Metcash Limited Annual Report 2013

Plain-text annual report

Annual Report 2013 Delivering value. It’s in our DNA. Metcash Limited ABN 32 112 073 480 Metcash Limited (Metcash) is Australia’s leading wholesale distribution and marketing company specialising in grocery, fresh produce, liquor, hardware and automotive parts and accessories. CONTENTS Five Year Review Chairman and CEO Reports Departing Word About Metcash – Our DNA Review of Operations – Metcash Food & Grocery Review of Operations – Australian Liquor Marketers Review of Operations – Hardware & Automotive Corporate Responsibility and Environment Our Board Key Management Personnel Corporate Governance Statement Financial Report Directors’ Report Notes to the Financial Statements Directors’ Declaration Auditor’s Independence Declaration ASX Additional Information Corporate Information 1 2 3 4 6 8 10 12 14 16 17 27 28 68 129 130 133 IBC Annual General Meeting Wednesday 28 August 2013 2.30 pm ASX Auditorium Exchange Square 20 Bridge Street, Sydney NSW Five Year Review PAT (Underlying) up 6.9% to $280.7m EPS (Underlying) down 4.4% to 32.6 cents per share Sales up 3.8% to $13.0bn EBITA (Underlying) up 2% to $460.4m DPS – 28.0 cents Payout ratio of 86% 2 5 6 . 2 2 4 1 . 4 2 4 4 . 9 2 2 7 . 6 2 2 5 . 9 2 0 2 . 5 2 8 0 . 7 2 6 2 . 5 2 0 6 . 0 2 9 . 5 2 9 . 7 2 6 . 5 3 3 . 4 3 1 . 5 3 2 . 0 3 4 . 1 3 2 . 6 1 2 , 9 7 7 1 2 , 5 0 1 1 2 , 3 6 4 4 6 0 . 4 4 5 1 . 2 4 3 8 . 0 2 4 . 0 1 1 , 5 1 7 1 0 , 9 7 4 4 0 1 . 2 3 7 1 . 3 2 82 72 6 2 8 2 4 8 6 % 8 1 % 8 1 % 8 1 % 8 2 % 9 0 0 . 1 1 . 7 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 Five Year Review Financial Performance Sales ($m) Underlying EBITA Interest, net ($m) Underlying proﬁt after tax ($m) Proﬁt after tax attributable to parent ($m) Financial Position 2013 2012 2011 2010 2009 12,976.6 12,501.1 12,364.0 11,517.4 460.4 61.6 280.7 206.0 451.2 67.6 262.5 90.0 438.0 66.3 256.2 241.4 401.2 49.3 244.9 227.6 10,974 371.3 49.8 225.9 202.5 Metcash shareholder equity ($m) 1,624.2 1,335.1 1,442.8 1,377.6 1,279.4 Net tangible assets per share (cents) Gearing (debt/debt+equity) (%) (9.5) 33.2 (28.1) 42.6 19.7 36.7 12.5 35.5 13.0 33.5 Share Statistics Fully paid ordinary shares 880,704,786 771,345,864 768,853,644 765,644,031 764,888,363 Weighted average ordinary shares 859,742,607 770,441,432 767,676,470 765,178,865 764,843,880 Earnings per share (cents) Underlying earnings per share (cents) Dividends declared per share (cents) 24.0 32.6 28.0 11.7 34.1 28.0 31.5 33.4 27.0 29.7 32.0 26.0 26.5 29.5 24.0 Other statistics Number of employees (full-time equivalents) 5,794.0 5,166.0 5,638.0 5,773.0 5,358.0 Metcash Annual Report 2013 1 Chairman and CEO Reports CHAIRMAN’S REPORT, Mr Peter L Barnes Metcash has again produced results in line with its guidance. Our Food & Grocery business performed reasonably; Australian Liquor Marketers extremely well; and the Hardware & Automotive business is performing in line with expectations. Our strategic acquisitions are also progressing soundly. Conditions for the independent retail sector however, remain challenging with low consumer conﬁdence and the self-serviced supermarket chains locked in a marketing war. As a core wholesaling business, Metcash is particularly affected by sustained price deﬂation. An equity raising undertaken in mid 2012 resulted in an additional 109 million shares being issued, to the value of $375 million. These additional shares impacted the capital structure of the company resulting in an 11.6% dilution in the underlying earnings per share. The funds raised have been used to purchase the remaining 49.9% of Mitre 10 and set up seven hardware joint ventures; further automation of the NSW Distribution Centre; acquisitions in the liquor market including three hotel joint ventures; the purchase of 75.1% of Automotive Brands Group (ABG) and purchase of Australian Truck and Auto Parts Group (ATAP). The business remains strong and is well placed to endure the current trading environment. The Board is pleased to announce a dividend of 28 cents per share, fully franked for the full year. This represents a payout ratio of 86% of underlying earnings per share. The dividend reﬂects the Board’s conﬁdence in the Group’s underlying position, its future prospects and strong cash ﬂow generation. Metcash announced an increase in group sales of 3.8% to $13 billion. Our reported proﬁt after tax rose 129.0% to $206 million. Underlying proﬁt after tax rose 6.9% to $281 million. Underlying earnings per share declined 4.4%, reﬂecting the fact that most of the investments funded by the equity raising occurred partway through the year and did not deliver a full year’s earnings. Metcash recorded a strong operating cash ﬂow, rising 5.5% to $300 million, resulting from underlying earnings and improved working capital performance. This was achieved despite continuing Franklins retail losses and cash outlays related to provisions raised last year. Inventory control was improved, and gearing was reduced to 33.2% reﬂecting the strong Cash Flow and equity proceeds. The year saw the Board renewal process continue. After 12 years service Richard Longes retired from the Board as a Non-executive Director. During this time Richard was Chairman of the Audit, Risk and Compliance Committee, his contributions to the Board’s deliberations and decisions were signiﬁcant and greatly appreciated. Ian Morrice joined the Board as a Non-executive Director in June, 2012. Ian has in excess of 30 years international retail experience, most recently as Group CEO and Managing Director of The Warehouse Group Limited (NZ). Patrick Allaway joined the Board as a Non-executive Director in November 2012. Patrick has 25 years of banking and ﬁnancial experience. Andrew Reitzer stepped down as CEO and Executive Director on 30 June 2013 and Ian Morrice was appointed CEO and Executive Director. Again I would like to thank our shareholders, dedicated staff, loyal customers, suppliers and other stakeholders for their continued support of Metcash. 2 Metcash Annual Report 2013 Finally the Board would like to acknowledge the outstanding service of outgoing CEO Andrew Reitzer. Andrew will be missed; his courage, insight and tenacity have taken Metcash from a challenged business to a successful ASX100 company. From the time of his appointment Andrew assembled a strong executive team and achieved notable successes. The company’s market capitalisation has increased from $130 million in 1998 to $3.1 billion today. Revenues have increased signiﬁcantly over this period from $4.5 to $13 billion. We thank him for the extraordinary achievements of the last 15 years and wish him well for his life post-Metcash. Following an exhaustive review of internal candidates, the Board appointed Ian Morrice to the role of CEO. Since March Ian has had the opportunity to familiarise himself with the challenges and opportunities facing the company and assumed the responsibilities of CEO on 1 July. Peter L Barnes – Chairman CEO’s REPORT, Mr Ian R Morrice I am delighted to have taken on the role of CEO of Metcash Limited. The results for the year are creditable in such difﬁcult economic conditions. Price deﬂation and the deregulation of trading hours in Western Australia have affected the business. This, together with some store closures, resulted in a small decline in Metcash Food & Grocery’s market share. Metcash Food & Grocery Metcash Food & Grocery sales fell by 2.3% from $9.3 billion to $9.1 billion, largely due to the closure of Campbells branches, Cornetts and Walters stores in far north Queensland, and some stores in Western Australia. Earnings before interest, tax and amortisation (EBITA) declined 5% from $398 million to $378 million, reﬂecting the deleveraging effect of deﬂation, signiﬁcant additional investment in marketing programs and increased utility and transport costs. We re-established the Supabarn wholesale supply contract and won a contract to supply Spotless operations in Western Australia and Queensland. In addition we have almost completed converting former Franklins stores into independent IGA retailers. Despite more store closures than originally anticipated, IGA now has a signiﬁcant strategic footprint in New South Wales. In response to the competitive environment, Metcash Food & Grocery focused on marketing and merchandising strategies. We relaunched the SUPA IGA supermarkets in New South Wales and developed new advertising campaigns featuring IGA brand ambassador and well-known personality, comedian Anh Do. These were very successful in raising IGA’s brand presence and showcasing our consumer value proposition: ‘Ranging’, ‘Fresh’ and ‘Locked Down Low Prices’. The campaigns also highlighted the contribution IGA makes to local communities, including the IGA Community Chest program. Metcash Food & Grocery opened 51 new IGA stores throughout Australia during the year. These stores – combined with additional retailers joining IGA from other banner groups and store extensions and refurbishments – added a total of 62,693 square metres to the IGA retail store footprint across Australia. In addition, we ‘bought’ back 50 stores under our store buy-back program, transferring them from underperforming operators into the hands of focused retailers, and increasing sales as a result. I have spent the last few months gaining a deeper understanding of the business, its strengths and opportunities. I have initiated a planning process to develop our strategic priorities and growth opportunities that will be completed by the end of 2013. In our Convenience division, the KNAPP system is now fully operational at the Huntingwood Distribution Centre. The system picks an average of 25,000 single items per day, with the capacity to increase to 35,000 single items per day in peak periods. A previously announced project to further automate the Huntingwood Distribution Centre has commenced. The new system is expected to go live in September 2014 and will increase the efﬁciency of the replenishment process, producing denser pallet assembly and reducing packing and transport costs. A key priority will be to review the Food & Grocery operations to respond to the continuing deﬂationary and competitive market conditions. This will be an ongoing focus for the group as we continue to invest in our core logistics capabilities, and optimise the value of recent acquisitions and supply contracts. I look forward to driving the next stage in Metcash’s evolution. Also in the cash and carry business, we opened a new concept store, Value Depot, in Brisbane. To date, the store has exceeded its forecast sales and EBIT targets. Mr Ian R Morrice – CEO Australian Liquor Marketers (ALM) Once again, our liquor division performed strongly this year, with sales growth of 24.9% and EBITA of $47 million, an increase of 35%. Not only did the division hold its position as the second-largest liquor retailer, it continued to grow volumes while the overall market declined. ALM’s highlights included a new supply contract with Liquor Marketing Group Limited and Hotel & Tourism Management Pty Limited (LMG); improved retail execution; and better retail offers at the store level from our Independent Brands Australia (IBA) network, particularly Cellarbrations and The Bottle-O. The latter also drove organic growth in the underlying business. ALM also rolled out larger-format retail stores in several locations, which have performed well and received positive responses from suppliers and consumers. We made three hotel acquisitions via joint ventures during the year, and will continue to pursue this strategy as opportunities arise. This will help us support parts of the existing retail network while introducing new wholesale revenue streams. Hardware & Automotive The Hardware & Automotive division grew sales by 12.6%, and increased EBITA by 70.8% to $36 million. This was a result of solid business performance, acquisitions in Mitre 10 and the addition of ABG. Mitre 10 continued to strengthen its distribution network by entering seven new joint ventures. Twenty new Mitre 10 stores also joined the network in the last 12 months. A total of 52 stores were converted to Mitre 10 over the past two and a half years, 33 of which have come from a major competitor. The Natbuild trade alliance was ﬁnalised this year and has further strengthened Metcash’s position in the trade sector. The automotive business is performing well and in line with expectations. The focus is now on future growth, with the $5.6 billion automotive aftermarket sector providing Metcash with signiﬁcant opportunities. Metcash’s acquisition of ATAP in May 2013 is the next stage in growing the Hardware & Automotive business. ATAP’s extensive network comprises distribution centres in all major cities, including a presence in New South Wales where ABG did not previously have a distribution centre. The ATAP network provides access to a fragmented market that includes approximately 2,500 independent retailers. DEPARTING WORD FROM FORMER CEO Mr Andrew Reitzer After 15 years, the time is right for me to move on. I have thoroughly enjoyed working at Metcash and am proud of my achievements. It has been an extraordinary journey from where we started. When we came to Australia in 1998, Davids Limited – as the company was known then – was in terrible shape and the independent grocery sector’s market share was 11%. Today, Metcash punches above its weight and is a serious competitor in the sectors in which it operates. What’s most pleasing is the way our stakeholders have beneﬁted over the last 15 years. Our shareholders have seen our share price rise and enjoyed strong dividends. Our customers – the independent retailers – have experienced network growth and improved competitiveness, and can now deliver real value to consumers. Our staff members have access to better careers and beneﬁts; and our suppliers can do business with a strong third distribution channel. I am proud of the fact that we are keeping the supermarket chains at bay by consolidating and growing the independent retail sector; the way that each of our businesses stay in touch with their local communities and the way IGA stores and their customers have contributed more than $60 million to their local communities over the last decade through the Community Chest program. We have given consumers a real alternative in the grocery, hardware and liquor markets. My sincere thanks to all of our stakeholders for their support, belief and encouragement during my time as CEO, and I extend my very best wishes to Ian and the team for the continuing journey. Mr Andrew Reitzer – Former CEO Metcash Annual Report 2013 3 Pioneering distribution and warehousing expertise is embedded in our DNA. These strengths, together with superior merchandising and marketing, drive value for our shareholders and our portfolio of leading independent stores. Metcash is acknowledged as a leader in supply chain and operational logistics. The keys to our success are efﬁciency, investing in the future and continually lowering the cost of doing business. We introduced the KNAPP system, with its intelligent ‘single pick’ capability, to serve more than 70,000 convenience stores. By the end of 2014, the SSI SCHAEFER robotics system will begin operating and will fully automate the dry goods warehouse at the Huntingwood Distribution Centre. Metcash supports independence. We have strength in numbers and use our network buying power to negotiate the best prices for our customers – the independent retailers. From our beginnings in food and liquor, we have diversiﬁed our business to include hardware and automotive parts. We have the experience, drive and enthusiasm to ensure independent retailers have a bright and sustainable future. 4 4 Metcash Annual Report 2013 Our DNA Champion of the independent retailer How – Network buying power – Innovation in warehouse and distribution logistics – Operational support Food & Grocery Supporting independence and delivering excellence in fresh and dry grocery retailing and marketing Liquor Wholesaling and distributing liquor to our network of independent retailers in Australia and New Zealand Hardware & Automotive Delivering operational excellence in the automotive after-market, and hardware retail and wholesale Results – Shareholder value – Network growth – A bright and sustainable future for independent retailers Metcash Annual Report 2013 5 Review of Operations Metcash Food & Grocery The 2012–13 year was the ﬁrst full year for the restructured Metcash Food & Grocery pillar. The business is already seeing results through better buying power and a more efﬁcient approach to customer support. Metcash Food & Grocery champions more than 2,500 independent retailers across Australia. The national network of sophisticated distribution centres ensures retailers have access to quality stock at prices that enable them to compete and build successful businesses. The retail network that Metcash Food & Grocery supports includes approximately 1,500 IGA-bannered supermarkets. Other brands serviced include Friendly Grocer and FoodWorks. The convenience sector is a signiﬁcant part of the Metcash Food & Grocery pillar and serves the Lucky 7 brand, more than 70,000 retailers such as 7-Eleven, and a range of other small businesses. The national network of sophisticated distribution centres ensures retailers have access to quality stock at prices that enable them to compete and build successful businesses. In addition to logistics expertise, Metcash Food & Grocery provides marketing, merchandising, buying and retail operations support for independent retailers, ensuring they can focus on offering the best level of service to their customers. New supply contracts Market conditions for FY13 were tough. Sales were affected by continued deﬂation across packaged groceries. Wholesale sales were down 2.3% to $9.1 billion and EBITA was down 5.0% to $378 million. Despite the difﬁcult conditions, there were many signiﬁcant achievements across Metcash Food & Grocery. The business won several major supply contracts, which will have a positive impact on FY14 performance. These include supplying the Supabarn chain in New South Wales and the Australian Capital Territory; Spotless in Western Australia and Queensland; Subway in South Australia and Western Australia; and BP convenience stores. The network of Metcash Food & Grocery retailers experienced good growth and investment in quality over the year, with 55 new stores – including conversions – and 57 extensions and refurbishments across the group. This commitment to quality continues with the store buy-back program. Over the year, 50 stores were converted as part of the buy-back strategy, lifting sales by approximately 20%. Marketing Metcash Food & Grocery responded to the challenging economic conditions by focusing on marketing and merchandising strategies, particularly around the IGA brand. After the acquired Franklins stores were converted to SUPA IGA, a relaunch of the SUPA IGA brand in NSW was undertaken. The relaunch campaign involved TV commercials, and outdoor, digital and in-store advertising. The campaign not only built awareness of SUPA IGA, but had a positive ﬂow-on effect on IGA stores across NSW. The conversion of Franklins stores to IGA is working well. Despite more store closures than anticipated, the acquisition has proven to be worthwhile, signiﬁcantly increasing the IGA footprint in NSW. Anh Do – author of The Happiest Refugee – fronted two major IGA brand campaigns: Ranging, and Community Chest. The further investment in marketing over FY13 demonstrates Metcash Food & Grocery’s commitment to helping independent retailers showcase their strengths: stocking their customers’ favourite brands and assisting the local community. Harvest Market A relatively new concept for Metcash Food & Grocery is its fresh- retail franchise offer, Harvest Market. The model continues to gain traction, with four franchises established in NSW and several more in the process of ﬁnal negotiation. The Harvest Market model enables retailers of fresh fruit and vegetables to beneﬁt from Metcash Food & Grocery’s buying power, retail expertise and operational support. Value Depot During the year, Metcash’s convenience business welcomed a new concept store that builds on the previous Campbells offer. Value Depot opened its doors at Eagle Farm, Queensland in December 2012. We plan to make further reﬁnements to the concept before converting other Campbells stores. KNAPP system Metcash continued to invest in the highest standards of logistical expertise for its customers. We installed the KNAPP system at the Huntingwood Distribution Centre in NSW. KNAPP is an automated 6 Metcash Annual Report 2013 order storage and retrieval system that picks an average of 25,000 single items per day. It has the capacity to pick up to 35,000 single items per day. The next step – fully automating the warehouse using SSI SCHAEFER robotics – is now underway at the Huntingwood Distribution Centre. This system will enable even greater efﬁciencies in warehousing and distribution by reducing labour costs, related injuries, pallet packaging and transport costs. Metcash Food & Grocery’s independent retailers will reap the beneﬁts of these improvements. Metcash Annual Report 2013 7 Review of Operations Australian Liquor Marketers Australian Liquor Marketers (ALM) is Metcash’s broad-range liquor wholesaler. It supplies more than 15,000 hotels, liquor stores, restaurants and other licensed premises across Australia. ALM serves customers out of 15 distribution centres across Australia and New Zealand, providing high- quality logistics, buying, merchandising, marketing and retail support. Its wholly owned subsidiary, Tasman Liquor Company, operates a similar market in New Zealand. ALM supports nationwide independent retail brands through Independent Brands Australia (IBA). Established in 2003 by Metcash, IBA works to create strong national brands by providing liquor retailers with the right business support framework so they can compete with the supermarket chains and secure their long-term sustainability. IBA offers marketing support and a wide variety of retail services. The four national IBA retail banners are Cellarbrations, IGA Liquor, The Bottle-O and The Bottle-O Neighbourhood. ALM supports nationwide independent retail brands through Independent Brands Australia (IBA). ALM’s sales were up 24.9% to $2.9 billion for the year ended April 2013. EBITA was up 35.0% to $47 million. While the overall market for liquor is declining, IBA continues to grow its share and improve its performance, driven by improved execution and retail offers at the store level. Like-for-like beer sales were up 7.0% when market growth was only 0.2%. The liquor segment achieved overall growth of 2.8%. IBA’s strategy to lift its mix of wine sales is achieving good results and IBA management continues to reﬁne these initiatives. Expansion and joint ventures ALM has continued pursuing its expansion strategy. During the year, it launched larger-format concept stores and entered into joint venture agreements with three hoteliers in Queensland. These arrangements are designed to expand the supply network where liquor licensing laws require retail liquor outlets to be part of a hotel. This venture will increase IBA’s retail footprint and support independently owned and operated hotels. Similarly, the Cellarbrations on-premise strategy continues to show excellent results, with sales to retail customers building signiﬁcantly on previous years. We are planning further initiatives in the coming year to grow the already strong sales platform. 8 Metcash Annual Report 2013 New supply agreement In August 2012, Metcash signed a 15-year supply agreement with Liquor Marketing Group and Hotel & Tourism Management Pty Limited (LMG). The agreement involves supplying approximately 1,700 stores trading under banners such as Bottlemart, Down Under Cellars, Harry Brown, Sip ‘n Save, Western Cellars, Liquor Legends and Urban Cellars. The LMG supply contract commenced in October 2012 and management has successfully integrated the increased supply volume across the network. The rise in sales has beneﬁted the network, improving Metcash’s operating leverage to reduce the average cost of doing business. Established in 2003 by Metcash, IBA works to create strong national brands by providing liquor retailers with the right business support framework so they can compete with the supermarket chains and secure their long-term sustainability. Metcash Annual Report 2013 9 Review of Operations Hardware & Automotive In June 2012, Metcash exercised its right to acquire the remaining 49.9% of Mitre 10. The following month, Metcash acquired a 75.1% stake in Automotive Brands Group (ABG). With the recent addition of Australian Truck & Auto Parts (ATAP) in May 2013, Metcash’s Hardware & Automotive division now champions independent retailers across hardware (including trade) and the $5.6 billion automotive parts and after-market sector. By entering this sector, Metcash can offer its core competencies in supply chain, merchandising, marketing and operational support to another group of independent retailers. The year saw a 12.6% increase in sales to $938 million, with EBITA increasing 70.8% to $36 million. This result was achieved despite a depressed construction market affecting hardware trade sales. Metcash’s Hardware & Automotive division now champions independent retailers across hardware (including trade) and the $5.6 billion automotive parts and after-market sector. Hardware Mitre 10 continues to be ‘Mighty Helpful’ to its customers and is rapidly expanding its national footprint through a series of joint ventures, alliances and store conversions. In FY13, the hardware business continued to strengthen, with the Mitre 10 network developing strategic partnerships to further grow its share of the hardware trade and retail markets. In April 2013, Mitre 10 and South Australia–based Banner Hardware entered an alliance, bringing six retail stores, two manufacturing plants, a showroom and a distribution centre to the network. In May 2013, Mitre 10 entered into joint ventures with two leading hardware trade groups: Dahlsens in northern Australia, and Capeview Building Supplies in Victoria. These partnerships add strength to the network, offer further growth opportunities and increase our hardware trade footprint. Dahlsens operates 11 trade outlets in Western Australia, the Northern Territory and north 10 Metcash Annual Report 2013 Queensland, and owns manufacturing facilities. Capeview Building Supplies operates stores mainly across the Gippsland area of Victoria. These joint ventures enable more independent hardware operators to leverage Mitre 10’s merchandising and marketing skills, helping them remain competitive and offer better service to their trade customers. Mitre 10 welcomes all its strategic and joint venture partners, and is excited about the tremendous growth opportunities they offer the group. Over the year, Mitre 10 enjoyed high brand awareness as a major sponsor of two series of Channel 9’s The Block TV program – All Stars and Sky High. With an average audience of 1.2 million per night, the sponsorship was invaluable in promoting and exposing the ‘Mighty Helpful, Mitre 10’ brand to a diverse range of consumers. Automotive The automotive division experienced many highs during its ﬁrst year as part of Metcash. A highlight was the Autobarn car – co-driven by ABG CEO Paul Dumbrell – ﬁnishing ﬁrst in the Bathurst 1000 race. The automotive business performed in line with expectations, with sales of more than $83 million during the period. The division continues to grow with the acquisition of Australian Automotive Division (AAD), which includes ATAP – a specialist brake, steering and suspension wholesaler – and its network of Auto Brake Services (ABS) brake, steering and auto repair specialists. The rapid growth of Metcash’s Hardware & Automotive division demonstrates its ability to leverage the core strengths of wholesaling, logistics, marketing and independent retailer support across several industry groups. The Hardware & Automotive division will continue to identify ways to further improve its buying capabilities and retail execution on behalf of its customers. The year saw a 12.6% increase in sales to $938 million, with EBITA increasing 70.8% to $36 million. This result was achieved despite a depressed construction market affecting hardware trade sales. Metcash Annual Report 2013 11 Corporate Social Responsibility Metcash is committed to a sustainable future for its leading portfolio of businesses. The company’s business practices are governed by social, economic, environmental and ethical considerations. We focus our Sustainability and Corporate Social Responsibility (CSR) projects on four fundamental groups: the Business, the Products, the Customers and the Suppliers. We have developed a suite of policies that guide all current and future business activity in the interests of CSR. The Business Safety Metcash is highly committed to its staff members’ safety. For FY13, the number of Lost Time Injuries (LTIs) was 148 and the Lost Time Injury Frequency Rate (LTIFR) was 16.3 per million hours worked. We reduced the number of serious injuries from 72 last year to 37 this year by focusing on safety training and education. Workers compensation claims fell more than 25% year on year, from 459 last year to 385 this year. Metcash enhanced its data capture systems throughout FY13, improving accuracy when recording employee, contractor and labour-hire hours, as well as incident and corrective actions. We continue to make improvements across the national Occupational Health and Safety (OH&S) management system, undertaking proactive education measures, and further consolidating injury prevention programs and training. Lost Time Injuries (no. LTI’s) 3 1 7 2 7 5 2 7 3 2 4 4 2 2 2 2 2 1 1 4 8 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 12 Metcash Annual Report 2013 Sustainability The Metcash Sustainability Committee adopts policies and guides projects to ensure CSR goals are met and continue to evolve. Metcash was re-admitted into the Dow Jones Sustainability Index (DJSI) 2012. The DJSI tracks the index prices of sustainability leaders against the ASX200 – sustainable companies consistently perform better. For the third consecutive year, Metcash was admitted into the Carbon Disclosure Leaders Index – an initiative of the Carbon Disclosure Project. The Carbon Disclosure Project is a not-for-proﬁt organisation providing a global system for companies and cities to measure, disclose, manage and share vital environmental information. The Products Metcash works with suppliers on issues raised by consumers to ensure its private label products continue to improve. Our private label products contain no genetically modiﬁed ingredients. Metcash is a member of the Roundtable on Sustainable Palm Oil and will switch to 100% sustainable palm oil by 2015. New sustainable products – including a pole- and line-caught tuna range – were released under the IGA Signature brand. Metcash has been a signatory to the Australian Packaging Covenant since 2000, and has a process in place to review the packaging of each product for usability and environmental sensitivity. The Customers Metcash’s customers – the independent retailers – are a core focus of the company’s CSR initiatives. IGA continues to champion local communities through the Community Chest program. A percentage of sales from Community Chest–marked IGA private label products is used to support community groups and not-for-proﬁt organisations. The Community Chest program has raised more than $60 million over the past 11 years. In 2013, we made donations weighing 570 tonnes to Foodbank, which collects usable but not saleable packaged products and distributes them to welfare agencies so they can feed vulnerable members of our community. We also donate pet food to animal charities. Our Sustainability@Retail Support Program is a simple way for retailers to reduce their energy costs. In the past year, seven retailers have completed energy efﬁciency works and are saving $146,000 per annum. These retailers also saved 880 tonnes of carbon equivalent emissions in the past year. The Suppliers Metcash recognises that environmental and social impacts extend beyond its own business operations to those of its suppliers and customers. We have put projects in place to encourage suppliers to support sustainable business practices. The Metcash Sustainable Supply Chain Management Program ensures that suppliers meet minimum standards for safety, ethics and environmental impact. The program includes third-party auditing of suppliers. Diversity Metcash recognises the beneﬁts of a workforce that offers a range of skills, backgrounds and experiences. During 2012, the Board endorsed Metcash’s three-year Diversity and Inclusion Strategy and Implementation Plan, which focuses on seven strategic priorities: Metcash has also made progress towards decreasing the female-to- male pay gap within the business. The average pay for women as Business Unit Leaders and at all other levels (excluding Executive) continues to be above 2011 levels. Our restructuring activity over the past year saw a slight decrease in the signiﬁcant increases achieved in 2011. As part of its annual remuneration review process, Metcash analyses pay levels by gender, identiﬁes any differences and takes appropriate steps to address them. The focus for the future will be to build on the results achieved to date, and continue to foster a diverse workforce by creating an inclusive culture. 1. Continue to enhance Metcash’s inclusive culture by enhancing leadership and governance practices 2. Celebrate cultural diversity 3. Improve the proportion of women employed at all levels of the workforce 4. Effectively manage workplace ﬂexibility 5. Support mature workers’ transition to retirement 6. Establish Indigenous internships 7. Increase the representation of employees with a disability. Metcash has implemented some actions as part of the above priorities, including holding ‘Harmony Day’ celebrations; changing recruitment practices to widen candidate pools, especially for leadership roles; introducing female networking sessions and Indigenous internships; and establishing a program to help mature workers transition into retirement. In accordance with the requirements of the Workplace Gender Equality Act 2012, Metcash has lodged its annual public report with the Workplace Gender Equality Agency. The current workplace proﬁle is shown in the table on page 22. The proﬁle indicates Metcash has made signiﬁcant progress towards increasing female representation in leadership roles. Women make up 32% of Metcash’s workforce and hold 25% of leadership roles. In 2012, Metcash appointed its ﬁrst female Senior Executive, taking female representation in the Executive Team to 8%. We also appointed our ﬁrst female Warehouse Supervisors in Victoria and South Australia. Western Australia increased the number of female employees in distribution centres, achieving the highest level in Metcash’s history. Our talent management processes are designed to identify high- potential women, leading to an increase in the number of women participating in senior development programs from one in to ﬁve this year. Metcash Annual Report 2013 13 Ian R Morrice Fiona E Balfour Our Board Peter L Barnes Andrew Reitzer Patrick N J Allaway Peter L Barnes B Commerce (Hons) MBA Non-executive Chairman Date of appointment to Metcash Limited: 18 April 2005 Member of the Remuneration Committee Andrew Reitzer B Commerce MBL CEO Metcash Group of Companies until 30 June 2013 Date of appointment to Metcash Limited: 18 April 2005 Retired 30 June 2013 Ian R Morrice MBA CEO Metcash Group of Companies with effect from 1 July 2013 Non-executive Director from 12 June to 28 February 2013 Date of appointment to Metcash Limited: 12 June 2012 Patrick N J Allaway BA/LLB Non-executive Director Date of appointment to Metcash Limited: 7 November 2012 Member of the Audit Risk & Compliance Committee Peter Barnes is a Director of News Corporation and Chairman of Samuel Smith & Sons Pty Limited. He also serves as Chairman of the Melbourne Business School. Peter was formerly the Chairman of Ansell Limited and an executive with Phillip Morris International Inc. He has held several senior management positions in Australia and overseas. Peter was appointed Chairman of Metcash Limited on 2 September 2010 and has been a Director with Metcash since November 1999. Andrew Reitzer has 35 years experience in the retail and wholesale industry. His previous positions at Metro Cash & Carry Limited included Group Operations Director (heading operations in Russia and Israel), Marketing Director and IT Director. He has also managed various operating divisions. Ian Morrice has more than three decades of retail experience as Managing Director, Trading Director and Retail Director for some of the UK’s leading retailers, including Dixons and the Kingﬁsher group. Ian was Group CEO and Managing Director of New Zealand’s The Warehouse Group from 2004 to 2011. His key areas of expertise include strategy; brand and category development; multi-channel and new store format roll-out; product sourcing; and supply chain innovation. 