may elect not to participate in the scheme. Granted up to $1,000 worth of fully paid ordinary shares in the Group annually for no cash consideration. The number of shares issued to participants in the scheme is the offer amount divided by the weighted average price at which the company’s shares are traded on the Australian Stock Exchange during the week ending the day before the date of issue on 12 August 2020 (2019: 31 July 2019). Conditions attached to the shares > The shares granted in 2019 vested on 31 July 2020, provided the employee remains employed by the Group. > Shares issued under the scheme may not be sold until the earlier of three years after issue or cessation > In all other respects, the shares rank equally with other fully-paid ordinary shares on issue. of employment. The Board of Directors has determined that the scheme will be continued in 2021 on the same basis as outlined above. Number of shares issued under the Employee Share Scheme 12 August 2020 31 July 2019 88,288 120,771 The number of shares issued to participants on 12 August 2020 was calculated based on the $1,000 offer amount divided by the weighted average price of $2.801 (2019: $1.763) at which the company’s shares were traded on the Australian Stock Exchange during the week ending the day before the date of issue. 50 McPherson’s Limited Directors’ Report continued K) REMUNERATION REPORT (continued) Share-based compensation (continued) Non-Executive Directors Fees Fees and payments to non-executive Directors reflect the demands which are made on, and the responsibilities of, the Directors. Remuneration of non-executive Directors is determined by the Board within an aggregate non-executive Directors’ fee pool limit which is periodically recommended for approval by the shareholders. Shareholder approval for Directors’ fees The aggregate fee pool was last considered by shareholders at the 2018 Annual General Meeting when a total remuneration of $650,000, increased from $550,000, (each inclusive of superannuation), was approved by shareholders. The Board asked shareholders to approve such increase as a consequence of an increase in the number of non-executive Directors from four to five, to provide capacity for the fees to be increased if required, and to provide the flexibility to appoint an additional Director if it was appropriate to do so. Including superannuation guarantee contributions made on their behalf by the Company, non-executive Director remuneration for the year ended 30 June 2020 totalled $523,859 (2019: $518,862). Incentives Non-executive Directors are not entitled to participate in any incentive scheme, nor are they eligible to receive share options or performance rights. Review by the Nomination and Remuneration Committee The remuneration of individual non-executive Directors was last reviewed by the Nomination and Remuneration Committee on 1 July 2017, at which time non-executive Director fees and committee fees were increased by 10%, the previous fee increase being 3% on 1 October 2014. Additional fees The Chairman and other non-executive Directors receive additional fees for their membership of the Board’s Audit, Risk Management and Compliance Committee. The Chairman of the Nomination and Remuneration Committee also receives an additional fee, however the other members of that committee do not. Superannuation Directors may direct the Company to make superannuation guarantee contributions, or additional superannuation contributions allocated from their Directors’ or committee membership fees, to any complying nominated superannuation fund. Directors’ Deeds At the Annual General Meeting of shareholders held on 7 November 1997, shareholders authorised the Company to enter into agreements with Directors (called “Directors’ Deeds”) which set out certain rights and obligations of the Director. The Directors’ Deeds do not reflect a fixed term of appointment as Directors are subject to retirement and re-election by shareholders at least every three years. The following fees applied for the year ended 30 June 2020 and continue to apply at the date of this report: Base fees Chairman Other Non-Executive Directors Additional fees Audit, Risk Management & Compliance Committee (Chairman) Audit, Risk Management & Compliance Committee (Member) Nomination & Remuneration Committee (Chairman) 2020 2019 $144,243 $144,243 $75,730 $75,730 $9,620 $6,006 $9,620 $9,620 $6,006 $9,620 The above amounts exclude company superannuation guarantee contributions payable on behalf of Directors at a rate of 9.50% on the base fees and additional fees. 51 2020 Annual Report Directors’ Report continued K) REMUNERATION REPORT (continued) Share-based compensation (continued) Additional information Loans to Directors and Executives There were no loans made to Directors of McPherson’s Limited or to any KMP of the Group, including their related entities during the year, nor were there any loans outstanding at the end of the current or prior financial year. During the year, the Group sold minor quantities of its products for domestic use to KMP on terms and conditions no more favourable than those adopted when dealing with other employees at arm’s length in the same circumstances. There were no transactions between the Group and the Directors of McPherson’s Limited or with any KMP of the Group, including their related entities, during the current or previous financial year other than those disclosed above, and relating to remuneration and to transactions concerning performance rights and shares, and the following transactions: Other transactions with Directors and Executives share into 5,000,000 ordinary shares in Aware; and Subscription Agreement and a Deed of Amendment, which set the terms under which: > On 10 October 2019, McPherson’s Limited and Aware Environmental Limited (Aware) executed a > McPherson’s Limited converted its 3,000,000 convertible notes at a conversion price of $0.60 per > McPherson’s Limited subscribed for 5,000,000 shares in Aware at a subscription price of $0.60 per share. The Group’s 10,000,000 shares represent 10.7% of the capital of Aware at 30 June 2020. > Mr. Geoffrey Pearce is a Director and a significant shareholder of Aware. The above transactions were conducted on normal commercial arm’s length terms and entered into in order to provide a more robust and reliable basis of skin care product supply to McPherson’s. L) SHARES UNDER OPTION Unissued ordinary shares of McPherson’s Limited under option at the date of this report are as follows: Date options granted 21 November 2016 Expiry date Number of shares under option 1 November 2024 213,000 No option holder has any right under the options to participate in any other share issue of the company or any other entity. Shares issued on the exercise of options The following ordinary shares of McPherson’s Limited were issued during the year ended 30 June 2020 on the exercise of options. No further shares have been issued since that date and no amounts are unpaid. Date options granted 21 November 2016 Issue price of Shares Number of shares issued $2.69 50,000 M) INDEMNIFICATION AND INSURANCE OF OFFICERS The Group has agreed to indemnify the current Directors and certain current executives of the Group against all liabilities to another person (other than the Group or a related body corporate) that may arise from their position as Directors or officers of the Group, to the extent permitted by law. The agreement stipulates that the Group will meet the full amount of any such liabilities, including costs and expenses. During the financial year, McPherson’s Limited paid a premium to insure Directors and certain officers of the Group. The Directors and officers covered by the insurance policy include the current Directors and Secretaries of McPherson’s Limited, Directors or Secretaries of controlled entities who are not or were not also Directors or Secretaries of McPherson’s Limited, senior management of the Group and senior management of divisions and controlled entities of McPherson’s Limited. As the insurance policy operates on a claim made basis, former Directors and officers of the Group are also covered. The liabilities insured include costs and expenses that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of the Company or controlled entities. The insurance policy outlined above does not contain details of premiums paid in respect of individual Directors and officers of the Company. The insurance policy prohibits disclosure of the premium paid. N) ENVIRONMENTAL REGULATION The Group is not subject to significant environmental regulation in respect of its operations. The Group is committed to achieving a high standard of environmental performance and the Group monitors its compliance with environmental regulations. The Board is not aware of any significant breaches of environmental regulation during the period covered by this report. 52 McPherson’s Limited Directors’ Report continued O) PROCEEDINGS ON BEHALF OF THE GROUP No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Group is a party, for the purpose of taking responsibility on behalf of the Group for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Group with leave of the Court under section 237 of the Corporations Act 2001. P) NON-AUDIT SERVICES The Group may decide to employ the external auditor on assignments additional to their statutory audit duties, where the external auditor’s expertise and experience with the Group are relevant. Details of the amounts paid or payable to the external auditor (PricewaterhouseCoopers) for non-audit services provided during the year are set out below. The Board of Directors has considered the position and, in accordance with the advice received from the Audit, Risk Management and Compliance Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: impartiality and objectivity of the auditor; and > all non-audit services have been reviewed by the Audit, Risk Management and Compliance Committee to ensure they do not impact the > none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. During the year, the following fees were paid or payable for non-audit services provided by the auditor of the parent entity, its related practices and non-related audit firms: Other services PricewaterhouseCoopers Australian firm: Consumables review Total remuneration for other services Total remuneration for non-audit services 2020 $ 2019 $ 50,000 50,000 50,000 — — — A copy of the auditor’s independence as required under section 307C of the Corporations Act 2001 is set out on page 54. Q) ROUNDING The Group is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and, in accordance with that instrument, all financial information in this Directors’ Report and the Financial Report have been rounded to the nearest thousand dollars unless otherwise stated. R) AUDIT, RISK MANAGEMENT AND COMPLIANCE COMMITTEE As at the date of this report, McPherson's Limited has an Audit, Risk Management and Compliance Committee consisting of the following independent Non-Executive Directors: > G.W. Peck (Chairman) > G.A. Cubbin > J.M. McKellar Signed in accordance with a resolution of the Directors: G.A. Cubbin Chairman 18 August 2020 L. McAllister Managing Director 18 August 2020 53 2020 Annual Report Auditor’s Independence Declaration Auditor’s Independence Declaration As lead auditor for the audit of McPherson's Limited for the year ended 30 June 2020, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of McPherson's Limited and the entities it controlled during the period. Shannon Maher Partner PricewaterhouseCoopers Sydney 18 August 2020 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 54 McPherson’s Limited Directors’ Declaration We, Graham A. Cubbin and Laurence McAllister, being two of the Directors of McPherson's Limited, declare that in the Directors’ opinion: a) the financial statements and notes as set out on pages 61 to 103 and the remuneration report on pages 37 to 52 are in accordance with the Corporations Act 2001, including: i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2020 and of its performance, as represented by the results of its operations and its cash flows, for the financial year ended on that date; b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and c) at the date of this declaration, there are reasonable grounds to believe that the parties to the Deed of Cross Guarantee identified in Note 32 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the Deed of Cross Guarantee described in Note 32. Note 1(a) confirms that the financial statements also comply with the International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Managing Director and Chief Financial Officer required by Section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. G.A. Cubbin Chairman 18 August 2020 L. McAllister Managing Director 18 August 2020 55 2020 Annual Report Independent Auditor’s Report Independent auditor’s report To the members of McPherson's Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of McPherson's Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 30 June 2020 and of its financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: the consolidated balance sheet as at 30 June 2020 the consolidated statement of comprehensive income for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 56 McPherson’s Limited Independent Auditor’s Report continued aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality Audit scope Key audit matters Our audit focused on where the Amongst other relevant topics, we Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. Our audit work focussed on the financial information of McPherson’s Consumer Products Pty Limited Australia given its financial significance to the Group as a whole. Additionally, we performed specific risk focussed audit procedures in relation to the Group’s other operations. communicated the following key audit matters to the Audit and Risk Committee: Impairment of goodwill and brand names Provision for inventory obsolescence Recoverability of investments in Joint Ventures and Financial assets at fair value through other comprehensive income (FVOCI) These are further described in the Key audit matters section of our report. For the purpose of our audit we used overall Group materiality of $1.19million, which represents approximately 5% of the Group’s profit before tax adjusted for impairment charges. We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. We chose Group profit before tax because, in our view, it is the benchmark against which the performance of the Group is most commonly measured. We adjusted for impairment charges as they are unusual or infrequently occurring items impacting profit and loss. We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. 57 2020 Annual Report Independent Auditor’s Report continued Key audit matter How our audit addressed the key audit matter Impairment of goodwill (carrying value of $15.76 million) and brand names (carrying value of $48.31 million) (Refer to notes 1 and 16) The present challenges in the trading environment and change in consumer demand during the COVID-19 pandemic, provide uncertainty and require significant judgement in relation to forecasting future cash flows. This has an impact on the value in use and the possibility of impairment of the intangible assets, which is an area of focus for the directors. In the current year an impairment charge of $8.52 million was recognised in respect of brand names. We have performed procedures over the Group’s impairment models (models). This involved consideration of whether the Group’s determination of Cash Generating Unites (CGUs) was consistent with our understanding of the nature of the Group’s operations and internal Group reporting. We also assessed whether the CGUs appropriately included all assets, liabilities and cash flows directly attributable to each CGU and a reasonable allocation of corporate assets and overheads. In assessing the models and the Group’s ability to forecast, we evaluated the Group’s future cash flow forecasts in the models and understood the process by which they were developed, with reference to the historical performance of the business. Significant judgement is required to estimate the key assumptions in the models prepared by the Group to determine the recoverable amount of goodwill and brand names and the amount of any resulting impairment. The most significant areas of judgement relate to: - Forecasting future cashflows; and - Determining the appropriate growth and discount rates. Given the level of judgement involved and the magnitude of the intangible assets recognised on the Group’s consolidated balance sheet this was a key audit matter. Provision for inventory obsolescence ($3.75 million) (Refer to note 1 and 10) The Group has gross inventories of $50.83 million with a provision of $3.75 million for inventory obsolescence/slow moving and discontinued stock. Inventory consists of raw materials and finished goods. As the Group values inventory at the lower of cost and net realisable value estimates are required to determine the recoverable amount. These estimates are based on the Group’s projection of future sales volumes and prices. Given the level of judgement involved in calculating the provision and the magnitude of inventory recognised on the Group’s consolidated balance sheet this was a key audit matter. 