14 Metcash Annual Report 2013 Patrick Allaway is a broad- based businessperson with extensive experience in ﬁnancial services. His career in investment banking has seen him hold positions with Swiss Bank Corporation in Zurich and London, and with Citibank in New York, Sydney and London. Over the past eight years, Patrick has been the Chairman and co-founder of Saltbush Capital Markets, a privately owned boutique corporate advisory and funds management business. He was also a Non-executive Director of Macquarie Goodman Limited until 2006 and the Interim Chairman of its Audit Committee. Patrick’s key areas of expertise include strategy, development, mergers and acquisitions, and capital management. He has a Bachelor of Arts/Law from the University of Sydney and is a Director of the University of Sydney Football Club Foundation Limited. Fiona E Balfour BA (Hons), MBA, Graduate Diploma Information Management, FAICD Non-executive Director Date of appointment to Metcash Limited: 16 November 2010 Member of the Remuneration Committee Fiona Balfour is an independent non-executive director of Salmat Limited and TAL Australia Limited and Air Services Australia; a Councillor of Knox Grammar School and of Chief Executive Women; and a Fellow of the AICD and Monash University since 2010. She was awarded the National Pearcey Medal in 2006. Fiona has more than 30 years executive experience in the aviation, telecommunications, ﬁnancial services, education and not-for-proﬁt sectors. Her professional expertise is in information and communications technology. She has extensive experience in global customer-facing business solutions across a variety of technologies, including digital channel management. She was a Director of SITA SC (Geneva) from 2001 to 2006, and a Trustee of the National Breast Cancer Foundation from 2007 to 2011. Michael R Butler Edwin M Jankelowitz Neil D Hamilton V Dudley Rubin Gregory C Watson Michael R Butler B SC, MBA, FAICD Non-executive Director Neil D Hamilton LLB Non-executive Director Edwin M Jankelowitz B Commerce, CA (SA) Non-executive Director V Dudley Rubin CA (SA), H DIP BDP, MBA Non-executive Director Gregory C Watson LLM, Dip Law General Counsel and Company Secretary Date of appointment to Metcash Limited: 8 February 2007 Date of appointment to Metcash Limited: 7 February 2008 Date of appointment to Metcash Limited: 18 April 2005 Date of appointment to Metcash Limited: 18 April 2005 Chairman of the Audit Risk & Compliance Committee Chairman of the Remuneration Committee Member of the Audit Risk and Compliance Committee Michael Butler has extensive experience in investment banking as an Executive Director of Bankers Trust’s Corporate Finance Group and as Executive Vice President of its Private Equity Group. He is currently Chairman of AMP Superannuation Limited and N.M. Superannuation Pty Limited. He has been a Non-executive Director and Chairman of various public and private companies. Neil Hamilton has more than 30 years experience in the legal profession and in business. His experience spans a number of industries, including investment and funds management, insurance, banking and resources. Neil is Chairman of OZ Minerals Limited and Miclyn Express Offshore Limited. He was appointed Chairman of the Remuneration & Nomination Committee on 1 September 2010. Dudley Rubin is a chartered accountant and a director of various companies trading in Africa. He has 30 years industry experience and has been a Director with Metcash since May 1998. Greg Watson joined Metcash in 2005 as Legal Counsel and was promoted to General Counsel in 2008. He was appointed Company Secretary in 2010. Greg has over 23 years professional and industry experience initially in private legal practice, followed by corporate legal counsel roles with multinational FMCG organisations. Greg is a graduate of the Metcash Executive Leadership Program. Edwin Jankelowitz was previously CFO of Metcash and was appointed a Non- executive Director in 2011. After qualifying as a Chartered Accountant, Edwin spent 12 years with Adcock Ingram Limited, reaching the positions of Group Company Secretary and Finance Director. He then consulted in business management and tax before taking a position with Caxton Limited, where he progressed to Finance Director, Managing Director and Chairman. Edwin has spent more than 39 years in corporate ofﬁces of listed companies and was a member of the Income Tax Special Court in South Africa for 20 years. Metcash Annual Report 2013 15 Key Management Personnel 2013 Mark R Laidlaw Fergus J Collins Ian R Morrrice Silvestro Morabito Andrew Reitzer Adrian E Gratwicke Ian R Morrrice MBA CEO Metcash Group of Companies with effect from 1 July 2013 Date of appointment to Metcash Limited: 12 June 2012 Non-executive Director from 12 June to 28 February 2013 Silvestro Morabito Associate Diploma in Food Retailing (FIT) Executive Diploma in Retail Management (ACFRS) COO Food & Grocery Date of appointment as COO Metcash Food & Grocery: January 2012 Ian Morrice has more than three decades of retail experience as Managing Director, Trading Director and Retail Director for some of the UK’s leading retailers, including Dixons and the Kingﬁsher group. Ian was Group CEO and Managing Director of New Zealand’s The Warehouse Group from 2004 to 2011. His key areas of expertise include strategy; brand and category development; multi-channel and new store format roll-out; product sourcing; and supply chain innovation. Silvestro Morabito has more than 33 years experience in grocery retailing both locally and internationally. During his 15 years with Safeway in Victoria, he held various senior positions in operations and IT. Silvestro was recruited by Dairy Farm International Holdings and held various senior management roles, including Director of Operations & Merchandising Manager for Fresh Foods (Woolworths NZ) in New Zealand, and CEO of the Cold Storage supermarket group in Singapore. Prior to his appointment as General Manager, IGA Distribution WA in 2006, Silvestro was CEO of Action Supermarkets, overseeing the sale of the supermarkets and the consolidation of the FAL retail brands. He was appointed CEO of IGA Distribution in 2010. Andrew Reitzer B Commerce MBL CEO Metcash Group of Companies until 30 June 2013 Date of appointment to Metcash Limited: 18 April 2005 Retired 30 June 2013 Andrew Reitzer has 35 years experience in the retail and wholesale industry. His previous positions at Metro Cash & Carry Limited included Group Operations Director (heading operations in Russia and Israel), Marketing Director and IT Director. He has also managed various operating divisions. Adrian E Gratwicke BA (Hons), ACA, MBA Chief Financial Ofﬁcer Date of appointment as Chief Financial Ofﬁcer: January 2011 Adrian brings more than 25 years commercial and industry experience to his position as Chief Financial Ofﬁcer. Since joining Metcash in April 1998, he has held several senior roles including National Accounting Manager; National Commercial Manager IGA Distribution; General Manager Mergers & Acquisitions, Risk and Investor Relations; and General Manager Finance. Fergus J Collins B Commerce (Hons) (University of Dublin), B SC MGMT (National University of Ireland), MBA CEO Australian Liquor Marketers (ALM) Date of appointment as CEO Australian Liquor Marketers: February 2007 Fergus Collins joined ALM in December 2001 as Commercial Manager Queensland and was promoted to General Manager Queensland in May 2004. He became General Manager, Independent Brands Australia in July 2006. Fergus is a graduate of the Metcash Executive Leadership Program. Mark R Laidlaw B Ec. (Monash University), CPA CEO Mitre 10 Australia Date of appointment as CEO Mitre 10 Australia: May 2010 Mark Laidlaw joined IGA Distribution in April 2001 as Commercial Manager, Victoria, and was promoted to General Manager, Victoria in July 2004. He has extensive experience in general management, sales, operations and commercial management. Prior to joining Metcash, Mark worked for Mobil Oil for 18 years in a range of senior positions, including National Commercial Manager, National Property Manager and Marketing Manager. He spent four years in Mobil’s international divisions in London, France and Germany. 16 Metcash Annual Report 2013 Corporate Governance Statement The Directors of Metcash Limited (Metcash or Company) support and adhere to the principles of corporate governance set out in the Metcash Corporate Governance Statement. In supporting these principles, the Directors acknowledge the need for the highest standards of behaviour and accountability. The Directors believe that Metcash’s policies and practices have complied in all substantial respects with corporate governance best practice in Australia, including the ASX Corporate Governance Council Corporate Governance Principles and Recommendations (Principles). Summary of compliance with Principles and Recommendations The table below summarises Metcash’s compliance with the Corporate Governance Council’s recommendations. RECOMMENDATION COMPLY YES/ NO REFERENCE/ EXPLANATION PRINCIPLE 1 – LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT 1.1 1.2 1.3 Companies should establish the functions reserved to the Board and those delegated to senior executives and disclose those functions. Companies should disclose the process for evaluating the performance of senior executives. Companies should provide the information indicated in the guide to reporting on Principle 1. PRINCIPLE 2 – STRUCTURE THE BOARD TO ADD VALUE 2.1 2.2 2.3 2.4 2.5 A majority of the Board should be Independent Directors. The Chair should be an Independent Director. The roles of Chair and Chief Executive Ofﬁcer should not be exercised by the same individual. The Board should establish a Nomination Committee. Companies should disclose the process for evaluating the performance of the Board, its Committees and individual Directors. 2.6 Companies should provide the information indicated in the guide to reporting on Principle 2. PRINCIPLE 3 – PROMOTE ETHICAL AND RESPONSIBLE DECISION-MAKING 3.1 3.2 3.3 Companies should establish a code of conduct and disclose the code or a summary of the code as to: • the practices necessary to maintain conﬁdence in the Company’s integrity; • the practices necessary to take into account their legal obligations and the reasonable expectations of their stakeholders; • the responsibility and accountability of individuals for reporting and investigating reports of unethical practices. Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the Board to establish measurable objectives for achieving gender diversity for the Board to assess annually both the objectives and progress in achieving them. Companies should disclose in each annual report the measurable objectives for achieving gender diversity set by the Board and in accordance with the diversity policy and progress towards achieving them. Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Website www.metcash.com Page 19 Page 19 Page 19 Page 20 Page 20 Page 21 Page 21 Pages 19 - 21 Website www.metcash.com Website www.metcash.com Page 21 Metcash Annual Report 2013 17 Summary of compliance with Principles and Recommendations (continued) 3.4 3.5 Companies should disclose in each annual report the proportion of women employees in the whole organisation, women in senior executive positions and on the Board. Companies should provide the information indicated in the guide to reporting on Principle 3. PRINCIPLE 4 – SAFEGUARD INTEGRITY IN FINANCIAL REPORTING 4.1 4.2 The Board should establish an Audit Committee. The Audit Committee should be structured so that it: • consists only of Non-executive Directors; • consists of a majority of Independent Directors; • is chaired by an Independent Chair, who is not Chair of the Board; • has at least three members. 4.3 The Audit Committee should have a formal charter. 4.4 Companies should provide the information indicated in the guide to reporting on Principle 4. PRINCIPLE 5 – MAKE TIMELY AND BALANCED DISCLOSURE 5.1 Companies should establish written policies designed to ensure compliance with ASX Listing Rule disclosure requirements and to ensure accountability at a senior executive level for that compliance and disclose those policies or a summary of those policies. 5.2 Companies should provide the information indicated in the guide to reporting on Principle 5. PRINCIPLE 6 – RESPECT THE RIGHTS OF SHAREHOLDERS 6.1 Companies should design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose their policy or a summary of that policy. 6.2 Companies should provide the information indicated in the guide to reporting on Principle 6. PRINCIPLE 7 – RECOGNISE AND MANAGE RISK 7.1 7.2 7.3 Companies should establish policies for the oversight and management of material business risks and disclose a summary of those policies. The Board should require management to design and implement the risk management and internal control system to manage the Company’s material business risks and report to it on whether those risks are being managed effectively. The Board should disclose that management has reported to it as to the effectiveness of the Company’s management of its material business risks. The Board should disclose whether it has received assurance from the Chief Executive Ofﬁcer (or equivalent) and the Chief Financial Ofﬁcer (or equivalent) that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to ﬁnancial reporting risks. Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Page 22 Page 21 Page 22 Page 22 Website www.metcash.com Pages 22 - 23 Website www.metcash.com Page 23 Page 24 Page 24 Page 24 Page 25 Yes Page 25 7.4 Companies should provide the information indicated in the guide to reporting on Principle 7. Yes Pages 24 - 25 PRINCIPLE 8 – REMUNERATE FAIRLY AND RESPONSIBLY 8.1 8.2 The Board should establish a Remuneration Committee. The Remuneration Committee should be structured so that it: • consists of a majority of Independent Directors; • is chaired by an Independent Chair • has at least three members. 8.3 Companies should clearly distinguish the structure of Non-executive Directors’ remuneration from that of Executive Directors and senior executives. 8.4 Companies should provide the information indicated in the guide to reporting on Principle 8. Yes Yes Yes Yes Page 26 Page 26 Page 26 Page 26 18 Metcash Annual Report 2013 Principle 1: Lay solid foundation for management and oversight Responsibilities of the Board and Management The Board of Directors is responsible for setting the strategic direction of Metcash and for overseeing and monitoring its businesses and affairs. The Board reviews and approves Metcash’s strategic and business plans and guiding policies. Day-to-day management of Metcash’s affairs and implementation of its strategy and policy initiatives are delegated to the Chief Executive Ofﬁcer and senior executives, who operate in accordance with Board-approved policies and delegated limits of authority. The principal functions of the Board include: • charting the direction, strategies and ﬁnancial objectives of the Company; • monitoring implementation of those strategies and the operational and ﬁnancial performance and risk of each of the Company’s activities; • reviewing major capital expenditure, acquisitions, divestments and funding; • reviewing performance, remuneration and succession of senior management; • monitoring compliance with legal regulatory requirements, including occupational health and safety laws, product safety and the protection of the environment; • monitoring the Company’s relationships with its stakeholders and compliance with ethical standards and Metcash’s Code of Conduct; • corporate governance generally. The Board’s Charter can be found on the Company’s website www.metcash.com under the heading ‘Corporate Governance’. Evaluating the Performance of Senior Executives On an annual basis, the Board, having received the advice of the Remuneration Committee, reviews the performance of the Chief Executive Ofﬁcer against qualitative and quantitative criteria, which include proﬁt performance, other ﬁnancial measures and achievement of the Company’s strategic objectives. During the 2013 ﬁnancial year, the Chief Executive Ofﬁcer’s performance was reviewed in accordance with the process speciﬁed above. The Company notes that during 2013 the incoming CEO was announced and accordingly, the retiring Chief Executive Ofﬁcer’s objectives included transitional and handover related criteria. The Company maintains a performance evaluation process which measures other senior executives against previously agreed Key Performance Indicators and Key Behavioural Indicators. This process is performed formally once a year, along with quarterly reviews, and took place for each senior executive during the 2013 ﬁnancial year. Senior executives have access to continuing education to update and enhance their skills and knowledge. Principle 2: Structure the Board to add value A majority of the Board should be Independent Directors Appointment to the Board The Board’s policy for the selection, appointment and re- appointment of Directors is to ensure that the Board possesses an appropriate range of skills, experience and expertise to enable the Board to most effectively carry out its responsibilities. As part of this appointment process, the Directors consider Board renewal and succession plans and whether the Board is of a size and composition that is conducive to making appropriate decisions. Prior to Directors standing for re-election, the Nomination Committee reviews the skills and contribution of the Directors concerned and decides whether the Committee supports their re-election. The Committee then recommends its decision to the Board. When a vacancy exists, or when it is considered that the Board would beneﬁt from the services of a new Director with particular skills, the Nomination Committee selects a panel of candidates with appropriate expertise and experience. This may be supplemented with advice from external consultants if necessary. The Board, on the Committee’s recommendation, then appoints the most suitable candidate who must stand for election at the next general meeting of shareholders. Directors are not appointed for a ﬁxed term but, under Metcash’s Constitution, must be re-elected each three years by rotation and are subject to Australian Securities Exchange (ASX) Listing Rules and Corporations Act provisions. The key terms and conditions of each director’s appointment are set out in a formal appointment letter. Board Composition Maintaining a balance of experience and skills is an important factor in Board composition. For details of the skills, experience and expertise of the individual Directors, and the period of ofﬁce held by each Director, please refer to page 14, headed ‘Board of Directors’, of this report. As at the date of this report, the Board of Metcash consisted of eight Directors, seven of whom are considered to be Non-executive, and six of whom are considered to be Independent Directors. The Board is currently constituted as follows: Independent Non-executive Directors Six Independent Directors hold key positions that include chairing the Board and the Board Committees of Audit Risk & Compliance, Remuneration and Nomination. They provide an external perspective and checks and balances for the interests of all shareholders. The Board has adopted a deﬁnition of independence which is derived from the deﬁnition set out in the Principles. Directors are considered independent if they are not a member of management and are free of any business or other relationship that would materially interfere with, or could reasonably be perceived to materially interfere with, the independent exercise of their judgement. When assessing the independence of a Director, the Board will consider whether the Director: • is a substantial shareholder of the Company or an ofﬁcer of, or otherwise associated directly with, a substantial shareholder of the Company; • is employed or has previously been employed in an executive capacity by the Company or another group member and there has not been a period of at least three years between ceasing to hold any such employment and serving on the Board; • has within the last three years been a principal of a material professional adviser or a material consultant to the Company or another group member, or an employee materially associated with the service provided; • is a material supplier or customer of the Company or other group member, or an ofﬁcer of or otherwise associated directly or indirectly with a material supplier or customer; • has a material contractual relationship with the Company or another group member other than as a Director of the Company. Metcash Annual Report 2013 19 The Board regularly assesses whether each Non-executive Director is independent, based on the deﬁnition and criteria above, and in light of information disclosed by those Directors that may be relevant to this assessment. Directors are required to declare the nature of any interest they have in business to be dealt with by the Board. Non-executive Director Mr Edwin Jankelowitz retired as an executive of the Company on 14 January 2011. Mr Jankelowitz remained a Director of the Company from that date. The Board considers Mr Jankelowitz to be a Non – executive Director and not an Independent Director. Executive Directors The Board has one Executive Director being the Chief Executive Ofﬁcer. During the 2013 ﬁnancial year that role was held by Mr Andrew Reitzer. Mr Reitzer retired from the Chief Executive Ofﬁcer role and the Board on 30 June 2013. Mr Ian Morrice was announced as incoming Chief Executive Ofﬁcer on 27 February 2013 and joined the Executive on 1 March 2013 in the role of CEO Elect and was formally appointed to the role of Chief Executive Ofﬁcer on 30 June 2013. All Directors, whether independent or not, bring an independent judgement to bear on Board decisions. Independent Professional Advice The Board has a policy of enabling Directors to seek independent professional advice at the Company’s expense. The Board will review in advance the estimated costs for reasonableness, but will not impede Directors from seeking advice. Company Secretary All Directors have access to the Company Secretary, Mr Greg Watson, who is accountable to the Board, through the Chairman, on governance matters. The Chair should be an Independent Director The Chair, Mr Peter Barnes, is considered by the Board to be an Independent Director. The roles of chair and chief executive ofﬁcer should not be exercised by the same individual. Six of Company’s Non-executive Directors are considered to be independent for the reasons set out as follows. • None of the Directors is a substantial shareholder of the Company or associated with a substantial shareholder of the Company (holding 5% or more of Company’s issued shares). • Messrs Allaway, Barnes, Butler, Hamilton and Longes (retired 30 August 2012), and Mrs Balfour are not employed by, nor have they previously been employed by, the Company or another group member. Mr Rubin was employed in executive positions by Metoz, the former group holding company and now a wholly owned Metcash subsidiary. That employment ceased on 18 April 2005 when the Metoz scheme became effective. • A period of more than three years has thus elapsed during which Mr Rubin remained as a Metcash Director. At all times, he has been a Non-executive Director of Metcash. Although there has not been ‘...a period of at least three years between ceasing such employment and serving on the Board’, it is noted that his role as a Metoz employee did not put him in a position of authority, responsibility, and/or directing the activities of the Company itself and, that this fact, combined with the eight year elapsed period are important factors in determining his capacity to bring independent judgement to bear on Metcash Board deliberations. Given the speciﬁc facts of his situation, the independence test does not preclude him from being considered independent. • The Board considered all relevant factors and concluded that Mr Rubin is an Independent Director. • None of the Non-executive Directors referred to above have a contractual relationship with the Company nor have they been a professional adviser or consultant to the group or an employee associated with the service provided. • None of the Non-executive Directors referred to above is a material supplier or customer of the Company or an ofﬁcer of, or otherwise associated directly or indirectly with, a material supplier or customer. Materiality is assessed as supplying 2.5% or more of Metcash’s annual purchases or a customer representing 2.5% or more of Metcash’s annual sales. Some of the Non-executive Directors are non-executive directors of organisations who supply Metcash on normal commercial terms and conditions. The level of purchases from these suppliers is not material. • None of the Non-executive Directors referred to above has a contractual relationship with the Company or another group member, other than as a Director of Company. 20 Metcash Annual Report 2013 The Board should establish a Nomination Committee The Board has a Nomination Committee (formerly the Remuneration & Nomination Committee). In light of the increasing workload of the Remuneration & Nomination Committee, the Remuneration & Nomination Committee’s responsibilities have been split and separate charters and committees have now been established for the oversight of remuneration and nomination. Nomination Committee The membership of the Nomination Committee consists of the Non-executive Directors of the Company. Responsibilities of the Nomination Committee include to: • Review and advise the Board with respect to Board membership, including with respect to composition, competencies, experience and diversity. The Committee shall also make recommendations for the appointment and re-election of Directors, and where necessary, propose candidates for consideration by the Board. • Assist the Board and the Chair of the Board, as required, in evaluating the performance of the Board, its Committees and individual Directors against robust and effective measures including as outlined in Section 8 of the Metcash Board Charter. • Ensure that an effective Board induction process is in place and regularly review its effectiveness. • Review the time expected to be devoted by Non-executive Directors in relation to the Company’s affairs and carrying out their duties as Non-executive Directors. • The Committee has the authority to: (a) obtain independent professional or other advice in the fulﬁlment of its duties at the cost of the Company; and (b) obtain such resources and information from the Company in the fulﬁlment of its duties as it may reasonably require. The Committee is comprised of the Non-executive Directors and is chaired by the Chair of the Board. Process for evaluating the performance of the Board, its Committees and individual Directors Annual reviews of the Board, its Committees and Directors are performed using a self-evaluation questionnaire, with an independent review to be conducted each third year using a recognised external Board Performance Consultant. This process was ﬁrst adopted in 2008. A recognised Board Performance Consultant (Cameron Ralph) conducted the 2011 ﬁnancial year review. Principle 3 – promote ethical and responsible decision-making Establish a Code of Conduct Metcash has a Code of Conduct that applies to Directors and all employees. Subjects covered by the Code include: • equal employment opportunity, discrimination and harassment; • security of Company records and assets and conﬁdentiality guidelines; • conﬂict of interest, acceptance of gifts, entertainment and services; • fraud, corruption and irregular transactions; • legal compliance; • honest ethical behaviour; • environmental protection and safe working environment. The Code can be found on the Company’s website www.metcash.com under the heading ‘Corporate Governance’. Compliance with the Code is checked through Company’s functions and related processes including business assurance and risk, security, human resources and occupational health and safety. New staff members are required to attend an induction program that includes behaviour guidelines. Additionally, Metcash’s staff appraisal process includes employees’ performance against ‘Key Behavioural Indicators’ as well as ‘Key Performance Indicators’. Metcash also has a ‘Business Conduct and Ethics policy which endeavours to encourage all staff and non-employees to report any person suspected of poor business conduct and ethical practices including fraud, corrupt conduct, inappropriate behaviour or concealment of such conduct, questionable accounting or auditing practices or substantial mismanagement of company resources that creates risks to public health, safety or risks to the environment or any other form of ‘Reportable Conduct’ that they may become aware of during their engagement with Metcash. This policy can be found on the Company’s website www.metcash.com under the heading ‘Corporate Governance’. Diversity policy The Metcash Diversity Policy was approved by the Board of Metcash in May 2011 and was introduced across the business supported by an educational programme detailing our aspirational goals, changes to processes and procedures, giving practical advice and guidance on how the policy was to be implemented. Self-evaluation by the Board, its Committees and Directors was conducted in 2013. The policy is located on the company’s website. The 2013 annual Board Performance Self-Evaluation Questionnaire covered the areas of: Board Appointments, Board Leadership, Teamwork and Management Relations, Board Meetings, Evaluation and Ethics/Stakeholders/Endowments. The Directors agreed that the 2013 evaluation process had been effective and that the individual discussions with the Chairman as part of that process had been frank and open. The overall conclusion was that the Board and its Committees comprise an appropriate level of knowledge and attributes reﬂective of the Company’s needs and necessary to maintain effective governance. In order to ensure strict adherence to the policy and to broaden the scope of diversity initiatives, during the last year, Metcash established a formal Diversity Strategy with initial attention given to increasing female representation across the organisation as well as supporting our mature workforce, creating further opportunities for workers with disabilities and celebrating cultural diversity including laying the foundation for an Indigenous talent pipeline. Although the Company’s approach to diversity is now in a broader context, management still recognises gender balance issues continue to exist. Metcash’s measurable objectives for achieving gender diversity are set by the Board. For the 2013 ﬁnancial year and for the next ﬁnancial year these are: • Increasing female representation at the Senior Manager level; • Increasing women performing Supervisor/Managerial roles across Metcash; and • Decreasing the female to male “pay gap” within the business. Metcash Annual Report 2013 21 The current workplace proﬁle indicates progress has been made towards increasing female representation in leadership roles at Metcash. • Women now make up 32% of Metcash’s workforce with 25% (up 1% year on year) representation in leaderships positions. • Western Australia has seen an increase in female representation of award employees in distribution centres taking it to the highest level in the history of Metcash. • During 2012 Metcash appointed its ﬁrst female Senior Executive, taking female representation of the Executive Team to 8%. • 2012 saw the appointment of the ﬁrst female Supervisors in warehouses in Victoria and South Australia. • Talent management processes have seen a signiﬁcant increase in the identiﬁcation of high potential women translating to an increase in the number of women participating in senior development programs (from one to ﬁve) in the past year. • Female representation on the Board is 13%. Progress towards decreasing the female to male “pay gap” within the business has continued with the average pay for women at leadership levels (excluding Executive) continuing to be above 2011 levels. However restructuring activity over the past 12 months has seen a slight decrease on the signiﬁcant increases seen in 2011. As part of its annual remuneration review process, Metcash undertakes an analysis of pay levels by gender, identiﬁes any differentials, and takes appropriate steps to address them. Further analysis comparing like for like roles will be conducted in the coming year with a formal remuneration review process through an independent provider. Current proportion of women at each level across the Company as reported in the most recent Gender Equality Act submission: (see table below) Metcash is now in its second phase of diversity initiatives and continues to focus on the following key aspects: • Building a culture around successful ﬂexible working arrangements, including the introduction of a management tool kit; • Roll out of an education programme around sub-conscious bias and how it impacts every-day decision making; • Continuing a relationship with Job Support to implement a plan to increase disability employment opportunities through their programmes; • Piloting the Indigenous Internship program to increase the Indigenous employee population within Metcash; and • Introducing a Transition into Retirement program to support our mature workforce. Principle 4 – Safeguard integrity in ﬁnancial reporting The Board should establish an Audit Committee The Board has an Audit, Risk & Compliance Committee which reports regularly to the Board. The membership of the Audit Risk & Compliance Committee consists of the Non-executive Independent Directors who are listed below, together with details of their qualiﬁcations and attendance at meetings during the past ﬁnancial year. Member Richard A Longes (C) (i) Michael R Butler (C) (ii) Qualiﬁcations BA, LLB, MBA B Sc, MBA Patrick N J Allaway (iii) BA, LLB Ian R Morrice (iv) MBA V Dudley Rubin CA (SA), HDip BDP, MBA Meetings eligible to attend during 2013 while in ofﬁce Meetings attended during 2013 ﬁnancial year 3 6 3 3 6 3 6 3 3 6 (i) Mr Longes resigned as chairman of the committee on 25 June 2012 and as a member of the committee on 30 August 2012. (ii) Mr Butler was appointed as chairman of the committee on 25 June 2012. (iii) Mr Allaway was appointed to the committee on 7 November 2012. (iv) Mr Morrice was appointed to the committee on 30 August 2012 and ceased being a member with effect from 1 March 2013. At all time during his appointment Mr Morrice was an Independent Non-executive Director. (C) Chairman The function of the Audit Risk & Compliance Committee is to advise on the establishment and maintenance of a framework of internal control, effective management of ﬁnancial and other risks, compliance with laws and regulations and appropriate ethical standards for the management of Company. It also gives the Board additional assurance regarding the quality and reliability of ﬁnancial information prepared for use by the Board in determining policies or for inclusion in the ﬁnancial statements. In accordance with the Principles, the Committee consists only of Independent Directors and is chaired by an Independent Director who is not the Chairman of the Board. Female Male Female Male Female Full Time Part Time Full Time Part Time Casual Casual Total Board Senior Exec 1 1 Senior Managers 40 Supervisors Managers Administration Employees Sales Employees Warehouse Employees 170 543 158 261 1174 0 1 6 114 141 120 382 7 12 180 458 371 244 2179 3451 0 0 1 1 50 98 150 0 0 0 57 154 222 433 0 0 0 18 206 426 650 1 1 41 176 714 453 603 1989 Male Total 7 12 180 459 390 500 2703 4521 Total Female Male % % 13% 88% 8% 92% 8 13 221 19% 81% 635 28% 72% 1104 65% 35% 953 48% 52% 3306 6240 18% 82% 32% 68% 22 Metcash Annual Report 2013 Committee Charter The Committee’s Charter, which is summarised below, sets out the speciﬁc responsibilities delegated to it by the Board and details the manner in which the Committee will operate. The Charter can be found on the Company’s website www.metcash.com under the heading ‘Corporate Governance’. The principal terms of reference of the Audit Risk & Compliance Committee are the effective management of ﬁnancial and other risks through ensuring that systems and management processes are in place to identify and manage operational, ﬁnancial and compliance risks. Speciﬁc areas of review include: • overseeing the establishment of a framework within which risks to the Company are identiﬁed and mitigated and risk avoidance processes are established and the effectiveness of the risk management process monitored; • ﬁnancial risk and exposure; • occupational health and safety; • environmental issues; • Hazard Analysis and Critical Control Points (HACCP) based food safety program; and integrity of information technology systems. The Committee reviews the effectiveness of risk management policies and procedures by: • reviewing monthly ﬁnancial performance against budget and updated forecasts at least quarterly; • reviewing the internal audit of the Company’s ﬁnancial controls, taxation compliance and adherence to policies and regulations; • reviewing annually the effectiveness and adequacy of the Company’s insurance program; • the provision of reliable management and ﬁnancial reporting - this is done by reviewing and assessing the: − quality and timing of management reporting to the Board to enable internal and external reporting of the Company’s risks, operations and ﬁnancial condition; − accounting policies and practices against generally accepted accounting principles and the requirements of the Corporations Law, Australian Accounting Standards and Australian Securities Exchange requirements; − half-yearly and annual ﬁnancial statements; • assessing compliance with laws and regulations by monitoring developments and changes in the various rules, laws and regulations relating to the Company’s business operations and the responsibilities of Directors and reviewing the extent to which the Board and the Company are meeting their obligations to ensure that all requirements are met; • the maintenance of an effective and efﬁcient audit function – this is achieved by: − recommending to the Board the appointment of external and internal auditors; − reviewing the effectiveness of the external and internal audit functions; − ensuring audit scopes are adequate and cover areas of anticipated risk; − reviewing audit ﬁndings and management response; − reviewing the independence of the external auditor; − ensuring auditors have the necessary access to Company information and staff to fulﬁl their obligations. The Audit Risk & Compliance Committee acts to ensure that operational, ﬁnancial and compliance risks are managed in accordance with the Board’s risk tolerance. Metcash has implemented a Risk Management Framework which is supported by specialised risk management teams (refer Principle 7 – Recognise and Manage Risk). The Committee has obtained assurance regarding the effectiveness of the overall system of risk management through various means. These means have included direct enquiry of management, internal and external audit reports and the monitoring of ﬁnancial and operational results. The Committee meets regularly, in private, with the Lead External Audit Partner and the Chief Audit Executive. A ‘Charter of Audit Independence’ is in place that details the circumstances in which Company’s external auditor may perform non-audit related services and the procedures to be followed to obtain approval for those services where they are permitted. The Charter also contains Metcash’s policies on the hiring of former partners and senior managers of the external auditor and the rotation of lead and review external audit engagement partners. The Charter can be found on the Company’s website www.metcash. com under the heading ‘Corporate Governance’. In principle, the appointment of an external auditor would be based on a tender process conducted by the Audit Risk & Compliance Committee. The Committee would select suitable candidates for the role, issue and evaluate tenders, interview the candidates and then make a recommendation to the Board. Principle 5 – Make timely and balanced disclosure Compliance with ASX listing rule disclosure requirements The Metcash Market Disclosure Policy is designed to ensure that: • there is full and timely disclosure of the Company’s activities to shareholders and the market, in accordance with the Company’s legal and regulatory obligations; and • all stakeholders (including shareholders, the market and other interested parties) have an equal opportunity to receive and obtain externally available information issued by the Company. The policy reﬂects the Company’s obligation to comply with the disclosure requirements of the Listing Rules of the Australian Securities Exchange (ASX), as well as relevant corporations and securities legislation. The policy is reviewed regularly to ensure that the policy reﬂects any legislative or regulatory requirements or ‘best practice’ developments. Disclosure responsibilities and procedures The Company has designated the Chairman, Chief Executive Ofﬁcer and Company Secretary as ‘Disclosure Ofﬁcers’. The Chairman’s approval, or that of his delegate, is required for disclosures. The Company Secretary has responsibility for liaising with the ASX in relation to all announcement and disclosure issues. Disclosure Ofﬁcers have responsibility for reviewing proposed disclosures and making decisions in relation to what information can or should be disclosed to the market. All company staff are required to inform a Disclosure Ofﬁcer of any potential ‘price sensitive’ information concerning Company as soon as they become aware of it. Staff may speak to their Business Pillar CEO or a Disclosure Ofﬁcer if they are in doubt as to whether information is potentially ‘price sensitive’. The Market Disclosure Policy can be found on the Company’s website www.metcash.com under the heading ‘Corporate Governance’. Metcash Annual Report 2013 23 Principle 6 – Respect the rights of shareholders Metcash believes that shareholder and market conﬁdence in all its dealings is paramount and is committed to ensuring it complies with continuous disclosure obligations so that its investors have timely and equal access to important company information. Information provided to the ASX is made available on the Company’s website so that all shareholders and other key stakeholders have timely access to it. In addition to meeting its continuous disclosure obligations, Metcash ensures shareholders and the broader investment community have timely access to important company information through a series of regular disclosure events during the ﬁnancial year. The calendar for these events is posted on Company’s website. The ‘Shareholder Communication Policy’ can be found on the Company’s website www.metcash.com under the heading ‘Corporate Governance’. The Company continues to encourage electronic communication with shareholders to facilitate the speedy, environmentally responsible and cost effective dissemination of information. This is being achieved through a program to obtain and update shareholder email addresses, to alert them to new information on the Metcash website and to distribute information, including the Annual Report, to them directly. The Company’s website contains more than ﬁve years of ASX and media announcements and Annual Reports. This information is shown under the heading ‘Investor Centre’. Provision has also been made for electronic proxy voting. The Board encourages full participation of shareholders at the Annual General Meeting to ensure a high level of accountability and discussion of the Company’s strategy and goals. The external auditor attends the Annual General Meeting to answer shareholder questions about the conduct of the audit and the preparation and content of the Auditor’s Report. Principle 7 – Recognise and manage risk Polices for the oversight and management of material business risks The Board is responsible for designing and reviewing Metcash’s Risk Management Policy and for determining Metcash’s appetite for risk, taking into account strategic objectives and other factors including stakeholder expectations. The level of tolerance for risk varies according to the risk area. The Risk and Assurance department with oversight from the Audit Risk & Compliance Committee, a Committee of the Board, implement a continuous process of communication with internal stakeholders at each stage of the risk management process. They also conduct annual examinations of Metcash’s external and internal environments, so as to establish the parameters within which risks must be managed. Policies on risk oversight and management of material business risks are summarised in a document entitled ‘Risk Management Policy’ which can be found on the Metcash website www.metcash. com under the heading ‘Corporate Governance’. Company’s risk management philosophy and practices are documented more fully in the Metcash Risk Management Framework and Guidelines (Risk Management Framework). The Company has adopted the Risk Management Standard ISO 31000:2009 as the basis for its Risk Management Framework. Metcash has implemented its Risk Management Framework through, amongst other things, the identiﬁcation of material business risk categories and the development of risk proﬁles for all the major segments and functions of the business. Material business risks that have been identiﬁed and included in the Risk Management Framework are grouped under the following categories: • Asset Management; • Business Continuity; • Health, Safety, Environment, Community (HSEC); • Compliance and Legal (Non-HSEC); • Employee; • Financial Reporting; • Criminal Activity; • Information Technology; • Reputational; • Solvency; • Operations/Warehouse; • Merchandising, Customer and Supplier (i.e. Supply chain); and • Strategic/Sustainability. The risk management process includes the following elements: • Risk assessment; - risk identiﬁcation; - risk analysis; - risk treatment; • Monitoring and review; and • Recording the risk management process. 24 Metcash Annual Report 2013 The risk management and internal control system provides regular feedback to management on their effectiveness in managing business risks. This is supported by the Risk Management platform database (software) which holds the risk controls library, all risk categories and events, risk proﬁles for each pillar/business, business/functional objectives, critical success factors, processes, compliance data, incidents and corrective actions. The Risk Management Policy and Risk Management Framework documents form an integral part of Metcash’s risk management. The Board continues to review these and provide support in deﬁning clear accountabilities, responsibilities and embedding Enterprise Risk Management in planning, strategy and company culture. The Board and the Audit Risk & Compliance Committee remain responsible for the oversight of the risk management process. Chief Executive Ofﬁcer and Chief Financial Ofﬁcer Declaration The Chief Executive Ofﬁcer and the Chief Financial Ofﬁcer provided a declaration in writing to the Board in accordance with section 295A of the Corporations Act that, among other things, Metcash’s ﬁnancial reports present a true and fair view of Metcash’s ﬁnancial condition and operational results and are in accordance with relevant accounting standards (refer to the Directors’ Report). The Board has received written assurance from the Chief Executive Ofﬁcer and the Chief Financial Ofﬁcer that the declaration provided by them in accordance with section 295A of the Corporations Act (refer to the Directors’ Report) is founded on a sound system of risk management and internal compliance and control and that the system is operating effectively in all material respects in relation to ﬁnancial reporting risks. Roles and responsibilities In addition to the speciﬁc responsibilities and reporting roles of the Group Risk and Assurance Department, the Metcash Executive Team is regularly required to report to the Board as to the emergence of any signiﬁcant risk issues and the management of previously reported material risk issues. The Audit Risk & Compliance Committee is responsible for monitoring management’s risk processes other than corporate strategy, the oversight of which is a Board responsibility. On behalf of the Board, the Committee monitors those risk events that could prevent the achievement of the Company’s corporate strategies. All Metcash employees are responsible for the management of risk within their areas. Management is responsible for assessing and monitoring risk and designing cost-effective mitigation to facilitate the achievement of goals and objectives. Non-management employees are always responsible for ensuring that risk controls within their scope of responsibility operate effectively. These employees are also required to advise management of increasing or new risk exposures and signiﬁcant operational incidents as they become aware of them. This ‘front line’ of risk management is supported by specialised risk management teams covering speciﬁc areas of risk within Metcash and by independent reviews conducted by the Metcash Assurance Department to verify the adequacy and effectiveness of risk management. The Board should require management to design and implement the risk management and internal control system to manage the Company’s material business risks and report to it on whether those risks are being managed effectively Metcash implements a risk oversight and risk management process that is based on Risk Management Standard ISO 31000:2009. This system is used to proﬁle all potential risks by identifying, prioritising and managing such risks across the Company. Management has reported to the Board as to the effectiveness of the Company’s management of its material business risks using this internal system. The Risk Management Policy and Risk Management Framework utilised at Metcash covers a wide range of activities and are used to identify, analyse, evaluate, manage and monitor risks across all areas of the business. Risk proﬁles are in place for existing and newly acquired sites. These are prepared in consultation with senior management, agreed with site business management and are periodically reviewed and updated by risk team members. Ongoing risk management activities include: • conﬁrmation of key controls; • reporting of incidents: recording and monitoring of key risk indicators (monitoring of residual risk levels); • follow-up on risk treatment/action plans; • escalation of issues; and • regular reporting processes to all levels of management. The ongoing process of communication, consultation, monitoring and review enables management to demonstrate continuous improvement whilst encouraging greater ownership by individuals across the business. Metcash Annual Report 2013 25 Remuneration Policy Metcash’s Remuneration Policy can be found on the Metcash website www.metcash.com under the heading of ‘Corporate Governance’. It is summarised in the ‘Remuneration Report’ contained within the Directors’ Report. Details of the compensation of senior executives are also contained in the Remuneration Report. Metcash’s policy on prohibiting entering into transactions in associated products which limit the economic risk of participating in unvested entitlements under any equity-based remuneration schemes is set out in the Company Code for Directors and Executives in Respect of Share Transactions which can be found on Company’s website www.metcash.com. Non-executive Directors’ compensation and retirement beneﬁts Refer to the ‘Remuneration Report’ contained within the Directors’ Report. The Remuneration Report explains how the structure of Non-executive Director remuneration is clearly distinguished from that of Executive Directors and senior executives. In particular, Non-executive Directors do not receive any performance based remuneration. Termination entitlements of CEO and senior executives Refer to the ‘Remuneration Report’ contained within the Directors’ Report. Principle 8 – Remunerate fairly and responsibly The Board should establish a Remuneration Committee The Board has established a Remuneration Committee (formerly the Remuneration & Nomination Committee). The membership of the Remuneration Committee consists of the Non-executive Independent Directors who are listed below, together with details of their qualiﬁcations and attendance at meetings during the past ﬁnancial year. Member P Barnes F Balfour Qualiﬁcations B Comm (Hons), MBA BA (Hons), MBA, Grad Dip Information Management, FAICD N Hamilton (C) LLB (C) Chairman Meetings eligible to attend during 2013 while in ofﬁce Meetings attended during 2013 ﬁnancial year 6 6 6 6 6 6 Responsibilities of the Committee include to: • advise the Board on remuneration of the CEO and senior management; • advise the Board on performance-linked compensation for management; • oversee the administration of Metcash’s employee incentive plans; • advise the Board on directorship and Board Committee appointments, Board succession planning and performance of the CEO; and • implement processes to assess the effectiveness of the Board and its Committees. The Committee consists only of Independent Directors and is chaired by an Independent Director who is not Chairman of the Board. The Charter of the Committee can be found on Company’s website www.metcash.com under the heading ‘Corporate Governance’. 26 Metcash Annual Report 2013 Financial Report for the Year Ended 30 April 2013 Directors’ Report Statement of Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Auditor’s Independence Declaration Independent Auditor’s Report 28 64 65 66 67 68 129 130 131 Metcash Annual Report 2013 27 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 Your Directors submit their report of Metcash Limited (the Company) and its controlled entities (the Group) for the year ended 30 April 2013. DIRECTORS The names and details of the Company’s Directors in office during the financial year and up to the date of this report are as follows: Peter L Barnes (Chairman) Andrew Reitzer (CEO)* Ian R Morrice (appointed 12 June 2012)* Patrick N J Allaway (appointed 7 November 2012) Fiona E Balfour Michael R Butler Neil D Hamilton Edwin M Jankelowitz Richard A Longes (retired 30 August 2012) V Dudley Rubin * Mr Reitzer will retire as CEO on 30 June 2013 and cease employment with Metcash on 30 September 2013. Mr Morrice was appointed as CEO to replace Mr Reitzer with effect from 30 June 2013. Directors were in office for this entire period unless otherwise stated. OPERATING AND FINANCIAL REVIEW The Board presents the 2013 Operating and Financial Review, which has been designed to provide shareholders with a clear and concise overview of Metcash’s operations, financial position, business strategies and prospects. The review also provides contextual information, including the impact of key events that have occurred during 2013 and material business risks faced by the business so that shareholders can make an informed assessment of the results and prospects of the Group. The review complements the financial report and has been prepared in accordance with the recently released guidance set out in RG247. 1. METCASH’S OPERATIONS Our Business Model (Incorporating Corporate Information) Metcash’s core business strategy is to be the ‘champion of the independent retailer’. As a dedicated wholesale distribution, merchandising and marketing company, Metcash provides independent retailers with the means to compete effectively and ultimately present a compelling proposition for the end consumer. In this way, Metcash’s success is inextricably linked to the success of our independent retailers. Our key strengths include our people, purchasing power, world class logistics systems and extensive merchandising, marketing, retail development and retail operational support capabilities. Metcash deploys these key competencies across our three business ‘pillars’, which span the food & grocery, liquor, hardware & automotive sectors across Australia and a smaller liquor business in New Zealand. These divisions supply $13 billion worth of goods annually to a number of leading retail brands, including IGA, Cellarbrations, Bottle-O, Mitre 10 and Autobarn/Autopro. Metcash competes against the vertically integrated retail chains and typically operates as the ‘third-force’ within these sectors. The food & grocery pillar is our largest division, representing 70% of total sales, 82% of segment EBITA, and services more than 2,500 grocery stores of which approximately 1,450 are branded IGA. In addition, this pillar services approximately 57,000 convenience customers whilst the liquor division services over 15,000 pubs, clubs and bottle shops, the Mitre 10 network supplies around 825 outlets and ABG services over 240 automotive stores. Metcash operates major distribution centres in all of the mainland states of Australia that predominantly service the food & grocery and liquor divisions, including our new ‘mega DC’ in Huntingwood, NSW. These are complemented by a number of smaller warehouses and our Campbells branch network. Metcash employs just over 6,000 staff across the Group. Wholesale sales volumes are the key driver of profitability. Metcash targets organic growth in its sales by assisting retailers to organically grow their sales to consumers. It also aims to increase its ‘teamwork score’, being the proportion of total products purchased by an independent retailer that are sourced from Metcash, by working with retailer’s to ensure the best range of products are carried in Metcash warehouses. In addition, Metcash works closely with retailers to find and develop store growth opportunities whether through expansion of existing footprints or building new stores. Across the Group, growth has also been delivered through acquisition and expansion into new sectors, including the hardware and automotive sectors. 28 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 Wholesale margins are driven by consumer product appeal, price inflation/deflation, promotional activities and the level of supplier support through volumetric and other rebates. Profitability is also highly dependent on minimising our ‘cost of doing business’ (CODB), which comprises the variable and fixed costs of operating the distribution centres and the administrative support functions. Because some of these costs are fixed, Metcash can ‘leverage’ its profitability through volume growth. Profitability is also driven by minimising the working capital deployed in the business to reduce funding costs and by ensuring that growth is achieved through solid returns from capital investments. Whilst Metcash operates in a highly competitive environment and wholesale profit margins are thin, the Group generates significant operating cashflows, which are reinvested back into the business to fuel future growth and returned to shareholders through fully franked dividends. 2013 Operating Result Summary Summary Results & Underlying Earnings Reconciliation (Unaudited) Revenue 2013 $’m 13,095.0 2012 $'m 12,612.3 Segment result (Note 3) Share based payments and other unallocated amounts (Note 3) Underlying EBITA Net finance costs (Note 4) Underlying profit before tax Tax expense on underlying profit Non controlling interests Underlying earnings (i) Amortisation of customer relationships (Note 4(v)) Significant items expense (Note 4(vi)) Tax (expense)/benefit on significant items Net profit for the period from continuing operations attributable 461.2 (0.8) 460.4 (61.6) 398.8 (115.0) (3.1) 280.7 (12.6) (1.1) (1.1) 453.8 (2.6) 451.2 (67.6) 383.6 (112.9) (8.2) 262.5 (9.7) (176.7) 41.1 Earnings per share (EPS) equivalent 2013 cps 2012 cps 32.6 34.1 to equity holders of the parent 265.9 117.2 30.9 15.2 Net loss after tax from discontinued operations attributable to equity holders of the parent Net profit for the period (59.9) 206.0 (27.2) 90.0 24.0 11.7 (i) Underlying earnings represents reported profit after tax from continuing operations attributable to equity holders of the parent, excluding amortisation of customer relationships and significant items after tax, as reconciled in the table above. Underlying earnings per share (EPS) is calculated by dividing underlying earnings by the weighted average shares outstanding during the period. The Directors have provided underlying earnings information after careful consideration of the requirements and guidelines contained in ASIC Regulatory Guide 230 (Disclosing non-IFRS financial information). Underlying earnings information, including this reconciliation to net profit, has been provided in order to meet the demands from users of the financial reports for information to better understand aspects of the Group’s performance. The Directors believe that underlying earnings is the most appropriate measure of the maintainable earnings of the Group and thereby best reflects the core drivers and ongoing influences upon those earnings. For this reason, the impact of significant items is excluded from the measurement of underlying earnings and specific information on these items is provided under Note 4 of these financial statements. Underlying earnings and underlying EPS are used for the purposes of providing guidance to shareholders and the market and are calculated on a consistent basis each year. Underlying earnings and underlying EPS are also used as the basis for short and long term incentive scheme rewards as detailed in the remuneration report. The Group generated $13.1 billion of revenue which was up 3.8% against the prior year. Underlying profit for the 2013 financial year was $280.7m, up 6.9% on the 2012 result. The trading environment during 2013 was difficult and impacted participants across the Australian retail sector. In particular, the effects of on-going deflation, rising utility costs, a highly value driven consumer and a persistent marketing war between the two large grocery chains impacted profit levels. Profit growth in the liquor division and from acquisitions was partly offset by a weaker result from the food & grocery division. Whilst underlying earnings increased, the equivalent underlying EPS result decreased 4.4% on the prior year largely as a result of the dilutive effect of the 110m new shares issued under the $375m equity raising in June/July 2012. Most of the investments funded by the equity raising occurred later in the year and accordingly did not deliver a full years’ worth of earnings during 2013. The equity funds have now been either fully deployed or committed and, aside from the $75m Project Mustang investment (detailed below), these investments are expected to be EPS accretive in fiscal 2014. Metcash Annual Report 2013 29 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 During 2013 the Group incurred $1.1m of significant items expense, which was all acquisition related. The Franklins corporate stores recorded a retail loss of $59.9m (2012: $27.2m) after tax for the year and this result has been recorded within discontinued operations. During the fiscal year Metcash disposed of, either by way of sale or closure, 70 of the 80 Franklins corporate stores. Plans are in place to dispose or close the remaining 10 stores, which are expected to significantly reduce the discontinued operations result in 2014. The reported net profit for the year was up by 129% to $206.0m reflecting the absence of restructure activities undertaken in fiscal 2012. Importantly, cash generated from operating activities was $299.8m, up 5.5% on prior year. These cash flows were applied towards funding business activities and providing a fully franked dividend return to our shareholders. The Board is pleased to announce a final fully franked dividend of 16.5 cents per share (total 2013 dividends 28.0 cents), which is consistent with the prior year. Further details in respect of these results are provided below. Key Developments (Incorporating Significant Changes in the State of Affairs) During June/July 2012, Metcash raised net proceeds of $368.2m in share capital through a fully underwritten institutional placement and a retail share placement to existing shareholders to fund growth opportunities. The majority of this funding was subsequently deployed during 2013 through the following acquisitions and investments totalling $216.3m: • On 31 July 2012 Metcash acquired the remaining 49.9% equity interest in the Mitre 10 Group for $47.9m, taking our ownership interest to 100% • During fiscal 2013, the Mitre 10 group acquired four hardware retail subsidiaries and invested in three associates at a combined cost of $55.2m. Mitre 10 now has strategic ‘joint venture’ investments in each state, which have strengthened the network and positioned it for further growth • Metcash acquired a 75.1% controlling interest in the Automotive Brands group (ABG) for $54.7m on 1 July 2012, which firmly positions Metcash in the automotive parts aftermarket sector. ABG is the 3rd largest in the sector and manages the Autobarn franchise and Autopro dealership groups The liquor division invested $41.6m in new joint venture interests in three hotels in Queensland, with associated detached bottle shops. It also assisted new retailers into new bottle stores with a retail development program similar to that operated in food & grocery and signed a 15-year supply contract with the Liquor Marketing Group (LMG) in October 2012, which is expected to generate approximately $600m in additional sales per annum • • Metcash announced Project Mustang, which is a $75m warehouse automation project centred on the new Huntingwood distribution facility. The capital expenditure represents the latest European robotic technology that will significantly automate the goods receipt, order selection, pallet assembly and distribution process for both the food & grocery and liquor divisions in NSW. Initial capital expenditure of $16.9m was outlaid during 2013, with the project ultimately expected to ‘go live’ during fiscal 2015 Immediately subsequent to fiscal 2013, ABG acquired 100% of the Australian Truck and Auto Parts group for approximately $84m including acquisition costs and Mitre 10 invested in two more trade hardware groups. These investments, together with the balance of $58.1m in Project Mustang capex, represent the full deployment of the abovementioned equity raising. Segment Results Food & grocery division sales decreased by 2.3% to $9.1 billion, largely due to the closure of 11 Campbells branches, the impact of WA deregulation as well as the exit of some stores in WA and from the closure of Cornetts and Walters retail stores as foreshadowed last year. National market share was down marginally reflecting these impacts. The trading conditions remain tough, with continued deflation, elevated promotional intensity and aggressive marketing campaigns being run by the major self supply chains. A full years worth of sales to the Franklins stores (seven months in prior period) assisted the result. The division invested an additional $8.3m in marketing programs including the National Locked Down Low Price campaign and a major relaunch of Supa IGA in NSW to support the Franklins store conversions. Food & grocery EBITA results were down 5.0% to $377.9m, with the group experiencing negative leverage from the effects of continued deflation with the elevated promotional volumes also causing supply chain peak inefficiencies. These effects, along with the additional $8.3m in marketing spend, were partly offset by structural cost savings from the Campbells branch closures and warehouse efficiency improvements like the KNAPP mini loader at Huntingwood that both improved the cost of doing business. 30 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 Liquor division sales grew strongly by 24.9% to $2.9 billion, partly due to a seven month contribution from the new LMG supply contract, but also from strong organic volume growth, particularly across its IBA retail brands. Competitive pricing and improved store execution are delivering strong sales resulting in the division increasing its market share. Further growth was achieved in Queensland through the establishment of three hotel ‘joint ventures’ (Envy, Queens Arms & Mermaid Tavern). Liquor division EBITA results increased by 35% to $47.1m reflecting the increased sales volumes as well as leveraging a reduction in CODB% through warehouse efficiency improvements. Hardware & Automotive sales increased by 12.6% to $938.4m, largely due to the acquisition of ABG which delivered $83.5m of sales. Divisional EBITA grew by 70.8% to $36.2m including the ABG contribution and solid growth in Mitre 10 earnings. Mitre 10 trade sales were relatively flat year on year, reflecting the depressed construction market. Sales were supported by a number of retail stores converting to Mitre 10 from competitor brands and network strengthening through the establishment of seven new retail joint ventures. Mitre 10 continued to raise brand awareness by presenting a consistent brand (retail store ‘blue & white’ ‘paint ups’) and continued association with Channel 9’s ‘The Block’ series. The Natbuild alliance commenced, which going forward will improve network trade buying power. The new ABG business is performing in line with expectations and delivered a solid EBITA contribution in line with acquisition expectations. The Autobarn and Autopro brands are considered leaders in customer service and product knowledge. The business has begun to leverage Metcash’s competencies in supply chain, merchandising and marketing and is positioned for further growth. Group Results – Other Key Expenses Metcash reduced its net finance costs by 8.9% to $61.6m. The improved result was achieved notwithstanding an additional $7.0m in non-cash expense arising from the unwinding of net present value discounts of long-lived rental subsidy and other provisions. The savings were mainly achieved due to lower debt levels, in part from equity raising funds but also from a significant reduction in working capital. The reduction in interest rates also contributed to the solid result. Tax expense on underlying profit of $115.0m represented an effective tax rate of 28.8%, down 0.6% mostly due to prior period refunds arising from the application of capital tax losses and research & development claims. Tax expense of $90.1m on fiscal 2013 reported profit reflected an effective tax rate of 30.4%, which is broadly consistent with the 30% Australian corporate tax rate. As noted above in the summary, the 2013 Franklins retail store discontinued loss was $59.9m after tax. The store sale program accelerated during the second half of fiscal 2013. By year end, 46 stores had been sold to independent retailers and 24 stores had been closed (total 70). By the end of June 2013, 74 stores are expected to have been sold or closed and the remaining 6 stores are expected to be sold or closed by October 2013 (including 4 stores previously closed now expected to re-open). By the completion of the process, including the 10 franchise stores, a total of 67 stores will have been sold or are expected to be sold or converted to IGA stores and 23 stores will have closed or are expected to close. The loss also included redundancy and other costs associated with the store closures and sale process, along with an additional $10.6m in non-cash expense arising from the unwinding of net present value discounts on rental subsidy provisions. Whilst more stores were closed than originally anticipated, the overall Franklins acquisition has delivered a strong strategic footprint in NSW, introduced new retailers to the business and increased operational leverage through the Huntingwood distribution centre. Metcash Annual Report 2013 31 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 2. Financial Position and Cashflows Summary Financial Position (Unaudited) Net working capital Property, plant & equipment, associate investments and intangible assets Total funds employed Net debt Net tax balances Net assets/equity Note 1 2 3 4 2013 $’m 236.6 2,078.1 2,314.7 (758.6) 68.1 1,624.2 2012 $'m 339.3 1,841.1 2,180.4 (940.3) 95.0 1,335.1 1. Net working capital broadly comprises the ‘trading’ components of the balance sheet. Working capital includes trade and other receivables, inventories, disposal groups and assets held for sale, prepayments, derivative financial instruments (assets and liabilities), trade and other payables, provisions and other financial liabilities, including the current & non-current components of these items 2. These non-current assets broadly represent the income earning components of the balance sheet. They include property, plant & equipment, investments in associates, other financial assets, intangible assets and goodwill 3. Net debt reflects the net borrowings position and includes cash and interest bearing loans and borrowings (current & non-current) 4. Net tax balances include income tax receivable or payable and net deferred tax assets Net working capital The net working capital position was managed effectively during the year resulting in a 30% reduction on the prior period to $236.6m, which is the lowest level achieved for a number of years. The improved result was delivered despite the expansion of the group through acquisition and featured a $79.8m reduction in inventory through tighter stock control. Additionally, the disposal of Franklins retail stores released a further $68.9m in assets held for sale. Total funds employed As noted in the key developments section, Metcash invested for growth during 2013 as evidenced by the 6.1% increase in total funds employed. This included a $133.3m increase in intangibles driven by the ABG, Mitre 10 subsidiary and Franklins acquisitions. Metcash invested $20.2m in associates, including the three Mitre 10 joint ventures. Metcash also deployed $86.8m in capital expenditure, including $33.9m in relation to the Huntingwood DC. Net debt The strong operating cashflow and residual unspent funds from the equity raising were deployed to invest for growth and also reduce debt levels by $181.7m. This facilitated a reduction in net gearing levels to 31.8%, compared to 41.3% in the prior period. Metcash had $733m in available debt facilities at balance date with an appropriate tenure and diversification of funding sources. Part of this headroom was deployed subsequent to year end to fund the $84m ATAP acquisition and two Mitre 10 joint ventures noted below. Net Assets/Equity Metcash’s net asset position increased primarily due to the $368.2m equity raising. This was partly offset by the payment of dividends of $245.7m (Final FY12 and Interim FY13), being in excess of FY13 reported profit of $206.0m, as the Board had the confidence to declare dividends based on the strong underlying profit result and cash generated by the group. The equity position also decreased by $47.9m due to the acquisition of the remaining 49.9% non-controlling interest in Mitre 10, taking Metcash’s ownership interest to 100%. Other Financial Exposures Contingent liability details are presented in Note 32 of the financial statements. Metcash is currently in dispute with the Australian Tax Office (‘ATO’) in relation to the ‘Action Stores’ matter and the ‘Foreign Tax Credit’ matter. The ATO have issued amended assessments or determinations totalling $72.2m in respect of these matters, against which Metcash has paid $24.4m (recorded as income tax receivable). Metcash is firmly of the view that it has adopted the appropriate treatment and, if necessary, intends to challenge these matters through to the Administrative Appeals Tribunal or Federal Court. 