58 In addition, we tested that forecast cash flows used in the impairment models were consistent with the most up-to- date budgets and business plans formally approved by the Board. We also tested the mathematical accuracy, on a sample basis, of the impairment models’ calculations. We compared the discount rates and growth rates used in the models to benchmarks developed by our valuation expert, which are based on market data and industry research. We also evaluated the adequacy of the disclosures made in note 16, including those regarding the key assumptions and sensitivities to changes in such assumptions, in light of the requirements of Australian Accounting Standards. We performed the following procedures, amongst others: - - Tested the mathematical accuracy and completeness of the provision calculation against the list of stock on hand; Evaluated whether the methodology applied to calculate the provision was reasonable and consistent with that applied in prior years; For a sample of inventory items compared the latest sales price to their cost to check if items being sold below cost were being appropriately provided for; - On a sample basis compared inventory holdings at - year-end to forecast sales volumes to identify potential slow-moving lines and assessed the adequacy of any related provisioning; - Assessed post year-end sales to test whether there was significant movement in relation to line items that the Group had identified as slow-moving; and - Attended a physical stocktake where we tested a sample to verify the existence of the inventory items and identify damaged inventory items. McPherson’s Limited Independent Auditor’s Report continued Key audit matter How our audit addressed the key audit matter We have performed procedures over the Group’s recoverability assessment models (the models). This involved testing the mathematical accuracy of the models’ calculations and an evaluation of the cash flow forecasts against those approved by the appropriate authority within each entity and performed sensitivity analysis. In addition, we evaluated the discount rates used in the models against available market data and considered the competency, qualification, experience and objectivity of the Group’s expert. We also evaluated the adequacy of disclosures made in notes 13 and 18 of the financial statements, in light of the requirements of Australian Accounting Standards. Recoverability of investments in Joint Ventures (carrying value of $1.91 million) and Financial assets at fair value through other comprehensive income (FVOCI) ($6.00 million) (Refer to note 1, 13 and 18) Over the past two years the Group has expanded the business through investing in Joint Ventures and other equity investments. Considering the current challenge in the market and that these investments are in their early development or production stages, the Group is required to make significant judgements to estimate the key assumptions used in the determination of their recoverable amounts. The most significant areas of judgement relate to: Forecasting future cash flows; and - - Determining the appropriate discount rates assisted by an external expert. In the current year an impairment charge of $1.97 million was recognised in respect of investments in Joint Ventures. Given the level of judgement involved and the financial significance of these investments this was a key audit matter. Other information The directors are responsible for the other information. The other information comprises the information included in the annual report for the year ended 30 June 2020, but does not include the financial report and our auditor’s report thereon. Prior to the date of this auditor's report, the other information we obtained included the Director's report. We expect the remaining other information to be made available to us after the date of this auditor's report. Our opinion on the financial report does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the other information not yet received, if we conclude that there is a material misstatement therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. 59 2020 Annual Report Independent Auditor’s Report continued Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf. This description forms part of our auditor's report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 37 to 52 of the directors’ report for the year ended 30 June 2020. In our opinion, the remuneration report of McPherson's Limited for the year ended 30 June 2020 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Shannon Maher Partner Sydney 18 August 2020 60 McPherson’s Limited Consolidated Statement of Comprehensive Income for the year ended 30 June 2020 Revenue Sales revenue Interest Total revenue Other income Total revenue and other income Expenses Materials and consumables Employee costs Advertising and promotions Cartage and freight Third party warehousing Rental expenses Depreciation Amortisation of intangibles Impairment of intangible assets Other expenses Borrowing costs Share of net loss of joint ventures accounted for using the equity method Profit before income tax Income tax expense Profit for the year after tax Other comprehensive income Items that may be reclassified to profit or loss Changes in fair value of cash flow hedges Exchange differences on translation of foreign operations Income tax benefit relating to these items Other comprehensive income for the year Total comprehensive income for the year Earnings per share Basic earnings / (loss) per share Diluted earnings / (loss) per share Note 2020 $’000 2019 $’000 222,186 210,337 20 302 70 222,488 210,407 364 — 222,852 210,407 (116,109) (111,228) (35,249) (20,100) (5,873) (2,262) (353) (4,418) (479) (8,517) (31,643) (21,189) (7,010) (2,237) (4,311) (1,475) (653) — (10,881) (10,246) (1,455) (3,894) 13,262 (7,200) 6,062 (956) (479) 18,980 (5,259) 13,721 (1,178) (1,138) 52 349 (777) 5,285 490 328 (320) 13,401 Cents Cents 5.7 5.7 13.0 13.0 3,16 20 18 6 24 24 24 29 29 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 61 2020 Annual Report Consolidated Balance Sheet as at 30 June 2020 Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Financial asset at fair value through profit or loss Total current assets Non-current assets Financial assets at fair value through other comprehensive income Property, plant and equipment Right-of-use assets Other receivables Intangible assets Deferred tax assets Loan receivable from joint ventures Investment in joint ventures Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Lease liabilities Provisions Derivative financial instruments Current tax liabilities Total current liabilities Non-current liabilities Borrowings Lease liabilities Provisions Deferred tax liabilities Derivative financial instruments Contingent consideration Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity The above consolidated balance sheet should be read in conjunction with the accompanying notes. 62 Note 2020 $’000 2019 $’000 8 9 10 11 12 13 14 15 16 17 18 18 19 20 21 11 20 21 22 11 18 23 24 24 7,149 46,695 47,086 — — 100,930 6,000 6,259 5,034 307 64,713 189 1,457 1,909 85,868 10,472 31,877 36,688 797 2,934 82,768 — 5,930 — — 73,973 86 1,570 716 82,275 186,798 165,043 49,858 — 4,507 7,910 570 4,291 32,219 1,667 — 6,098 234 2,506 67,136 42,724 16,377 16,269 3,785 732 6,718 45 1,776 29,433 96,569 90,229 — 709 8,813 — — 25,791 68,515 96,528 159,444 4,342 (73,557) 157,751 4,674 (65,897) 90,229 96,528 McPherson’s Limited Consolidated Statement of Changes in Equity for the year ended 30 June 2020 Balance at 30 June 2019 Adoption of new AASB 16 Leases Balance at 1 July 2019 Profit for the year Other comprehensive income Total comprehensive income Transactions with shareholders Shares issued, net of transaction costs and tax Dividends provided for or paid Shares vested and transferred to employees Share-based payment transactions with employees Total transactions with shareholders Balance at 30 June 2020 Balance at 1 July 2018 Profit for the year Other comprehensive income Total comprehensive income Transactions with shareholders Shares issued, net of transaction costs and tax Dividends provided for or paid Share-based payment transactions with employees Total transactions with shareholders Balance at 30 June 2019 Note 1(b) 23 4 23 25 23 4 25 Contributed equity $’000 Reserves $’000 Accumulated losses $’000 Total equity $’000 157,751 — 157,751 — — — 1,480 — 213 — 1,693 4,674 — 4,674 — (777) (777) — — (213) 658 445 (65,897) (3,061) (68,958) 6,062 — 6,062 96,528 (3,061) 93,467 6,062 (777) 5,285 — 1,480 (10,661) (10,661) — — — 658 (10,661) (8,523) 159,444 4,342 (73,557) 90,229 155,882 — — — 1,869 — — 1,869 157,751 4,828 — (320) (320) — — 166 166 (70,690) 13,721 — 13,721 — (8,928) — (8,928) 90,020 13,721 (320) 13,401 1,869 (8,928) 166 (6,893) 4,674 (65,897) 96,528 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 63 2020 Annual Report Consolidated Statement of Cash Flows for the year ended 30 June 2020 Note 2020 $’000 2019 $’000 Cash flows from operating activities Receipts from customers, inclusive of GST Payments to suppliers and employees, inclusive of GST Interest received Interest and borrowing costs paid Income taxes paid 233,863 (207,352) 63 (1,291) (5,951) Net cash inflows from operating activities 33 19,332 240,222 (214,376) 30 (890) (5,208) 19,778 — (4,119) (643) (1,158) (1,529) (3,000) (3,000) (1,745) (71) (630) (2,698) — 23 (8,144) (10,449) (23) 61,775 (63,334) (3,767) (9,159) (14,508) (3,320) 10,472 (3) (10) 62,982 (63,500) — (7,048) (7,576) 1,753 8,607 112 8 7,149 10,472 Cash flows from investing activities Payments for financial assets at fair value through OCI Payments for purchase of property, plant and equipment Payments for purchase of other intangible assets Payments for acquisition of joint ventures Loan to joint ventures Payments for convertible note Net cash outflows from investing activities Cash flows from financing activities Share issue transaction costs Proceeds from borrowings Repayment of borrowings Repayment of lease liabilities Dividends paid Net cash outflows from financing activities Net (decrease)/increase in cash held Cash at beginning of financial year Effects of exchange rate changes Cash held at end of financial year The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 64 McPherson’s Limited Notes to the Consolidated Financial Statements 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of McPherson's Limited and its controlled entities. a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. McPherson’s Limited is a for-profit entity for the purpose of preparing the financial statements. Compliance with IFRS The consolidated financial statements also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Historical cost convention These financial statements have been prepared under the historical cost convention, except for certain financial assets and liabilities, including derivative instruments, which are carried at fair value. New and amended standards The Group has applied the new AASB 16 Leases for the first time for the annual reporting period commencing 1 July 2019. The impact of the adoption of the new AASB 16 Leases and new accounting policies are disclosed in Note 1(b) below. Certain new accounting standards and interpretations have been published that are not mandatory for the 30 June 2020 reporting periods and have not been early adopted by the Group. These standards are not expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions. b) Changes in accounting policies This section explains the impact of the adoption of AASB 16 Leases on the Group’s financial statements and also discloses new accounting policies that have been applied from 1 July 2019. AASB 16 Leases The Group adopted the standard using the modified transition approach which means that: > The cumulative impact of adoption has been recognised in retained earnings as of 1 July 2019; and > The comparatives have not been restated as follows: Consolidated Balance Sheet (extract) 30 June 2019 $’000 Adoption of AASB 16 $’000 1 July 2019 $’000 Non-current assets Right-of-use assets Equity Accumulated losses Current liabilities Lease liabilities Non-current liabilities Deferred tax liability Lease liabilities i) Practical expedients applied The Group has used the following practical expedients permitted by the standard: — 6,667 6,667 65,897 3,061 68,958 — (3,910) (3,910) (8,813) — 1,301 (7,119) (7,512) (7,119) contracts as at 1 July 2019; > Applying a single discount rate to a portfolio of leases with reasonably similar characteristics; > Relying on previous assessments on whether leases are onerous as an alternative to performing an impairment review – there were no onerous > Accounting for operating leases with a remaining lease term of less than 12 months as at 1 July 2019 as short-term leases; > Excluding initial transaction costs for the measurement of the right-of-use asset at the date of initial application; > Using hindsight in determining the lease term where the contract contains options to extend or terminate the lease; and > The Group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date, the Group relied on its assessment made applying AASB 117 and Interpretation 4 Determining whether an Arrangement contains a Lease. 65 2020 Annual Report Notes to the Consolidated Financial Statements continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) b) Changes in accounting policies (continued) ii) Measurement of lease liabilities The lease liabilities are measured as the present value of the remaining lease payments from the adoption of the new standard on 1 July 2019, using: > Fixed payments, including CPI and market review increases, less any lease incentives receivable; and > Lease payments with reasonably certain extension options. The lease payments are discounted using the Group’s incremental borrowing rate, being the rate that the Group would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. The weighted average incremental borrowing rate applied to the lease liabilities on 1 July 2019 is 5.67% across the Group. The lease liabilities will be decreased over time by rental payments and give rise to interest expenses. Reconciliation of lease commitments as at 30 June 2019 to lease liabilities recognised as at 1 July 2019: Operating lease commitments disclosed as at 30 June 2019 Discounted at the Group’s incremental borrowing rate at the date of initial application (Less) short-term leases not recognised as a liability (Less) low-value leases not recognised as a liability (Less) contracts reassessed as service agreements Lease liabilities recognised as at 1 July 2019 Of which are: Current lease liabilities Non-current lease liabilities 2019 $’000 13,589 (998) (99) (4) (1,459) 11,029 3,910 7,119 iii) Measurement of right-of-use assets The right-of-use assets are measured as if AASB 16 had always applied, as the present value of the lease payments, and are depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. iv) Lease term The Group determines the lease term as the non-cancellable period of a lease, together with the periods covered by an option to extend the lease if it is reasonably certain to exercise that option. c) Principles of consolidation Subsidiaries Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group (refer to Note 1(i)). Intercompany transactions, balances and unrealised gains on transactions between Group entities are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Investments in controlled entities are accounted for at cost in the individual financial statements of the parent entity. Changes in ownership interests When the Group ceases to have control, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in profit or loss. This fair value becomes the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss. Joint arrangements Under AASB 11, investments in joint arrangements are classified as either joint operations or joint ventures. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. 66 McPherson’s Limited Notes to the Consolidated Financial Statements continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) c) Principles of consolidation (continued) Equity method Under the equity method, investments are initially recognised at cost and adjusted thereafter to recognise the Group’s share of the post- investment profits or losses of the investee, and the Group’s share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from the investee are recognised as a reduction in the carrying amount of the investment. When the Group’s share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the other entity. Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in these entities. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of equity-accounted investees have been changed where necessary to ensure consistency with the policies adopted by the Group. d) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Managing Director of McPherson's Limited. e) Foreign currency translation Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which it operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is McPherson’s Limited’s functional and presentation currency. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at year end exchange rates are generally recognised in profit or loss. They are deferred in equity if they relate to qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation. Group companies The results and financial position of foreign operations 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 the balance sheet; > Income and expenses for the statement of comprehensive income are translated at average exchange rates, unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions; and > All resulting exchange differences are recognised in other comprehensive income. On consolidation, exchange differences arising from the translation of any net investment in foreign entities, and of borrowings and other financial instruments designated as hedges of such investments, are recognised in other comprehensive income. When a foreign operation is sold or any borrowings forming part of the net investment are repaid, the associated exchange differences are reclassified to profit or loss, as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. f) Revenue recognition Sales revenue The Group markets and distributes Health, Wellness and Beauty products. Sales are recognised at a point in time when the control of the products has transferred, being when the products are delivered to the customer, or when the customer has directed the Group to warehouse finished goods on its behalf, with the risks of control and ownership transferring to the customer. The customer has full discretion over the price to sell the products, and there is no unfulfilled obligation that could affect the customer’s acceptance of the products. Delivery occurs when the products have been delivered to the specific location, the risks of obsolescence and loss have been transferred to the customer, and the Group has objective evidence that all criteria for acceptance have been satisfied. The Group’s products are often sold on terms that include settlement discounts and volume rebates. Revenue from these sales is recognised based on the price specified in the contract, net of estimated discounts and rebates, using the expected value method. A contract liability is recognised for expected discounts and rebates payable to customers in relation to sales made until the end of the reporting period. No element of financing is deemed present as sales are made with credit term normally between 30 and 60 days, which is consistent with market practice. A receivable is recognised when the goods are delivered to the customer, or when the customer directs the Group to warehouse finished goods on its behalf, with the risks of control and ownership transferring to the customer, as this is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. 