32 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 Metcash’s operating lease commitments, which predominantly relate to warehouse and retail stores, are detailed in Note 23 of the financial statements. Part of the 4.9% increase in commitments has been the extension of the Huntingwood DC lease, as well as an increase through acquisitions. In certain situations, Metcash will take the head lease on a retail property and sublet the store to the independent retailer. The acquisition of the Franklins retail stores and the subsequent sale and sublease of these stores has also increased the amount committed. If the head lease rental expense exceeds the sublease rental income and the position is considered onerous, a provision is raised for the difference as set out in Note 19(b). Metcash has a relatively low exposure to interest rate risk and minimal foreign exchange risk. Variable interest rate exposures on core debt are hedged in accordance with the Treasury Policy between a minimum and maximum range (28% hedged at year end). The fixed interest and foreign exchange exposure on the US$225m USPP debt facility is effectively converted via hedges into $210.1m of variable rate funding. Further details are set out in Note 22. Cashflows Metcash recorded its strongest ever operating cashflow of $299.8m. This result was achieved due to the solid underlying earnings result supplemented by lower tax payments and the improvement in working capital. The investing cashflow of $178.9m correlated to the investment activity described above, whilst the financing cash outflow notably included a reduction in borrowings. 3. Business Strategies and Prospects (Incorporating Likely Developments and Expected Results) Metcash’s core strategy will continue to be the ‘champion of the independent retailer’ and to support our independent retailers to drive mutually profitable growth. Metcash will also continue to focus on growth through targeted acquisition and investment. The incoming CEO, Ian Morrice has commenced a formal strategic planning process from which a number of initiatives will be developed and communicated at 1H 14. While the plan will continue to focus on strategies to champion sustainable independent businesses, it will also look to identify and pursue new growth opportunities in existing and complementary sectors for each Metcash division. Initial priorities for Mr Morrice will include reviewing the Food & Grocery operations to respond to the ongoing deflationary market conditions; developing strategies to better address the online and digital marketing requirements of each division; driving continued supply chain evolution through the new automated solutions being built for the Huntingwood DC, and optimising recent acquisitions and supply contracts. Sales Volumes Deflation and its deleveraging impact together with the intensely competitive trading environment remain the most challenging and significant business risks. Metcash’s wholesale sales volumes and therefore its profitability are directly related to the level of retail sales achieved by our independent retailer customers. Metcash may also face financial exposure to these retailers through trade receivables, loans and lease commitments in the event of customer default. In the food & grocery business, the strategy is to support the independent IGA retailers to be competitive and to help them differentiate themselves from the chains in four key areas: fresh offer (‘200% guarantee’), range (‘favourite brands’), value (‘locked down low prices’) and community (e.g. Community Chest) in order to present a unique consumer proposition. Food & grocery plans to drive organic growth principally through new store development, conversions, extensions and refurbishment activities. Further sales volume growth is expected through the ‘buyback’ program, whereby poorer performing IGA stores are placed into the hands of more experienced retailers. Food & grocery also plans to grow sales by securing new customer contracts, with recent examples including the contract to supply Supabarn in NSW/ACT and also to supply Spotless in WA/Queensland. Food & grocery is also trialling new store formats, including Value Depot (convenience) and Harvest Market (fresh). Brand presence will be strengthened through targeted marketing and merchandising strategies, including integrated campaigns featuring comedian Ahn Do to promote the IGA brand. The liquor division plans to step up on its recent organic growth by continuing to refine execution levels and the retail offer at store level, supplemented by supplier support. The strategy to lift wine sales through the network will continue. The division is also trialling new larger format stores under the Cellarbrations and Bottle-O banners. The liquor division will continue to review opportunities to grow in key markets through its hotel strategy. Metcash Annual Report 2013 33 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 The hardware & automotive division plans to further strengthen the network through its joint venture activities in Mitre 10 and to entice retailers to convert to the Mitre 10 brand. The Mitre 10 trade business has been strengthened through the Natbuild alliance, benefitting Mitre 10 store owners through lower costs. Mitre 10 will continue to build brand presence through its association with Channel 9’s ‘The Block’ television series. The automotive business will target organic growth in the significant $5.6 billion automotive aftermarket retail parts sector through increased ranging and customer service by leveraging existing support structures within the Metcash group. Margins & the ‘Cost Of Doing Business’ (CODB) The level of sales price deflation and cost inflation evident in the grocery market, together with the increased propensity of the consumer to purchase goods when on promotion continue to be material business risks. Sales deflation negatively impacts profit margins, largely because margins are earned as a percentage of a ‘deflated’ wholesale sales revenue. Sales deflation and promotional activity will be reviewed in the upcoming strategic review. Cost inflation, including rising transport, utility and other costs, has a direct impact on the CODB. In the near term, Metcash plans to deliver cost synergies by integrating the recently acquired businesses with Metcash. CODB improvements are also expected through IT systems (completion of the national rollout of ‘Power Enterprise’ transaction system and e-commerce solutions), along with ‘business-as-usual’ initiatives to drive warehouse and support costs down. In the longer term, Project Mustang (warehouse automation - noted above) is expected to deliver further benefits. Discontinued Operations – Franklins Retail Stores Metcash’s strategy has been to sell the 80 Franklins stores to independent retailers and this program of sales has recently accelerated. By the end of June 2013, 74 stores are expected to have been sold or closed and the remaining 6 stores are expected to be sold or closed by October 2013, at which point the retail trading losses will cease. The Franklins Rockdale head office has already been wound down and will be closed in the first quarter. Expansion Subsequent to year end, Metcash acquired 100% of the ATAP group through ABG for $84.0m as detailed in Note 33. The acquisition represents the next stage in Metcash’s growth strategy in the automotive aftermarket sector. The acquisition provides greater access to 2,500 independents and further opportunity for increased ranging and service levels across the ABG and ATAP businesses. Metcash will continue to identify further acquisition or investment-led growth opportunities for its various divisions as part of the Group’s long-term aspirations to grow shareholder value. End of the Operating and Financial Review. SHAREHOLDER RETURNS Basic earnings per share (cents) Earnings per share from continuing operations before significant items (cents) Dividend declared per share (cents) Dividend payout ratio on earnings per share (%) (i) Return on equity (%) (ii) Share price at balance date ($) Dividend yield (%) (i) (i) (ii) Calculated using underlying earnings per share as detailed in the operating and financial review Calculated using underlying earnings as detailed in the operating and financial review. YEAR ENDED 30 APRIL 2013 2012 2011 2010 2009 24.0 32.6 28.0 85.9 16.6 4.10 6.8 11.7 34.1 28.0 82.1 18.9 3.98 7.0 31.5 33.4 27.0 80.8 17.2 4.08 6.6 29.7 32.0 26.0 83.3 17.3 4.15 5.8 26.5 29.5 24.0 83.6 17.2 4.12 5.0 EARNINGS PER SHARE Basic earnings per share Diluted earnings per share 34 Metcash Annual Report 2013 2013 CENTS 23.96 23.87 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 DIVIDENDS ON ORDINARY SHARES (cid:3)(cid:3) Final dividend for the 2013 year - payable in July 2013 Dividends paid during the year: Interim dividend for the 2013 year - paid in January 2013 Final dividend for the 2012 year - paid in July 2012 Total dividends paid during the 2013 financial year Total dividends declared in respect of the 2013 financial year SUBSEQUENT EVENTS (cid:3)(cid:3) (cid:3)(cid:3) CENTS $’m 16.5 145.3 11.5 16.5 28.0 28.0 101.3 142.6 243.9 246.6 Australian Truck & Auto Parts Group On 16 May 2013 Metcash announced the acquisition, through Automotive Brands Group (ABG), of 100% of the Australian Truck & Auto Parts Group (ATAP) for approximately $84.0 million including acquisition costs. The Group assumed control of ATAP on 20 May 2013 being the date of completion. ATAP is a national wholesaler of brake, clutch and under-car products and also includes: ABS, the franchisor of a national chain of 53 retail service and brake/clutch repair centres, with 4 corporate stores and 5 joint venture stores; IBS Auto Solutions, Garmax, Melbourne Clutch & Brake; and Brake Friction Technology. The acquisition will result in a dilution of the non-controlling interests in ABG to reflect the additional equity contribution by Metcash. Refer Note 29(f) of the financial statements for further details. Mitre 10 joint ventures On 6 May 2013, Metcash announced that Mitre 10 had entered into joint ventures with two hardware trade groups – Dahlsens and Capeview Building Supplies. Metcash acquired a 36% interest in the Dahlsens joint venture, which includes 11 stores in the Northern Territory, Western Australia and in Northern Queensland. Metcash acquired an 80% interest in Capeview Building Supplies, which includes 5 stores throughout Victoria, particularly in the Gippsland region. Except as noted above, there are no events that have occurred after the end of the financial year that would materially affect the reported results or would require disclosure in this report. Metcash Annual Report 2013 35 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 DIRECTORS QUALIFICATIONS AND EXPERIENCE The qualifications and experience of Directors is set out below. Peter L Barnes B COMMERCE (HONS), MBA Non executive Chairman Member of the Remuneration Committee Date of Appointment to Metcash Limited: 18 April 2005 Peter Barnes is a Director of News Corporation and Chairman of Samuel Smith & Sons Pty Ltd. He also serves as Chairman of the Melbourne Business School. Peter was formerly the Chairman of Ansell Limited and an executive with Phillip Morris International Inc. and held several senior management positions both here in Australia and overseas. Peter was appointed Chairman of Metcash Limited on 2 September 2010 and has been involved with the Metcash business as a director since November 1999. Andrew Reitzer B COMM, MBL CEO Metcash Group of Companies until 30 June 2013 Date of Appointment to Metcash Limited: 18 April 2005 Andrew Reitzer has 35 years’ experience in the retail/wholesale industry. Previous positions at Metro Cash and Carry Limited include Group Operations Director, heading operations in Russia and Israel, Marketing Director, IT Director and managing various operating divisions. Ian R Morrice MBA CEO Metcash Group of Companies with effect from 30 June 2013 Date of Appointment to Metcash Limited: 12 June 2012 Ian Morrice has over three decades of retail experience as Managing Director, Trading Director and Retail Director for some of the UK’s leading retailers, including Dixons and The Kingfisher Group. Ian was Group CEO and Managing Director of New Zealand’s Warehouse Group from 2004 to 2011. Ian’s key areas of expertise include strategy, brand and category development, multi-channel and new store format roll-out, product sourcing and supply chain innovation. Patrick N J Allaway BA/LLB Non executive Director Member of the Audit Risk and Compliance Committee Date of Appointment to Metcash Limited: 7 November 2012 Patrick Allaway is a broad based business person with extensive experience in financial services. His career in investment banking has seen him hold positions with Swiss Bank Corporation initially in Zurich and then London; and also with Citibank in New York, Sydney and London. Over the past eight years Patrick has been the Chairman and co-founder of a privately owned boutique corporate advisory and funds management business, Saltbush Capital Markets. Patrick was also a Non executive Director of Macquarie Goodman Ltd until 2006 and the Interim Chairman of its Audit Committee. Patrick’s key areas of expertise include strategy, development, mergers & acquisitions and capital management. Patrick has a Bachelor of Arts/Law from Sydney University and is a Director of the Sydney University Football Club Foundation Ltd. 36 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 Fiona E Balfour BA (Hons), MBA, GRAD DIP INFORMATION MANAGEMENT, FAICD Non executive Director Member of the Remuneration Committee Date of Appointment to Metcash Limited: 16 November 2010 Fiona Balfour is an independent non-executive director of Salmat Limited, TAL Australia Limited and Airservices Australia, a Councillor of Knox Grammar School and Chief Executive Women; a Fellow of the AICD and Monash University (2010) and was awarded the National Pearcey Medal in 2006. Fiona has over thirty years executive experience across Aviation, Telecommunications, Financial Services, Education and not-for-profits. Her professional expertise is in information and communications technology. She has extensive experience in global ‘customer–facing’ business solutions across a variety of technologies – including digital channel management. She is a former Director of SITA SC (Geneva) 2001-06 and a former Trustee of the National Breast Cancer Foundation 2007-11. Michael R Butler B SC, MBA, FAICD Non executive Director Chairman of the Audit Risk and Compliance Committee Date of Appointment to Metcash Limited: 8 February 2007 Michael Butler has extensive experience in investment banking gained as an Executive Director of Bankers Trust’s Corporate Finance Group and as Executive Vice President of its Private Equity group. He is currently Chairman of AMP Superannuation Limited and N.M. Superannuation Pty Ltd. He was previously a Non executive Director and Chairman of various public and private companies. Neil D Hamilton LLB Non executive Director Chairman of the Remuneration Committee Date of Appointment to Metcash Limited: 7 February 2008 Neil Hamilton is based in Perth and has over 30 years’ experience in the legal profession and in business with substantial experience in a number of industries including investment/funds management, insurance, banking and resources. Neil is Chairman of OZ Minerals Ltd and Miclyn Express Offshore Limited. He was appointed Chairman of the Remuneration Committee on 1 September 2010. Edwin M Jankelowitz B COMM, CA (SA) Non executive Director Date of Appointment to Metcash Limited: 18 April 2005 Edwin Jankelowitz was previously CFO of Metcash and was appointed a Non-executive Director in 2011. After qualifying as a Chartered Accountant he spent 12 years with Adcock Ingram Ltd eventually being promoted to Group Company Secretary and Finance Director. He then consulted in business management and tax before taking a position with Caxton Ltd where he progressed to Finance Director, Managing Director and Chairman. Edwin has spent over 39 years in corporate offices of listed companies and was a member of the Income Tax Special Court in South Africa for 20 years. Metcash Annual Report 2013 37 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 Richard A Longes BA, LLB, MBA Non executive Director Date of Appointment to Metcash Limited: Date of Retirement from Metcash Limited: 18 April 2005 30 August 2012 Richard Longes has been a director of a number of public companies and a member of various government bodies and inquiries for more than 20 years. He is currently Chairman of Austbrokers Holdings Ltd and a Director of Boral Limited and Investec Bank (Australia) Ltd. Richard was formerly a co-founder and principal of the corporate advisory and private equity firm, Wentworth Associates, and prior to that a partner of Freehill Hollingdale & Page, solicitors. V Dudley Rubin CA (SA), H DIP BDP, MBA Non executive Director Member of the Audit Risk and Compliance Committee Date of Appointment to Metcash Limited: 18 April 2005 Dudley Rubin is a chartered accountant and is a director of various companies trading in Africa. He has 30 years’ industry experience and has been involved with the Metcash business as a director since May 1998. COMPANY SECRETARY Greg Watson LLM, Dip Law General Counsel and Company Secretary Greg Watson joined Metcash in 2005 as Legal Counsel and was promoted to General Counsel in 2008. He was appointed Company Secretary in 2010. Greg has over 23 years professional and industry experience initially in private legal practice, followed by corporate legal counsel roles with multinational FMCG organisations. Greg is a graduate of the Metcash Executive Leadership Program. DIRECTORS’ MEETINGS The number of meetings of Directors (including meetings of committees of Directors) held during the year and the number of meetings attended is as follows: Directors meetings: Eligible to attend Directors meetings: Attended Remuneration: Eligible to attend Remuneration: Attended Audit Risk and Compliance: Eligible to attend Audit Risk and Compliance: Attended Peter L Barnes Andrew Reitzer Ian R Morrice(i) Patrick N J Allaway(ii) Fiona E Balfour Michael R Butler Neil D Hamilton Edwin M Jankelowitz Richard A Longes(iii) V Dudley Rubin (i) Mr Morrice was appointed as a Non-executive Director on 12 June 2012 and as an Executive Director on 1 March 2013. (ii) Mr Allaway was appointed as a Non-executive Director on 7 November 2012. (iii) Mr Longes retired as a Non-executive Director on 30 August 2012. 12 10 10 6 12 11 12 11 3 11 12 12 11 6 12 12 12 12 4 12 6 - - - 6 - 6 - - - 6 - - - 6 - 6 - - - - - 3 3 - 6 - - 3 6 - - 3 3 - 6 - - 3 6 38 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 COMMITTEE MEMBERSHIP At the date of this report, the Company had an Audit Risk & Compliance Committee and a Remuneration Committee. Members acting on these Board committees for the full year unless otherwise stated were: AUDIT RISK & COMPLIANCE REMUNERATION Richard A Longes (Chairman)(i) Michael R Butler (Chairman) (ii) Patrick N J Allaway(iii) Ian R Morrice(iv) Neil D Hamilton (Chairman) Fiona E Balfour Peter L Barnes V Dudley Rubin (i) Mr Longes retired as chairman of the committee on 26 June 2012 and as a member of the committee on 30 August 2012. (ii) Mr Butler was appointed as chairman of the committee on 26 June 2012. (iii) Mr Allaway was appointed to the committee on 7 November 2012. (iv) Mr Morrice was appointed to the committee on 12 June 2012 and ceased being a member with effect from 1 March 2013. INTERESTS IN SHARES AND OPTIONS OF THE COMPANY AND RELATED BODIES CORPORATE As at the date of this report, the Directors held the following shares and options in Metcash Limited: Peter L Barnes Andrew Reitzer Ian R Morrice(i) Patrick N J Allaway(ii) Fiona E Balfour Michael R Butler Neil D Hamilton Edwin M Jankelowitz V Dudley Rubin (i) Mr Morrice was appointed as a Non-executive Director on 12 June 2012. (ii) Mr Allaway was appointed as a Non-executive Director on 7 November 2012. SHARE OPTIONS & PERFORMANCE RIGHTS Unissued shares NUMBER OF ORDINARY SHARES NUMBER OF OPTIONS OVER ORDINARY SHARES 182,034 829,951 21,000 54,000 29,673 54,951 20,000 320,000 17,500 - - - - - - - - - As at the date of this report, there were 13,361,853 unissued ordinary shares under option (13,395,496 at the reporting date). As at the date of this report, there were 4,471,452 unissued ordinary shares under performance rights (4,489,265 at the reporting date). Refer to Note 25 of the financial statements for further details of the performance rights and options outstanding. Shares issued as a result of options and performance rights During or since the end of the financial year, no shares in the Company were issued to employees and executives in respect of the exercise of options or performance rights. Metcash Annual Report 2013 39 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS (i) The Constitution of the Company permits the grant of an indemnity (to the maximum extent permitted by law) in favour of each Director, the Company Secretary, past Directors and Secretaries, and all past and present Executive Officers. The Company has entered into Deeds of Indemnity and Access with R A Longes, F J Conroy, C P Curran, T A Haggai, R A Allan, J J David, Sir Leo Hielscher, B A Hogan, M Wesslink, J L Jardim (Lou Jardin), C dos Santos and M Jablonski together with all of the current Directors and certain other officers of the Company. This indemnity is against any liability to third parties (other than related Metcash companies), by such officers unless the liability arises out of conduct involving a lack of good faith. The indemnity also includes costs or expenses incurred by an officer in unsuccessfully defending proceedings relating to that person’s position. (ii) During the financial year, the Company has paid, or agreed to pay, a premium in respect of a contract of insurance insuring officers (and any persons who are officers in the future) against certain liabilities incurred in that capacity. Disclosure of the total amount of the premiums and the nature of the liabilities in respect of such insurance is prohibited by the contract of insurance. ROUNDING The amounts contained in this report and in the financial statements have been rounded to the nearest $100,000 (where rounding is applicable) under the option available to the Company under Australian Securities and Investments Commission (ASIC) Class Order 98/0100. The Company is an entity to which the Class Order applies. 40 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 REMUNERATION REPORT 1. MESSAGE FROM THE CHAIRMAN OF THE REMUNERATION COMMITTEE (UNAUDITED) The Metcash Limited Remuneration Committee presents the Remuneration Report for the year ended 30 April 2013. The remuneration report outlines the remuneration arrangements for key management personnel (‘KMP’) comprising the Group Executives and the Non-Executive directors. Metcash is a marketing and distribution specialist operating in the competitive grocery, liquor, hardware and automotive industries. As “Champion of the Independent Retailer”, Metcash provides the scale necessary to create competitive buying power, together with marketing, distribution, financial expertise and support. Metcash’s collective relationships with the independent retailers and suppliers compete as the ‘Third Force’ in Australia’s consumer staples market against the vertically integrated chains. Metcash generates wholesale revenue through its distribution and marketing activities, leaving the independent retailer to earn the retail revenue from sales to the end consumer. The nature of these operations therefore requires expertise across distribution and retail and competition for high calibre staff in these areas is intense. Metcash’s Board is committed to a remuneration framework which ensures that Metcash attracts and retains a high quality Executive team who are appropriately rewarded for achieving financial outcomes for the Company which provide shareholders with reasonable returns. To achieve this, a significant portion of executive remuneration is ‘at risk’ and subject to Company performance. The Company’s remuneration policy and structure for its Group Executives comprises a combination of the following two main components: • • a fixed component which is the total base salary and includes compulsory employer superannuation contributions; and a variable ‘at risk’ component which is performance based and comprises a part cash, part share-based short term incentive (‘STI’) plan that is linked to both the performance of the Company and individual performance, and a long term incentive (‘LTI’) program under which executives, at the discretion of the Board, are offered performance rights which vest if the Company achieves certain hurdles over a three year period. The combination of fixed and variable ‘at risk’ remuneration ensures that Metcash’s remuneration policies are consistent with generally accepted best practice. Events and Board Decisions Affecting Remuneration KMP fixed annual remuneration was increased effective 1 May 2012, based on business and individual performance and aligned to market remuneration levels. The ‘at target’ pay levels for KMP are set with reference to other S&P/ASX 51-100 companies and peers within the Consumer Staples group. The weighted average KMP fixed remuneration increase was 7.5%. As set out in the 2012 Remuneration Report, having considered current market practice and shareholder views, the Board approved the following changes to the Metcash STI and LTI schemes: Short term incentive: • maximum target performance by members of the Executive Team will result in the payment of an STI equal to 12 months fixed remuneration; • 25% of any STI awarded to a member of the Executive Team will be deferred for a 15 month period; • should the Executive no longer be employed by the Company on the scheduled vesting date, the deferred component will be forfeited; and releasing the deferred 25% component of the STI by way of issuing Metcash equity. • Long term incentive: • commencing with the 2013 financial year, the performance hurdles are indexed by reference to a calculation based on the inflation/deflation on the Company’s goods sold in the current year as compared to the prior year, thereby providing targets that reward management performance which exclude the effects of inflation/deflation. Metcash Annual Report 2013 41 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 Mr Reitzer was eligible for a three year cash based LTI with a potential maximum reward of $5 million. The performance period for this grant commenced on 1 May 2010 and concluded on 30 April 2013. This grant was subject to a growth in underlying earnings per share performance hurdle. The performance hurdles were not met and no amount was payable to Mr Reitzer in relation to this grant (refer section 8 for full details of the grant). On 27 September 2012 the Company confirmed the previously announced intention of Mr Reitzer to retire as CEO in 2013. Mr Reitzer will step down as CEO effective 30 June 2013 and will cease employment with Metcash on 30 September 2013. The Board and Mr Reitzer have agreed that Mr Reitzer’s services will be retained as a consultant to the Board for strategic advice and assistance in relation to key customer, supplier and joint venture relationships, for 3 years following Mr Reitzer’s expected termination date of 30 September 2013. During the consultancy period, Mr Reitzer will be subject to appropriate non-compete restrictions. The consultancy fees are set at $350,000 in year one reflecting greater involvement in the handover process and then $300,000 per annum (to be paid quarterly) in years two and three based on certain service levels, above which additional fees would be payable. In recognition of the Company’s significant growth under his leadership, and in accordance with his employment contract, Mr Reitzer will receive a cash payment of $2,029,801 equivalent to 12 months average base salary upon termination of employment on 30 September 2013 (refer to section 10). On 27 February 2013 the Company announced the appointment of Mr Ian Morrice as Chief Executive Officer, effective 30 June 2013, to replace Mr Reitzer. Mr Morrice has more than 30 years of retail experience, including Managing Director and senior executive for some of the United Kingdom’s leading retailers. He was Group CEO and Managing Director of New Zealand’s Warehouse Group from 2004 to 2011. Mr Morrice was appointed as an Executive Director effective 1 March 2013, with a fixed salary of $1,500,000 per annum including superannuation. Mr Morrice is not eligible to participate in the FY2013 STI or LTI programs. From 1 May 2013 and in keeping with the Board’s vision of aligning executive remuneration with Company performance approximately 64% of Mr Morrice’s maximum remuneration will be linked to Company results. Mr Morrice will participate in the FY2014 STI program with a maximum reward equivalent to 12 months fixed remuneration of $1,500,000 and in the FY2014 LTI program with a maximum reward equivalent to $1,200,000. Accordingly, Mr Morrice’s total maximum remuneration package comprises approximately 36% fixed remuneration, approximately 36% maximum ‘at risk’ STI and approximately 28% maximum ‘at risk’ LTI, totalling $4,200,000. Refer section 5 for further details of the Company STI and LTI schemes. Mr Morrice’s remuneration package was determined by the Board, taking into consideration advice from PricewaterhouseCoopers, which included reference against current ASX 51-100 peer group CEO remuneration levels and structures. The Committee has commissioned a full review of the Company’s total rewards framework including the fixed and at risk infrastructure to ensure the Company’s full remuneration offering is benchmarked to market standards and expectations. On behalf of the Committee, I commend the guide and this year’s remuneration report to you. Neil Hamilton Chairman, Remuneration Committee 42 Metcash Annual Report 2013 METCASH FINANCIAL REPORT T 2013 DIRECTORS’ REPORT Year ended 30 April 2013 2. EXECUTIVE REMUNERATION N GUIDE (UNAUDITED) Overview This short guide is intended to provide shar to the Company’s 2013 performance. This g information set out in sections 3 to 12 of the reholders with an overview of KMP remuneration outcome guide is not audited and the information provided is in add e formal remuneration report. s for 2013 having regard ition to the audited Company Performance The 2013 financial year was challenging. De promotional intensity, continued to impact M and Executives have remained focussed on eflation evident since 2010, fuelled by the high Australian Metcash’s core food and grocery business and the industry n achieving sustainable performance, in spite of these con dollar and elevated y in general. The Board straints. Total revenue for the year increased by 3.8% underlying profit after non-controlling interes in underlying earnings on the prior year, und profit for the year attributable to equity holde % to $13,095.0 million and underlying EBITA rose by 2.0% sts and tax for the year increasing by 6.9% to $280.7 millio derlying EPS decreased by 4.4% as a result of the equity ers of the parent increased by 128.9% to $206.0 million (2 % to $460.4 million, with on. Despite the increase raising in July 2012. Net 2012: $90.0 million). A full reconciliation between underlying earn of the Directors’ Report. The effect of these nings and reported profit is included in the review and resu items is shown in the reported figures below. ults of operations section $’m $13,500 $13,000 $12,500 $12,000 $11,500 $11,000 $10,500 $10,000 $9,500 $m $500 $400 $300 $200 $100 $- Total Revenue $1 11,608 ncrease In of 5.7% o $10,982 Increase from 2008 of 8.6% $12,462 Increase of 7.4% $12,612 Increase of 1.2% $13,095 Increase of 3.8% 2009 2 2010 2011 2012 2013 EBITA Reported EBIT TA Underlying $352 $371 $394 $401 $431 $438 $451 $460 $373 $236 2009 20 010 2011 2012 2013 Metcash Annual Report 2013 43 METCASH FINANCIAL REPORT T 2013 DIRECTORS’ REPORT Year ended 30 April 2013 2. EXECUTIVE REMUNERATION N GUIDE (UNAUDITED) (Continued) $m PBT Reported PBT Un nderlying $450 $400 $350 $300 $250 $200 $150 $100 $50 $- $m $300 $250 $200 $150 $100 $50 $- cents /share 40.0c 35.0c 30.0c 25.0c 20.0c 15.0c 10.0c 5.0c 0.0c $320 $290 $327 $349 $348 $362 $384 $399 $299 $158 2009 20 010 2011 2012 2013 PAT Reported PAT Underlying $226 8 $228 $203 $245 $241 $256 $263 $281 $206 $90 2009 20 010 2011 2012 2013 EPS Reported EPS U Underlying 29.5c 29.7c 26.5c 32.0c 31.5c 33.4c 34.1c 32.6c 24.0c 11.7c 2009 20 010 2011 2012 2013 44 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 2. EXECUTIVE REMUNERATION GUIDE (UNAUDITED) (Continued) 2013 Remuneration Outcomes Short term incentive As outlined below, Company performance was reflected in executive remuneration outcomes for 2013. The key metrics used in determining the quantum of STI payable are total revenue which was $13,095.0 million (2012: $12,612.3 million), underlying earnings before interest, tax and amortisation of $460.4 million (2012: $451.2 million) and underlying profit before tax which was $398.8 million (2012: $383.6 million). Within the Group each Business Pillar and the Corporate Head Office have separate STI schemes, designed to align each executive's incentives to the financial objectives of the pillar or team concerned and which aggregate to overall Group objectives. Two key KPIs are utilised, being – total revenue and underlying profit before tax. The Board considers and forms a matrix to measure performance starting at a base level that the Board considers to be the minimum level of acceptable performance (including the cost of the STI payments as the scheme is self funding) to qualify for an STI payment, moving to a target at which approximately 73% of the STI is achieved with provision to earn up to 100% of the STI at a stretch performance level. The targets vary from business to business depending on the circumstances and objectives of each pillar. However, they are all constructed so as to provide a stretch to exceed revenue and profit targets. STI payments for KMP for the year were paid at an average of approximately 76% of the maximum entitlement, with the remainder being forfeited. This reflected an 80% achievement against Group revenue and profit targets, whilst business pillar achievement levels ranged from 40% to 100% of maximum. In accordance with the STI Scheme rules for KMP, 75% of the STI reward will be paid in July 2013. The remaining 25% of the STI reward will be deferred and released through the issue of Metcash ordinary shares conditional upon the Executive remaining employed by the Company on 15 April 2014. The number of shares to be issued will be calculated by dividing the 25% STI reward dollar value by the Metcash (MTS) VWAP for the five days ending on 31 July 2013. The shares will be issued by 30 April 2014, but will be restricted from trading until 31 July 2014.The actual results by KMP are presented in Tables 6.1 and 6.2. Long term incentive The Metcash LTI scheme is designed to incentivise and reward the Company’s executives for implementing strategies to achieve specific underlying EPS growth targets which are aligned to the Company’s overall strategy of increasing returns to shareholders. • • • The Performance Rights granted under the Rights Plan in December 2010 did not achieve the minimum performance hurdle and will be forfeited on 30 June 2013; The Performance Rights granted under the Rights Plan in December 2011 and December 2012 will be subject to performance tests in FY2014 and FY2015, respectively. Present forecasts indicate that they are unlikely to meet the minimum performance hurdles (full details of the scheme are contained in section 7 of this report); The final 20% tranche of the 2008 options issued to Mr Gratwicke, Mr Morabito and Mr Laidlaw vested in the current year. The options have an exercise price of $4.27 per option and expire on 7 February 2014 (full details of the scheme are contained in section 8 of this report); • Mr Reitzer was eligible for a three year cash based LTI with a potential maximum reward of $5 million. The performance period for this grant commenced on 1 May 2010 and concluded on 30 April 2013. This grant was subject to a growth in underlying earnings per share performance hurdle. The performance hurdles were not met and no amount was payable to Mr Reitzer in relation to this grant (refer section 8 for full details of the grant). These Performance Rights LTI plans are measured against underlying EPS growth targets over a three year period. The current year underlying EPS decreased by 4.4% to 32.6 cents per share, impacted by the dilutionary effect of the $375 million equity raising. As a result, present forecasts indicate that the KMP are unlikely to receive any reward under any of the three Performance Rights LTI plan periods ending FY2013, FY2014 or FY2015. Metcash Annual Report 2013 45 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 2. EXECUTIVE REMUNERATION GUIDE (UNAUDITED) (Continued) Remuneration actually received The accounting standards require the calculation of remuneration on an accrual basis including the use of sophisticated valuation models for long term share based incentives. The accounting standards require the recognition of long term incentives over the associated vesting period based on assumptions that may or may not eventuate and without regard to the actual economic benefit ultimately derived by the executive from the incentive. Because of potential confusion in interpreting remuneration table values the Board has provided details of actual remuneration received by executives during the reporting period in the unaudited table below. These figures represent the fixed remuneration actually paid over 2013, as well as the value of STI benefits that will be received as a result of performance in 2013, the value of LTI’s for 2013 and the value of discretionary bonus payments. The audited accounting value of remuneration received during the 2013 financial year, reported in accordance with statutory obligations and the accounting standards, has been presented in table 10.1 of the remuneration report. Table 2.1 Remuneration actually received (unaudited) Name A Reitzer I Morrice(5) A Gratwicke S Morabito F Collins M Laidlaw Total Fixed (1) $ STI(2) $ LTI(3) $ Other(4) $ Total $ 1,787,731 1,648,000 251,897 795,959 1,096,030 684,868 632,145 - 484,104 486,675 472,500 325,000 5,248,630 3,416,279 - - - - - - - (358,610) 3,077,121 30,807 25,005 146,111 143,728 30,488 17,529 282,704 1,305,068 1,728,816 1,301,096 987,633 8,682,438 (1) Fixed remuneration includes superannuation and accrued annual leave. (2) The STI amount represents the 75% cash component payable to the executive in July 2013, which is based on the achievement of the relevant performance conditions in respect of the 2013 financial year as set out in Table 6.2 of the Remuneration Report. The 25% deferred equity component is not included in the table because the reward is conditional upon employment of the executive until 15 April 2014. (3) The value of share based long term incentives calculated in accordance with the accounting standards is reported in Table 10.1 of the Remuneration Report. The above LTI column is unaudited and records the actual economic value realised by the executive as a result of exercising options or performance rights vesting. The economic value of performance rights reflects the market value of shares issued to the executive when the performance rights vest and are converted into shares. The economic value of options represents the difference between the exercise price of the options and the value of the relevant shares on exercise date. Other amounts include the value of other benefits that have been determined in accordance with the accounting standards, and are consistent with the (4) amounts disclosed in the ‘other benefits’ in Table 10.1 of the Remuneration Report, plus accrued long service leave and reductions in such leave entitlements and discretionary bonus payments. Mr Morrice was appointed as an Executive Director on 1 March 2013 and will become the CEO effective 30 June 2013. (5) 46 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 3. WHO DOES THIS REPORT COVER? (AUDITED) This Remuneration Report, which comprises sections 3 to 12 inclusive, is prepared in accordance with the statutory requirements (section 300A) of the Corporations Act 2001. The information set out in sections 3 to 12 of this remuneration report has been audited in accordance with section 308(3C) of the Corporations Act 2001 and accounting standards. The report sets out the remuneration details for the Non-Executive Directors, the CEO and the group executives of Metcash, who together have the authority and responsibility for planning, directing and controlling the activities of the Group. For the purposes of this report, the CEO and the group executives are referred to as the KMP. Non-Executive Directors(1) Name Peter Barnes Patrick Allaway Fiona Balfour Michael Butler Neil Hamilton Edwin Jankelowitz Position Chairman Director – appointed 7 November 2012 Director Director Director Director Richard Longes Director – retired 30 August 2012 Ian Morrice Director – 12 June 2012 to 28 February 2013 Dudley Rubin (cid:3) All non-executive directors held their current positions for the entire 2013 financial year unless otherwise stated. Director (cid:894)(cid:1005)(cid:895) KMP Name Andrew Reitzer Position Chief Executive Officer & Director Period KMP The whole year Ian Morrice Executive Director 1 March 2013 to 30 April 2013 Adrian Gratwicke Chief Financial Officer The whole year Silvestro Morabito Chief Operating Officer, Food & Grocery The whole year Fergus Collins Chief Executive Officer, ALM Mark Laidlaw Chief Executive Officer, Hardware The whole year The whole year Metcash Annual Report 2013 47 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 4. HOW REMUNERATION DECISIONS ARE MADE (AUDITED) The diagram below illustrates how decisions are made with respect to remuneration of KMP and non-executive directors. BOARD Maintains overall responsibility and accountability for oversight of Metcash’s remuneration policy and practices. Approves, having regard to recommendations of the Remuneration Committee: • • • the CEO’s remuneration package; the remuneration and terms of any incentives for any Executive Directors, the Company Secretary and all other direct reports of the CEO, at least annually; and the remuneration of Non Executive Directors. REMUNERATION AND OTHER EXTERNAL CONSULTANTS Supports the Remuneration Committee by providing independent: • • • advice on remuneration quantum and structure; benchmarking data and market practice information about other listed companies; and advice regarding legal and regulatory issues that impact on remuneration arrangements. REMUNERATION COMMITTEE Primarily responsible: • • • reviewing and advising the Board annually on the remuneration and components of remuneration for the CEO and his direct reports; reviewing and making recommendations to the Board regarding the design of all executive incentive plans and the total proposed payments from each executive incentive plan; and reviewing and recommending to the Board the level of remuneration for Non Executive Directors In performing its role, the Board and Remuneration Committee directly commission and receive information, advice and recommendations from independent external advisers. In 2012 the Board reviewed the process for engaging and seeking advice from external advisers and adopted a protocol setting out the process for receiving remuneration recommendations in relation to KMP which, among other things, is designed to ensure that the recommendations made are free from undue influence by management. One of the key outcomes of this review was that the Chairman of the Remuneration Committee appoints and engages directly with remuneration consultants in relation to KMP remuneration matters. During the 2013 financial year, the Remuneration Committee employed the services of PricewaterhouseCoopers (‘PwC’) under the Board approved protocol to review and provide recommendations on the appropriateness of the incoming Group CEO (Mr Morrice) remuneration structure and levels. Amounts paid to PricewaterhouseCoopers during FY2013 are detailed below: Remuneration consultant Appointed by Nature of work Pricewaterhouse Coopers Remuneration Committee Review of incoming Group CEO (Mr Morrice) remuneration structure and levels. Fees paid $8,000 The Board is satisfied that the remuneration recommendations made by PwC were made free from any undue influence. In addition to the internal protocols referred to above PwC provided a formal declaration confirming that the recommendation was made free from ‘undue influence’ by the members of the KMP to whom the recommendation related. The Remuneration Committee engaged Herbert Smith Freehills to provide independent governance and legal advice in relation to senior executive remuneration matters. 48 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 5. KMP REMUNERATION (AUDITED) Policy and Approach The Board is committed to developing and maintaining a remuneration framework that attracts and retains quality executives and aligns the interests of the members of the KMP with shareholder interests by rewarding high performance that results in increased shareholder value. The particular principles that guide the Remuneration Committee when they set KMP remuneration are listed below. • Attract and retain talent - Metcash operates in the highly competitive food, liquor, hardware and automotive industries. Remuneration packages are structured to ensure that they remain market competitive and take into account the individual’s role and performance. Fixed salaries are determined, in part, by reference to benchmarking data relating to companies in the ASX Top 51-100. In addition, business specific criteria are considered. The ‘at risk’ components of remuneration (featuring short and long term elements) are designed to motivate individual and group performance. The fixed and variable ‘at risk’ remuneration in aggregate is designed to be competitive in the market place and align with shareholder outcomes. • Link remuneration to performance - A proportion of KMP remuneration is ‘at risk’, which means that it is only delivered if certain performance conditions are met. KMP are prohibited by law from hedging their ‘at risk’ remuneration. ‘At risk’ includes both short and long term outcomes to meet market best practice. • Align remuneration to creation of shareholder value - KMP receive fixed remuneration and short and long term ‘at risk’ incentives designed to motivate and help achieve superior business and financial performance, benefitting shareholders. Both short and long term KPI’s are designed to provide appropriate alignment between management and shareholders. • Metcash’s current Key Performance Indicators (KPI’s) Short term incentive Metcash’s short term incentive plan is designed to reward executives for delivering on pre-determined revenue and underlying profit before tax targets. The performance conditions are set at the beginning of each financial year and are designed to drive successful and sustainable financial and business outcomes which are set with reference to Board approved objectives, plans and budgets. The CEO and CFO short term incentives are determined with reference to Group revenue and underlying profit before tax and business pillar CEO’s with reference to Group and pillar revenue and underlying profit before tax. If the targets are met, 75% of the reward is payable immediately in cash and the remaining 25% is deferred and released as equity, conditional upon subsequent employment. Performance criteria are disclosed in section 6 of the remuneration report. If the minimum growth targets are not met, no STI is payable. The CEO may award discretionary bonus payments to Executives outside the STI scheme where circumstances warrant such a payment. Long term incentive The Company’s LTI plan is the Metcash Performance Rights Plan (‘Rights Plan’). All Performance Rights granted by the Company are subject to performance hurdles. These hurdles have attached objectives that must be satisfied on a prolonged basis (usually 3 years) and which directly improve Company value. The Board considers underlying earnings per share (EPS) to be the most appropriate reflection of the underlying ongoing profitability of the Company. There is genuine scope for individual executive performance to impact EPS outcomes and so the Board considers EPS to be a more effective hurdle for its LTI program than largely market-based hurdles such as relative TSR, which can vary due to external factors such as market sentiment (which do not necessarily reflect Company or executive performance). In 2012 the Board conducted a review of remuneration and obtained independent advice in relation to the correlation between shareholder return and remuneration and concluded that underlying earnings per share remains the best measure of alignment between LTI and shareholder returns. Therefore, the Board has chosen the measures it believes best meet shareholder alignment. The Board sets and reviews the Rights Plan EPS hurdle rates annually. The underlying earnings per share targets for each new grant are based on factors including the Company’s strategic objectives and business plans, financial performance, state of the industry/market and other operational measures. Metcash Annual Report 2013 49 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 5. KMP REMUNERATION (AUDITED) (Continued) The FY2013 plan hurdles were set at between 4% (‘lower bound hurdle rate’) and 7% (‘upper bound hurdle rate’) compound underlying EPS growth, both adjusted up or down for the effects of actual year-on-year inflation/deflation, over a three year vesting period as follows: • Achieving an underlying EPS growth rate equivalent to the lower bound hurdle rate results in 0% vesting. • Achieving an underlying EPS growth rate equivalent to the upper bound hurdle rate results in 100% vesting. Pro-rata vesting occurs for EPS growth between the lower and upper bound hurdle rates. Any LTIs that do not vest are forfeited. The FY2012 and FY2011 plan hurdles, which are not adjusted for the effects of inflation/deflation, were set at between 5% and 10% compound underlying EPS growth over a three year vesting period as follows: • • Achieving 5% underlying EPS growth results in 50% vesting. Achieving 10% underlying EPS growth results in 100% vesting. Pro-rata vesting occurs for EPS growth over 5% and under 10%. Any LTIs that do not vest are forfeited. Determination of underlying earnings Company value improvement is expressed as an increase in revenue, underlying profit before tax and underlying earnings per share. To provide an accurate and consistent basis of measuring this growth in value, a calculation is used to determine underlying earnings per share. This reflects reported earnings per share from continuing operations excluding amortisation of customer relationships and significant items (whether positive or negative). In determining underlying earnings, the Board takes into account material impacts on earnings arising from significant items. Having regard to STI, the impacts from these items are taken into account when determining the STI grids. Having regard to LTI, adjustments, as considered appropriate, are made to the calculation to account for these impacts. A reconciliation of underlying earnings to net profit is presented in the review and results of operations in the Directors’ Report. In addition to these core principles, the Board is committed to promoting transparency around its remuneration arrangements and to providing shareholders and other stakeholders with clear, complete and concise information about Metcash’s remuneration structures. Remuneration Framework - key aspects of KMP Remuneration Fixed Remuneration What is included in fixed remuneration? Fixed remuneration comprises fixed salary, statutory superannuation benefits and any additional benefits that form part of the arrangement including motor vehicle lease and salary sacrifice superannuation contributions. How is fixed remuneration set? Fixed remuneration is determined based on the scope and nature of an individual’s role, qualifications, performance and experience. Market data, including in relation to the ASX 51- 100 and the Company’s peers, is used to benchmark salary levels. Metcash’s policy is to position fixed remuneration at the 65th percentile of the ASX 100. Remuneration levels need to be competitive with those of Metcash’s competitors (including much larger businesses such as Woolworths and Wesfarmers) so that the Company can attract and retain quality people. How and when is fixed remuneration reviewed? The Remuneration Committee reviews KMP remuneration each year, based on market trends and individual performance, and recommends any adjustments to the Board. All adjustments must be approved by the Board. 50 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 5. KMP REMUNERATION (AUDITED) (Continued) Short Term Incentive (STI) What is the STI program? What are the KPIs STI is an ‘at risk’ component of KMP remuneration which gives KMP the opportunity to receive a reward, dependent on performance against set key performance indicators (KPIs). If these KPIs are met, 75% of the STI reward amount is payable immediately in cash and the remaining 25% is deferred for 15 months and released through the issue of Metcash shares, conditional upon the Executive being employed by the Company on 15 April of the year subsequent to the performance year. The STI program and the KPIs set under it are intended to motivate and reward high performance and link performance and reward. All STIs are structured to encourage the relevant individual to exceed annual revenue and profit targets. KPIs are tailored for individual members of the KMP depending on their role and sphere of influence, but are all financial in nature and based on a combination of group and/or divisional measures (primarily revenue and underlying profit measures). The Board believes that financial targets are appropriate because they align with key drivers of the business and are objectively measurable. What is the maximum potential STI level? KMPs are eligible to receive an STI reward of up to a maximum of 100% of total fixed remuneration, depending on their performance against KPIs. Long Term Incentive (LTI) What is the LTI program? LTI is an equity-based ‘at risk’ component of KMP remuneration tied to the Company’s longer term performance. Metcash operates a Performance Rights Plan introduced in June 2010. Participation in the Performance Rights Plan gives members of the KMP an opportunity to acquire shares in the Company if they achieve outcomes linked to the creation of long term sustainable growth for shareholders over a performance period of at least three years. Additionally, legacy equity programs remain open that include option and cash based incentives. Full details are provided in Sections 7 and 8. Why was the LTI program adopted? The LTI program encourages members of the KMP to focus on long term Company performance and the achievement of sustainable growth. It provides KMPs with the opportunity to receive equity based rewards and thereby aligns their interests with shareholder’s interests and encourages them to take a shareholder’s perspective. What are the performance hurdles? The Board believes earnings per share growth is the most appropriate measure of value creation and considers “underlying” earnings per share to be the most accurate and consistent basis of measuring this growth in value. “Underlying” EPS represents reported earnings per share from continuing operations excluding amortisation of customer relationships and significant items which best reflects the underlying ongoing profitability of the Company. In determining underlying EPS, both positive and negative significant items are excluded. A reconciliation of underlying earnings to net profit is presented in the review and results of operations in the Directors’ Report. The performance rights issued in FY2013 include an adjustment to EPS performance hurdles for the effects of actual year-on-year inflation/deflation. What happens to LTIs when an executive ceases employment? When a KMP ceases to be an employee of Metcash their unvested LTIs will lapse, except in instances of death and disability or special circumstances as determined by the Board. Metcash Annual Report 2013 51 METCASH FINANCIAL REPORT T 2013 DIRECTORS’ REPORT Year ended 30 April 2013 5. KMP REMUNERATION (AUDI ITED) (Continued) Proportion of fixed and ‘at risk’ remunera ation The relative proportions of KMP’s total remu uneration granted during FY2013 are set below: Table 5.1 Proportion of fixed and ‘at risk’ remu uneration % of To otal Maximum Remuneration (annualised) ‘At risk’ – performance- based(1) emuneration Fixed Re Andrew Reitzer(2) Ian Morrice(3) Other KMP STI LTI 50% 36% 41% 50% 36% 41% -% 28% 18% (1) These amounts are based on the KMP’s maximum by the closing share price on grant date. This assu grants made in prior financial years. STI and LTI opportunities. LTI value is calculated by multiplying the share mes the performance conditions detailed in section 7 are met. The LTI doe performance right on grant date es not include any value for (2) There were no ‘at risk’ LTI grants made to the CEO reward of $5 million. The performance period for thi underlying earnings per share performance hurdle. (refer section 8 for full details of the grant). O in the current year. Mr Reitzer was eligible for a three year cash based LT is grant commenced on 1 May 2010 and concluded on 30 April 2013. This The performance hurdles were not met and no amount was payable to Mr TI with a potential maximum s grant was subject to a growth in r Reitzer in relation to this grant (3) This represents Mr Morrice’s remuneration structure e for FY2014. Together, the STI and LTI components com amount of KMP remuneration is tied to the s mprise a significant proportion of total remuneration, which e. success of Metcash and the creation of shareholder value means that a significant Graph: Proportion of fixed and ‘at risk’ remun neration (cid:62)(cid:100)(cid:47) (cid:1004)(cid:1081) (cid:94)(cid:100)(cid:47) (cid:1009)(cid:1004)(cid:1081) (cid:62)(cid:100)(cid:47) (cid:1006)(cid:1012)(cid:1081) (cid:38)(cid:4)(cid:90) (cid:1007)(cid:1010)(cid:1081) (cid:38)(cid:4)(cid:90) (cid:1009)(cid:1004)(cid:1081) (cid:94)(cid:100)(cid:47) (cid:1007)(cid:1010)(cid:1081) (cid:38)(cid:4)(cid:90) (cid:1008)(cid:1005)(cid:1081) (cid:100)(cid:47) (cid:62)(cid:100) (cid:1012)(cid:1081) (cid:1005)(cid:1012) (cid:94)(cid:100)(cid:47) (cid:1081) (cid:1008)(cid:1005)(cid:1081) A Reitzer FY2013 I Morrice FY2014 KMP FY2013 52 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 5. KMP REMUNERATION (AUDITED) (Continued) Company performance and remuneration A snapshot of Metcash’s performance as measured by a range of financial and other indicators is outlined in the table below. Table 5.2 – 5 year performance against key annual performance metrics r a e Y l a i c n a n F i Share Performance Earnings Performance Liquidity Closing share price ($) Dividend p/share (c/share) Underlying EPS (c/share) Reported EPS (c/share) Underlying EBITA ($’m) Reported NPAT ($’m) Cash flow from Operations ($’m) Gearing (Debt/(Debt +Equity) 2012/13 2011/12 2010/11 2009/10 2008/09 4.10 3.98 4.08 4.15 4.12 28.0 28.0 27.0 26.0 24.0 32.6 34.1 33.4 32.0 29.5 24.0 11.7 31.5 29.7 26.5 460.4 451.2 438.0 401.2 371.3 206.0 90.0 241.4 227.6 202.5 299.8 284.3 142.5 294.7 248.1 33.3% 42.6% 36.7% 35.5% 33.5% Metcash Annual Report 2013 53 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 6. DETERMINING STI OUTCOMES (AUDITED) The STI program focuses behaviour towards achieving superior Company and business unit performance, which deliver better results to shareholders. Key Performance Indicators are established and measured at different levels throughout the business: • Group level - applies to most KMP • Business level - applies to the KMP from each business pillar After the end of each financial year, KMP performance is assessed against their individual KPIs to determine the amount of STI to be awarded. If these KPI are met, 75% of the STI reward amount is paid in July of each year after the release of the audited accounts. The remaining 25% is deferred for 15 months and released through the issue of Metcash ordinary shares, conditional upon the Executive being employed by the Company on 15 April of the year subsequent to the performance year. Any STI not achieved is forfeited. The tables below set out the outcome of the assessment process for the CEO and other members of the KMP for 2013. Table 6.1 STI vesting for CEO KPI Group Revenue and underlying PBT ($) 2,060,000 80% Cash Payable ($) 1,648,000 Deferred Equity ($) -(1) ($) 412,000 (1) The CEO STI reward is payable in cash, with no deferred component, due to the retirement of the CEO. Maximum STI Vested STI achieved STI forfeited Table 6.2 STI vesting other KMP Maximum STI Vested STI achieved STI forfeited 75% Cash Payable(1) ($) 25% Deferred Equity(2) ($) - - - - - ($) ($) 80% 484,104 806,840 KPI I Morrice (Executive Director) (3) Group Revenue and underlying PBT A Gratwicke (CFO) Group Revenue and underlying PBT S Morabito (COO, Food & Grocery) Group Revenue and underlying PBT Sales and EBIT for Food & Grocery F Collins (CEO, ALM) Group Revenue and underlying PBT Sales and EBIT for ALM M Laidlaw (CEO, Hardware) Group Revenue and underlying PBT Sales and EBIT for Mitre 10 75% of STI reward amount payable in cash in July 2013 25% of STI reward amount deferred and released through the issue of Metcash ordinary shares, conditional upon the Executive being employed by the (1) (2) Company on 15 April 2014. The number of shares to be issued will be calculated by dividing the 25% STI reward dollar value by the Metcash VWAP for the five days ending on 31 July 2013. The shares will be issued by 30 April 2014, but will be restricted from trading until 31 July 2014. (3) in the FY2013 STI scheme. Mr Morrice was appointed as an Executive Director on 1 March 2013 and will become the CEO effective 30 June 2013. Mr Morrice is not entitled to participate 325,000 325,000 195,000 130,000 540,750 540,750 350,000 350,000 210,000 262,500 324,450 162,225 108,150 54,075 65,000 43,333 70,000 87,500 70,000 - 108,150 324,450 65,000 151,667 80% 100% 80% 53% 80% 40% 161,368 161,368 The following two financial KPIs are used to assess performance for most members of the KMP: • Group underlying profit before tax (PBT) • Group revenue from continuing operations - as disclosed in the Statement of Comprehensive Income. These two KPIs are used because they are clear, objective and regularly reported indicators of the performance of Metcash and its different businesses, warehouses and stores. The KPIs for the KMP from each business pillar also include targets linked to the financial performance of their particular business unit, to drive them to strive towards achieving better than target performance in their areas of direct responsibility. 54 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 6. DETERMINING STI OUTCOMES (AUDITED) (Continued) For FY2013, the potential (or maximum) STI payable was typically set at a stretch above target revenue and earnings levels. Target revenue and earnings were set at a level consistent with guidance provided to the market for FY2013. This stretch target was largely achieved at Group level during FY2013 and this resulted in the payment of STI rewards at the 80% level. The Food & Grocery, Mitre 10 and ALM business pillar results were reflected in actual STI rewards closer to their individual stretch targets. 7. LONG TERM INCENTIVE (AUDITED) Objective The objectives of the LTI program are to ensure the Company is able to attract and retain its key group executives, whilst incentivising these executives to achieve challenging financial performance hurdles which will increase shareholder value. Since 2010, the Board has operated the Metcash Performance Rights Plan (‘Rights Plan’). Summary of Performance Rights The table below sets out the Performance Rights granted to members of the KMP under the Rights Plan. Table 7.1 Performance Rights granted to KMP Participants Andrew Reitzer Ian Morrice(1) Adrian Gratwicke Silvestro Morabito Fergus Collins Mark Laidlaw Grant date Dec 2012 Dec 2011 Dec 2010 - Dec 2012 Dec 2011 Dec 2010 Dec 2012 Dec 2011 Dec 2010 Dec 2012 Dec 2011 Dec 2010 Dec 2012 Dec 2011 Dec 2010 Vesting date 7-Sep-15 30-Jun-14 30-Jun-13 - 7-Sep-15 30-Jun-14 30-Jun-13 7-Sep-15 30-Jun-14 30-Jun-13 7-Sep-15 30-Jun-14 30-Jun-13 7-Sep-15 30-Jun-14 30-Jun-13 Number of rights granted - - - - 100,841 73,204 59,770 135,169 72,516 70,171 87,488 55,725 53,923 81,239 46,201 49,166 Fair value per right (at grant date) N/A N/A N/A - $2.30 $3.62 $3.62 $2.30 $3.62 $3.62 $2.30 $3.62 $3.62 $2.30 $3.62 $3.62 Vested in FY2013 Forfeited in FY2013 N/A N/A N/A - 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% N/A N/A N/A - 0.0% 0.0% 100.0%(2) 0.0% 0.0% 100.0%(2) 0.0% 0.0% 100.0%(2) 0.0% 0.0% 100.0%(2) Mr Morrice was appointed as an Executive Director on 1 March 2013 and will become the CEO effective 30 June 2013. Mr Morrice is not entitled to participate The December 2010 Performance Rights did not achieve the minimum underlying EPS performance hurdle. Accordingly, these Performance Rights will be (1) in the FY2013 LTI scheme. (2) forfeited on 30 June 2013. The Rights Plan Performance Rights (granted under the Rights Plan) replaced share options as the Company’s long term incentive vehicle from 30 June 2010. Further details of Performance Rights are provided in Note 25 to the financial statements. The key terms of the Rights Plan include: • Each Performance Right is an entitlement to receive a fully paid ordinary share in the Company on terms and conditions determined by the Board, including vesting conditions linked to service and performance over a 3 year period; • Performance Rights are offered at no cost to participants; and • Performance Rights do not carry voting or dividend rights, however shares allocated upon vesting of Performance Rights will carry the same rights as other ordinary shares. Metcash Annual Report 2013 55 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 8. LONG TERM INCENTIVES – LEGACY PLANS (AUDITED) May 2010 Cash LTI In May 2010 a three year retention incentive was granted to Mr Reitzer (Group CEO). The performance period for this grant commenced on 1 May 2010 and concluded on 30 April 2013. This grant is subject to a growth in underlying earnings per share performance hurdle and tested at the end of the performance period. A minimum payment of $3 million was payable for the achievement of a 5% annual compounded growth in underlying earnings per share for the three years, based on underlying earnings for the 2010 year, and a maximum payment of $5 million for the achievement of a 10% or better growth in compounded underlying earnings per share over that period. Pro rata payments are to be made for achievements between 5% and 10%. In FY2013, the minimum performance hurdle for this grant was not achieved and accordingly the plan has now concluded with $nil payable. May 2009 Cash LTI A long term retention incentive of $1 million was granted in May 2009 to Mr Gratwicke (then GM Finance, now CFO). The vesting of the long term incentive grant is subject to achievement of the performance hurdles over a five year period (a compounding 8% increase in underlying earnings per share based on 2009 underlying earnings per share adjusted for material changes to the number of shares issued) and only payable: • • on successful achievement of the performance hurdles described above in 2014 and; if the Executive is still employed by the Company at that time and a member of the Metcash Executive Team. If the compound annual growth achieved by the Company from the base year is; • • • equal to or greater than the target, then the maximum amount ($1 million) will be paid; less than 40% of the target at the end of the five year period, no payment will be made or; greater than or equal to 40% of the target, then the amount paid will be increased to the maximum amount on a pro rata basis. Prior to this grant Mr Gratwicke was not invited to participate in any cash based LTI plan. This incentive was provided in 2009 to ensure his equitable treatment in relation to other members of the Executive Team and to ensure effective retention arrangements were in place. However, in recognition that Mr Gratwicke has the opportunity to earn benefits from the options issued to him in 2008 (see discussion under “Options” section below), and as these benefits are not available to the other members of the Executive Team, in the event he exercises any of his options during the period up to 30 April 2014, the amount which would otherwise have been payable to him under this 2009 LTI grant will be reduced by an amount equal to the pre-tax profits in respect of exercising the options. In this case, pre-tax profit is calculated using the number of options exercised and the difference between the market price of the options on the day of exercise and the price at which the options were issued. It should be noted that options not exercised by 7 February 2014 will be cancelled. Therefore, the maximum amount payable to Mr Gratwicke under the retention plan will be $1 million less any applicable pre-tax profit earned from exercising the 2008 options. February 2008 Options Options were issued in February 2008 to Mr Gratwicke (then GM Finance, now CFO) but were not offered to Executive Directors and other members of the Executive Team. A performance hurdle applies to these options, the hurdle being a compounding 8% increase in underlying earnings per share based on underlying earnings per share for the 2007 financial year, which must be achieved in the financial year prior to the financial year in which a tranche of options becomes able to be exercised. Before these options are exercised, agreement is obtained from the Remuneration Committee which verifies that the hurdle has been achieved with confirmation from the Company’s external auditor. The final 20% tranche of these options met the performance hurdle during FY2013, such that 100% of all options issued have now vested. In total, 500,000 options have been issued to Mr Gratwicke with an exercise price of $4.27 per share, and which lapse on 7 February 2014. 