67 2020 Annual Report Notes to the Consolidated Financial Statements continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) f) Revenue recognition (continued) Accounting for refunds When the customer has a right to return the product within a given period, the entity has a potential obligation to refund the purchase price. A refund liability for the expected refunds to customers is recognised as adjustment to revenue in trade and other payables. At the same time, the Group has a right to recover the product from the customer where the customer exercises its right of return and recognises an asset in trade and other receivables and a corresponding adjustment to cost of sales. The asset is measured by reference to the former carrying amount of the product. The costs to recover the products are not material because the customer usually returns the product in a saleable condition to the Group. The Group does not have any contracts where the period between the supply of goods or services to the customer and payment by the customer exceeds one year. Consequently, the Group does not adjust any of the transaction prices for the time value of money. Other income Other income is recognised when the income is received or becomes receivable. Government grants Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received, and the Group will comply with all attached conditions. Government grants relating to costs are deferred and recognised in profit or loss over the period necessary to match them with the costs that they are intended to compensate. Income tax g) The income tax expense or income for the period is the tax payable or receivable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and any unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries and associates operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It 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 the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates and laws, that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised, or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax is recognised in profit or loss except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Investment allowances Companies within the Group may be entitled to claim special tax deductions for investments in qualifying assets (investment allowances) or qualifying expenditure (research and development tax incentive regime). The Group accounts for such allowances as tax credits, which means that the allowance reduces income tax payable and current tax expense. A deferred tax asset is recognised for unclaimed tax credits that are carried forward as deferred tax assets. Tax consolidation legislation McPherson’s Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. As a consequence, these entities are taxed as a single entity. McPherson’s Limited, as the head entity in the tax consolidated Group, recognises current tax amounts relating to transactions, events and balances of the wholly-owned Australian controlled entities in this Group as if those transactions, events and balances were its own, in addition to the current and deferred tax amounts arising in relation to its own transactions, events and balances. Amounts receivable or payable under a Tax Funding Agreement with the tax consolidated entities are recognised separately as tax-related amounts receivable or payable. Expenses and revenues arising under the Tax Funding Agreement are presented as income tax expenses or credits. 68 McPherson’s Limited Notes to the Consolidated Financial Statements continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) h) Leases The following is the accounting policy effective 1 July 2019 in compliance with AASB16 Leases. Please refer to the FY19 4E for prior period accounting policy. Lease contracts The Group leases various offices, warehouses, equipment and vehicles. Rental contracts are typically made for fixed periods of 12 months to 20 years, but may have extension options. Extension and termination options are included in a number of property and equipment leases across the Group. Contracts may contain both lease and non-lease components. The Group allocates the consideration in the contract to the lease and non-lease components based on their relative stand-alone prices. Lease terms are negotiated on an individual basis and contain a wide range of different terms and conditions. The lease agreements do not impose any covenants other than the security interests in the leased assets that are held by the lessor. Leased assets may not be used as security for borrowing purposes. Lease liabilities Lease liabilities are initially measured on a present value basis of the following lease payments: > Fixed payments less any lease incentives receivable; and > Variable lease payments based on a rate initially measured at the commencement date, such as CPI. Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. The lease payments are discounted using the interest rate implicit in the lease. If that rate cannot be readily determined, which is generally the case for leases in the Group, the Group’s incremental borrowing rate is used, being the rate that an individual lessee would have to pay to borrow the funds necessary to obtain an asset of similar value to the right-of-use asset in a similar economic environment with similar terms, security and conditions. Right-of-use assets Right-of-use assets are measured at present value comprising the following: > The amount of the initial measurement of lease liability; > Any lease payments made at or before the commencement date less any lease incentives received; > Any initial direct costs; and > Restoration costs. Right-of-use assets are generally depreciated over the shorter of the asset's useful life and the lease term on a straight-line basis. If the Group is reasonably certain to exercise a purchase option, the right-of-use asset is depreciated over the underlying asset’s useful life. Short term leases Payments associated with short-term leases of equipment and vehicles and all leases of low-value assets are recognised on a straight-line basis as an expense in profit or loss. Short-term leases are leases with a lease term of 12 months or less. Low-value assets comprise IT equipment and small items of office furniture. i) Business combinations The acquisition method is used to account for all business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition comprises the fair value of the assets transferred, shares issued, and liabilities incurred or assumed at the date of exchange. The consideration transferred also includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Where equity instruments are issued in an acquisition, the value of the instruments is their published market price as at the date of exchange unless, in rare circumstances, it can be demonstrated that the published price at the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair value at the acquisition date. The excess of the consideration transferred over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill (refer to Note 1(s)). If the consideration transferred is less than the fair value of the net assets of the business acquired, the difference is recognised directly in profit or loss as a bargain purchase, but only after a reassessment of the identification and measurement of the net assets acquired. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. Impairment of assets j) Goodwill and intangible assets that have an indefinite useful life are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows (cash generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period. 69 2020 Annual Report Notes to the Consolidated Financial Statements continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) k) Cash and cash equivalents Cash and cash equivalents include cash on hand and deposits at call which are readily convertible to cash on hand and are used in the cash management function on a day-to-day basis net of outstanding bank overdrafts. Bank overdrafts, if any, are shown within borrowings in current liabilities in the balance sheet. Trade receivables l) Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Trade receivables are generally due for settlement no more than 60 days from the date of recognition. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. The Group applies the simplified approach to providing for expected credit losses prescribed by AASB 9, which permits the use of the lifetime expected loss provision for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on shared credit risk characteristics and the days past due. m) Inventories Inventories are valued at the lower of cost and net realisable value. Costs are assigned to individual items of inventory on a weighted average basis. Cost includes the reclassification from equity of any gains or losses on qualifying cash flow hedges relating to purchases of inventory. Cost of work in progress and finished manufactured products includes materials, labour and an appropriate proportion of factory overhead expenditure, the latter being allocated on the basis of normal operating capacity. Costs of purchased inventory are determined after deducting rebates and discounts. Unrealised profits on intercompany inventory transfers are eliminated on consolidation. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale. n) Non-current assets, or disposal groups, held for sale and discontinued operations Non-current assets, or disposal groups, are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. They are measured at the lower of their carrying amount and fair value less costs to sell, except for assets such as deferred tax assets, assets arising from employee benefits and financial assets. An impairment loss is recognised for any initial or subsequent write down of the asset, or disposal group, to fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset, or disposal group, but not in excess of any cumulative impairment loss previously recognised. A gain or loss not previously recognised by the date of the sale of the non-current asset, or disposal group, is recognised at the date of derecognition. Non-current assets, including those that are part of a disposal group, are not depreciated or amortised while they are classified as held for sale. Non-current assets classified as held for sale and the assets of a disposal group classified as held for sale are presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet. A discontinued operation is a component of the entity that has been disposed of or is classified as held for sale and that represents a separate cash-generating unit or a group of cash-generating units and is a separate major line of business or geographical area of operations and is part of a single co-ordinated plan to dispose of such a line of business or area of operations. The results of discontinued operations are presented separately in the statement of comprehensive income. Investments and other financial assets o) i) Classification The Group classifies its financial assets in the following measurement categories: > Those to be measured subsequently at fair value (either through other comprehensive income, or through profit or loss); and > Those to be measured at amortised cost. The classification depends on the entity’s business model for managing the financial assets and the contractual terms of the cash flows. For assets measured at fair value, gains and losses will either be recorded in profit or loss or other comprehensive income. ii) Financial assets at fair value through profit or loss The Group classifies the following financial assets at fair value through profit or loss: > Debt investments that do not qualify for measurement at either amortised cost or at fair value through other comprehensive income; > Equity investments that are held for trading; and > Equity investments for which the entity has not elected to recognise fair value gains and losses through other comprehensive income. iii) Financial assets at fair value through other comprehensive income Financial assets at fair value through other comprehensive income are equity investments which are not held for trading, and for which the Group’s management has elected to present fair value gains and losses in other comprehensive income. There is no subsequent reclassification of fair value gains and losses to profit or loss following the derecognition of the investment. Dividends from such investments continue to be recognised in profit or loss as other income when the Group’s right to receive payments is established. Impairment losses and reversal of impairment losses on equity investments measured at fair value through other comprehensive income are not reported separately from other changes in fair value. 70 McPherson’s Limited Notes to the Consolidated Financial Statements continued Investments and other financial assets (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) o) iv) Other financial assets at amortised cost The Group classifies its financial assets at amortised cost only if both of the following criteria are met: > The asset is held within a business model with the objective of collecting the contractual cash flows; and > The contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. They are included in current assets, except for those with maturities greater than 12 months after the balance sheet date which are classified as non current assets. Financial assets at amortised cost are included in receivables in the balance sheet. v) Impairment The Group assesses on a forward looking basis the expected credit losses associated with its debt instruments carried at amortised cost and fair value through other comprehensive income. The impairment methodology applied depends on whether there has been a significant increase in credit risk. For trade receivables, the Group applies the simplified approach permitted by AASB 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. p) Derivatives and hedging activities 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 at the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged and the type of hedge relationship designated. The Group documents at the inception of the hedging transaction the economic relationship between hedging instruments and hedged items including whether the hedging instrument is expected to offset changes in cash flows of hedged items. The Group documents its risk management objective and strategy for undertaking various hedge transactions at the inception of each hedge relationship. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months. It is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. Cash flow hedges that qualify for hedge accounting The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the cash flow hedge reserve within equity, limited to the cumulative change in fair value of the hedged item on a present value basis from the inception of the hedge. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, within finance costs. When option contracts are used to hedge forecast transactions, the Group designates only the intrinsic value of the option contract as the hedging instrument. Gains or losses relating to the effective portion of the change in intrinsic value of the option contracts are recognised in the cash flow hedge reserve within equity. The changes in the time value of the option contracts that relate to the hedged item are recognised within other comprehensive income in the costs of hedging reserve within equity. When forward contracts are used to hedge forecast transactions, the Group generally designates only the change in fair value of the forward contract related to the spot component as the hedging instrument. Gains or losses relating to the effective portion of the change in the spot component of the forward contracts are recognised in the cash flow hedge reserve within equity. The change in the forward element of the contract that relates to the hedged item is recognised within other comprehensive income in the costs of hedging reserve within equity. In some cases, the entity may designate the full change in fair value of the forward contract (including forward points) as the hedging instrument. In such cases, the gains or losses relating to the effective portion of the change in fair value of the entire forward contract are recognised in the cash flow hedge reserve within equity. Amounts accumulated in equity are reclassified in the periods when the hedged item affects profit or loss, as follows: > Gain or loss relating to the effective portion of the intrinsic value of option contracts where the hedged item subsequently results in the recognition of a non-financial asset (such as inventory), both the deferred hedging gains and losses and the deferred aligned time value of the option contracts are included within the initial cost of the asset. The deferred amounts are ultimately recognised in profit or loss as the hedged item affects profit or loss. > Gain or loss relating to the effective portion of the spot component of forward contracts where the hedged item subsequently results in the recognition of a non-financial asset (such as inventory), both the deferred hedging gains and losses and the deferred aligned forward points are included within the initial cost of the asset. The deferred amounts are ultimately recognised in profit or loss as the hedged item affects profit or loss. > The gain or loss relating to the effective portion of the interest rate swaps hedging variable rate borrowings is recognised in profit or loss within ‘finance cost’ at the same time as the interest expense on the hedged borrowings. When a hedging instrument expires, or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss and deferred costs of hedging in equity at that time remain in equity until the forecast transaction occurs, resulting in the recognition of a non-financial asset such as inventory. When the forecast transaction is no longer expected to occur, the cumulative gain or loss and deferred costs of hedging that were reported in equity are immediately reclassified to profit or loss. Hedge ineffectiveness is recognised in profit or loss within finance cost. 71 2020 Annual Report Notes to the Consolidated Financial Statements continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) q) Fair value estimation The fair value of financial assets and financial liabilities must be estimated for recognition, measurement and disclosure purposes. The fair value of interest rate hedge contracts is calculated as the present value of the estimated future cash flows. The fair value of forward exchange contracts and other foreign currency contracts are determined using forward exchange market rates and volatility at the balance sheet date. The net nominal value of trade receivables and payables are assumed to approximate their fair values. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. r) Property, plant and equipment All property, plant and equipment are stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the property, plant and equipment. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance costs are charged to profit or loss during the reporting period in which they are incurred. Depreciation on assets is calculated using the straight-line method to allocate their net cost over their estimated useful lives. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. 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 (refer to Note 1(j)). Gains and losses on disposals are determined by comparing proceeds with carrying amounts and are included in profit or loss. Intangible assets s) i) Goodwill Goodwill is measured as described in Note 1(i). Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is not amortised, but it 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. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units that are expected to benefit from the business combination in which the goodwill arose. The units or groups of units are identified at the lowest level at which goodwill is monitored for internal management purposes, being the operating segments. ii) Brand names The Group recognises brand names that are acquired as part of a business combination or that are specifically acquired from a vendor. The Group does not recognise internally generated brand names. Brand names are initially recognised at fair value, if acquired as part of a business combination, or at cost, if specifically acquired from a vendor. For brand names specifically acquired from a vendor and held at cost, any subsequent adjustments arising from a contingent consideration arrangement associated with the brand acquisition are reflected in the carrying value of the relevant brand name. Subsequent to initial recognition, brand names are recognised at cost less accumulated impairment losses. The carrying amount of brand names are not amortised as the Directors are of the view that the brand names have an indefinite useful life. Brand names are tested individually for impairment annually, or more frequently if events or changes in circumstances indicate that they might be impaired. The recoverable amount of a brand name is determined based on the higher of the value-in-use or fair value less costs to sell. iii) IT development and software Costs incurred in developing products or systems and costs incurred in acquiring software and licences that will contribute to future period financial benefits through revenue generation or cost reduction are capitalised to software. Costs capitalised include external direct costs of materials and service, direct payroll and payroll related costs of employees’ time spent on the project. Amortisation is calculated on a straight-line basis generally over three to five years. IT development costs include only those costs directly attributable to the development phase and are only recognised where the Group has an intention and ability to use the asset. iv) Research and development Research expenditure and development expenditure that do not meet the criteria in (iii) above are recognised as an expense as incurred. Development costs previously recognised as an expense are not recognised as an asset in a subsequent period. t) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which remain unpaid. These amounts are unsecured and are normally settled within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the reporting period. They are initially recognised at fair value and are subsequently measured at amortised cost using the effective interest method. 72 McPherson’s Limited Notes to the Consolidated Financial Statements continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) u) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation, and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The cost of products and services provided under warranty is expensed as incurred. The Company provides for warranties based on history of claims and management’s best estimate of expected claims. v) Employee benefits i) Short-term obligations Liabilities for wages and salaries, including annual leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees' services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. ii) Other long-term employee benefit obligations The liability for long service leave and annual leave which is not expected to be settled within 12 months after the end of the period in which the employees render the related service is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Remeasurements as a result of experience adjustments and changes in actuarial assumptions are recognised in profit or loss. The obligations are presented as current liabilities in the balance sheet if the entity does not have an unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual settlement is expected to occur. iii) Bonus plans A liability for employee benefits in the form of bonuses is recognised in provisions when there is no realistic alternative but to settle the liability and at least one of the following conditions is met: > There are formal terms for determining the amount of the benefit; > The amounts to be paid are determined before the time of completion of the financial report; and > Past practice gives clear evidence of the amount of the obligation. iv) Superannuation Contributions to employee superannuation funds are made by McPherson’s Limited and controlled entities. Contributions are recognised as an expense as they become payable. v) Termination benefits Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits at the earlier of the following dates: (a) when the Group can no longer withdraw the offer of those benefits; and (b) when the entity recognises costs for a restructuring that is within the scope of AASB 137 and involves the payment of terminations benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. The liabilities for termination benefits are recognised in other creditors unless timing of the payment is uncertain, in which case they are recognised as provisions. vi) Employee benefit on-costs Employee benefit on-costs are recognised and included in employee benefit liabilities when the employee benefits to which they relate are recognised as liabilities. vii) Share-based payments Share-based compensation benefits are provided to employees via the McPherson’s Limited Employee Share Scheme or the McPherson’s Limited Performance Rights Plan. The fair value of options or rights granted to employees is recognised as an employee benefit expense with a corresponding increase in equity. The fair value is independently determined at grant date and recognised over the period during which the employees become unconditionally entitled to the options or rights. Non-market vesting conditions are included in assumptions about the number of options or rights that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of options or rights that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. Upon the exercise of options or rights, the balance of the share-based payments reserve relating to those options or rights is transferred to share capital. 73 2020 Annual Report Notes to the Consolidated Financial Statements continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) w) Contributed equity and dividends i) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. ii) Dividends Provision is made for any dividend declared by the Directors, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at balance date. x) Earnings per share i) Basic earnings per share Basic earnings per share is determined by dividing the operating profit after income tax attributable to members of McPherson’s Limited by the weighted average number of ordinary shares outstanding during the financial year (refer to Note 29). ii) Diluted earnings per share Diluted earnings per share adjusts the basic earnings per share by taking into account all dilutive potential ordinary shares arising from commencement rights granted to the Group’s Managing Director and estimated number of shares to be issued under the Employee Share Scheme (refer to Note 29). y) Borrowings and borrowing costs Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Borrowings are removed from the balance sheet when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss as other income or financial costs. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan and are amortised over the period of the facility to which they relate, unless a shorter period is considered more appropriate. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least twelve months after the reporting period. Borrowing costs are expensed as incurred. z) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flows. aa) Rounding of amounts The Group is of a kind referred to in Australian Securities and Investments Commission (ASIC) Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and in accordance with that instrument, amounts in this Directors’ Report and the Financial Report have been rounded to the nearest thousand dollars unless otherwise stated. ab) Parent entity financial information The financial information for the parent entity, McPherson’s Limited, disclosed in Note 35 has been prepared on the same basis as the consolidated financial statements, except as set out below. Investments in subsidiaries Investments in subsidiaries are accounted for at cost in the financial statements of McPherson’s Limited. Dividends received from subsidiaries are recognised in the parent entity’s profit or loss when its right to receive the dividend is established. 74 McPherson’s Limited Notes to the Consolidated Financial Statements continued 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ac) Critical accounting estimates and assumptions The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The area involving a higher degree of judgement or complexity, or area where assumptions and estimates are significant is discussed below. Estimated recoverable amount of goodwill and brand names with an indefinite useful life The Group tests goodwill and indefinite lived brand names annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. In calculating the recoverable amount of these assets, the use of assumptions is required. Refer to Note 16 for details of these assumptions. Provision for stock obsolescence Inventories are valued at the lower of cost and net realisable value. Estimates are required to be made in relation to the recoverable amount of inventory. These estimates are based on projected sales volumes and sell prices determined using current information and past experience. Estimates of net realisable values for the excess volumes are made and provisions recognised where necessary. Investments in joint ventures The recoverability of the investments in joint ventures and receivables from joint ventures is determined based on the net asset position of the joint ventures, or a value-in-use calculation should the net asset position of the joint venture not exceed the carrying amount of investments in joint ventures and receivables from joint ventures. The value-in-use calculations are based on cash flow projections based on financial budgets covering a two-year period. Cash flows beyond the projected period are extrapolated using estimated growth rates. In performing the value-in-use calculations for the joint ventures, the Group has applied a post-tax discount rate to discount the forecast future attributable post-tax cash flows. ad) Reclassification Certain comparative amounts have been reclassified to conform with the current year’s presentation to better reflect the nature of the financial position and performance of the Group. 2. FINANCIAL RISK MANAGEMENT The Group's activities expose it to financial risks such as currency risk, interest rate risk, credit risk and liquidity risk. In order to minimise any adverse effects on the financial performance of the Group, derivative financial instruments, such as foreign exchange and interest rate hedge contracts are used to hedge certain risk exposures. Derivatives are used exclusively for hedging purposes and not as trading or other speculative instruments. Financial risk management is predominantly controlled by a central treasury function under policies approved by the Board of Directors. Whilst the Group’s hedging policy only allows for highly effective hedge relationships to be established, at times some hedge ineffectiveness can arise. Hedge ineffectiveness can arise from the following hedge risks: Foreign exchange risk Interest rate risk hedging instrument; > If the timing of the hedged highly probable forecast transaction changes from what was originally estimated; > If the amount of the hedged highly probable forecast transaction decreases to an amount below the associated hedging instrument amount; or > If differences arise between the credit risk inherent within the hedged item and the hedging instrument. > If the underlying interest rate inherent within the Group’s borrowing arrangements differs from the underlying interest rate included within the > If the Group’s outstanding borrowings reduce to an amount below that included within the hedging instrument; > If the time period of the hedging instrument goes beyond the maturity date of the related borrowings and it is unlikely that the Group would > If differences arise between the credit risk inherent within the hedged item and the hedging instrument. refinance its borrowings for a further period; or Credit risk 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. Credit risk arises from cash and cash equivalents, derivative financial instruments and receivables due from customers. 75 2020 Annual Report Notes to the Consolidated Financial Statements continued 2. FINANCIAL RISK MANAGEMENTS (continued) Liquidity risk Liquidity risk is the risk that an entity will not be able to meet its financial obligations as they fall due. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities. The Group holds the following financial instruments: Financial assets Cash and cash equivalents Trade and other receivables Derivatives financial instruments Financial assets at fair value through profit or loss Financial assets at fair value through other comprehensive income Loan receivable from joint ventures Total financial assets Financial liabilities Trade and other payables Borrowings Lease liabilities Derivatives financial instruments Contingent consideration Total financial liabilities Note 8 9 11 12 13 18(d) 19 20 11 18 2020 $’000 2019 $’000 7,149 46,695 — — 6,000 1,457 10,472 31,877 797 2,934 — 1,570 61,301 47,650 49,858 16,377 8,292 615 1,776 32,219 17,936 — 234 — 76,918 50,389 The fair value measurements of the derivative financial instruments are shown in Note 2(e). a) Foreign exchange risk The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the majority of the Group’s foreign currency purchases made in USD. Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in currencies that are not the entity's functional currency and net investment in foreign operations. The Board's foreign exchange risk management policy is to hedge 100% of anticipated cash flows, mainly inventory purchases in USD, for twelve months. At balance date, 100% (2019: 100%) of projected USD purchases qualified as "highly probable" forecast transactions for hedge accounting purposes. The Group also hedges material exposures arising in foreign currencies other than USD. The Group uses a mixture of foreign currency options and forward exchange contracts to hedge its exposures to foreign currency. The weighted average hedged rate for the AUD/USD hedges the Group had in place at 30 June 2020 was 0.6590 (2019: 0.7023). The Group's exposure to foreign currency risk (being unhedged payable and receivable amounts, and outstanding hedges associated with forecast future transactions) at the reporting date was as follows: A$’000 30 June 2020 (Group) Trade receivables Trade payables Forward foreign exchange contracts - buy foreign currency Foreign currency options - buy foreign currency 30 June 2019 (Group) Trade receivables Trade payables Forward foreign exchange contracts - buy foreign currency Foreign currency options - buy foreign currency USD EUR GBP HKD AUD CNY 672 55 31,698 35,628 595 230 32,389 33,224 88 355 — — 51 194 — — — 153 — — 43 74 — — — 106 — — — 2,202 — — — 6 — — 7 64 — — — 931 — — 6 14 — — Group sensitivity Based on the financial instruments held at 30 June 2020, had the Australian dollar weakened/strengthened by 5% against other foreign currencies at that date, with all other variables held constant, it is estimated that equity would have been $905,443 higher / ($1,348,409) lower (2019: $1,648,153 higher / ($1,265,789) lower), arising from forward foreign exchange contracts and foreign currency options designated as cash flow hedges. The Group's exposure to unhedged amounts is not material. 76 McPherson’s Limited Notes to the Consolidated Financial Statements continued Interest rate risk 2. FINANCIAL RISK MANAGEMENTS (continued) b) The Group's main cash flow interest rate risk arises from long-term borrowings with variable interest rates. The Group manages its interest rate exposure by maintaining a policy to combine, if considered necessary and approved by the Board, fixed and floating rate liabilities through the use of derivative instruments and entry into fixed rate borrowings. At 30 June 2020, the Group’s debt at variable rates are: Weighted average interest rate Balance $’000 % of total loans 2020 Bank loans at variable rate Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk 2019 Bank loans at variable rate Net exposure to cash flow interest rate risk 1.1% 1.3% 2.2% 16,667 (15,000) 1,667 18,000 18,000 100% 100% c) Credit risk The maximum exposure to credit risk at balance date is the carrying amount of the financial assets as summarised in Note 2. For derivative instruments, counterparties are limited to approved institutions with secure long-term credit ratings. Credit limits are set and monitored by management with respect to individual customers and in some instances, debtor insurance is taken out against specific customers in order to minimise the credit risk. Credit limits are based on the customers’ financial position and prior payment history. For derivative financial instruments, the Board determines and reviews on a regular basis the coverage required by the Group. The Group uses the major Australian banks as counterparties for most of the Group’s derivative instruments. Derivatives entered into by foreign subsidiaries also use the major banks from within that country. Refer to Notes 9 and 11 for additional information regarding receivables and credit risk exposure. Trade receivables The loss allowance provision as at 30 June 2020 is determined as follows. The expected credit losses below also incorporate forward looking information. 2020 $’000 Neither past due nor impaired Less than 30 days 30 to 59 days 60 to 89 days 90 to 119 days 120 days or more Gross carrying amount Loss allowance provision Expected loss rate 31,895 — 0.0% 9,781 — 0.0% 769 — 0.0% 247 — 0.0% 187 — 0.0% 134 99 74.1% Total 43,013 99 0.2% Credit risk concentration Two external customers represent respectively $8,499,729 (2019: $8,657,440) and $14,688,687 (2019: $4,454,838) of the closing receivables balance. These debtor balances are in relation to the Australian business. d) Liquidity risk Financing Arrangements The Group has access to the following undrawn borrowing facilities at the end of the reporting period: Unused at balance date at floating rate Bank loans expiring within one year Bank loans expiring beyond one year Total undrawn borrowing facilities Refer to Note 20 for further information regarding the financing facilities available to the Group. 2020 $’000 2019 $’000 — 33,334 33,334 — 27,000 27,000 77 2020 Annual Report Notes to the Consolidated Financial Statements continued 2. FINANCIAL RISK MANAGEMENTS (continued) d) Liquidity risk (continued) Maturity profile of the Group’s borrowings The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at balance date to the contractual maturity date. The amounts disclosed are the contractual undiscounted cash flows. Less than 1 Year $’000 Between 1 & 2 Years $’000 Between 2 & 3 years $’000 Total Between Contractual 4 & 6 years Cash Flows $’000 $’000 Carrying Amount $’000 30 June 2020 Non-derivatives Payables Borrowings Lease liabilities Total non-derivative financial liabilities Derivatives 49,858 183 4,507 54,548 — 183 3,486 3,669 — 16,850 268 17,118 — — 214 214 49,858 17,216 8,475 75,549 49,858 16,377 8,292 74,527 Forward foreign exchange contracts – inflow Forward foreign exchange contracts – outflow (31,698) 31,969 Foreign currency options Interest rate contracts Total derivative financial liabilities 30 June 2019 Non-derivatives Payables Borrowings Total non-derivative financial liabilities — — — — 24 24 271 279 20 570 32,219 2,053 34,272 — 16,397 16,397 — — — — 21 21 — — — — — — — — — — — — (31,698) (31,698) 31,969 31,969 271 279 65 615 271 279 65 615 32,219 18,450 50,669 32,220 17,936 50,156 e) Fair value measurement of financial instruments The following financial instruments held by the Group were measured and recognised at fair value at 30 June 2020 and 30 June 2019 on a recurring basis: 30 June 2020 30 June 2019 Recurring fair value measurements Financial assets at fair value Derivative financial instruments Financial assets through OCI Financial asset through profit or loss Total financial assets at fair value Financial liabilities at fair value Derivative financial instruments Total financial liabilities at fair value Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 — — — — — — — — — — — — 6,000 6,000 — — 6,000 6,000 (615) (615) — — (615) (615) — — — — — — 797 — — — — 797 — 2,934 2,934 797 2,934 3,731 (234) (234) — — (234) (234) AASB 13 Fair Value Measurement requires disclosure of fair value measurements by level using the following fair value measurement hierarchy: Level 1: The fair value of financial instruments traded in active markets is based on quoted market prices at the end of the reporting period. Level 2: The fair value of financial instruments that are not traded in an active market is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. Level 3: If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3. The Group holds level 2 and level 3 instruments as at 30 June 2020. 78 McPherson’s Limited Notes to the Consolidated Financial Statements continued 2. FINANCIAL RISK MANAGEMENTS (continued) e) Fair value measurement of financial instruments (continued) Level 2 instruments The fair value of the derivative financial instruments is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at the end of each reporting period. The fair value of forward exchange and option contracts is determined using forward exchange market rates at the end of the reporting period. Level 3 instruments The Group’s Financial Assets at Fair Value through OCI, being the unlisted equity securities of Aware Environmental Limited, are classified as Level 3 as the timing of cash flows and discount rates are significant non-observable inputs. The unobservable inputs into the valuation of the Group’s Financial Assets at Fair Value through OCI are determined based on the best information available, including the Group’s own assessment of the assumptions that market participants would use in pricing the asset. The Group calculated the fair value of its Financial Assets at Fair Value through OCI using a discounted cash flow to determine the fair value of its Financial Assets at Fair Value through OCI. The following table shows a reconciliation of the movement in the fair value of financial instruments categorised with level 3 of the fair value hierarchy during the financial year: 30 June 2020 30 June 2019 Opening balance Acquisitions Unrecognised gain on acquisition Fair value gains / (losses) Maturities, disposals and interest Transfer to other categories Closing balance Assets $’000 2,934 3,000 — 66 — — 6,000 Liabilities $’000 — — — — — — — Assets $’000 — 4,138 (1,138) 14 (80) — 2,934 Liabilities $’000 — — — — — — — The following table shows the sensitivity of Level 3 financial instruments to a reasonable change in alternative assumptions in respect of significant non-observable inputs into the fair value calculation: Fair value Range of inputs 30 June 2020 $’000 30 June 2019 $’000 Significant non-observable inputs 30 June 2020 30 June 2019 Reasonable change in non-observable inputs & impact to fair value Financial Assets at Fair Value through OCI 6,000 — Discount rate 11.8% Financial Assets at Fair Value through Profit or Loss — 2,934 Conversion rate — — The fair value of the investment would increase to $11,100,000 if the discount rate decreases by 1% and would decrease to $8,791,000 if the discount rate increases by 1%. $0.60 to $1.00 per convertible note The fair value of the conversion option, embedded in the Financial Asset at Fair Value through Profit or Loss, would increase if the conversion rate increases. The fair value of the conversion option amounts to approximately $61,000 if the conversion rate is $0.60, per convertible note and approximately $2,000,000 if the conversion rate is $1.00 per convertible note. As at 30 June 2019, the Group’s Financial Assets at Fair Value through Profit or Loss, being the convertible notes with Aware Environmental Limited, were classified as Level 3 as the timing of cash flows, discount rates, conversion scenario, volatility and dividend yield were significant non-observable inputs. These convertible notes were converted into shares in Aware Environmental Limited on 10 October 2019, which are classified as Financial Assets through Other Comprehensive Income as at 30 June 2020. 79 2020 Annual Report Notes to the Consolidated Financial Statements continued 3. SIGNIFICANT ITEMS The Group’s profit after income tax includes the following items that are significant because of their nature or size: i) Impairment of A’kin and Moosehead brand names Less applicable income tax benefit ii) Impairment of investment and shareholder loan with the Kotia joint venture Less applicable income tax benefit iii) Share of net loss from the Kotia joint venture relating to the impairment of goodwill and the release of earn out liability Less applicable income tax benefit Total significant items before income tax Less applicable income tax benefits Total significant items after income tax 4. DIVIDENDS Details of dividends declared during the year ended 30 June 2020 are as follows: Final 30 June 2019 dividend of 6.0 cents per fully paid share (2018: 6.0 cents per fully paid share) fully franked at 30% Interim 2020 ordinary dividend of 4.0 cents per fully paid share (2019: 4.0 cents per fully paid share) fully franked at 30%, and no special dividend (2019: 2.0 cents per fully paid share) fully franked at 30% Total dividends Dividends not recognised at year end 2020 $’000 8,517 (358) 8,159 204 (61) 143 1,972 — 1,972 10,693 (419) 10,274 2019 $’000 — — — — — — — — — — — — 2020 $’000 2019 $’000 6,387 2,619 4,274 10,661 6,309 8,928 Since the 2020 financial year end, the Directors have declared a fully franked final dividend of 7.0 cents per fully paid share (2019: 6.0 cents per fully paid share). The aggregate amount of the dividend to be paid on 24 September 2020 but not recognised as a liability at year end. 7,509 6,380 Franked Dividends Franked dividends paid after 30 June 2020 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending 30 June 2020. Franking credits available for subsequent financial years based on a tax rate of 30% 24,470 23,245 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for the future receipt of the current tax assets. Dividend reinvestment plan (DRP) The Company's DRP continues to operate with a discount of 2.5% and will apply to the upcoming final dividend. Shareholders on the register at the record date of 7 September 2020 will be eligible for the dividend. Shareholders wishing to participate in the DRP need to have elected to do so by no later than the trading day immediately following the record date, or by 8 September 2020. Shareholders that have previously elected to participate in the DRP will continue to do so on the same basis unless a formal election to vary or cease participation is provided by 8 September 2020. The shares issued under the DRP are fully paid ordinary shares and rank equally with other fully paid ordinary shares. The issue price under the dividend reinvestment plan is calculated as the volume weighted average price of all shares sold through normal trade on the ASX during the five trading days commencing on the third trading day after the record date, less a 2.5% discount. 80 McPherson’s Limited Notes to the Consolidated Financial Statements continued 5. SEGMENT INFORMATION Operating segments are reported in a manner which is consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as the Managing Director of McPherson's Limited. The internal reports reviewed by the Managing Director, which are used to make strategic decisions, are separated into geographic segments and are considered on the basis of Australia, New Zealand and the rest of the world. Segment revenues Segment revenues are allocated based on the location in which the revenue originated. Sales between segments are eliminated on consolidation. Revenues from continuing operations of approximately $35,765,218 (2019: $34,698,000) and $37,236,925 (2019: $30,944,000) were derived from two external customers. These revenues were attributable to the Australian segment. Segment assets Segment assets are allocated based on where the asset is located. Assets arising from transactions between segments are eliminated on consolidation. Australia New Zealand $000 $000 Rest of the World $000 Intersegment eliminations Consolidated $000 $000 2020 Sales to external customers Inter-segment sales Total sales revenue Other income (excluding interest) Net borrowing costs Profit before income tax Income tax expense Profit after income tax Segment assets 2019 Sales to external customers Inter-segment sales Total sales revenue Other income (excluding interest) Net borrowing costs Profit before income tax Income tax expense Profit after income tax Segment assets Total segment revenue and other income (excluding interest) 210,824 EBITDA before significant items Depreciation and amortisation expense Segment result before significant items Significant items before tax Segment result including significant items before tax 30,515 (4,026) 26,489 (10,693) 15,796 Total segment revenue and other income (excluding interest) 196,055 EBITDA before significant items Depreciation and amortisation expense Segment result before significant items Significant items before tax Segment result including significant items before tax 20,503 (1,861) 18,642 — 18,642 158,863 3,204 24,731 — 186,798 207,391 3,424 210,815 9 193,228 2,827 196,055 — 8,989 — 8,989 118 9,107 (588) (327) (915) — (915) 5,806 1,317 7,123 237 7,360 380 (544) (164) — (164) — 222,186 (4,741) — (4,741) 222,186 — 364 (4,741) 222,550 — — — — — 30,307 (4,897) 25,410 (10,693) 14,717 (1,455) 13,262 (7,200) 6,062 9,631 — 9,631 — 9,631 307 (173) 134 — 134 7,478 2,033 9,511 — 9,511 1,254 (94) 1,160 — 1,160 — 210,337 (4,860) — (4,860) 210,337 — — (4,860) 210,337 — — — — — 22,064 (2,128) 19,936 — 19,936 (956) 18,980 (5,259) 13,721 137,114 3,793 24,136 — 165,043 81 2020 Annual Report Notes to the Consolidated Financial Statements continued 6. a) INCOME TAX Income tax expense Current tax Deferred tax (Over) / under provision in prior years Total income tax expense Deferred income tax (credit) / expense included in income tax expense comprises: Decrease / (increase) in deferred tax assets Increase / (decrease) in deferred tax liabilities Total deferred tax b) Numerical reconciliation of income tax expense Total operating profit before tax Prima facie income tax expense at 30% Tax effect of amounts which are not deductible / (taxable) in calculating taxable income: Impairment of intangible assets Tax rate differences in overseas entities Share-based payments expense (Over) / under provision in prior years Share of loss from investments Other Income tax expense Note 17 22 2020 $’000 8,343 (389) (754) 7,200 (106) (283) (389) 2019 $’000 4,600 1,144 (485) 5,259 464 680 1,144 13,262 3,979 18,980 5,694 2,197 58 201 (754) 1,168 351 7,200 — (163) 52 (485) 96 65 5,259 c) Amounts recognised directly in equity Aggregate current and deferred tax arising in the reporting period and not recognised in net profit or loss or other comprehensive income but directly credited to equity: Deferred tax assets 17 (12) (4) d) Tax expense relating to items of other comprehensive income Cash flow hedges 17, 22 349 328 7. KEY MANAGEMENT PERSONNEL Key management personnel compensation Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Total key management personnel compensation 2020 $ 2019 $ 2,630,595 2,162,979 120,445 23,401 337,949 110,988 26,966 71,227 3,112,390 2,372,160 Detailed remuneration disclosures are provided in the Remuneration Report contained within the Directors’ Report, which is in section (k) of the Directors’ Report. Loans to key management personnel There were no loans made to Directors of McPherson’s Limited, or to any other key management personnel of the Group, including their related entities during the current or previous year, nor were there any loans outstanding at the end of the current or previous financial year. Other transactions with key management personnel During the year, the Group sold minor quantities of its products for domestic use to key management personnel on terms and conditions no more favourable than those adopted when dealing with other employees at arm’s length in the same circumstances. 82 McPherson’s Limited Notes to the Consolidated Financial Statements continued 7. KEY MANAGEMENT PERSONNEL (continued) Other transactions with key management personnel (continued) There were no transactions between the Group and the Directors of McPherson’s Limited or with any KMP of the Group, including their related entities, during the current or previous financial year other than those disclosed above, and relating to remuneration and to transactions concerning performance rights and shares, and the following transactions: set the terms under which: > On 10 October 2019, MCP and Aware Environmental Limited (Aware) executed a Subscription Agreement and a Deed of Amendment, which > MCP converted its 3,000,000 convertible notes at a conversion price of $0.60 per share into 5,000,000 ordinary shares in Aware; and > MCP subscribed for 5,000,000 shares in Aware at a subscription price of $0.60 per share. > The Group’s 10,000,000 shares represent 10.7% of the capital of Aware at 30 June 2020. > Mr. Geoffrey Pearce is a Director and a significant shareholder of Aware Environmental Limited. The above transactions were conducted on normal commercial arm’s length terms and entered into in order to provide a more robust and reliable basis of skin care product supply to McPherson’s. 8. CASH AND CASH EQUIVALENTS Cash on hand Cash at bank and on deposit (at call) Total cash and cash equivalents 9. TRADE AND OTHER RECEIVABLES Trade receivables Provision for impairment Trade receivables, net of impairment Other receivables and prepayments Total trade and other receivables Movements in the provision for impairment of trade receivables Balance at 1 July Reversal of provisions for impairment Net receivables written off as uncollectible Foreign exchange Total provision for impairment 2020 $’000 7 7,142 7,149 2020 $’000 43,013 (99) 42,914 3,781 46,695 2019 $’000 7 10,465 10,472 2019 $’000 29,430 (115) 29,315 2,562 31,877 (115) (121) 16 — — 2 5 (1) (99) (115) Other receivables do not contain impaired assets and are not past due. It is expected that these amounts will be received in full when due. Due to the short-term nature of current receivables, their carrying amounts are assumed to be the same as their fair value. Credit risk The credit risk relating to trade and other receivables of the Group has been recognised, net of any provision for impairment. The following provides an overview of the credit risk associated with trade receivables. 