56 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 8. LONG TERM INCENTIVES – LEGACY PLANS (AUDITED) (Continued) Table 8.1 Legacy LTI Table Name A Reitzer A Gratwicke S Morabito M Laidlaw Grant Date May-10 May-09 Feb-08 Feb-08 Feb-08 Type LTI - Cash LTI - Cash LTI - Options LTI - Options LTI - Options Number of Options granted Fair value per Option Maximum Cash Payment Vested in FY2013 Forfeited in FY2013 Vesting dates 1 May 2010 to 30 April 2013 N/A 1 May 2009 to 30 April 2014 N/A N/A N/A $5,000,000 $1,000,000 7 Feb 2008 to 7 Feb 2013 500,000 $0.88 7 Feb 2008 to 7 Feb 2013 350,000 $0.88 7 Feb 2008 to 7 Feb 2013 350,000 $0.88 N/A N/A N/A 0% 0% 20% 20% 20% 100% 0% 0% 0% 0% As at 30 April 2013 and at the date of this report, Mr Morrice and Mr Collins do not hold any outstanding LTI Options and do not participate in any LTI Cash schemes. 9. SUMMARY OF SERVICE AGREEMENTS (AUDITED) The remuneration and other terms of employment for KMP are formalised in service agreements. The material terms of the KMP’s service agreements are set out below. Table 9.1 Service Agreements Name A Reitzer(1) I Morrice(2) A Gratwicke S Morabito F Collins M Laidlaw Agreement Term Ongoing unless notice given(1) Ongoing unless notice given Ongoing unless notice given Ongoing unless notice given Ongoing unless notice given Ongoing unless notice given Executive Notice Metcash Notice Redundancy 3 months 6 months 3 months 3 months 3 months 3 months 15 months Metcash Notice + 9 months 12 months 12 months 9 months 9 months 9 months 9 months Metcash Notice + 6months Metcash Notice + 6months Metcash Notice + 6months Metcash Notice + 6months New service contracts entered into post the introduction of the new termination benefits legislation in 2009 contain similar elements to other executives’ service contracts and any termination benefits provided under contracts that are subject to the new law will comply with the new twelve months of base salary cap. (1) Mr Reitzer’s contract has not been amended since the new federal legislation relating to termination benefits was introduced in November 2009. On 27 September 2012 the Company announced the intended retirement of Mr Reitzer. Mr Reitzer will step down as the CEO effective 30 June 2013 and will cease employment with Metcash on 30 September 2013. (2) Mr Morrice was appointed as an Executive Director on 1 March 2013 and will become the CEO effective 30 June 2013. (3) Executives who resign or whose employment is terminated for cause and whose short term or long term incentives are unvested at the time, forfeit their entitlements to those unvested incentives. Executives who are retrenched or who retire from full time work before vesting of short or long term incentives or who die whilst employed by the Company, may be allowed (or their Estate may be allowed) to keep all or part of those unvested incentives, at the discretion of the Board. (4) In some circumstances surrounding termination of employment, the Company may require individuals to enter into non-compete arrangements with the Company, to protect the Company's rights. These non-compete arrangements may require a payment to the individual in consideration of these arrangements. Metcash Annual Report 2013 57 d e t a l e R e c n a m r o f r e P l a t o T $ % 6 . 3 5 1 2 1 , 7 7 0 , 3 1 - - % 0 . 0 % 7 . 3 4 % 8 . 1 3 % 0 . 0 4 % 1 . 7 3 % 0 . 2 4 4 0 7 , 2 8 2 8 1 8 , 7 5 4 , 1 9 4 2 , 2 2 8 , 1 6 4 8 , 9 7 3 , 1 0 2 1 , 4 5 0 , 1 4 8 6 , 0 8 3 1 1 , 1 8 0 5 7 , 8 7 7 6 1 , 4 5 8 5 8 , 3 7 0 , 9 4 1 7 , 4 9 2 - - - 0 0 6 , 7 1 0 2 3 , 2 1 0 2 3 , 2 1 0 4 2 , 2 4 ) 0 6 6 , 7 6 3 ( - 1 7 4 , 9 7 1 4 6 , 1 2 8 0 7 , 3 3 8 8 4 , 0 3 ) 2 5 3 , 2 0 2 ( 2 - - - - - - - 4 5 3 6 1 , 0 5 0 9 , , 0 0 0 8 4 6 1 , 5 4 7 2 , 4 5 3 6 1 , 4 5 3 6 1 , 4 5 3 6 1 , 4 5 3 6 1 , 5 1 5 , 4 8 - - 7 0 8 0 3 , 4 0 7 4 4 2 1 , 5 0 2 0 , 0 1 1 - 4 0 1 4 8 4 , 5 7 6 6 8 4 , 0 0 5 , 2 7 4 0 0 0 5 2 3 , , 7 7 3 1 7 7 , 1 2 5 1 9 4 2 , 5 0 6 9 7 7 , 4 1 5 , 8 6 6 1 9 7 5 1 6 , , 6 7 6 9 7 0 , 1 7 4 3 , 4 7 2 9 7 2 , 6 1 4 , 3 5 1 1 , 4 6 1 , 5 l a t o T s e v i t u c e x E 3 e c i r r o M I i e k c w t a r G A o t i b a r o M S r e z t i e R A s n i l l o C F 3 1 0 2 O E C l i w a d a L M e r a h S ( I T S d e s a b e r a h S ( I T L d e s a b ) s t n e m y a p ) s t n e m y a p $ $ $ $ $ d n a I T L 6 e v a e L n o i t a n m r e T i t s o P t n e m y o p m E l – s t i f e n e b s t i f e n e b n o i t a u n n a r e p u s r e h t O s t i f e n e b $ $ $ 1 I T S d e x F i ) h s a C ( n o i t a r e n u m e R d n a e c n a m r o f r e p e h t r e v o s t l u s e r l i a c n a n i f e h t n i i d e s n g o c e r s i t n e n o p m o c i s h T . y t i u q e h g u o r h t d e s a e e r l d n a d e r r e f e d s i t a h t t n u o m a d r a w e r l a o t t e h t f o t n e n o p m o c % 5 2 e h t o t n o i t l a e r n i e s n e p x e r a e y t n e r r u c e h t s t n e s e r p e r t n u o m a d r a w e r ) s t n e m y a P d e s a B e r a h S ( I T S e h T . 3 1 0 2 5 1 n o s e d u c n o c l d n a 2 1 0 2 y a M 1 n o d e c n e m m o c d o i r e p i e c v r e s e h T . ’ d o i r e p e c v r e s i ‘ e h t s a o t d e r r e f e r e r a r e h t e g o t i h c h w , s d o i r e p e r u t i e f r o f l y u J n i h s a c n i l e b a y a p s i i h c h w , 3 1 0 2 Y F r o f t n u o m a d r a w e r l a t o t e h t f o % 5 7 s t n e s e r p e r l e b a t e h t n i d e d u c n l i t n u o m a d r a w e r ) h s a C ( I T S e h T ) 1 ( p e t s l l i w r e z t i e R r M . 3 1 0 2 n i O E C s a e r i t e r o t r e z t i e R r M f o n o i t n e t n i d e c n u o n n a y s u o v e r p i l e h t d e m r i f n o c y n a p m o C e h t 2 1 0 2 t r e b m e p e S 7 2 n O ) 2 ( . 4 1 0 2 l i r p A ’ s y n a p m o C e h t f o n o i t i n g o c e r n I . 3 1 0 2 r e b m e p e S 0 3 n o t h s a c t e M h t i w t n e m y o p m e l e s a e c l l i w d n a 3 1 0 2 e n u J 0 3 e v i t c e f f e O E C s a n w o d , 1 0 8 9 2 0 2 $ , f o t n e m y a p h s a c a i e v e c e r l l i w r e z t i e R r M , t c a r t n o c t n e m y o p m e l i s h h t i w e c n a d r o c c a n i i d n a p h s r e d a e l i s h r e d n u t h w o r g t n a c i f i n g s i 3 1 0 2 Y F g n i r u d e d a m s t n e m y a p e r a s t i f e n e b t r e h O n i d e d u c n I l . e c n a t s s s a i l a t n e r d n a n o i t a c o e r l l e b a n o s a e r h t i w e c i r r o M r i M e d v o r p o t d e e r g a s a h y n a p m o C e h T . 3 1 0 2 e n u J 0 3 e v i t c e f f e O E C e h t e m o c e b l l i w d n a 3 1 0 2 h c r a M 1 n o r o t c e r i D e v i t u c e x E n a s a d e t n o p p a i s a w e c i r r o M r M ) 3 ( . 3 1 0 2 r e b m e t p e S 0 3 n o t n e m y o p m e f o l i n o i t a n m r e t n o p u y r a a s e s a b l e g a r e v a s h t n o m 2 1 o t t l n e a v u q e i l . y e v i t c e p s e r 7 0 9 , 9 2 $ d n a 0 0 9 $ o t g n i t n u o m a s e s n e p x e l a t n e r d n a n o i t a c o e r l r o f t n e m y a p a s t n e s e r p e r d n a 2 1 0 2 Y F n i o t i b a r o M r M y b s e v i t c e b o j c i f i c e p s f o t n e m e v e h c a i e h t o t n o i t a e r l n i d e d r a w a t n e m y a p y r a n o i t e r c s D i ) 4 ( d n a 2 1 0 2 Y F n i s n i l l o C r M y b s e v i t c e b o j c i f i c e p s f o t i n e m e v e h c a e h t o t n o i t a e r l n i d e d r a w a 0 2 0 , 6 9 $ f o t n e m y a p s u n o b y r a n o i t e r c s d a i s e d u c n l I ) 5 ( . 2 1 0 2 y u J n l i d e v o r p p a t n e m y a p a s t n e s e r p e r . 2 1 0 2 y u J n l i d e v o r p p a r a e y t n e r r u c f o s s e c x e n i d e s i l i t u e v a e l i e c v r e s g n o l t n e s e r p e r s e r u g i f e v i t a g e N . t n e m e l t i t n e e v a e l i e c v r e s g n o l n i t n e m e v o m e h t s e d u c n l i i s h T ) 6 ( . d e u r c c a t n e m e l t i t n e I 3 1 0 2 T R O P E R L A C N A N F H S A C T E M I T R O P E R ’ S R O T C E R D I 3 1 0 2 l i r p A 0 3 d e d n e r a e Y ) I D E T D U A ( I S E L B A T N O T A R E N U M E R n o i t a r e n u m e R ’ k s i R t A ‘ d n a d e x F i . 0 1 1 . 0 1 58 Metcash Annual Report 2013 s t n e m y a P d e t a l e R e r a h S d e s a B e c n a m r o f r e P l a t o T $ e r a h S ( I T L d e s a b ) s t n e m y a p $ d n a I T L e v a e L $ t s o P t n e m y o p m E l – s t i f e n e b r e h t O n o i t a n m r e T i n o i t a u n n a r e p u s s t i f e n e b s t i f e n e b $ $ $ I T S $ d e x i F n o i t a r e n u m e R $ 2 1 0 2 ) d e u n i t n o C ( ) I D E T D U A ( I S E L B A T N O T A R E N U M E R . 0 1 3 1 0 2 l i r p A 0 3 d e d n e r a e Y I 3 1 0 2 T R O P E R L A C N A N F H S A C T E M I T R O P E R ’ S R O T C E R D I % 0 . 0 1 ) % 2 . 5 9 ( 7 9 8 , 0 2 1 , 1 - 1 ) 6 5 2 , 3 3 6 , 1 ( 9 7 6 5 1 , 6 4 5 3 , % 4 . 6 % 0 . 5 ) % 1 . 2 ( % 2 . 7 % 3 . 3 % 6 . 5 2 % 4 . 6 1 % 8 . 2 3 % 3 . 6 3 ) % 3 . 0 ( 0 0 1 , 3 5 0 , 1 7 5 1 , 6 9 0 , 1 1 8 1 , 5 9 8 9 7 7 , 7 5 8 8 6 5 , 7 6 4 4 8 , 4 5 0 7 0 , 2 6 ) 2 5 5 , 8 1 ( ) 6 9 1 , 9 ( 8 4 0 , 8 4 2 4 8 0 , 4 6 5 4 4 , 4 1 4 1 1 , 3 2 0 , 5 0 3 9 , 5 6 1 ) 5 7 8 , 5 1 5 , 1 ( 9 7 6 5 1 , 9 7 6 , 5 1 9 7 6 , 5 1 9 7 6 5 1 , 5 9 3 8 7 , - - 5 9 6 2 4 , 4 8 9 , 6 3 5 2 2 3 8 , - - - - - - 0 0 0 0 0 6 , 2 5 0 7 2 2 , 0 2 6 , 4 2 1 5 5 2 , 9 5 2 2 8 4 9 4 2 , , 8 2 9 4 3 1 2 , 2 0 3 9 0 7 , 6 6 9 , 2 5 8 1 3 7 , 7 3 5 3 0 1 6 1 5 , s e v i t u c e x E i e k c w t a r G A o t i b a r o M S r e z t i e R A s n i l l o C F O E C l i w a d a L M 9 0 4 , 0 6 4 1 , 0 3 0 1 5 7 , , 4 l a t o T e s n e p x e n a s a i d e s n g o c e r l y s u o v e r p i t n u o m a e v i t l a u m u c e h t n a h t s s e l i g n e b s a d e s s e s s a s i e v i t n e c n i h s a c e h t f o n o i t a u a v l a t a r o r p e h t e r e h W , t e m e b o t l y e k i l n u s a w e d r u h l e c n a m r o f r e p S P E g n y l r e d n u i e h t t a h t s a w t l u s e r n o i t a u a v l 2 1 0 2 e h T . d e c u d e r s i l e b a y a p t n u o m a e v i t l a u m u c e h t . e s n e p x e n a s a i d e s n g o c e r i l y s u o v e r p 6 6 6 , 6 6 6 , 1 $ e h t f o l a s r e v e r e h t n i d e t l u s e r i h c h w . e t a d g n i t r o p e r h c a e t a d e s s e s s a s i d o i r e p e c n a m r o f r e p e h t f o d n e e h t t a g n i t s e v ) 8 n o i t c e s r e f e r ( I T L d e s a b h s a c s ’ r e z t i e R r M f o y t i l i b a b o r p e h T ) 1 ( l y u J n i s n i l l o C r M o t l e b a y a p t n u o m a l a o t t e h T . s r a e y l i a c n a n i f 1 1 0 2 d n a 0 1 0 2 , 9 0 0 2 , 8 0 0 2 e h t f o h c a e r o f e d a m o s a l s a w 0 0 0 , 0 0 2 $ f o I T L e h t . 4 4 6 , 2 5 8 $ e r o f e r e h t s a w n a p l I T L 7 0 0 2 e h t r e d n u 2 1 0 2 r o f l a u r c c a n a s d r a d n a S g n t i t n u o c c A e h t h t i w e c n a d r o c c a n I . n a p l I T L h s a C 7 0 0 2 e h t o t n o i t a e r l n i 4 4 6 , 2 5 $ f o l a u r c c a n a s e d u c n l i t n u o m a i s h T ) 2 ( Metcash Annual Report 2013 59 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 10. REMUNERATION TABLES (AUDITED) (Continued) Name Non Executive Director E Jankelowitz Chief Executive Officer A Reitzer Executives I Morrice A Gratwicke S Morabito F Collins M Laidlaw Value of Options exercised during the year Value of Options lapsed during the year 2013 $ - - - - - - - 2012 $ - - - 949 3,491 4,745 - 2013 $ - - - - - - - 2012 $ 13,858 102,336 - - - - 9,745 11. DIRECTORS AND KEY MANAGEMENT PERSONNEL SHARE AND OPTION HOLDINGS (AUDITED) For details of shares, performance rights and share options held by KMP, refer to Note 26 in the annual financial statements. 60 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 12. NON-EXECUTIVE DIRECTORS (AUDITED) Policy The objectives of Metcash’s policy regarding fees for non-executive directors are to: • Safeguard independence - To preserve the independence of non-executive directors, fees do not include any performance-related element; and • Be market competitive - Fees are set at a level competitive with non-executive directors in the ASX 100 and take into account the time commitment of overseeing the large and diverse business of the Metcash Group. To align individual interests with shareholders’ interests, non-executive directors are encouraged to hold Metcash shares. Non-executive directors fund their own share purchases. All non-executive directors must comply with Metcash’s share trading policy. Review of levels of remuneration Non-executive directors’ remuneration is within an aggregate limit determined, from time to time, by members at a general meeting. The current limit of $1,600,000 was agreed by members at the Annual General Meeting held on 30 August 2012. The Remuneration Committee has responsibility for reviewing and recommending the level of remuneration for non-executive directors. External professional advice is sought before any changes are made to the amount paid to non-executive directors within the overall maximum amount approved by shareholders. Structure Non-executive director remuneration, except for certain legacy entitlements as detailed below, is structured as follows: • All non-executive directors are paid an annual fixed fee; • Non-executive directors also performing chairperson or committee duties are paid an additional fixed fee for each role; • Non-executive directors are not entitled to participate in any of the Group’s short or long term incentive schemes; and • No additional benefits are paid to non-executive directors upon retirement from office Current per annum fixed fee structure The current per annum fee structure is set out in the following table. These fee levels are within the aggregate limit approved by members and took effect from the 30 August 2012 Annual General Meeting. Table 12.1 Non Executive Director Fee Structure Name P Barnes N Hamilton M Butler1 P Allaway F Balfour E Jankelowitz I Morrice2 D Rubin Base Fee $ Chair Fee $ 118,450 118,450 118,450 118,450 118,450 118,450 118,450 118,450 172,500 28,840 28,840 - - - - - Committee Fee $ 11,845 - - 11,845 11,845 - 11,845 11,845 Super- annuation $ 16,470 13,256 13,256 11,727 11,727 10,661 11,727 11,727 Total $ 319,265 160,546 160,546 142,022 142,022 129,111 142,022 142,022 (1) Mr Butler was appointed the chairman of the audit committee on the retirement of Mr Longes on 30 August 2012. (2) Mr Morrice was appointed as an Executive Director on 1 March 2013 and therefore ceased to be a Non Executive Director on this date. Metcash Annual Report 2013 61 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 12. NON-EXECUTIVE DIRECTORS (AUDITED) (Continued) Non-Executive Directors’ Remuneration for 2013 The fees paid or payable to non-executive directors in relation to the 2013 financial year are set out in the following table. The general increase in amounts paid reflects the full year effect of the changes made following the aggregate fee limit increase that was approved at the 30 August 2012 Annual General Meeting and, for certain directors, changes in roles (including appointment as a director and appointment/cessation of chairperson/committee memberships). Table 12.2 Non-Executive Director Remuneration Fixed Fees1 $ Post Employment (Superannuation)2 $ Other $ M Butler F Balfour R Longes3 N Hamilton P Allaway4 Name P Barnes N/A 301,070 N/A 299,000 N/A 145,017 N/A 138,000 N/A 142,175 N/A 126,500 211,619 35,750 N/A 143,000 N/A 52,315 - - N/A 129,346 N/A 126,500 N/A 117,587 N/A 115,000 N/A 91,465 - - N/A 129,346 N/A 126,500 211,619 1,144,071 N/A 1,074,500 (1) Fixed fees represent base director fees, chairperson and committee fees. Directors fees that are salary sacrificed are included in this amount. (2) Post employment benefits comprise statutory superannuation obligations. (3) Mr Longes retired from the Board of Directors on 30 August 2012 and was entitled to a retirement benefit as noted below. (4) Mr Allaway was appointed as a Non-executive Director on 7 November 2012. (5) Mr Morrice was appointed as an Executive Director on 1 March 2013 and therefore ceased to be a Non Executive Director on this date. 16,872 15,199 13,052 12,420 12,796 11,385 3,218 12,870 4,708 - 11,641 11,385 10,583 10,350 8,232 - 11,641 11,385 92,743 84,994 Total $ 317,942 314,199 158,069 150,420 154,971 137,885 38,968 155,870 57,023 - 140,987 137,885 128,170 125,350 99,697 - 140,987 137,885 1,236,814 1,159,494 Financial Year 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 E Jankelowitz I Morrice5 D Rubin Total Legacy entitlements Metcash previously operated a retirement benefit scheme for non-executive directors, which was discontinued at the 2005 Annual General Meeting. The benefits were in accordance with Section 8.3(g) and (h) of the Company’s Constitution and Section 200 of the Corporations Law. The accrued retirement benefits were frozen as at the date of the 2005 Annual General Meeting. These benefits, which are inclusive of superannuation, are payable to the following directors in cash upon ceasing to be a director of Metcash Limited. Retirement benefit (fixed) P Barnes $ 211,619 On 30 August 2012, Mr Longes retired from the Board of Directors and in accordance with the above provisions, was paid a retirement benefit of $211,619. This concludes the remuneration report. 62 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ REPORT Year ended 30 April 2013 CEO AND CFO DECLARATION The Chief Executive Officer and Chief Financial Officer declare: (a) With regard to the integrity of the financial statements of Metcash Limited (the Company) for the financial year ended 30 April 2013, after having made appropriate inquiries, in our opinion: (i) The financial statements and associated notes for the consolidated entity comply with the accounting standards and regulations as required by Section 296 of the Corporations Act 2001 and International Financial Reporting Standards; The financial statements and associated notes for the consolidated entity give a true and fair view of the financial position as at 30 April 2013 and performance of the consolidated entity for the twelve months then ended as required by Section 297 of the Corporations Act 2001; As at the date of this declaration, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. (iv) As at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group (as that term is defined in the Metcash Deed of Cross Guarantee, dated 18 April 2012), 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. (b) With regard to the financial records and systems of risk management and internal compliance and control of the Company for the financial year ended 30 April 2013: (i) The financial records of the Company and each entity in the consolidated group have been properly maintained in accordance with Section 286 of the Corporations Act 2001; The statements made in (a) and (b)(i) above are founded on a sound system of risk management and internal compliance and control which is operating effectively, in all material respects, in relation to financial reporting risks; The risk management and internal compliance and control systems of the Company relating to financial reporting, compliance and operations objectives including material business risks are operating efficiently and effectively, in all material respects. Management has reported to the Board as to the effectiveness of the Company’s management of its material business risks. (ii) (iii) (ii) (iii) (iv) Subsequent to 30 April 2013, no changes or other matters have arisen that would have a material effect on the operation of risk management and internal control and control systems of the Company. AUDITOR'S INDEPENDENCE DECLARATION The auditor’s independence declaration for the year ended 30 April 2013 has been received and is included on page 130. NON-AUDIT SERVICES The following non-audit services were provided by the entity’s auditor, Ernst & Young. The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. The amount payable to Ernst & Young should be seen in the context of the tax audit which the Company has undergone and the significant work which has been required in responding to the Australian Taxation Office queries. Ernst & Young received or are due to receive the following amounts for the provision of non-audit services: Tax compliance and advisory ATO income tax audit advice Assurance-related Tax acquisitions/other Signed in accordance with a resolution of the Directors. $ 946,493 $ 998,155 $ 37,000 $ 398,543 Andrew Reitzer Director Sydney, 24 June 2013 Metcash Annual Report 2013 63 METCASH FINANCIAL REPORT 2013 STATEMENT OF COMPREHENSIVE INCOME Year ended 30 April 2013 Revenue Cost of sales Gross profit Distribution costs Administrative costs Share of profit/(loss) of associates Significant items Finance costs Profit from continuing operations before income tax Income tax expense Net profit for the year from continuing operations Net loss after tax for the year from discontinued operations Net profit for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss: Foreign currency translation adjustments Cash flow hedge adjustment Income tax (expense)/benefit on items of other comprehensive income Other comprehensive income for the year, net of tax Total comprehensive income for the year Profit for the year is attributable to: Equity holders of the parent Non controlling interests Total comprehensive income for the year is attributable to: Equity holders of the parent Non controlling interests NOTES 4(i) 2013 $’m 2012 $’m 13,095.0 (11,758.7) 1,336.3 12,612.3 (11,332.1) 1,280.2 12 4(vi) 4(vii) 5 31 (430.9) (453.3) 3.4 (1.1) (69.3) 385.1 (116.1) 269.0 (59.9) 209.1 0.3 3.6 (0.9) 3.0 212.1 206.0 3.1 209.1 209.0 3.1 212.1 (436.9) (389.4) 0.3 (176.7) (80.3) 197.2 (71.8) 125.4 (27.2) 98.2 1.0 (6.4) 1.9 (3.5) 94.7 90.0 8.2 98.2 86.5 8.2 94.7 15.22 15.18 Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the Company: - basic earnings per share (cents) - diluted earnings per share (cents) 30.93 30.82 30 30 Earnings per share for profit/(loss) from discontinued operations attributable to the ordinary equity holders of the Company: (3.53) - basic earnings per share (cents) (3.52) - diluted earnings per share (cents) (6.97) (6.95) 30 30 Earnings per share attributable to ordinary equity holders of the Company: - basic earnings per share (cents) - diluted earnings per share (cents) 30 30 23.96 23.87 11.69 11.66 The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 64 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 STATEMENT OF FINANCIAL POSITION As at 30 April 2013 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Disposal groups and assets held for sale Income tax receivable Prepayments and other assets Derivative financial instruments Total current assets Non-current assets Derivative financial instruments Trade and other receivables Investments in associates Other financial assets Property, plant and equipment Net deferred tax assets Intangible assets and goodwill Total non-current assets TOTAL ASSETS LIABILITIES Current liabilities Trade and other payables Interest bearing loans and borrowings Derivative financial instruments Provisions Income tax payable Other financial liabilities Total current liabilities Non-current liabilities Interest bearing loans and borrowings Provisions Derivative financial instruments Other financial liabilities Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Other equity Other reserves Retained earnings Parent interest Non controlling interests TOTAL EQUITY NOTES 2013 $’m 2012 $’m 7 8 9 31 32 10 10 11 12 13 14 5 15 16 17 18 19 20 17 19 18 20 21 21 21 21 50.3 1,012.9 753.8 47.6 24.4 5.7 0.6 1,895.3 37.7 60.4 91.3 0.3 278.5 61.8 1,708.0 2,238.0 51.5 979.4 833.6 116.5 24.4 6.5 - 2,011.9 27.8 51.3 68.3 0.2 220.7 95.5 1,551.9 2,015.7 4,133.3 4,027.6 1,335.6 57.5 0.5 137.8 18.1 1.7 1,551.2 751.4 166.6 2.7 37.2 957.9 1,369.5 17.8 0.9 147.7 24.9 0.6 1,561.4 974.0 151.4 4.3 1.4 1,131.1 2,509.1 2,692.5 1,624.2 1,335.1 2,284.9 (765.9) (6.8) 106.7 1,618.9 5.3 1,624.2 1,914.7 (765.9) 26.0 86.3 1,261.1 74.0 1,335.1 The above Statement of Financial Position should be read in conjunction with the accompanying notes. Metcash Annual Report 2013 65 y t i u q E l a t o T t s e r e t n I m ’ $ m ’ $ g n i l l o r t n o C e h t f o t n e r a P m ’ $ e g d e H e v r e s e R n o i t a l s n a r T e v r e s e R l a t i p a C e v r e s e R d e n i a t e R i s g n n r a E s t n e m y a P e v r e s e R m ’ $ m ’ $ m ’ $ m ’ $ m ’ $ r e h t O y t i u q E m ’ $ d e t u b i r t n o C y t i u q E m ’ $ n o N s r e n w O l w o F h s a C y c n e r r u C n g i e r o F - e r a h S d e s a b I Y T U Q E N I S E G N A H C F O T N E M E T A T S 3 1 0 2 l i r p A 0 3 d e d n e r a e Y I 3 1 0 2 T R O P E R L A C N A N F H S A C T E M I 1 . 2 1 2 1 . 5 3 3 , 1 1 . 3 0 . 4 7 0 . 9 0 2 1 . 1 6 2 , 1 7 . 2 ) 5 . 4 ( 3 . 0 ) 9 . 5 ( - 4 . 0 ) 8 . 4 ( 0 . 5 7 3 ) 9 . 7 4 ( ) 7 . 5 4 2 ( 2 . 4 2 6 , 1 - - - - 3 . 5 ) 8 . 1 ( ) 0 . 0 7 ( ) 8 . 4 ( 1 . 2 2 4 . 0 0 . 5 7 3 - ) 9 . 3 4 2 ( - - - - - - 9 . 8 1 6 , 1 ) 8 . 1 ( 7 . 4 9 8 . 2 4 4 , 1 2 . 8 6 . 7 6 2 . 5 7 3 , 1 - 5 . 6 8 ) 5 . 4 ( 8 . 9 3 . 1 - - ) 5 . 3 1 2 ( 1 . 5 3 3 , 1 ) 8 . 1 ( 0 . 4 7 8 . 9 3 . 1 ) 7 . 1 1 2 ( 1 . 1 6 2 , 1 - - - 1 2 ) 5 . 4 ( - - - - - - ) 6 . 5 ( 0 . 1 ) 9 . 6 ( - - - 1 2 ) 9 . 5 ( - - - 8 . 2 1 - - 1 . 2 2 - ) 9 . 4 3 ( 8 . 2 1 - - - - 1 2 8 . 2 1 - - - - 3 . 6 8 0 . 6 0 2 3 . 8 5 7 . 6 0 1 ) 9 . 3 4 2 ( 0 . 0 9 0 . 8 0 2 - - 1 2 3 . 6 8 ) 7 . 1 1 2 ( 6 . 3 2 ) 9 . 5 6 7 ( 7 . 4 1 9 1 , 2 1 0 2 y a M 1 t A - - - - - . 4 0 . 6 0 ) 4 . 3 2 ( - - - - - - - - - - - - . ) 8 4 ( 0 . 5 7 3 ) 9 . 5 6 7 ( 9 . 4 8 2 2 , 3 . 2 2 ) 9 . 5 6 7 ( 9 . 4 0 9 1 , - - - . 3 1 1 2 6 . 3 2 - - - - - - - . 8 9 1 2 1 2 ) 9 . 5 6 7 ( 7 . 4 1 9 1 , : s r e n w o s a y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T x a t f o t e n , e m o c n i i e v s n e h e r p m o c l a t o T p u o r G 0 1 e r t i M n i t s e r e t n i y t i u q e % 9 . 9 4 f o n o i i t i s u q c A x a t f o t e n s t s o c e u s s i e r a h S s t n e m y a p d e s a b - e r a h S i d a p s d n e d v D i i i g n s a r i y t i u q e m o r f s d e e c o r P : s r e n w o s a y t i c a p a c r i e h t n i s r e n w o h t i w s n o i t c a s n a r T x a t f o t e n , e m o c n i i e v s n e h e r p m o c l a t o T s t n e m y a p d e s a b - e r a h S s n o i t p o f o i e s c r e x E 3 1 0 2 l i r p A 0 3 t A s r e f s n a r T 1 1 0 2 y a M 1 t A 2 1 0 2 l i r p A 0 3 t A e t o N i d a p s d n e d v D i i . s e o n t i g n y n a p m o c c a e h t h t i w n o j i t c n u n o c n i d a e r l e b d u o h s y t i u q E n i s e g n a h C f o t n e m e t a t S e v o b a e h T 66 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 STATEMENT OF CASH FLOWS Year ended 30 April 2013 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Dividends received Interest received Finance costs Income tax paid, net of tax refunds Goods and services tax paid Net cash generated by operating activities Cash flows from investing activities Proceeds from sale of property, plant and equipment Purchase of property, plant and equipment Payments for intangibles Proceeds from sale of discontinued operations Proceeds from sale of business assets Payment on acquisition of businesses net of cash acquired Costs paid on acquisition of businesses Recovery of acquisition costs from ACCC Payment on acquisition of associates Proceeds from loans repaid by other entities Loans to other entities Net cash used in investing activities Cash flows from financing activities: Proceeds from the issue of ordinary shares Share issue costs Payment on acquisition of non controlling interest Payment of refinancing costs Proceeds from borrowings – other Repayments of borrowings – other Payment of dividends on ordinary shares Payment of dividends to non controlling interests Repayment of finance lease principal Net cash used in financing activities Net decrease in cash and cash equivalents Add opening cash brought forward Effect of exchange rate changes on cash Cash and cash equivalents at the end of the year NOTES 2013 $’m 2012 $’m 14,180.6 (13,510.7) 0.6 7.7 (58.5) (51.3) (268.6) 299.8 13,713.6 (12,994.5) 1.1 12.7 (76.9) (110.3) (261.4) 284.3 22.3 (83.7) (49.1) 58.3 23.9 (107.4) (2.6) 3.5 (16.6) 29.7 (57.2) (178.9) 375.0 (6.8) (47.9) - 4,775.0 (4,994.5) (243.9) (1.8) (7.0) (151.9) (31.0) 51.5 - 20.5 7.1 (75.9) (17.9) - 23.5 (205.5) - - (1.6) 18.0 (18.3) (270.6) 9.8 - - (3.4) 3,973.1 (3,872.3) (211.7) (1.8) (9.2) (115.5) (101.8) 152.9 0.4 51.5 7 29(a) 21 21 21(b) 6 7 The above Statement of Cash Flows should be read in conjunction with the accompanying notes. Metcash Annual Report 2013 67 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 1. CORPORATE INFORMATION The financial statements of Metcash Limited (the Company) and its controlled entities (the Group) for the year ended 30 April 2013 was authorised for issue in accordance with a resolution of the Directors on 24 June 2013. Metcash Limited is a for profit company limited by ordinary shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange. The nature of the operations and principal activities of the Group are described in the Directors’ Report. 2. (i) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF ACCOUNTING The financial statements are a general purpose financial report that has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial statements have been prepared using the historical cost basis except for derivative financial instruments which have been measured at fair value and share rights which have been valued using options pricing models. The financial statements are presented in Australian dollars and all values are rounded to the nearest $100,000 unless otherwise stated under the option available to the Company under ASIC Class Order 98/100. The Company is an entity to which the Class Order applies. The financial statements present the results of the current year, which comprised the 52 week period that commenced on 30 April 2012 and ended on 28 April 2013. The prior year results comprise a 52 week period that commenced on 2 May 2011 and ended on 29 April 2012. (ii) STATEMENT OF COMPLIANCE The financial statements comply with Australian Accounting Standards. The financial statements also comply with International Financial Reporting Standards (IFRS). (a) Changes in accounting policy (i) The accounting policies adopted are consistent with those of the previous financial year. (ii) The Group has adopted all new and amended Australian Accounting Standards and AASB Interpretations that became applicable during the current financial year. The adoption of these Standards and Interpretations has not had a material effect on any of the amounts recognised in the current year or any prior year and are not likely to have a material effect on future reporting periods. 68 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 2. (b) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Australian Accounting Standards issued but not yet effective/Early adoption of Australian Accounting Standards A number of new accounting standards have been issued but were not effective during the year ended 30 April 2013. The Group has elected not to early adopt any of these new standards or amendments in these financial statements. AASB 10 Consolidated Financial Statements (applicable to the Group from the financial year ending 30 April 2014) broadens the situations where an entity is likely to be considered to control another entity and includes new guidance for determining control of an entity. Based on investments held by the Group at 30 April 2013, the Standard is not expected to have a significant impact on the entities that are currently consolidated or equity accounted in the year of initial application. AASB 11 Joint Arrangements (applicable to the Group from the financial year ending 30 April 2014) uses the principle of control in AASB 10 to define joint control and removes the option to choose to account for jointly controlled entities using the proportionate consolidation method or the equity method. This Standard is not expected to have a significant impact on the Group’s financial results and balance sheet in the year of initial application as the Group will continue to equity account for investments in associates and joint ventures. AASB 12 Disclosure of Interests in Other Entities (applicable to the Group from the financial year ending 30 April 2014) introduces new disclosures about judgements made by management in determining whether control exists, and requires summarised information about joint arrangements, associates, structured entities and subsidiaries with external non- controlling interests. Based on investments held by the Group at 30 April 2013, this standard is not expected to have any impact on the Group’s financial results and balance sheet in the year of initial application. AASB 13 Fair Value Measurement (applicable to the Group from the financial year ending 30 April 2014) establishes a single source of guidance for determining the fair value of assets and liabilities. This Standard is not expected to have a significant impact on the Group’s financial results and disclosures in the year of initial application. Except for the above, the Group has yet to fully assess the impact the following accounting standards and amendments to accounting standards will have on the financial statements, when applied in future periods: • AASB 9: Financial Instruments; • AASB 2011-3: Amendments to Australian Accounting Standard - Improvements to AASB 1049; • AASB 2011-7: Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards [AASB 1, 2, 3, 5, 7, 9, 2009-11, 101, 107, 112, 118, 121, 124, 132, 133, 136, 138, 139, 1023 & 1038 and Interpretations 5, 9, 16 & 17]; • AASB 2011-8: Amendments to Australian Accounting Standards arising from AASB 13 (September 2011) [AASB 1,2, 3, 4, 5, 7, 9, 2009-11, 2010-7, 101, 102, 108, 110, 116, 117, 118,119, 120, 121, 128, 131, 132, 133, 134, 136, 138, 139, 140, 141, 1004, 1023 & 1038 and Interpretations 2, 4, 12 13, 14, 17, 19, 131 & 132]; • AASB 119: Employee Benefits; • AASB 2012-2: Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities; • AASB 2011-4: Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements; • AASB 2012-3: Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities; and • AASB 2010-7: Amendments to Australian Accounting Standards arising from AASB 9 (December 2010) [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 120, 121, 127, 128, 131, 132, 136, 137, 139, 1023 & 1038 and Interpretations 2, 5, 10, 12, 19 & 127]. Metcash Annual Report 2013 69 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (iii) BASIS OF CONSOLIDATION The financial statements comprise the consolidated financial statements of Metcash Limited and its controlled entities as at 30 April 2013. The financial statements of controlled entities are prepared for the same reporting period as the parent entity, using consistent accounting policies. Controlled entities are all those entities over which the Group has the power to govern the financial and operating policies so as to obtain benefits from their activities. Controlled entities are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. In preparing the consolidated financial statements, all intercompany balances and transactions have been eliminated in full. Investments in controlled entities held by Metcash Limited are accounted for at cost in the separate financial statements of the parent entity less any impairment charges. Dividends received from controlled entities are recorded as a component of other revenues in the separate income statement of the parent entity, and do not impact the recorded cost of the investment. The acquisition of controlled entities is accounted for using the purchase method of accounting. The purchase method of accounting involves allocating the costs of the business combination to the fair value of the assets acquired and the liabilities and contingent liabilities assumed at the date of acquisition. The difference between the above items and the fair value of the consideration (including the fair value of any pre-existing investment in the acquiree) is goodwill or a discount on acquisition. Arrangements within certain business combinations entitle the non-controlling interests to require the Group to acquire their shareholding via exercise of a put option, subject to specific terms and conditions. Where such an arrangement is deemed to be part of the business combination a financial liability is recognised on the acquisition date measured at the present value of the redemption amount under the arrangement. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is deemed to be an asset or liability will be recognised in accordance with AASB 139 either in profit or loss or as a change to other comprehensive income. Non-controlling interests are allocated their share of net profit after tax in the statement of comprehensive income and are presented within equity in the statement of financial position, separately from the parent shareholders' equity. For those controlled entities with non-coterminous year ends, management accounts for the relevant period to the Group’s reporting date have been consolidated. In the opinion of the Directors, the expense of providing additional coterminous statutory accounts, together with consequential delay in producing the Group’s financial statements, would outweigh any benefit to shareholders. (iv) REVERSE ACQUISITION In accordance with AASB 3 Business Combinations, in 2005 when Metcash Limited (the legal parent) acquired the Metoz group (being Metoz Holdings Limited and its controlled entities including Metcash Trading Limited (the legal subsidiary)), the acquisition was deemed to be a reverse acquisition. The consolidated financial statements are issued under the name of the legal parent (Metcash Limited) but are a continuation of the financial statements of the deemed acquirer under the reverse acquisition rules (Metcash Trading Limited). (v) (a) SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS Significant accounting judgements In the process of applying the Group’s accounting policies, the following judgements were made, apart from those involving estimations, which have a significant effect on the amounts recognised in the financial statements: Purchase price allocation Determining the acquisition date fair value of assets acquired and liabilities assumed on acquisition of controlled entities. The basis for determining the purchase price allocation is discussed in Note 29. Contractual customer relationships Identifying those acquired relationships with customers that meet the definition of separately identifiable intangibles that have a finite life. 70 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 2. (v) (b) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (Continued) Significant accounting estimates and assumptions The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting period are: Provision for restructuring The Group has recognised a provision in accordance with the accounting policy described in Note 2(xxi). The Group has made assumptions in relation to the cost of employee redundancies and the costs associated with the early exit of stores earmarked for closure. Provision for rental subsidy The Group recognises provisions for rental agreements where the arrangements are estimated to be ‘onerous’ to the Group (Refer Note 19(b)(i) for further discussion). In measuring these provisions, assumptions are made about future sales of retail customers, future rental costs and in determining the appropriate discount rate to be used in the cash flow calculations. Impairment of goodwill The Group determines whether goodwill is impaired on an annual basis. This requires an estimation of the recoverable amount of the cash generating units to which the goodwill is allocated. The assumptions used in this estimation of the recoverable amount and the carrying amount of goodwill are discussed in Note 15. Impairment of investment in associates The Group assesses the recoverable amount of its investment in associates when an indicator of impairment is identified. In assessing the recoverable amount assumptions are made about the growth prospects of the associate and in determining the discount rate used to calculate the net present value of future cash flows when a discounted cash flow model is used. These assumptions are discussed in Note 12. Contractual customer relationships The useful life of contractual customer relationships of between 5 to 25 years is based on expected future attrition rates based on historical rates experienced. (vi) FOREIGN CURRENCY TRANSLATION Translation of foreign currency transactions Both the functional and presentation currency of Metcash Limited and its Australian subsidiaries are Australian dollars ($). Transactions in foreign currencies are initially recorded in the functional currency at the exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the reporting date. All exchange differences, other than those that arise as a result of translating foreign subsidiaries from functional currency to presentation currency are taken to profit or loss in the financial statements. Translation of financial statements of overseas operations The functional currency of the overseas subsidiaries is as follows: Tasman Liquor Company Limited is New Zealand dollars. • • Metoz Holdings Limited is South African rand. • Soetensteeg 2–61 Exploitatiemaatschappij BV is euros. As at the reporting date the results of the overseas subsidiaries are translated into the presentation currency of Metcash Limited. Assets and liabilities are translated at the rate of exchange ruling at the reporting date whilst all elements contained within the statement of comprehensive income are translated at the weighted average exchange rate for the year. The exchange differences arising on the translation are taken directly to the foreign currency translation reserve. (vii) CASH AND CASH EQUIVALENTS Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash, which are subject to an insignificant risk of changes in value and have a maturity of three months or less at the date of acquisition. Metcash Annual Report 2013 71 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (viii) TRADE AND OTHER RECEIVABLES Trade receivables are recognised and carried at original invoice amount less a provision for any uncollectable debts. An estimate for doubtful debts is made when collection of the full amount is no longer probable. Bad debts are written off as incurred. Trade receivables provided as security under the Group’s securitisation facility as detailed in Note 8 are only de-recognised when the receivable is settled by the debtor as the Group retains the significant risks and rewards associated with these receivables until settlement is received. (ix) INVESTMENTS AND OTHER FINANCIAL ASSETS All investments are initially recognised at cost, being the fair value of the consideration given. After initial recognition, investments which are classified as held for trading or available-for-sale are measured at fair value. Gains or losses on investments held for trading are recognised in the statement of comprehensive income. For investments that are actively traded in organised financial markets, fair value is determined by reference to Stock Exchange quoted market bid prices at the close of business on the relevant reporting date. (x) DERIVATIVE FINANCIAL INSTRUMENTS The Group uses derivative financial instruments (including forward currency contracts and interest rate swaps) to hedge its risks associated with foreign currency and interest rate fluctuations. Such derivative financial instruments are initially recognised at fair value on the date at which a derivative contract is entered into and are subsequently remeasured to fair value. The fair value of derivative contracts is determined by reference to market values for similar instruments. Derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. The fair values of forward currency contracts are calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair values of interest rate swaps are determined using a valuation technique based on cash flows discounted to present value using current market interest rates. Any gains or losses arising from changes in the fair value of derivatives, except for those that qualify as cash flow hedges, are taken directly to profit or loss for the year. For the purposes of hedge accounting, hedges are classified as: • • fair value hedges, when they hedge the exposure to changes in the fair value of a recognised asset or liability; or cash flow hedges, when they hedge the exposure to variability in cash flows that is attributable either to a particular risk associated with a recognised asset or liability or to a forecast transaction. Hedges that meet the strict criteria for hedge accounting are accounted as follows: • • for cash flow hedges the effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in profit or loss. for fair value hedges, the carrying amount of the hedged item is adjusted for gains and losses attributable to the risk being hedged and the derivative is remeasured to fair value. Gains and losses from both are taken to profit or loss. Fair value hedges The change in the fair value of a hedging derivative is recognised in the income statement as finance costs. The change in the fair value of the hedged item attributable to the risk hedged is recorded as part of the carrying value of the hedged item and is also recognised in the income statement as finance costs. If the hedged item is derecognised, the unamortised fair value is recognised immediately in profit or loss. When an unrecognised firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognised as an asset or liability with a corresponding gain or loss recognised in the profit and loss. Cash flow hedges The effective portion of the gain or loss on the hedging instrument is recognised directly in other comprehensive income in the cash flow hedge reserve, while any ineffective portion is recognised immediately in the income statement as finance costs. 72 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (x) DERIVATIVE FINANCIAL INSTRUMENTS (Continued) The Group uses forward currency contracts as hedges of its exposure to foreign currency risk in forecast transactions and firm commitments. The ineffective portion relating to foreign currency contracts is recognised in finance costs. Refer to Note 18 for more details. Amounts recognised as other comprehensive income are transferred to profit or loss when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs. When the hedged item is the cost of a non-financial asset or non-financial liability, the amounts recognised as other comprehensive income are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction or firm commitment is no longer expected to occur, the cumulative gain or loss previously recognised in equity is transferred to the income statement. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, any cumulative gain or loss previously recognised in other comprehensive income remains in other comprehensive income until the forecast transaction or firm commitment affects profit or loss. Current versus non-current classification Derivative instruments that are not designated as effective hedging instruments are classified as current or non-current or separated into current and non-current portions based on an assessment of the facts and circumstances including the underlying contracted cash flows. Derivative instruments that are designated as, and are effective hedging instruments, are classified consistently with the classification of the underlying hedged item. The derivative instrument is separated into a current portion and a non-current portion only if a reliable allocation can be made. (xi) INVESTMENT IN ASSOCIATES The Group’s investments in its associates are accounted for using the equity method of accounting in the financial statements. These are the entities in which the Group has significant influence and which are neither subsidiaries nor joint ventures. The investments in associates are carried in the statement of financial position at cost plus post-acquisition changes in the Group’s share of net assets of the associate, less any impairment in value. Goodwill relating to an associate is included in the carrying amount of the investment and is not amortised. The statement of comprehensive income reflects the Group’s share of the results of operations of the associates. Where there has been a change recognised directly in the associate’s equity, the Group recognises its share of any changes and discloses this in the statement of changes in equity. (xii) INVENTORIES Inventories are valued at the lower of cost or net realisable value. Costs incurred in bringing each product to its present location and condition are accounted for using the standard cost method. Cost is determined by deducting from the supplier’s invoice price any purchase incentives, allowances, discounts and net marketing income. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Metcash Annual Report 2013 73 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (xiii) PROPERTY, PLANT AND EQUIPMENT Cost All classes of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. Depreciation Depreciation is provided on a straight-line basis on all property, plant and equipment, other than freehold land and assets under construction. Major depreciation periods are: Freehold buildings Plant and equipment 2013 50 years 5 – 15 years 2012 50 years 5 – 15 years De-recognition An item of property, plant and equipment is de-recognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on de-recognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the statement of comprehensive income in the period the item is de-recognised. (xiv) IMPAIRMENT OF ASSETS At each reporting date, the Group assesses whether there is any indication that the value of an asset may be impaired. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount the asset is considered impaired and is written down to its recoverable amount. Recoverable amount is the greater of fair value less costs to sell and value in use. It is determined for an individual asset, unless the asset’s value in use cannot be estimated to be close to its fair value less costs to sell and it does not generate cash inflows that are largely independent of those from other assets or groups of assets. In this case, the recoverable amount is determined for the cash-generating unit (CGU) to which the asset belongs. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses are recognised in the statement of comprehensive income. Goodwill Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of each CGU (or group of CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised. Impairment losses for goodwill are not subsequently reversed. Trade names Indefinite life trade name balances will be tested annually for impairment at the same time as goodwill is tested. Finite useful life trade names are tested for impairment when an indicator of impairment is identified. (xv) LEASES Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. Operating leases - Group as a lessee Operating leases are those leases where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item. Operating lease payments are recognised as an expense on a straight-line basis. 74 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (xv) LEASES (Continued) Operating leases - Group as a lessor Leases in which the Group retains substantially all the risks and benefits of the leased asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as rental income. Finance leases Leases that transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item are capitalised at the inception of the lease at the lower of fair value of the leased property or the present value of the minimum lease payments. Capitalised leases are disclosed as property, plant and equipment under lease. A lease liability of equal value is also recognised. Minimum lease payments are apportioned between finance charges and a reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalised lease assets are depreciated over the shorter of the assets estimated useful life and the lease term. The cost of improvements to or on leasehold property are capitalised, disclosed as leasehold improvements, and amortised over the shorter of the unexpired period of the lease or the estimated useful lives of the improvements. (xvi) GOODWILL Goodwill acquired in a business combination is initially measured at cost; being the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquirer's identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is not amortised. When goodwill forms part of a group of cash generating units and an operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the groups of cash-generating units retained. (xvii) INTANGIBLE ASSETS Intangible assets acquired separately or in a business combination are initially measured at cost. Following initial recognition, the cost model is applied to the class of intangible assets. The useful lives of these intangible assets are assessed to be either finite or indefinite. Where amortisation is charged on assets with finite lives, this expense is taken to the profit or loss on a straight-line basis. Intangible assets (excluding software development costs) created within the business are not capitalised and expenditure is charged against profits in the period in which the expenditure is incurred. Intangible assets with finite useful lives are tested for impairment where an indicator of impairment exists. Useful lives are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis. Trade names are recognised as intangible assets where a registered trade mark is acquired with attributable value. Trade names are valued on a relief from royalty method. Trade names are considered to be indefinite life intangibles and are not amortised, unless there is an intention to discontinue use of the name in which case it is amortised over its estimated remaining useful life. Contractual customer relationships are recognised as intangible assets when the criteria specified in AASB 138 Intangible Assets have been met. Contractual customer relationships are assessed to have a finite life and are amortised over the asset’s useful life. Metcash Annual Report 2013 75 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (xvii) INTANGIBLE ASSETS (Continued) Liquor licenses and gaming licenses are valued at cost. They are considered to have an indefinite useful life. As a consequence, no amortisation is charged. They are tested for impairment annually and whenever an indication of impairment exists. Any impairment is recognised immediately in profit or loss. Software development costs incurred on an individual project are carried forward when future recoverability can reasonably be assured. Following the initial recognition of software development costs, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any costs carried forward are amortised over the assets’ useful economic lives. The carrying value of software development costs is reviewed for impairment annually when an asset is not in use or more frequently when an indicator of impairment arises during a reporting period indicating that the carrying value may not be recoverable. Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the statement of comprehensive income when the asset is de-recognised. The estimated useful lives of existing finite life intangible assets are as follows: - - - Customer contracts – five to twenty five years; Software development costs – five to ten years; and Other – ten years. (xviii) TRADE AND OTHER PAYABLES Trade payables and other payables are carried at amortised cost. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. (xix) EMPLOYEE LEAVE BENEFITS Wages, salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave, are recognised in provisions in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities expected to be settled within 12 months of the reporting date are classified as current liabilities and those expected to be settled after 12 months of the reporting date are classified as non-current liabilities. Liabilities for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. Long service leave The liability for long service leave 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 reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity that match as closely as possible, the estimated future cash outflows. (xx) INTEREST-BEARING LOANS AND BORROWINGS All loans and borrowings are initially recognised at the fair value of the consideration received net of issue costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the liabilities are de-recognised. 76 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (xxi) PROVISIONS Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Where the Group expects some or all of a provision to be reimbursed, for example, under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is probable. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. If the effect of the time value of money is material, provisions are measured at the net present value of the expected future cash outflows using a current pre-tax rate that reflects the risks specific to the liability. During each period the provision is increased by an amount that is equal to the provision multiplied by the discount rate. This increment, including any change in the value of the provision as a result of a change in discount rate, is treated as a finance cost in the Statement of Comprehensive Income. Provisions for property lease and remediation costs are raised where the economic entity is committed by the requirements of the lease agreement. The future lease costs, net of any income from sub-leasing, are discounted to their net present value in determining the provision. Dividends payable are recognised when a legal or constructive obligation to pay the dividend arises, typically following approval of the dividend at a meeting of directors. (xxii) SHARE-BASED PAYMENT TRANSACTIONS The Group provides benefits to employees of the Group in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions). The Group provides benefits to executive directors, senior executives and its employees in the form of the Metcash Executive and Senior Managers Performance Rights Plan (Rights Plan) and the Metcash Employee Option Plan (MEOP). The cost of these equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined using an appropriate valuation model, further details of which are given in Note 25. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Metcash Limited (market conditions). The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (vesting date). The cumulative expense recognised for equity-settled transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the number of awards that, in the opinion of the directors of the Group, will ultimately vest. This opinion is formed based on the best available information at balance date. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. Where the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition, an expense is recognised for any increase in the value of the transaction as a result of the modification, as measured at the date of modification. Where an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect, if any, of outstanding options and performance rights are reflected as additional share dilution in the computation of earnings per share. Metcash Annual Report 2013 77 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (xxiii) REVENUE RECOGNITION Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The specific recognition criteria described below must also be met before revenue is recognised. Sale of goods Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on acceptance of delivery of the goods. Rendering of services Revenue from promotional activities is recognised when the promotional activities occur. Interest Revenue is recognised as the interest is earned. Dividends Revenue is recognised when the right to receive the payment is established. Rental income Rental income is accounted for on a straight-line basis over the lease term. Contingent rental income is recognised as income in the periods in which it is earned. (xxiv) FINANCE COSTS Finance costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the asset. All other finance costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. Certain provisions are measured at their discounted value. During each period the provision is increased by an amount that is equal to the provision multiplied by the discount rate. This increment, including any change in the value of the provision as a result of a change in discount rate, is treated as a finance cost in the Statement of Comprehensive Income. (xxv) INCOME TAX Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from, or paid to the taxation authority. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the relevant reporting date. Deferred income tax is provided on all temporary differences at the reporting date, between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: • • except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised: • except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting nor taxable profit or loss; and 78 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (xxv) INCOME TAX (Continued) • in respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the relevant reporting date. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. Income taxes relating to items recognised directly in equity are recognised in equity and not in the statement of comprehensive income. (xxvi) OTHER TAXES Revenues, expenses and assets are recognised net of the amount of GST except: • when the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and • receivables and payables which are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows related to GST are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority, is classified as an operating cash flow. Commitments and contingencies are disclosed net of the amount of GST recoverable or payable. (xxvii) EARNINGS PER SHARE Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to exclude any costs of servicing equity (other than dividends) divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted earnings per share are calculated as net profit attributable to members of the parent, adjusted for: • • • costs of servicing equity (other than dividends); the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares, divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. Metcash Annual Report 2013 79 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) (xxviii) 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. (xxix) NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Non-current assets and disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Non-current assets and disposal groups are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the asset or disposal group is available for immediate sale in its present condition. The sale must be committed to and should be expected to qualify for recognition as a completed sale within a reasonable period of time. In the statement of comprehensive income, income and expenses from discontinued operations are reported separately from income and expenses from continuing operations, down to the level of profit after taxes, even when the Group retains a non- controlling interest in the subsidiary after the sale. Once classified as held for sale, property, plant and equipment and intangible assets are not depreciated or amortised. (xxx) RETAIL DEVELOPMENT ASSETS Costs incurred in respect of a greenfields development which involves the lease or acquisition of land and subsequent construction of a retail store or shopping centre are capitalised as assets under construction and included in property, plant and equipment. On conclusion of the development the capitalised costs are transferred to non-current assets held for sale provided they meet the criteria detailed in Note 2(xxix). Costs incurred in respect of the acquisition of an existing retail store or shopping centre are capitalised as non-current assets held for sale provided they meet the recognition criteria in Note 2(xxix). Any costs subsequent to acquisition required to refurbish the site are capitalised as assets under construction during the refurbishment phase. Once the refurbishment is completed the acquisition costs and refurbishment costs are transferred either to property, plant and equipment or to assets held for sale. (xxxi) FINANCIAL GUARANTEE CONTRACTS Financial guarantee contracts issued by the Group are those contracts that require a payment to be made to reimburse the holder for a loss it incurs because the specified debtor fails to make a payment when due in accordance with the terms of a debt instrument. Financial guarantee contracts are recognised initially as a liability at fair value, adjusted for transaction costs that are directly attributable to the issuance of the guarantee. Subsequently, the liability is measured at the higher of the best estimate of the expenditure required to settle the present obligation at the reporting date and the amount recognised less cumulative amortisation. (xxxii) COMPARATIVE INFORMATION Certain comparative information was amended in these financial statements to conform to the current year presentation. These amendments do not impact the Group’s financial results and do not have any significant impact on the Group’s balance sheet. 80 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 3. SEGMENT INFORMATION Identification of reportable segments The Group has identified its operating segments based on the internal reports that are reviewed and used by the CEO (the chief operating decision maker) in assessing performance and in determining the allocation of resources. The operating segments are identified based on the differences in the products and services provided. Discrete financial information about each of these operating segments is reported to the CEO on at least a monthly basis. The reportable segments are based on the aggregated operating segments determined by the similarity of the products sold, as these are the sources of the Group’s major risks and have the most effect on the rates of return. Information reported to the CEO for the purposes of resource allocation and assessment of performance is more specifically focused on the category of each type of product. The Group’s reportable segments are therefore as follows: • Food and Grocery activities comprise the distribution of dry grocery, perishable and general merchandise supplies to retail outlets. Liquor activities comprise the distribution of liquor products to retail outlets and hotels. • • Hardware and Automotive comprises the distribution of hardware supplies and automotive parts and accessories to retail outlets. On 25 January 2012 the Group announced the amalgamation of IGA>D, IGA Fresh, Campbells Cash and Carry and all the associated merchandising and marketing functions into a single Food & Grocery business pillar. This amalgamation facilitated a change in reporting structures with previously disclosed Food Distribution and Cash and Carry Distribution segments now combined into the Food and Grocery segment. The comparative segment information has been restated. The Automotive and Hardware operating segments have been combined as one reportable segment as these segments, separately, do not meet the quantitative thresholds prescribed by AASB 8 Operating Segments. On 30 November 2012, the Group announced Project Mustang, which is a $75 million warehouse automation project centred on the Group’s new distribution facility in Huntingwood, NSW. The capital expenditure represents the latest European technology that will significantly automate the goods receipt, order selection, pallet assembly and distribution processes for both the Food & Grocery and Liquor businesses that operate within this distribution centre. This project is expected to ‘go live’ during FY2015, at which point the Food & Grocery and Liquor management structures and reporting will be merged in NSW. As a result, the Food & Grocery and Liquor results will be amalgamated into one reportable segment from 1 May 2014. Geographically the Group operates predominantly in Australia. The New Zealand operation represents less than 5% of revenue, results and assets of the Group. Segment accounting policies The selling price between segments is at normal selling prices and is paid under similar terms and conditions as any other customers of the Group. The Food and Grocery segment results include wholesale sales to Franklins retail stores that are expected to continue to trade but do not include wholesale sales to stores that are expected to close or have closed. Major customers The Group does not have a single external customer which represents greater than 10% of the Group's revenue. Metcash Annual Report 2013 81 s n o i t a r e p o g n u n i t n o c i m o r f s t l u s e R d n a e r a w d r a H e v i t o m o t u A m ’ $ 2 1 0 2 9 . 7 0 1 1 . 1 0 5 , 2 1 0 . 9 0 6 , 2 1 m ’ $ 3 1 0 2 7 . 6 6 6 . 6 7 9 , 2 1 - m ’ $ 2 1 0 2 2 . 3 3 8 3 . 3 4 0 , 3 1 2 . 3 3 8 m ’ $ 3 1 0 2 1 . 0 4 . 8 3 9 5 . 8 3 9 m ’ $ 2 1 0 2 8 . 6 8 2 . 6 3 3 , 2 0 . 3 2 4 , 2 m $ ’ 3 1 0 2 2 . 3 3 . 6 7 1 9 , 2 . 8 0 5 9 , 2 m $ ’ 2 1 0 2 1 . 1 2 7 . 1 3 3 9 , 8 . 2 5 3 9 , m $ ’ 3 1 0 2 4 . 3 3 . 6 0 2 1 , 9 . 0 4 5 1 , 9 r o u q L i y r e c o r G d n a d o o F ) d e u n i t n o C ( I N O T A M R O F N I T N E M G E S . 3 3 1 0 2 l i r p A 0 3 d e d n e r a e y e h t r o F s t n e m g e s s s e n i s u B s r e m o t s u c l a n r e t x e o t l s e a S s e u n e v e r t n e m g e s - r e t n I e u n e v e r t n e m g e s l a t o T 8 . 3 5 4 2 . 1 6 4 2 . 1 2 2 . 6 3 9 . 4 3 1 . 7 4 7 . 7 9 3 9 . 7 7 3 x a t e r o f e b ) s s o l ( / t i f o r p t n e m g e S I S T N E M E T A T S L A C N A N F E H T O T S E T O N I I 3 1 0 2 T R O P E R L A C N A N F H S A C T E (cid:3) M I 5 . 8 9 7 . 2 1 m ’ $ 2 1 0 2 ) 9 . 7 0 1 ( 0 . 9 0 6 , 2 1 7 . 7 ) 7 . 6 6 ( 7 . 0 1 1 m ’ $ 3 1 0 2 3 . 3 4 0 , 3 1 3 . 2 1 6 , 2 1 0 . 5 9 0 , 3 1 m ’ $ 2 1 0 2 8 . 3 5 4 ) 6 . 7 6 ( ) 3 . 1 ( ) 7 . 9 ( 5 . 8 9 ) 5 . 8 9 ( ) 7 . 6 7 1 ( ) 3 . 1 ( 2 . 7 9 1 m ’ $ 3 1 0 2 2 . 1 6 4 ) 6 . 1 6 ( ) 4 . 0 ( ) 6 . 2 1 ( 7 . 0 1 1 ) 1 . 1 ( ) 4 . 0 ( 1 . 5 8 3 ) 7 . 0 1 1 ( e m o c n i e v i s n e h e r p m o c f o t n e m e t a t s e h t o t n o i t a i l i c n o c e r x a t e r o f e b t i f o r p t n e m g e S ) i i (cid:3) e m o c n i e v i s n e h e r p m o c f o t n e m e t a t s e h t o t n o i t a i l i c n o c e r e u n e v e r t n e m g e S (cid:895) (cid:349) ) 1 3 e t o N o t r e f e R ( . s n o i t a r e p o d e u n i t n o c s d m o r f i s t l u s e r t n e m g e s e h t l s e d u c x e e v o b a e h T s n o i t a r e p o g n u n i t n o c m o r f i e u n e v e r l a t o T s n o i t a r o p r o c / s n o s r e p r e h t o m o r f t s e r e t n I n o i t a n m i i l e s e u n e v e r t n e m g e s - r e t n I e u n e v e r t n e m g e s l a t o T e m o c n i t n e R s t n e m e e r g a e c n e c i l i d n a s p h s n o i t a e r l x a t e r o f e b t i f o r p t n e m g e S r e m o t s u c f o n o i t a s i t r o m A s t n e m y a p d e s a b e r a h S s t s o c e c n a n i f t e N d e t a c o l l a n U / e t a r o p r o C s m e t i t n a c i f i n g S i e s n e p x e t n e R e m o c n i t n e R x a t e m o c n i e r o f e b s n o i t a r e p o g n u n i t n o c m o r f i t i f o r p t e N 82 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 4. REVENUES AND EXPENSES Revenue (i) Sale of goods Rent Interest from other persons/corporations Other income (ii) Net profit from disposal of property, plant and equipment (iii) Operating lease rental Minimum lease payments - warehouse and other Minimum lease payments - stores Employee benefit expense (iv) Salaries and wages Defined contribution plan expense Workers compensation costs Share based payments Other employee benefit costs Other expenses (v) Depreciation of property, plant and equipment Amortisation of software Amortisation of customer relationships and licence agreements Impairment Software development intangibles Retail development assets Plant and equipment Trade receivables impairment provision Inventories net realisable value provision Significant items (vi) Acquisition and restructure costs/(recovery) - Distribution centre closure costs - - Acquisition costs (recovery)/expense: Franklins (a) Acquisition costs: ABG and ATAP (b) Group restructuring Lease tail and exit costs - - Redundancy costs - - - Other closure costs - Impairment - property, plant & equipment Impairment - goodwill Profit on disposal of business assets Associate impairment Loans and receivables - - Equity accounted investment - Customer contract intangibles - Restructure costs (provided) - Restructure costs (paid) 2013 $’m 2012 $’m 12,976.6 110.7 7.7 13,095.0 12,501.1 98.5 12.7 12,612.3 2.7 0.2 128.4 110.7 433.2 33.2 11.8 0.4 7.1 34.5 12.4 12.6 59.5 - 2.2 0.6 2.8 19.9 6.2 - (3.5) 4.6 1.1 - - - - - - - - - - - - - 1.1 105.8 98.5 404.0 32.4 11.0 1.3 4.6 34.0 10.7 9.7 54.4 2.2 - - 2.2 17.5 5.8 22.2 6.3 - 28.5 17.0 11.5 9.9 2.5 8.8 (7.2) 42.5 50.8 24.6 9.1 12.5 8.7 105.7 176.7 Metcash Annual Report 2013 83 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 4. REVENUES AND EXPENSES (Continued) (vii) Finance costs Interest expense Deferred borrowing cost Finance costs attributable to discounting of provisions and liabilities (Refer note 2xxiv) 2013 $’m 2012 $’m 58.5 1.8 9.0 69.3 74.9 3.4 2.0 80.3 (a) Acquisition costs (recovery)/expense: Franklins Metcash completed the acquisition of the IGH Group (Franklins) on 30 September 2011. During the prior year, Metcash incurred legal and other costs in connection with the legal proceedings brought by the Australian Competition and Consumer Commission and finally in completing the acquisition. During the current year, Metcash received a reimbursement of $3.5 million of costs from the Australian Consumer and Competition Commission (ACCC) as a result of a court order in relation to the prior period legal proceedings. (b) Acquisition costs: ABG and ATAP With effect from 1 July 2012 Metcash acquired 75.1% of the Automotive Brands Group (ABG) for $54.7 million. The transaction costs associated with this acquisition have been disclosed as a significant item as the acquisition is deemed to be material. On 16 May 2013 Metcash announced the acquisition, through Automotive Brands Group (ABG), of 100% of the Australian Truck & Auto Parts Group (ATAP) for approximately $84.0 million including acquisition costs. The transaction costs incurred during the current year associated with this acquisition have been disclosed as a significant item as the acquisition is deemed to be material. 