2020 $’000 2019 $’000 Neither past due nor impaired Past due, but not impaired: > Less than 30 days > 30 to 59 days > 60 to 89 days > 90 to 119 days > 120 days or more Gross carrying amount Provision for impairment Net carrying amount 31,895 25,250 9,781 2,977 769 247 187 134 43,013 (99) 42,914 752 240 18 193 29,430 (115) 29,315 Credit risk concentration Two external customers represent $14,688,687 (2019: $8,657,440) and $8,499,729 (2019: $4,454,838) respectively of the closing receivables balance. These debtor balances are in relation to the Australian business. 83 2020 Annual Report Notes to the Consolidated Financial Statements continued 10. INVENTORIES Raw materials Finished goods Total inventories Provision for inventory obsolescence Total inventories, net of obsolescence provision 11. DERIVATIVE FINANCIAL INSTRUMENTS Derivatives are only used for economic hedging purposes and not as trading or speculative instruments. Current derivative financial instrument assets Forward foreign exchange contracts – cash flow hedges Total current derivative financial instrument assets Current derivative financial instrument liabilities Interest rate swaps – cash flow hedges Forward foreign exchange contracts – cash flow hedges Foreign currency options – cash flow hedges Total current derivative financial instrument liabilities Non-current liabilities Interest rate swaps – cash flow hedges 2020 $’000 9,013 41,821 50,834 (3,748) 47,086 2019 $’000 5,180 34,971 40,151 (3,463) 36,688 2020 $’000 2019 $’000 — — 20 271 279 570 45 797 797 — — 234 234 — Derivative financial instruments used by the Group The Group is party to derivative financial instruments in the normal course of business in order to hedge exposure to fluctuations in interest and foreign exchange rates in accordance with the Group's financial risk management policies (refer to Note 2). For information about the methods and assumptions used in determining the fair value of derivatives please refer to Note 2(e). Forward foreign exchange contracts – cash flow hedges The Group enters into forward foreign exchange contracts to hedge a portion of highly probable forecast purchases denominated in foreign currencies, predominantly in USD. The terms of these commitments are twelve months or less. Foreign currency options – cash flow hedges The Group has also entered into foreign currency option contracts to partially hedge a portion of anticipated USD purchases. At balance date, the outstanding foreign currency option contracts cover the period from July 2020 to June 2021. The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognised directly in equity. When the cash flows occur, the Group adjusts the initial measurement of the component recognised in the balance sheet by the related amount deferred in equity. Interest rate swaps – cash flow hedges The Group has entered into an interest rate swap contract maturing in June 2023 to partially restrict the Group’s interest rate exposure. The interest rate swap contract is settled on a quarterly basis and compared with the 90-day Bank Bill Swap Bid Rate (BBSY). 12. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Current assets Convertible note receivable – Aware Environmental Limited The following gains were recognised in profit or loss: Fair value gain 2020 $’000 2019 $’000 — 66 2,934 14 Please refer to Note 2 (e) for details on the classification, process, measurement and recognition of this fair value hierarchy Level 3 instrument. 84 McPherson’s Limited Notes to the Consolidated Financial Statements continued 13. FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME 2020 $’000 2019 $’000 Current assets Unlisted equity securities – Aware Environmental Limited 6,000 — There were no gains or losses recognised in other comprehensive income in relation to unlisted equity securities in 2020 (2019: nil). Please refer to Note 2 (e) for details on the classification, process, measurement and recognition of this fair value hierarchy Level 3 instrument. 14. PROPERTY, PLANT AND EQUIPMENT 2020 $’000 2019 $’000 Leasehold improvements At cost Accumulated depreciation Total leasehold improvements Plant and equipment At cost Accumulated depreciation Total plant and equipment Total property, plant and equipment a) Reconciliations Carrying amount at 1 July 2018 Additions Disposals Depreciation expense Foreign currency exchange differences Carrying amount at 30 June 2019 Additions Disposals Transfer from other intangibles Depreciation expense Foreign currency exchange differences Carrying amount at 30 June 2020 339 (321) 18 37,041 (30,800) 6,241 6,259 Leasehold Improvements $’000 Plant and Equipment $’000 44 — — (8) (13) 23 — — — (5) — 18 3,224 4,119 — (1,467) 31 5,907 1,745 — 335 (1,776) 30 6,241 292 (269) 23 35,080 (29,173) 5,907 5,930 Total $’000 3,268 4,119 — (1,475) 18 5,930 1,745 — 335 (1,781) 30 6,259 b) Non-current assets pledged as security Refer to Note 20 for information on non-current assets pledged as security by the parent entity and certain controlled entities. 15. LEASES a) Right-of-use assets Buildings Equipment and Vehicles Total right-of-use assets Additions to right-of-use assets in 2020 were $1,004,244. 2020 $’000 3,651 1,383 5,034 1 July 2019 $’000 4,776 1,891 6,667 85 2020 Annual Report Notes to the Consolidated Financial Statements continued 15. LEASES (continued) b) Amounts recognised in the statement of comprehensive income Depreciation charge of right-of-use assets Buildings Equipment and Vehicles Total depreciation charge of right-of-use assets Expenses relating to short-term and low value leases (included in Rental Expense) Interest expense (included in Borrowing Costs) Cash outflow for leases 2020 $’000 2019 $’000 (1,928) (709) (2,637) (353) (503) (4,275) — — — — — — As disclosed in note 1(b), the new AASB16 Leases accounting standard is effective 1 July 2019 and comparatives were not restated, as allowed under the modified transition approach. 16. INTANGIBLE ASSETS Goodwill Brand names Other intangibles Accumulated amortisation Total other intangibles Total intangibles 2020 $’000 15,757 48,310 7,662 (7,016) 646 64,713 2019 $’000 15,757 56,827 8,439 (7,050) 1,389 73,973 Reconciliations Reconciliations of the carrying amounts of each class of intangible assets at the beginning and end of the financial year are set out below: Goodwill $’000 Brand names Other Intangibles $’000 $’000 Total $’000 Carrying amount at 1 July 2018 15,674 56,827 1,399 73,900 Additions Impairment charge Amortisation charge Foreign currency exchange differences Carrying amount at 30 June 2019 Additions Impairment charge Amortisation charge Transfer to property, plant and equipment Foreign currency exchange differences — — — 83 — — — — 643 — (653) — 643 — (653) 83 15,757 56,827 1,389 73,973 — — — — — — (8,517) — — — 71 — (479) (335) — 646 71 (8,517) (479) (335) — 64,713 Carrying amount at 30 June 2020 15,757 48,310 Acquired brand names are not amortised under AASB 138 Intangible Assets, as the Directors consider these to have an indefinite life. The brand names are subject to an annual impairment test. 86 McPherson’s Limited Notes to the Consolidated Financial Statements continued 16. INTANGIBLE ASSETS (continued) Impairment Testing Goodwill Goodwill is allocated to the following cash generating units: Australia 2020 $’000 2019 $’000 15,757 15,757 The recoverable amount of a cash generating unit (CGU) is determined based on a value-in-use calculation. The value-in-use calculations includes cash flow projections based on the Board approved budgets covering a one year period. Cash flows beyond the projected period are extrapolated using estimated growth rates. In performing the value-in-use calculations for the CGU, the Group has applied a post-tax discount rate to discount the forecast future attributable post-tax cash flows. The assumptions used in the value-in-use calculation of the Australian CGU are set out below: 30 June 2020 30 June 2019 CGU Australia Estimated Growth Rates Year 2 Onwards Terminal Pre-Tax Post-Tax Growth Discount Discount Rate Rate Rate Estimated Growth Rates Year 2 Onwards Terminal Growth Rate Post-Tax Discount Rate Pre-Tax Discount Rate 2.0% 2.0% 10.0% 13.7% 2.0% 2.0% 10.0% 13.7% In addition to the above, it is noted that the year one cash flow projection is a key assumption within the value-in-use calculation. The cash flow projections used for the year one cash flows are based on the Board approved budgets. The budgets reflect the Board's expectation of cash flows for the Australian CGU arising from profit optimisation initiatives, new product launches and the inventory rationalisation project. At 30 June 2020, the value-in-use calculation for the Australian CGU exceeded the carrying value of its net assets. The surplus amount for the Australian CGU is $134,431,322 (June 2019: $102,986,000). Impairment charge No goodwill impairment charge was recognised in 2020 (2019: nil). Impact of possible changes in key assumptions A sensitivity analysis was undertaken by management to examine the effect of changes in key assumptions which would cause the carrying amount to exceed the recoverable amount for the Australian CGU. Management is satisfied that any reasonably likely changes in the key assumptions of the value-in-use calculation would not cause the carrying value of the Australian CGU to materially exceed its recoverable amount. Brand names Brand names are tested for impairment on an individual basis annually and more frequently if events or changes in circumstances indicate that they might be impaired. The recoverable amount of a brand name is determined based on the higher of value-in-use or fair value less costs to sell calculations. The value-in-use calculations are prepared using a discounted cash flow analysis of the future net contribution expected to be generated by the brand, which is based on the Board approved budget covering a one year period. Cash flows beyond the projected period are extrapolated using estimated growth rates. In performing the value-in-use calculations the Group has applied a post-tax discount rate to discount the forecast future attributable post-tax cash flows. The assumptions used in the brand name value-in-use calculations, are set out below. Estimated annual growth rates Terminal year growth rates Post-tax discount rates Pre-tax discount rates 2020 2019 1.0% – 15.0% 1.0% – 15.0% 1.0% – 3.0% 1.0% – 3.0% 10.0% 13.7% 10.0% 13.7% In addition to the above, it is noted that the year one cash flow projection is a key assumption within the value-in-use calculations. At 30 June 2020, the total carrying value of brand names was $48,311,000 (2019: $56,827,000). The value-in-use calculations for these brand names exceeded their carrying values. Impairment charge An impairment charge of $8,517,000 was recognised in 2020 (2019: nil) for the brands A’kin and Moosehead, which were adversely impacted by a change in consumer demand during the COVID-19 pandemic. The Group anticipates that these challenges will persist into the medium term based on the decline in retailer scan data in the Natural Skincare and Haircare categories, and therefore impaired the entire carrying value of the A’kin and Moosehead brands as at 30 June 2020. 87 2020 Annual Report Notes to the Consolidated Financial Statements continued 16. INTANGIBLE ASSETS (continued) Impact of possible changes in key assumptions If the year one projected sales by brand were 10.0% below the current estimates used in the value-in-use calculations, no impairment charge would arise. If the year one contribution margin percentages were 2.0% below the current estimates used in the value-in-use calculations, no impairment charge would arise. If the terminal year growth rates used in the value-in-use calculations were to be 1.0% lower than management’s estimates, no impairment charge would arise. If the post-tax discount rate used in the value-in-use calculations was to be 0.5% higher than management’s estimates, no impairment charge would arise. 17. DEFERRED TAX ASSETS The balance comprises temporary differences attributable to: Employee benefits Depreciation Net of right-of-use assets and lease liabilities Other Total temporary differences Note Set-off of deferred tax liabilities pursuant to set-off provisions 22 Net deferred tax assets Movements Opening balance at 1 July 2018 Charged to profit or loss Charged to equity Amortisation of transaction costs on share issues Under/(over) provision in prior years Foreign currency exchange differences Closing balance at 30 June 2019 AASB16 adjustment at 1 July 2019 Charged to profit or loss Charged to equity Charged to other comprehensive income Amortisation of transaction costs on share issues Under/(over) provision in prior years Foreign currency exchange differences Note 6 Leases 1 $’000 — — — — — — — 1(b) 6 1,301 (333) — — — — — Employee Benefits $’000 1,459 27 — — (69) (1) 1,416 — 249 — — — — — Depreciation $’000 761 (67) — — (37) — 657 — 219 — — — 78 — 2020 $’000 1,665 954 968 622 4,209 (4,020) 189 Other $’000 735 (424) 4 (8) 126 22 455 — (29) 12 183 (5) 6 — 2019 $’000 1,416 657 — 455 2,528 (2,442) 86 Total $’000 2,955 (464) 4 (8) 20 21 2,528 1,301 106 12 183 (5) 84 — Closing balance at 30 June 2020 968 1,665 954 622 4,209 1) Net of right-of-use assets and lease liabilities Deferred tax assets to be recovered within 12 months Deferred tax assets to be recovered after more than 12 months Total deferred tax assets 2020 $’000 3,012 1,197 4,209 2019 $’000 1,660 868 2,528 88 McPherson’s Limited Notes to the Consolidated Financial Statements continued 18. INVESTMENT IN JOINT VENTURES a) Formation of the My Kart joint venture (Soulful) On 23 July 2019, the Group announced the acquisition of 51% interest in the joint venture My Kart Pty Ltd from privately owned Australian companies The Beetle Co Pty Ltd, Sandybanks Marketing Pty Ltd and Sodor Investments Pty Ltd (“Soulful shareholders”). The Group’s investment for this holding comprised the following: > $0.5 million equity in My Kart; > $0.5 million shareholder loan to My Kart; and > $0.2 million working capital loan to My Kart. My Kart is a consumer goods business based on adult and student milk formulas, pre-packaged dried and organic foods, and digestive related tonics and bars trading under the “Soulful” brand. Under the terms of the agreement, the parties entered into the following transactions: The Group recognised on acquisition date an earn out liability which amounts to $1.8 million at 30 June 2020. > Earn out payable by the Group, based on a normalised EBIT multiple of My Kart for the financial years ending 30 June 2020, 2021 and 2022. > The Group has the option to call, after 30 June 2024, the 49% interest in My Kart owned by the Soulful shareholders; and > The Soulful shareholders has the option to put its 49% interest in My Kart to the Group after 30 June 2024. b) Formation of the Dr. LeWinn’s China Limited joint venture On 11 November 2019, the Group announced a joint venture with Access Brand Management (ABM) in order to expand sales of Dr. LeWinn’s branded products in Greater China, and to jointly develop new brands and products for the Greater China market. Under the terms of the joint venture agreement: ended 30 June 2020, 2021 and 2022; and > The Group and ABM hold respectively 49% and 51% of the HK$100 issued share capital of the joint venture, incorporated in Hong Kong; > MCP and ABM will execute an Exclusive Distribution Agreement for the Dr. LeWinn’s brand in Greater China until 30 June 2022; > ABM commits to increase its purchases of Dr. LeWinn’s products by a minimum compound annual growth rate of 5% for the financial years > If ABM does not achieve a target of $35 million in annual purchases of Dr. LeWinn’s products from McPherson’s in any year prior to 30 June 2022, or aggregate purchases of Dr. LeWinn’s products from McPherson’s of $82.5 million over the three year period ended 30 June 2022, then the Group may elect to acquire the trademarks of the joint venture for a value agreed with ABM. As at 30 June 2020, ABM had achieved the annual purchase target. Interest in joint ventures c) The following table summarises the financial information of the equity accounted investees as at 30 June 2020. Entity Country % Interest Measurement method Kotia Limited Sugarbaby & Co Pty Ltd My Kart Pty Ltd New Zealand Australia Australia Dr. LeWinn’s China Limited Hong Kong 51 51 51 49 Equity method Equity method Equity method Equity method The joint ventures are private entities, for which no quoted market prices are available. Carrying amount $’000 Share of loss $’000 — — 1,798 111 1,909 3,067 373 454 — 3,894 89 2020 Annual Report Notes to the Consolidated Financial Statements continued Interest in joint ventures (continued) 18. INVESTMENT IN JOINT VENTURES (continued) c) The new ventures are deemed to represent joint ventures on the basis that the unanimous consent of both shareholders is required for several key decisions. Consequently, the Group does not consolidate the results of the joint ventures, rather it equity-accounts for its share of the joint ventures’ profit or loss and movements in other comprehensive income. Any dividends received from the joint ventures in future periods will be recognised as dividend income and a reduction in the carrying amount of the Group’s investment in this entity. Movements in carrying amount of equity accounted investments Opening balance Acquisition of investment in joint ventures Share of joint ventures’ loss Share of joint ventures’ loss recognised against receivable balances Dividends Carrying amount of equity accounted investments Share of joint ventures’ statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets/(liabilities) 2020 $’000 716 2,363 (3,894) 2,724 — 1,909 544 3,040 3,584 (3,935) — (3,935) (351) 2019 $’000 — 1,195 (479) — — 716 843 2,795 3,638 (1,963) (833) (2,796) 842 d) Loan receivable from joint ventures The following table summarises financial information in relation to the Group’s loans to the joint ventures as at 30 June 2020: Name of entity Loans from the Group Carrying amount $’000 Interest rate Term Kotia Limited Shareholder loan Sugarbaby & Co Pty Ltd Shareholder loan My Kart Pty Ltd Total Shareholder loan Working capital loan — 530 810 117 1,457 6% The loan is not expected to be repaid within 12 months 5% The loan is not expected to be repaid within 12 months 6% The loan is not expected to be repaid within 12 months — The loan is not expected to be repaid within 12 months The purpose of these loans is to fund the working capital requirements of the joint ventures. As at 30 June 2020, the Group recognised an impairment charge of $204,000 before tax (2019: nil) against the shareholder loan to Kotia Limited. 19. TRADE AND OTHER PAYABLES Trade payables Customer contract liabilities Other payables Total trade and other payables 90 2020 $’000 30,043 13,924 5,891 49,858 2019 $’000 17,445 9,908 4,866 32,219 McPherson’s Limited Notes to the Consolidated Financial Statements continued 20. BORROWINGS Bank loans – secured Total current borrowings Bank loan – secured Debt issue costs Total non-current borrowings Total borrowings Interest income from continuing operations Interest income Borrowing costs from continuing operations Borrowing costs Amortisation of refinancing costs Total borrowing costs Net borrowing costs 2020 $’000 — — 16,667 (290) 16,377 16,377 2019 $’000 1,667 1,667 16,333 (64) 16,269 17,936 302 70 (1,391) (64) (1,455) (1,153) (933) (23) (956) (886) The Group’s new three-year facility, denominated in Australian dollars, has a facility limit of $47.5 million (2019: $41.9 million) and expires in June 2023. This facility comprises three tranches: > $35.0 million revolving working capital facility; > $10.0 million acquisition facility; and > $2.5 million documentary facility, covering the Group’s bank guarantee and letters of credit requirements. Drawings under the $35.0 million working capital tranche of the facility are required to be backed by eligible trade debtor and inventory assets. Under the terms of the new borrowing facilities, the Group is required to comply with the following key financial covenants: > Secured leverage ratio must not exceed 2.50 times; > Interest cover ratio must be at least 3.50 times; and > Total shareholder funds must not be less than $70,000,000. As at 30 June 2020, the Group was compliant with its debt covenants. In addition to the new three-year $47.5 million facility, the Group holds a $5 million overdraft facility (2019: $5 million). Security for borrowings The Group provides security to its lenders in order to access all tranches of the new debt facility. The Group facilities are secured by the following: > Fixed and floating charges over the assets of the parent entity and certain controlled entities; > Mortgages over shares held in certain controlled entities; and > Cross guarantees and indemnities provided by the parent entity and certain controlled entities. Assets pledged as security Fixed charge Property, plant and equipment Intangible assets Total non-current assets pledged as security The following current assets are also pledged as security: Fixed charge Receivables Floating charge Cash Inventories Receivables Total current assets pledged as security Total assets pledged as security 2020 $’000 2019 $’000 6,167 63,229 69,396 5,824 72,489 78,313 41,882 28,162 5,716 46,127 3,271 96,996 8,718 35,641 1,510 74,031 166,392 152,344 91 2020 Annual Report Notes to the Consolidated Financial Statements continued 21. PROVISIONS Provisions – current Employee entitlements Employee incentives Other Total current provisions Provisions – non-current Employee entitlements 2020 $’000 5,538 2,372 — 7,910 2019 $’000 4,678 1,320 100 6,098 732 709 a) Employee entitlements Current employee entitlements reflect annual leave and long service leave accrued for the next 12 months. Based on past experience, the Group expects that approximately 32% of the current balance will be taken or paid within the next 12 months. The non-current provision for employee entitlements relates to the Group’s liability for long service leave beyond 12 months from balance date. b) Employee incentives Amounts reflect incentive payments to employees on the basis that certain criteria were fulfilled during the financial year. Movement in provisions Movements in each class of provision during the financial year, other than employee entitlements, are set out below: Employee Incentives $’000 1,320 2,673 (45) (1,575) (1) 2,372 Other $’000 100 — — (96) (4) — Note 2020 $’000 2019 $’000 10,694 11,052 — 44 166 37 10,738 11,255 (4,020) 6,718 38 10,700 10,738 (2,442) 8,813 191 11,064 11,255 Carrying amount at 1 July 2019 Additional provisions charged to profit or loss Unused amounts reversed to profit or loss Payments Foreign currency exchange differences Carrying amount at 30 June 2020 22. DEFERRED TAX LIABILITIES The balance comprises temporary differences attributable to: Brand names Cash flow hedges Other Total temporary differences Set-off of deferred tax asset pursuant to set-off provisions 17 Net deferred tax liabilities Deferred tax liabilities to be settled within 12 months Deferred tax liabilities to be settled after more than 12 months Total temporary differences 92 McPherson’s Limited Notes to the Consolidated Financial Statements continued 22. DEFERRED TAX LIABILITIES (continued) Movements Consolidated Closing balance at 30 June 2018 Debited/(credited) to profit or loss Charged to other comprehensive income Under provision in prior years Foreign exchange Closing balance at 30 June 2019 Debited/(credited) to profit or loss Charged to other comprehensive income Under provision in prior years Foreign exchange Closing balance at 30 June 2020 23. CONTRIBUTED EQUITY Issued and paid up capital: Brand names $’000 Cash Flow Hedges $’000 Note Other $’000 Total $’000 6 6 6 6 11,067 — — (15) — 11,052 (358) — — — 10,694 450 44 (328) — — 166 — (166) — — — 18 636 — (615) (2) 37 75 — (71) 3 44 11,535 680 (328) (630) (2) 11,255 (283) (166) (71) 3 10,738 2020 $’000 2019 $’000 107,264,580 fully paid ordinary shares (June 2019: 106,329,245) 159,444 157,751 Movements in ordinary share capital Date Details 1 July 2018 Opening Balance Shares issued – DRP for 30 June 2018 final dividend Shares issued – DRP for 31 December 2018 interim dividend Transaction costs associated with share issues Tax effect of share issue transaction costs recognised directly in equity 30 June 2019 Closing Balance Employee shares scheme Shares issued – DRP for 30 June 2019 final dividend Shares issued – DRP for 31 December 2019 interim dividend Performance rights conversion Transaction costs associated with share issues Tax effect of share issue transaction costs recognised directly in equity Number of Shares Price $ $’000 104,771,194 368,884 1,189,167 106,329,245 122,517 391,541 371,277 50,000 1.52 1.11 1.74 2.19 1.74 155,882 560 1,319 (14) 4 157,751 213 857 646 — (35) 12 30 June 2020 Closing Balance 107,264,580 159,444 Ordinary shares Ordinary shares entitle the holder to participate in dividends, and to share in the proceeds of winding up the Company in proportion to the number of shares held. On a show of hands, every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. Options and Performance Rights Information relating to the Group’s Employee Performance Rights and options plans, including details of Performance Rights issued and outstanding at the end of the year, is set out in the Remuneration Report within the Directors’ Report and within Note 25. 93 2020 Annual Report Notes to the Consolidated Financial Statements continued 23. CONTRIBUTED EQUITY (continued) Capital risk management One of the Group’s key objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can continue 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. One measure the Group uses to assess its capital structure is its gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings less cash assets. Total capital is calculated as net debt plus total equity. Total borrowings Less: Cash assets Net debt, excluding lease liabilities Total equity Total capital Gearing ratio 24. RESERVES AND ACCUMULATED LOSSES a) Reserves Hedging reserve – cash flow hedges Share-based payments reserve Foreign currency translation reserve Total reserves Cash flow hedge reserve Balance 1 July Revaluation – gross Deferred tax Transfer to cost of sales – gross Deferred tax Total cash flow hedge reserve Share-based payments reserve Balance at 1 July Share-based payments FY20 employee share scheme accrued during the year FY19 employee share scheme issued during the year Total share-based payments reserve Foreign currency translation reserve Balance 1 July Currency translation differences arising during the year Total foreign currency translation reserve b) Accumulated losses Balance 1 July Effects from changes in accounting policy Profit/(loss) after tax Dividends provided for or paid Total accumulated losses 94 Note 20 8 Note 17, 22 17, 22 25 25 2020 $’000 16,377 (7,149) 9,228 90,229 99,456 9.3% 2020 $’000 (321) 2,625 2,038 4,342 508 (615) 183 (563) 166 (321) 2,180 428 236 (219) 2,625 1,986 52 2,038 2019 $’000 17,936 (10,472) 7,464 96,528 103,992 7.2% 2019 $’000 508 2,180 1,986 4,674 1,318 722 (212) (1,860) 540 508 2,014 (39) 205 — 2,180 1,496 490 1,986 1(b) (65,897) (70,690) (3,061) 6,062 (10,661) — 13,721 (8,928) (73,557) (65,897) McPherson’s Limited Notes to the Consolidated Financial Statements continued 24. RESERVES AND ACCUMULATED LOSSES (continued) c) Nature and purpose of reserves Cash flow hedge reserve The hedging reserve is used to record gains or losses on hedging instruments in cash flow hedges that are recognised in other comprehensive income as described in Note 1(p). Amounts are subsequently either transferred to the initial cost of inventory or reclassified to profit or loss as appropriate. Share-based payments reserve The share-based payments reserve is used to recognise the fair value of Performance Rights issued at grant date but not exercised or cancelled and shares estimated to be issued under the employee share scheme. Foreign currency translation reserve Exchange differences arising on translation of foreign controlled entities are taken to the foreign currency translation reserve, as described in Note 1(e). The reserve is recognised in profit or loss when the net investment is disposed of. 25. SHARE-BASED PAYMENTS a) Employee Performance Rights Plan Long-term incentives are provided to executives to align this element of compensation with the objective of improving long-term shareholder returns. During the current year the Group continued with its Performance Rights plan (the McPherson’s Limited Performance Rights Plan) to provide long-term incentives to executives. Under this plan, participants are granted Performance Rights which only vest if certain performance conditions (relating to compound annual growth in earnings per share and total shareholder return) are met and the executive is still employed by the Group at the end of the vesting period, or where not employed at the end of the vesting period is deemed to be a “good leaver” by the Board. Participation in the plan is at the discretion of the Nomination and Remuneration Committee and no individual has a contractual right to receive any guaranteed benefits. The maximum LTI opportunity for the Managing Director is $1 million per annum and for other senior executives in 2020 is 40% of fixed remuneration. Each Performance Right carries an entitlement to acquire one ordinary share in the Company for no consideration subject to the satisfaction of the vesting conditions which are based on performance and time related conditions. The Performance Rights carry no dividend or voting rights. Approval for the issue of Performance Rights granted to the Managing Director for the years from 2019 to 2021 was obtained under ASX Listing Rule 10.14 at the Company’s 2019 Annual General Meeting. The number of Rights that will vest will be determined proportionately on a straight line basis as follows: Type of Rights KMP Commencement Rights High Level Performance Rights (HLP) and Performance Rights Managing Director HLP – Managing Director Performance Rights – Chief Financial Officer (and Company Secretary) and National Accounts Director HLP Managing Director Performance Rights Chief Financial Officer (and Company Secretary) and National Accounts Director Exceptional Level Performance Rights (ELP) Managing Director Year of Grant 2017 2017 2018 Vesting Hurdles To continue to be the Managing Director of the Company until 1 November 2019. These rights vested in 2020. Zero Rights vesting at +3.0% (or less) Underlying EPS CAGR, to 100% of Rights vesting at +8.0% (or higher) Underlying EPS CAGR Zero Rights vesting at +5.0% (or less) Underlying EPS CAGR, to 100% of Rights vesting at +10.0% (or higher) Underlying EPS CAGR 2019 & 2020 Zero Rights vesting at +5.0% (or less) Underlying EPS CAGR, to 100% of Rights vesting at +10.0% (or higher) Underlying EPS CAGR First 50% of Rights Zero Rights vesting at +5.0% Underlying EPS CAGR (or less), to 100% of Rights vesting at +10.0% (or higher) Underlying EPS CAGR Remaining 50% of Rights 25% of Rights vesting at +10.0% TSR CAGR (at least), to 100% of Rights vesting at +15.0% (or higher) TSR CAGR 25% of Rights vesting at +15.0% TSR CAGR (at least), to 100% of Rights vesting at +25.0% TSR CAGR (or higher) 25% of Rights vesting at +15.0% TSR CAGR (at least), to 100% of Rights vesting at +20.0% TSR CAGR (or higher) 2019 & 2020 2017 & 2018 2019 & 2020 Vesting Period 3 years 3 years 3 years 3 years 3 years 3 years 4 years 4 years 95 2020 Annual Report Notes to the Consolidated Financial Statements continued 25. SHARE-BASED PAYMENTS (continued) a) Employee Performance Rights Plan (continued) Set out below is a summary of Performance Rights granted under the plan: As at 1 July Granted during the year Redeemed during the year Lapsed during the year As at 30 June Vested and exercisable 2020 2019 Average fair value at grant date $1.09 $1.88 Average fair value at grant date $0.88 $0.82 Number of rights 3,424,000 877,000 (50,000) (512,000) Number of rights 3,255,000 1,094,000 — (925,000) $1.43 3,739,000 $1.09 3,424,000 213,000 — Performance Rights outstanding at the end of the year have the following expiry dates: Grant date Vesting date 22 September 2016 21 November 2016 21 November 2016 21 September 2017 21 September 2017 21 September 2017 25 September 2018 25 September 2018 25 September 2019 18 November 2019 18 November 2019 Total 25 September 2019 25 September 2019 25 September 2020 22 September 2020 22 September 2020 22 September 2021 25 September 2021 25 September 2022 26 September 2022 26 September 2022 25 September 2023 Number of rights 30 June 2020 30 June 2019 — 213,000 590,000 294,000 235,000 436,000 696,000 398,000 422,000 182,000 273,000 194,000 581,000 590,000 294,000 235,000 436,000 696,000 398,000 — — — 3,739,000 3,424,000 The fair value of the Performance Rights issued were valued as follows: Performance Rights Fair value Commencement Rights and HLP Independently valued at grant date, applying a discounted cash flow methodology, using the market price of the related shares at the commencement date or grant date less the present value of expected dividends forgone prior to vesting ELP Independently valued at grant date using the assumptions underlying the Black-Scholes methodology to produce a simulation model which allows for the incorporation of the Total Shareholder Return (TSR) hurdle that must be met before these rights vest Consequently, in addition to being sensitive to the dividend yield, the ELP Rights are also sensitive to market volatility and the initial TSR, with the risk free rate as a further valuation input Other Performance Rights Financial year of grant before 2019 Independently valued at grant date, applying a discounted cash flow methodology, using the market price of the related shares at the grant date less the present value of expected dividends forgone prior to vesting Financial year of grant 2019 onwards EPS CAGR element independently valued at grant date, applying a discounted cash flow methodology, using the market price of the related shares at the grant date less the present value of expected dividends forgone prior to vesting TSR CAGR element independently valued at grant date using the assumptions underlying the Black-Scholes methodology to produce a simulation model which allows for the incorporation of the Total Shareholder Return (TSR) hurdle that must be met before these rights vest. Consequently, in addition to being sensitive to the dividend yield, the Performance Rights are also sensitive to market volatility and the initial TSR, with the risk free rate as a further valuation input 96 McPherson’s Limited Notes to the Consolidated Financial Statements continued 25. SHARE-BASED PAYMENTS (continued) b) Employee Share Scheme Under the McPherson’s Employee Share Scheme, approved by the Board of Directors, shares with up to $1,000 value may be issued by the Company to certain employees for no cash consideration. The purpose of this scheme is to improve employee engagement, reward our employees for service and provide employees with an ownership interest in the company, thereby improving the alignment of investor and employee objectives. All employees, excluding the Managing Director and other members of the Senior Leadership Team who are entitled to a long term incentive, who have been continuously employed by the Group for a period of at least one year are eligible to participate in the scheme at the discretion of the Board of Directors. Employees may elect not to participate in the scheme. Under the scheme, eligible employees may be granted up to $1,000 worth of fully paid ordinary shares in the Group annually for no cash consideration. The shares granted in 2019 vested on 31 July 2020 provided the employee remains employed by the Group. The number of shares issued to participants in the scheme is the offer amount divided by the weighted average price at which the company’s shares are traded on the Australian Stock Exchange during the week ending the day before the date of issue on 12 August 2020. Applications under the scheme are accepted at the discretion of the Board of Directors. Shares issued under the scheme may not be sold until the earlier of three years after issue or cessation of employment. In all other respects the shares rank equally with other fully-paid ordinary shares on issue. The Board of Directors has determined that the scheme will be continued in 2021 on the same basis as outlined above. Number of shares issued under the Employee Share Scheme 12 August 2020 31 July 2019 88,288 120,771 The number of shares issued to participants on 12 August 2020 was calculated based on the $1,000 offer amount divided by the weighted average price of $2.801 (2019: $1.763) at which the company’s shares were traded on the Australian Stock Exchange during the week ending the day before the date of issue. c) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of employee benefit expense were as follows: Performance Rights issued under the Employee Performance Rights plan Shares estimated to be issued under the Employee Share Scheme Total expenses 26. CONTRACTUAL COMMITMENTS FOR EXPENDITURE a) Capital commitments Aggregate capital expenditure contracted for at balance date, but not provided for in the accounts, due: Not later than one year 2020 $’000 428 230 658 2020 $’000 443 2019 $’000 (39) 205 166 2019 $’000 448 The Group primarily leases offices, warehouses, motor vehicles and equipment under non-cancellable leases expiring within one to seven years. The leases have varying terms and renewal rights. On renewal, the terms are renegotiated. b) Operating leases Aggregate amount of non-cancellable operating leases contracted for at balance date, but not provided for in the accounts, due: Not later than one year Later than one year but not later than five years Later than five years Total non-cancellable operating leases 2020 $’000 — — — — 2019 $’000 4,713 8,876 — 13,589 AASB16 was implemented from 1 July 2019, consequently all commitments in relation to non-cancellable operating leases contracted for at balance date have been recognised as lease liabilities in 2020. 97 2020 Annual Report Notes to the Consolidated Financial Statements continued 27. CONTINGENT LIABILITIES From time to time, the Group is subject to claims and litigations during the normal course of business. The Board has given consideration to such matters, which are or may be subject to litigation at year end and, subject to specific provisions raised, is of the opinion that no material liability exists. 28. REMUNERATION OF AUDITORS During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and non-related audit firms: 2020 $’000 2019 $’000 273,800 273,800 327,600 327,600 50,000 50,000 — — 323,800 327,600 — — — — 323,800 327,600 31,569 31,569 30,211 30,211 355,369 357,811 2020 Cents 5.7 5.7 15.3 15.2 2020 $’000 2019 Cents 13.0 13.0 13.0 13.0 2019 $’000 16,336 (10,274) 6,062 13,721 — 13,721 a) PricewaterhouseCoopers Australia i) Audit and other assurance services Audit and review of financial statements Total remuneration for audit and other assurance services ii) Other services Consumables review Total remuneration for other services Total remuneration of PricewaterhouseCoopers Australia b) Network firms of PricewaterhouseCoopers Australia i) Audit and other assurance services Audit and review of financial statements Total remuneration for audit and other assurance services Total remuneration of PricewaterhouseCoopers Australia c) Non PricewaterhouseCoopers audit firms i) Audit and other assurance services Audit and review of financial statements Total remuneration of non-PricewaterhouseCoopers audit firms Total remuneration of auditors 29. EARNINGS PER SHARE Basic earnings per share Diluted earnings per share Basic earnings per share excluding significant items Diluted earnings per share excluding significant items Reconciliation of earnings used in calculating earnings per share Basic and diluted earnings per share Profit after income tax (excluding significant items) Significant items after income tax (Note 3) Profit after income tax 98 McPherson’s Limited Notes to the Consolidated Financial Statements continued 29. EARNINGS PER SHARE (continued) 2020 Number 2019 Number Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 106,849,062 105,356,954 Adjustments for calculation of diluted earnings per share: Commencement Rights granted to the Managing Director Shares issued under the employee share scheme are dilutive and therefore are included in the calculation of diluted earnings per share Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 213,000 248,991 76,730 120,771 107,138,792 105,726,716 Information concerning the classification of securities Performance Rights Performance Rights granted to employees are considered to be potential ordinary shares and are included in the determination of diluted earnings per share to the extent to which they are dilutive. The Performance Rights have not been included in the determination of basic earnings per share. Except for the Commencement Rights granted to the Managing Director, the remaining outstanding Performance Rights are not included in the calculation of diluted earnings per share because they are not dilutive for the years ended 30 June 2020 and 30 June 2019. These Performance Rights could potentially dilute basic earnings per share in the future. Employee share scheme The shares estimated to be issued under employee share scheme are dilutive and therefore are included in the calculation of diluted earnings per share for the year ended 30 June 2020 and 30 June 2019. 30. PARTICULARS IN RELATION TO CONTROLLED ENTITIES Name of entity Country of Incorporation McPherson’s Limited McPherson's Consumer Products (NZ) Limited McPherson’s Consumer Products Pty Ltd 1 McPherson's Consumer Products Pte Ltd McPherson’s America Inc. McPherson's Consumer Products (HK) Limited McPherson’s (UK) Limited McPherson's (Shanghai) Co.,Ltd. During the financial year, the Group deregistered the following entities: Name of entity Domenica Pty Ltd 1 A.C.N. 082 110 101 Pty Ltd A.C.N. 137 363 038 PTY LTD Electrical Distributors Australia Pty Ltd Electrical Distributors Repairs Servicing Pty Ltd Euromaid Cooking Appliances NZ Limited Integrated Appliances Group Pty Ltd A.C.N. 127 192 223 PTY LTD Multix Pty Ltd 1 McPherson’s Publishing Inc Regent Sheffield Ltd McPherson’s Hong Kong Limited Cork International Far East Limited Australia New Zealand Australia Singapore USA Hong Kong United Kingdom China Country of Incorporation Australia Australia Australia Australia Australia New Zealand Australia Australia Australia USA USA Hong Kong Hong Kong 1) These subsidiaries have been granted relief from the necessity to prepare financial reports in accordance with ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 issued by the Australian Securities and Investments Commission. For further information refer to Note 35. All investments represent 100% ownership interest unless otherwise stated. 99 2020 Annual Report Notes to the Consolidated Financial Statements continued 31. RELATED PARTIES Directors Details relating to the insurance of Directors are included in the Directors’ Report. Controlled entities Transactions between McPherson’s Limited and its controlled entities in the Group during the year consisted of: > Amounts advanced to and by McPherson's Limited > Amounts repaid to McPherson's Limited > Amounts borrowed by McPherson's Limited > Payment and receipt of interest on certain advances at prevailing rates > Payment of dividends to McPherson's Limited > Receipt and payment of tax, rent, management and license fees Refer to the Remuneration Report within the Directors’ Report for information relating to key management personnel disclosures. Transactions with other related parties On 10 October 2019, MCP and Aware Environmental Limited (Aware) executed a Subscription Agreement and a Deed of Amendment, which set the terms under which: > MCP converted its 3,000,000 convertibles notes at a conversion price of $0.60 per share into 5,000,000 ordinary shares in Aware; and > MCP subscribed for 5,000,000 shares in Aware at a subscription price of $0.60 per share. The Group’s 10,000,000 shares represent 10.7% of the capital of Aware at 30 June 2020. Mr. Geoffrey Pearce is a Director and a significant shareholder of Aware Environmental Limited. The above transactions were conducted on normal commercial arm’s length terms and entered into in order to provide a more robust and reliable basis of skin care product supply to McPherson’s. Terms and conditions Transactions with related parties are on an arm’s length basis. Receivable amounts outstanding, other than loans, are repayable in cash and are due to be settled within two months of balance date. Outstanding loans are unsecured and do not have a specified repayment date. 32. DEED OF CROSS GUARANTEE McPherson’s Limited and McPherson’s Consumer Products Pty Ltd are parties to a Deed of Cross Guarantee under which each company guarantees the debts of the other. By entering into the Deed, McPherson’s Consumer Products Pty Ltd has been relieved from the requirement to prepare a Financial Report and Directors’ Report under ASIC Corporations (Wholly-owned Companies) Instrument 2016/785. a) Condensed consolidated income statement of the parties to the Deed of Cross Guarantee Set out below is a consolidated income statement and a summary of movements in consolidated retained profits for the year ended 30 June 2020 of the parties to the Deed of Cross Guarantee. Income statement Revenue Other income Expenses Finance costs Profit before income tax Income tax expense Profit for the year b) Movements in consolidated retained profits of the parties to the Deed of Cross Guarantee Summary of movements in consolidated retained profits Accumulated losses at beginning of the financial year Profit after income tax for the year AASB 16 impact Dividends provided for or paid Accumulated losses at the end of the financial year 100 2020 $’000 2019 $’000 207,391 309 193,228 1,149 (197,767) (175,041) (1,404) 8,529 (7,237) 1,292 (956) 18,380 (4,383) 13,997 (9,371) 1,292 (3,035) (10,661) (33,369) 13,997 — 8,928 (21,775) (10,444) McPherson’s Limited Notes to the Consolidated Financial Statements continued 32. DEED OF CROSS GUARANTEE (continued) c) Balance sheet of the parties to the Deed of Cross Guarantee Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Total current assets Non-current assets Other financial assets Property, plant and equipment Right-of-use assets Intangible assets Financial assets at fair value through OCI Investments Total non-current assets Total assets Current liabilities Trade and other payables Borrowings Lease liabilities Derivative financial instruments Provisions Current tax liabilities Total current liabilities Non-current liabilities Payables Borrowings Lease liabilities Contingent liabilities Derivative financial instruments Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity 2020 $’000 2019 $’000 4,876 43,747 43,873 — 92,496 1,457 5,926 3,978 64,698 6,000 73,402 8,235 28,152 33,393 788 70,568 4,504 5,572 — 72,898 — 83,511 155,461 166,485 247,957 237,053 63,079 — 3,678 566 7,160 4,331 51,408 1,667 — 234 5,363 2,573 78,814 61,245 — 16,377 3,525 1,776 45 726 6,718 29,167 107,981 — 16,269 — — — 706 8,847 25,822 87,067 139,976 149,986 159,444 2,308 (21,776) 157,751 2,679 (10,444) 139,976 149,986 101 2020 Annual Report Notes to the Consolidated Financial Statements continued 33. NOTES TO THE STATEMENT OF CASH FLOWS a) Reconciliation of net cash inflows from operating activities to profit after income tax Profit after income tax Impairment of brand names Impairment of investment in joint venture Share of loss in joint ventures Depreciation of property, plant and equipment Amortisation of other intangibles Depreciation of right of use asset Share-based payments expense Changes in operating assets and liabilities, excluding the effects from purchase or disposal of business assets: 2020 $’000 6,062 8,517 205 3,894 1,781 479 2,637 671 17,927 (100) 1,927 1,206 (15,521) (10,353) 19,332 2020 $’000 1,503 2020 $’000 7,149 — (4,507) (16,377) (3,785) (17,520) 7,149 (8,292) (16,377) (17,520) 2019 $’000 13,721 — — — 1,475 653 — 173 4,230 (635) (372) 196 (1,057) 1,394 19,778 2019 $’000 1,879 2019 $’000 10,472 (1,667) — (16,269) — (7,464) 10,472 — (17,936) (7,464) Note 23 Liabilities from financing activities Cash and cash equivalents $’000 Borrowings $’000 Leases $’000 Total $’000 10,472 (17,936) (11,029) (18,493) (3,320) 1,559 — (3) — — — — 3,767 (1,004) (26) — 2,006 (1,004) (29) — 7,149 (16,377) (8,292) (17,520) Increase in payables (Decrease) in other provisions Increase/(Decrease) in employee entitlements Increase in net tax liabilities (Increase) in receivables (Increase)/Decrease in inventories Net cash inflows from operating activities b) Non-cash investing and financing activities Shares issued under Dividend Reinvestment Plan c) Net debt reconciliation Cash and cash equivalents Borrowings repayable within one year (including overdraft) Current lease liabilities Borrowings repayable after one year Non-current lease liabilities Net debt Cash and cash equivalents Gross debt at fixed interest rates (lease liabilities) Gross debt at variable interest rates Net debt Net debt as at 1 July 2019 Cash flows Acquisition – leases Foreign exchange adjustment Other non-cash movements Net debt as at 30 June 2020 102 McPherson’s Limited Notes to the Consolidated Financial Statements continued 34. EVENTS OCCURRING AFTER BALANCE DATE The recent second wave of COVID-19 restrictions imposed in Victoria and New Zealand has not significantly impacted McPherson’s, with key Melbourne based suppliers remaining unaffected and sales orders from Victorian and New Zealand based retailers remaining relatively stable. No other matter or circumstance, other than what has been noted above, has arisen since 30 June 2020 that has significantly affected the Group’s operations, results or state of affairs, or may do so in future financial years. 35. PARENT ENTITY FINANCIAL INFORMATION a) Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance Sheet Current assets Total assets Current liabilities Total liabilities Shareholders' equity Issued capital Cash flow hedge reserve Share-based payments reserve Accumulated losses – 2016 reserve Retained earnings – 2017/2018/2019 reserves Total shareholders’ equity Profit for the period Total comprehensive income 2020 $’000 2019 $’000 496 183,416 108,695 128,986 4,681 183,085 113,298 131,074 159,443 157,751 (316) 2,625 499 2,180 (116,096) (116,096) 8,774 54,430 11,992 11,176 7,443 51,777 11,778 11,016 b) Contingent liabilities and guarantees The parent entity has guaranteed the repayment of borrowings of certain controlled entities. The cross guarantee given by those entities listed in Note 32 may give rise to liabilities in the parent entity if McPherson’s Consumer Products Pty Ltd does not meet its obligations under the terms of the overdrafts, loans, leases, or other liabilities subject to the guarantee. 103 2020 Annual Report Shareholder Information The shareholder information set out below was applicable as at 31 August 2020. SHARE CAPITAL The ordinary share capital in the Company was held by the following number of shareholders as at 31 August 2020: Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 Over Total Holding less than a marketable parcel Total holders Total shares % Shares 1,982 1,385 561 778 65 902,501 3,653,890 4,317,502 21,602,424 76,876,551 0.84 3.40 4.02 20.12 71.61 4,771 107,352,868 100.00 361 7,583 0.01 VOTING RIGHTS Each ordinary share on issue entitles the holder to one vote. Performance Rights have no voting rights. LARGEST SHAREHOLDERS AS AT 31 AUGUST 2020 HSBC CUSTODY NOMINEES GROUP (AUSTRALIA) LIMITED NATIONAL NOMINEES GROUP J P MORGAN NOMINEES AUSTRALIA PTY LIMITED CITICORP NOMINEES GROUP BNP PARIBAS NOMINEES PTY LTDUBS NOMINEES PTY LTD NEWECONOMY COM AU NOMINEES PTY LIMITED <900 ACCOUNT> BNP PARIBAS NOMS PTY LTD CS THIRD NOMINEES PTY LIMITED 1 2 3 4 5 6 7 8 9 10 EST MR DAVID MADDEN 11 MR JOHN GASSNER + MR NATHAN ROTHCHILD 12 CS FOURTH NOMINEES PTY LIMITED 13 MR KENNETH JOSEPH HALL 14 EGEA PTY LTD 15 P & M MAGUIRE SUPER PTY LTD 16 CMC MARKETS STOCKBROKING NOMINEES PTY LIMITED
17 EXLDATA PTY LTD 18 HATIM TAIY PTY LIMITED 19 AUSTRALIAN EXECUTOR TRUSTEES LIMITED 20 BNP PARIBAS NOMINEES PTY LTD 20 DR ANDREW RICHARD CONWAY + DR VANESSA JOY TEAGUE Total 21 largest shareholders Total ordinary fully paid shares Number of shares % Shares 18,466,087 16,830,082 12,263,405 8,473,985 2,312,731 1,749,565 1,288,824 940,101 937,609 925,000 801,501 710,707 710,451 570,239 416,000 362,528 351,500 313,000 310,000 300,000 300,000 69,333,315 17.20 15.68 11.42 7.89 2.15 1.63 1.20 0.88 0.87 0.86 0.75 0.66 0.66 0.53 0.39 0.34 0.33 0.29 0.29 0.28 0.28 64.58 107,352,868 100.00 SUBSTANTIAL SHAREHOLDERS The names and shareholdings of substantial shareholders who have notified the Company in accordance with Section 671B of the Corporations Act 2001 as at 31 August 2020 are as follows: Name of Substantial Holder Microequities Asset Management Pty Ltd Pie Funds Management Limited Challenger Limited Group / Lennox Capital Partners Pty Ltd Investors Mutual Limited Number of shares % Shares 7,465,334 6,670,672 6,502,799 5,952,226 7.18 6.22 6.06 5.55 UNQUOTED EQUITY SECURITIES The number of unquoted equity securities on issue as at 31 August 2020 is 3,739,000 performance rights (total holders: 9). MCPHERSON’S LISTING McPherson’s Limited is listed on the Australian Securities Exchange. 104 McPherson’s Limited T his page is intentionally left blank 105 2020 Annual Report T his page is intentionally left blank 106 McPherson’s Limited Corporate Directory & Financial Calendar Financial calendar 1 November 2020 McPherson’s Limited will be holding a virtual Annual General Meeting at 2:00pm (AEDT) on Wednesday, 4 November 2020, to be accessed by the following link: https://web.lumiagm.com/390343763. Shareholders will be able to participate in the AGM online using a computer or mobile device. There will not be a physical venue for shareholders to attend. February 2021 Appendix 4D for the half year ended 31 December 2020 May 2021 Investor Day presentation August 2021 Appendix 4E for the financial year ended 30 June 2021 September 2021 Annual Report for the financial year ended 30 June 2021 1) Dates and location may be subject to change McPherson’s Limited ACN: 004 068 419 ASX CODE: MCP McPherson’s Limited is a company limited by shares, incorporated and based in Australia. Its registered office and principal place of business is located at: 105 Vanessa Street Kingsgrove NSW 2208 Telephone: (02) 9370 8000 (02) 9370 8091 Facsimile: enquiries@mcpher.com.au Email: Website: www.mcphersons.com.au Auditors PricewaterhouseCoopers One International Towers Sydney Watermans Quay Barrangaroo NSW 2000 Solicitors Thomson Geer Lawyers Level 14, 60 Martin Place Sydney NSW 2000 Share Registry Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford Victoria 3067 Telephone within Australia: 1300 85 05 05 Telephone outside of Australia: +61 3 9415 5000 Facsimile: (03) 9473 2500 www.computershare.com www.investorcentre.com/contactus Shareholder Enquiries Shareholders who wish to contact the Company on any matter related to their shareholding are invited to telephone or write to the Share Registry. It is important that shareholders notify the Share Registry in writing if there is a change to their registered address, bank account, email address or other personal details. For added protection, shareholders should always quote their Securityholder Reference Number (SRN). 107 2020 Annual Report years Creating Better in Australia W W W . M C P H E R S O N S . C O M . A U