5. INCOME TAX The major components of income tax expense are: Current income tax Current income tax charge Adjustments in respect of income tax of previous years Deferred income tax relating to origination and reversal of temporary differences Income tax expense reported in the statement of comprehensive income A reconciliation between tax expense and the product of accounting profit before income tax multiplied by the Group’s applicable income tax rate is as follows: Accounting profit before income tax At the Group’s statutory income tax rate of 30% (2012: 30%) Expenditure not allowable for income tax purposes – continuing operations Expenditure not allowable for income tax purposes – significant items Adjustments in respect of income tax of previous years Income tax expense reported in the statement of comprehensive income at an effective tax rate of 30% (2012: 30%) Income tax attributable to continuing operations Income tax benefit attributable to discontinued operations 2013 $’m 2012 $’m 71.2 (3.9) 48.8 116.1 385.1 115.5 3.1 1.4 (3.9) 116.1 116.1 (26.0) 90.1 109.5 (0.7) (37.0) 71.8 197.2 59.2 1.4 11.9 (0.7) 71.8 71.8 (11.7) 60.1 84 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 5. INCOME TAX (Continued) Deferred income tax Deferred income tax of the Group at 30 April relates to the following: Deferred tax liabilities Intangibles Accelerated depreciation for tax purposes Other Set off against deferred tax assets Deferred tax assets Provisions Other Unutilised tax losses Set off from deferred tax liabilities Recognised net deferred tax assets Opening balance Credited/(charged) to net profit for the year Credited/(charged) to other comprehensive income for the year Tax benefit associated to share issue costs Adjustment attributable to finalisation of Franklins acquisition (Note 29) Acquisitions from business combinations (Note 29) Closing balance 2013 $’m 2012 $’m 66.8 1.3 - (68.1) - 115.6 0.7 13.6 (68.1) 61.8 95.5 (48.8) (0.9) 2.0 22.8 (8.8) 61.8 47.2 2.3 1.6 (51.1) - 133.2 1.2 12.2 (51.1) 95.5 6.6 37.0 1.9 - - 50.0 95.5 At 30 April 2013, there is no recognised or unrecognised deferred income tax liability (2012: $nil) for taxes that would be payable on the unremitted earnings of certain of the Group’s subsidiaries and associates as the Group has no liability for additional taxation should these earnings be remitted. The Group has unrecognised gross capital losses of $16 million (2012: $20 million) that are available indefinitely for offset against future capital gains. TAX CONSOLIDATION Metcash Limited and its 100% owned Australian resident subsidiaries have formed a tax consolidated group with effect from 1 July 2005. Metcash Limited is the head entity of the tax consolidated group. Members of the group have entered into a tax sharing arrangement in order to allocate income tax expense to the wholly owned subsidiaries on a modified standalone basis. In addition the agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. With effect from 1 August 2012, Mittenmet Limited joined the tax consolidated group. TAX EFFECT ACCOUNTING BY MEMBERS OF THE TAX CONSOLIDATED GROUP Members of the tax consolidated group have entered into a tax funding agreement. The tax funding agreement provides for the allocation of current taxes to members of the tax consolidated group in accordance with a group allocation method using modified stand alone tax calculation as the basis for allocation. Deferred taxes of members of the tax consolidated group are measured and recognised in accordance with the principles of AASB 112 Income Taxes. Under the tax funding agreement, funding is based upon the amounts allocated and recognised by the member entities. Accordingly, funding results in an increase/decrease in the subsidiaries’ intercompany accounts with the tax consolidated group head company, Metcash Limited. Metcash Annual Report 2013 85 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 6. DIVIDENDS PAID AND PROPOSED (a) Dividends paid and declared on ordinary shares during the year Dividends paid on ordinary shares during the year Final fully franked dividend for 2012: 16.5c (2011: 16.0c) Interim fully franked dividend for 2013: 11.5c (2012: 11.5c) Dividends declared (not recognised as a liability as at 30 April 2013) Final fully franked dividend for 2013: 16.5c (2012: 16.5c) (b) Franking credit balance of Metcash Limited Franking account balance as at the end of the financial year at 30% (2012: 30%) Franking credits that will arise from the payment of income tax payable as at the end of the financial year Amount of franking credit on dividends declared but not recognised as a distribution to shareholders during the year 2013 $’m 2012 $’m 142.6 101.3 243.9 123.0 88.7 211.7 145.3 142.6 2013 $’m 2012 $’m 92.4 135.4 9.3 24.9 (62.3) 39.4 (61.1) 99.2 The franking credit balance of $39.4 million (2012: $99.2 million) includes certain franking credits associated with the income tax receivable of $24.4 million paid in respect of the Action Stores disputed tax (Note 32). (c) Tax rates Dividends paid and declared have been fully franked at the rate of 30% (2012: 30%). 86 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 7. CASH AND CASH EQUIVALENTS Cash at bank and on hand Bank overdrafts (Note 17) (a) Reconciliation of net profit after tax to net cash flows from operations Net profit for the year Adjustments for: Depreciation and amortisation Impairment losses Net profit on disposal of property, plant and equipment Net profit on disposal of discontinued operations Share of associates’ net (profit)/loss Dividends received from associates Deferred borrowing costs Share based payments Significant items: Acquisition costs – Costs paid on acquisitions of businesses Acquisition costs – Recovery of costs from ACCC Group restructuring – impairment of property, plant & equipment (Note 4(vi)) Group restructuring – impairment of goodwill (Note 4(vi)) Group restructuring – profit on disposal of business assets (Note 4(vi)) Associate impairment – loans and receivables (Note 4(vi)) Associate impairment – equity accounted investment (Note 4(vi)) Associate impairment – customer contract intangible (Note 4(vi)) Changes in assets and liabilities, net of purchase and disposal of subsidiaries (Increase)/decrease in trade and other receivables (Increase)/decrease in assets held for sale (Increase)/decrease in other current assets (Increase)/decrease in inventories (Increase)/decrease in deferred tax assets (Decrease)/increase in payables and provisions (Decrease)/increase in tax payable Cash from operating activities 2013 $’m 50.3 (29.8) 20.5 209.1 61.0 2.8 (2.7) (2.5) (3.4) 0.6 1.8 0.4 4.6 (3.5) - - - - - - (31.3) 19.3 1.1 89.6 48.8 (89.1) (6.8) 299.8 2012 $’m 51.5 - 51.5 98.2 54.4 - (0.2) - (0.3) 1.1 3.4 1.3 - - 9.9 2.5 (7.2) 50.8 24.6 9.1 13.8 2.7 0.6 154.0 (34.8) (85.7) (13.9) 284.3 (b) Non-cash financing and investing activities Acquisition of assets by means of finance lease 3.1 4.3 Metcash Annual Report 2013 87 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 8. TRADE AND OTHER RECEIVABLES (CURRENT) Trade receivables - securitised (i)(Note 17 (iv)) Trade receivables - non-securitised (i) Allowance for impairment loss Customer loans (ii) Allowance for impairment loss Marketing debtors (iii) Other receivables (iii) 2013 $’m 738.8 200.7 (47.4) 892.1 43.8 (6.5) 929.4 12.4 71.1 1,012.9 2012 $’m 689.1 194.5 (50.1) 833.5 23.6 (1.6) 855.5 30.5 93.4 979.4 (i) Trade receivables are non-interest bearing and repayment terms vary by business unit. At 30 April 2013, 82.3% of trade receivables are required to be settled within 30 days (2012: 83.3%), 17.0% have terms extending from 30 to 60 days (2012: 15.8%) and 0.7% have terms greater than 60 days (2012: 0.9%). The amount of the allowance for impairment loss has been measured as the difference between the carrying amount of the trade receivables and the estimated future cash flows expected to be received from the relevant debtors. (ii) Customer loans receivable are current and have repayment terms of less than 12 months. $2.3 million (2012: $0.7 million) of loans are non-interest-bearing. $41.5 million (2012: $22.9 million) of loans have a weighted average annual interest rate of 9.16% (2012: 8.71%). (iii) Marketing debtors and other receivables are non-interest bearing and have repayment terms of less than 12 months. IMPAIRED TRADE RECEIVABLES AND OTHER CURRENT RECEIVABLES During the year ended 30 April 2013 receivables of the value of $49.2 million (2012: $15.7 million) were considered non- recoverable and written off. As at 30 April 2013, trade receivables and other current receivables with a carrying value of $53.9 million (2012: $51.7 million) were provided for as impaired. As at 1 May Reclassified from non-current (Note 11) Accounts written off as non-recoverable Charged as an expense during the year Charged as an expense during the year - significant items As at 30 April TRADE DEBTORS AGEING 2013 $’m 51.7 31.5 (49.2) 19.9 - 53.9 2012 $’m 23.9 - (15.7) 17.5 26.0 51.7 As at 30 April 2013, the ageing analysis of trade receivables for the Group that were not impaired is as follows: NEITHER PAST DUE OR IMPAIRED $’m 745.1 83.5% 662.7 79.5% LESS THAN 30 DAYS OVERDUE $’m 111.7 12.5% 123.4 14.8% MORE THAN 30 LESS THAN 60 $’m 20.8 2.3% 19.7 2.4% MORE THAN 60 LESS THAN 90 $’m 6.8 0.8% 8.4 1.0% MORE THAN 90 LESS THAN 120 $’m 4.1 0.5% 8.4 1.0% MORE THAN 120 $’m 3.6 0.4% 10.9 1.3% TOTAL $’m 892.1 100.0% 833.5 100.0% 2013 2012 The credit quality of the unimpaired trade receivables is good. Metcash believes that the above trade receivables will be recovered. 88 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 8. TRADE AND OTHER RECEIVABLES (CURRENT) (Continued) CUSTOMER LOANS AGEING As at 30 April 2013, the ageing analysis of current and non current customer loans for the Group that were not impaired is as follows: NEITHER PAST DUE OR IMPAIRED LESS THAN 30 DAYS OVERDUE MORE THAN 30 LESS THAN 60 MORE THAN 60 LESS THAN 90 MORE THAN 90 LESS THAN 120 $’m 86.3 92.3% 63.0 92.9% $’m 3.8 4.0% 1.1 1.6% $’m 0.4 0.5% 0.6 0.9% $’m 0.2 0.3% 0.3 0.4% $’m 0.1 0.2% 0.1 0.1% MORE THAN 120 $’m 2.5 2.7% 2.7 4.0% TOTAL $’m 93.3 100.0% 67.8 100.0% 2013 2012 The credit quality of the unimpaired customer loans is good. Metcash believes that the above loans will be recovered. MARKETING AND OTHER RECEIVABLES AGEING As at 30 April 2013, the analysis of current and non-current marketing and other receivables for the Group that were not impaired is as follows: NEITHER PAST DUE OR IMPAIRED LESS THAN 30 DAYS OVERDUE MORE THAN 30 LESS THAN 60 MORE THAN 60 LESS THAN 90 MORE THAN 90 LESS THAN 120 $’m 85.1 97.0% 128.0 98.9% $’m 1.0 1.1% 0.4 0.3% $’m 0.8 0.9% 0.8 0.6% $’m 0.3 0.3% 0.1 0.1% $’m 0.5 0.5% 0.0 0.0% MORE THAN 120 $’m 0.2 0.2% 0.1 0.1% TOTAL $’m 87.9 100.0% 129.4 100.0% 2013 2012 The credit quality of the unimpaired marketing and other receivables is good. Metcash believes that the above marketing and other receivables will be recovered. CUSTOMER LOAN SECURITY For certain customer loans, customers are required to provide security in the event of default. These may include bank and personal guarantees, fixed and floating charges and security over property assets. The fair value of these securities (against both current and non-current customer loans) as at 30 April 2013 was $22.5 million (2012: $34.2 million). 9. INVENTORIES 2013 $’m 2012 $’m Total finished goods inventories at the lower of cost and net realisable value 753.8 833.6 Inventory write-downs recognised as an expense totalled $6.2 million (2012: $10.9 million). $6.2 million (2012: $5.8 million) of the write down is included in the cost of sales line item as a cost of inventory and $Nil (2012: $5.1 million) is included in significant items. Metcash Annual Report 2013 89 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 10. DERIVATIVE FINANCIAL INSTRUMENTS Current Foreign currency forward contracts Non current Cross currency interest rate swaps – US Private Placement 2013 $’m 2012 $’m 0.6 - 37.7 27.8 The above derivatives are designated and effective as hedging instruments and are carried at fair value through other comprehensive income. 11. RECEIVABLES (NON-CURRENT) Customer loans(i) Allowance for impairment loss Other receivables(ii) 2013 $’m 56.0 - 4.4 60.4 2012 $’m 77.3 (31.5) 5.5 51.3 (i) Customer loans receivable are non-current and have repayment terms of greater than 12 months. $2.7 million (2012: $1.9 million) of loans are non-interest bearing. $53.3 million (2012: $75.4 million) of the loans have a weighted average annual interest rate of 8.75% (2012: 8.15%). Refer to Note 8 for ageing analysis and credit quality. (ii) Other receivables are non-interest-bearing and have repayment terms greater than 12 months. These receivables are all neither past due nor impaired. Refer Note 8 for ageing analysis and credit quality. IMPAIRED CUSTOMER LOANS (NON CURRENT) As at 30 April 2013, non current customer loans with a carrying value of $Nil (2012: $31.5 million) were provided for as impaired. As at 1 May Reclassified to current (Note 8) Charge for the year - significant items As at 30 April 2013 $’m 31.5 (31.5) - - 2012 $’m - - 31.5 31.5 Refer Note 8 for ageing analysis and credit quality of customer loans that were not impaired. NON CURRENT RECEIVABLES FAIR VALUE The fair value of non-current receivables is calculated based on cash flows discounted at a rate reflecting current market rates adjusted for counterparty credit risk. The fair value and carrying values of non-current receivables of the Group are as follows: Customer loans Other receivables CARRYING AMOUNT 2013 $’m 56.0 4.4 60.4 CARRYING AMOUNT 2012 $’m 45.8 5.5 51.3 FAIR VALUE 2013 $’m 57.9 4.4 62.3 FAIR VALUE 2012 $’m 46.8 5.5 52.3 90 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 12. INVESTMENTS IN ASSOCIATES As at 1 May Additions Share of profit/(loss) of associates Dividends received Impairment – significant items As at 30 April Interest in associates PRINCIPAL ACTIVITIES BALANCE DATE Abacus Independent Retail Property Trust Plumpton Park Developments Pty Limited Ritchies Stores Pty Ltd BMS Retail Group Pty Ltd Kangaroo Flat Supermarket Pty Ltd Long Gully Supermarket Pty Ltd Dramet Pty Ltd Dart Trading Co Pty Ltd Bamlane Pty Ltd Mundin Pty Ltd G'Butt Pty ltd Mussen Pty Ltd Ully Pty Ltd Adcome Pty Ltd Lecome Pty Ltd Progressive Trading Pty Ltd (Progressive) (i) Metfood Pty Limited Sunshine Hardware Pty Ltd Northern Hardware Group Pty Ltd Timberten Pty Ltd Waltock Pty Limited Banner 10 Pty Ltd Mermaid Tavern (Trading) Pty Ltd Queens Arms Hotel New Farm Pty Ltd Queens Arms Freehold Pty Ltd Retail property investment Property development Grocery retailing Grocery retailing Grocery retailing Grocery retailing Grocery retailing Grocery retailing Grocery retailing Grocery retailing Grocery retailing Grocery retailing Grocery retailing Grocery retailing Grocery retailing Grocery retailing Merchandise services for Metcash and Foodstuffs Hardware retailing Hardware retailing Hardware retailing Hardware retailing Hardware retailing Liquor retailing and hospitality Liquor retailing and hospitality Property investment 30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 April 30 April 30 April 30 April 30 June 30 June 30 June 30 June 30 June 30 April 30 April 30 April 2013 $’m 68.3 20.2 3.4 (0.6) - 91.3 2012 $’m 92.1 1.6 0.3 (1.1) (24.6) 68.3 OWNERSHIP INTEREST 2013 2012 % % 25.0 50.0 26.0 25.1 25.1 25.1 26.0 26.0 26.0 26.0 26.0 26.0 26.0 45.0 50.0 52.2 50.0 49.0 49.9 40.0 49.0 49.0 50.0 50.0 50.0 25.0 50.0 26.0 25.1 25.1 25.1 26.0 26.0 26.0 26.0 26.0 26.0 26.0 45.0 50.0 52.2 50.0 49.0 49.9 - - - - - - (i) Metcash has a direct ownership of 45.4% in Progressive, and an indirect ownership of 6.8% via the 25.1% interest in BMS Retail Group Pty Ltd. Although the Group’s total ownership interest in Progressive is greater than 50%, it is still considered to be an associate of the Group, as Metcash Limited does not have the power to govern the financial and operating policies of Progressive. The following table illustrates the summarised financial information relating the Group’s investment in associates. Metcash Annual Report 2013 91 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 12. INVESTMENTS IN ASSOCIATES (Continued) Share of associates’ profit: Profit before income tax Income tax expense Profit after income tax Share of associates’ statement of financial position: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets 13. OTHER FINANCIAL ASSETS (NON-CURRENT) Investment in shares (unlisted) 14. PROPERTY, PLANT AND EQUIPMENT Year ended 30 April 2013 At 1 May 2012 Opening balance Additions Assets transferred from assets under construction Assets transferred into property, plant and equipment(ii) Assets transferred out of property, plant and equipment(iii) Acquisition from business combination (Note 29) Disposals Impairment Depreciation Closing balance At 30 April 2013 Cost Accumulated depreciation & impairment Net carrying amount 2013 $’m 4.9 (1.5) 3.4 2013 $’m 74.7 126.6 201.3 (87.5) (59.5) (147.0) 54.3 2013 $’m 0.3 LAND & BUILDINGS $’m PLANT & EQUIPMENT(i) $’m 69.3 19.8 14.1 - - - (16.5) - (1.0) 85.7 91.7 (6.0) 85.7 151.4 67.0 (14.1) 37.6 (20.5) 8.6 (3.1) (0.6) (33.5) 192.8 386.3 (193.5) 192.8 2012 $’m 0.6 (0.3) 0.3 2012 $’m 69.3 127.6 196.9 (119.7) (43.2) (162.9) 34.0 2012 $’m 0.2 TOTAL $’m 220.7 86.8 - 37.6 (20.5) 8.6 (19.6) (0.6) (34.5) 278.5 478.0 (199.5) 278.5 (i) Additions to plant and equipment include additions of $6.3 million (2012: $39.8 million) to assets under construction. The closing balance of plant and equipment includes assets under construction with a carrying value of $54.9 million (2012: $43.7 million). (ii) Amounts previously disclosed as part of current assets have been transferred to property, plant and equipment consistent with the Group’s accounting policy as detailed in Note 2(xxx). (iii) Assets that meet the criteria as assets held for sale have been transferred in accordance with the Group’s accounting policy as detailed in Note 2(xxix). 92 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 14. PROPERTY, PLANT AND EQUIPMENT (Continued) Year ended 30 April 2012 At 1 May 2011 Opening balance Additions Acquisition from business combination (Note 29) Disposals Exchange differences Impairment charged to significant items Impairment reversal Depreciation Closing balance At 30 April 2012 Cost Accumulated depreciation & impairment Net carrying amount LAND & BUILDINGS PLANT & EQUIPMENT $’m $’m 75.3 0.5 - (5.5) - - - (1.0) 69.3 77.1 (7.8) 69.3 122.3 75.4 1.2 (1.4) (0.1) (13.6) 0.6 (33.0) 151.4 354.1 (202.7) 151.4 TOTAL $’m 197.6 75.9 1.2 (6.9) (0.1) (13.6) 0.6 (34.0) 220.7 431.2 (210.5) 220.7 The carrying value of plant and equipment held under finance leases and hire purchase contracts at 30 April 2013 is $10.6 million (2012: $13.0 million). 15. INTANGIBLE ASSETS AND GOODWILL SOFTWARE DEVELOPMENT COSTS CUSTOMER CONTRACTS GOODWILL TRADE NAMES OTHER TOTAL $'m $'m $'m $'m $'m $'m Year ended 30 April 2013 At 1 May 2012 Net carrying amount Additions Acquisition from business combinations (Note 29) Adjustment attributable to finalisation of Franklins acquisition (Note 29) Disposals Amortisation At 30 April 2013 Net carrying amount At 30 April 2013 Cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount 74.1 17.4 - - (0.9) (12.4) 161.9 36.4 30.4 - (1.3) (12.3) 1,283.6 - 70.0 16.2 (2.3) - 78.2 215.1 1,367.5 180.2 268.1 1,367.5 (102.0) 78.2 (53.0) 215.1 - 1,367.5 30.3 - 14.7 - - (1.5) 43.5 45.1 (1.6) 43.5 2.0 - 2.0 - - (0.3) 3.7 5.0 (1.3) 3.7 1,551.9 53.8 117.1 16.2 (4.5) (26.5) 1,708.0 1,865.9 (157.9) 1,708.0 Metcash Annual Report 2013 93 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 15. INTANGIBLE ASSETS AND GOODWILL (Continued) SOFTWARE DEVELOPMENT COSTS CUSTOMER CONTRACTS GOODWILL TRADE NAMES OTHER TOTAL $'m $'m $'m $'m $'m $'m Year ended 30 April 2012 At 1 May 2011 Net carrying amount Additions Acquisition from business combination (Note 29) Disposals Impairment Amortisation At 30 April 2012 Net carrying amount At 30 April 2012 Cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount 70.2 16.8 - - (2.2) (10.7) 151.1 1.1 28.1 - (9.1) (9.3) 1,040.3 - 256.0 (10.2) (2.5) - 74.1 161.9 1,283.6 167.9 (93.8) 74.1 215.5 1,286.1 (53.6) 161.9 (2.5) 1,283.6 27.2 - 3.2 - - (0.1) 30.3 30.4 (0.1) 30.3 2.3 - - - - (0.3) 2.0 3.0 (1.0) 2.0 1,291.1 17.9 287.3 (10.2) (13.8) (20.4) 1,551.9 1,702.9 (151.0) 1,551.9 (a) DESCRIPTION OF THE GROUP’S INTANGIBLE ASSETS AND GOODWILL(cid:3) Software development costs Development costs have been capitalised at cost and are amortised using the straight-line method over the asset’s useful economic life. Useful lives range from five to ten years. Software development costs are tested for impairment where an indicator of impairment exists. Useful lives are also estimated on an annual basis and adjustments, where applicable, are made on a prospective basis. Customer contracts Customer contracts are acquired either through business combinations or through direct acquisition of contractual relationships. The carrying amount represents the costs less accumulated amortisation. Customer contracts are amortised over 5 to 25 years. The amortisation has been recognised in the statement of comprehensive income in the line item "Administrative Costs". If an impairment indication arises, the recoverable amount is estimated and an impairment loss is recognised to the extent that the recoverable amount is less than the carrying amount. (cid:3) Trade names Trade names have been acquired through business combinations and are carried at cost less any impairment losses. These intangible assets have been determined to have either a finite or an indefinite useful life. Trade names with indefinite useful lives will be subjected to impairment testing on an annual basis or whenever there is an indication of impairment. Impairment testing was carried out in February 2013. Trade names are considered to have a finite useful life when there is an intention to discontinue use of the name in which case it is amortised over its estimated remaining useful life. Other The Group entered into an Alliance Agreement with Lenards Pty Ltd in 2009 to offer customers the opportunity to purchase products under Lenards Franchise. The agreement fee is being amortised over 10 years, on a straight line basis. The intangible is carried at cost less accumulated amortisation. Included in other intangibles are liquor and gaming licences acquired during the year. These are considered to have indefinite useful lives and will be subjected to impairment testing on an annual basis or whenever there is an indication of impairment. 94 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 (cid:3) (cid:3) 15. INTANGIBLE ASSETS AND GOODWILL (Continued) (b) IMPAIRMENT TESTS FOR GOODWILL AND INTANGIBLES WITH INDEFINITE USEFUL LIVES Goodwill Description of cash generating units (i) Goodwill acquired through business combinations have been allocated to the lowest level within the entity at which the goodwill is monitored, being the four business pillars (Food & Grocery, ALM, Mitre 10 and ABG). Under AIFRS, goodwill and intangibles with indefinite lives must be tested annually and when impairment indicators arise, provided the testing is done at the same time each year. Impairment testing was conducted in February 2013 for all CGUs. The recoverable amounts of the group of CGUs have been determined based on value in use calculations using cash flow projections based on financial projections covering a five year period. (ii) The Group has applied the following key assumptions in its cash flow projections: Key assumptions used in valuations Budgeted gross margins – These have been estimated based on the utilisation of existing assets and on the average gross margins achieved immediately before the budgeted year, increased for expected efficiency improvements. Discount rates – The weighted average cost of capital for the Group based on risk free rates of return, the Group’s risk profile relative to the market, the marginal cost of borrowing for the Group, its average level of gearing and a market risk premium. Future growth – The long term growth rate is driven by population growth, inflation and market share. The pre-tax discount rates applied to cash flow projections are between 9.80% and 10.60% depending on the nature of the business (2012: 8.51%). Cash flows beyond the five-year period are extrapolated using a 1.4% long term growth rate (2012: 2.5%) which is based on the historical population and applicable product inflation and growth rates for each group of CGUs. Results of testing (iii) Based on the testing performed during the current year, no impairment of goodwill was identified in each of the CGUs (2012: $2.5 million). Sensitivity to changes in assumptions (iv) The table below summarises the goodwill attributed to each group of CGUs and the potential impairment trigger point at the impairment testing date of February 2013: Group of CGUs Food and Grocery Australian Liquor Marketers Mitre 10 Automotive Brands Group Goodwill $’m As at 28 February 2013 Discount Rate at Which Impairment is Triggered % Increase in Discount Rate at Which Impairment is Triggered % 1,163.9 88.9 71.5 22.4 19.92% 18.39% 12.75% 22.81% 10.12% 8.59% 2.55% 12.21% No impairment is triggered in the above groups of CGUs if cash flows beyond the five-year period were extrapolated at a growth rate of 0%. Trade names (i) Trade names primarily comprise the Mitre 10, Autobarn and Autopro trade names. (ii) Key assumptions used in assessing the recoverable amount of the Mitre 10, Autobarn and Autopro trade names: Royalty rate - An estimate based on similar royalty rates for similar types of franchising store formats in a similar industry from a global analysis. Budgeted gross margins – These have been estimated based on the utilisation of existing assets and on the average gross margins achieved immediately before the budgeted year, increased for expected efficiency improvements. Discount rates – The weighted average cost of capital for the Mitre 10 Group and Automotive Brands Group are based on risk free rates of return, their respective risk profiles relative to the market, the marginal cost of borrowing for the group, their average level of gearing and a market risk premium. Future growth – Mitre 10 and ABG’s growth is driven by population growth, estimated inflation and changes in market share. Metcash Annual Report 2013 95 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 15. INTANGIBLE ASSETS AND GOODWILL (Continued) (c) IMPAIRMENT TESTS FOR GOODWILL AND INTANGIBLES WITH INDEFINITE USEFUL LIVES (continued) (iii) Results of testing Based on the testing performed during the current year, no impairment of trade names was identified (2012: $Nil). (iv) Sensitivity to changes in assumptions No reasonably possible change in any of the above key assumptions would cause the carrying value of the trade names to materially exceed its recoverable amount. 16. TRADE AND OTHER PAYABLES Trade payables Accruals 2013 $’m 1,081.3 254.3 1,335.6 2012 $’m 1,112.2 257.3 1,369.5 Trade payables and accruals are non-interest-bearing and are normally settled within 30-day terms. Due to the short term nature of these payables, their carrying value approximates their fair value. 17. INTEREST BEARING LOANS AND BORROWINGS Current Bank overdrafts – working capital(ii) Bank loans - working capital(ii) Finance lease obligations(i) Non-current Finance lease obligations(i) Bank loans - syndicated(iii) Debt securitisation(iv) US private placement(v) Deferred borrowing costs 2013 $’m 29.8 22.0 5.7 57.5 6.3 500.0 - 248.9 (3.8) 751.4 2012 $’m - 11.0 6.8 17.8 9.1 600.0 130.0 240.0 (5.1) 974.0 (i) Finance leases have an average lease term of 4 years with the option to purchase the asset at the completion of the lease term for the asset’s market value. The weighted average interest rate implicit in the lease is 8.52% (2012: 9.19%). Certain lease liabilities are secured by a charge over the leased asset. (ii) Working capital bank loans represent two unsecured revolving facilities totalling $225 million, which expire in October 2013 ($150 million) and February 2014 ($75 million). Interest payable on any loans drawn under these facilities is based on BBSY or the RBA cash rate plus a margin. These bank loans are subject to certain financial undertakings as detailed in Note 17(vi) below. (iii) Syndicated bank loans are three and four year senior unsecured loan note subscription facilities, which expire in December 2014 ($400 million) and December 2015 ($300 million). Interest payable on the facility is based on BBSY plus a margin and interest resets are quarterly. The applicable margin is dependent upon an escalation matrix linked to the senior leverage ratio achieved. These bank loans are subject to certain financial undertakings as detailed in Note 17(vi) below. (iv) Under the $400 million debt securitisation facility, an equitable interest has been granted in certain trade receivables to a special purpose trust, which is managed by a major Australian bank. The facility is subject to the periodic renewal of the facility agreement and is currently committed until May 2014. The Group has therefore classified the facility as non- current at April 2013. Interest payable on the facility is based on BBSY plus a margin. 96 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 17. INTEREST BEARING LOANS AND BORROWINGS (Continued) The terms of the facility require that, at any time, the book value of the securitised receivables must exceed by at least a certain proportional amount, the funds drawn under the facility. At the end of the financial year, trade receivables of $738.8 million (2012: $689.1 million) had been securitised, with $Nil (2012: $130 million) of funds drawn under the facility. The resultant security margin exceeded the minimum required at that time. The facility may be terminated by the trust manager at short notice in the event of an act of default, which includes the insolvency of any of the individual companies securitising trade receivables, failure of the Group to remit funds when due, or a substantial deterioration in the overdue proportion of certain trade receivables. The Group considers that it does not control the special purpose trust as it does not have power to determine the operating and financial policies of the trust, nor is the Group exposed to the risks and benefits of the trust. Accordingly, the Group does not consolidate the trust in its financial statements. (v) US private placement (USPP) comprises three tranches of fixed coupon debt of US$70 million maturing September 2018, US$35 million maturing September 2019, and US$120 million maturing September 2023. The foreign exchange and fixed interest rate risk has been hedged using a series of cross currency interest rate swaps that mitigate these risks. The financial effect of these hedges is to convert the US$225 million of USPP fixed interest rate debt into $210.1 million of floating rate debt with interest payable at BBSW plus a margin. The US$225 million USPP debt has been revalued at balance date to $248.9 million (2012: $240 million) and presented as interest bearing debt as disclosed above. The mark-to-market fair value of the associated cross currency interest rate swaps are separately disclosed within derivative financial instruments ($37.7 million – Note 10), the cash flow hedge reserve ($0.8 million – Note 21), and associated deferred tax assets ($0.3 million – Note 5). Together, these four components reflect the $210.1 million of hedged debt. The USPP debt is subject to certain financial undertakings as detailed in Note 17(vi) below. (vi) The Group must comply with three primary covenants which apply to the syndicated bank facility, both working capital bank facilities and the USPP debt. These covenants are: a fixed charges cover ratio (Earnings Before Interest, Tax, Depreciation, Amortisation and Net Rent (EBITDAR) divided by Total Net Interest plus Net Rent Expense), a senior leverage ratio (Total Group Debt divided by Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA)) and minimum shareholders funds (a fixed figure representing the Group share capital and reserves). (a) FAIR VALUE The carrying amount of the Group's current and non-current borrowings approximates their fair value. The weighted average effective interest rate on the syndicated and working capital bank loans, the debt securitisation and the USPP debt, after taking into account cross currency and interest rate swaps, at the end of the financial year was 5.55% (2012: 6.51%). (b) DEFAULTS OR BREACHES At the reporting date, there were no defaults or breaches on any of the loans. (c) INTEREST RATE RISK AND LIQUIDITY RISK Details regarding interest rate risk and liquidity risk are disclosed in Note 22. 18. DERIVATIVE FINANCIAL INSTRUMENTS Current Interest rate swap contracts Foreign currency forward contracts Non current Interest rate swap contracts Foreign currency forward contracts 2013 $’m 2012 $’m 0.2 0.3 0.5 2.6 0.1 2.7 0.6 0.3 0.9 4.3 - 4.3 The above derivatives are designated and effective as hedging instruments and are carried at fair value through other comprehensive income. Metcash Annual Report 2013 97 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 19. PROVISIONS Current Employee entitlements Rental subsidy (b)(i) Restructuring (b)(ii) Other Non-current Employee entitlements Rental subsidy (b)(i) Restructuring (b)(ii) Other Total (a) Movements in provisions (other than employee entitlements) 1 May 2012 Expense arising during the year Attributable to acquisition of assets Attributable to Franklins acquisition Utilised – continuing operations Utilised – discontinued operations Finance cost discount rate adjustment – continuing operations Finance cost discount rate adjustment – discontinued operations 30 April 2013 1 May 2011 Expense arising during the year Expense arising from significant items Attributable to Franklins acquisition Utilised Released Finance cost discount rate adjustment – continuing operations Finance cost discount rate adjustment – discontinued operations 30 April 2012 (b) (i) Nature and timing of provisions Rental subsidy provision 2013 $’m 2012 $’m 92.8 29.8 9.5 5.7 137.8 5.6 149.5 10.9 0.6 166.6 Rental subsidy $’m Restruc turing $’m Other $’m 157.7 0.9 - 34.1 (8.8) (22.4) 4.4 13.4 179.3 34.4 - 2.2 144.4 (16.7) (11.3) 2.0 2.7 157.7 45.9 5.0 - - (31.9) - 1.4 - 20.4 3.7 1.5 52.6 - (11.9) - - - 45.9 - - 6.4 - (0.1) - - - 6.3 0.3 - - - (0.3) - - - - 92.4 23.4 31.9 - 147.7 3.1 134.3 14.0 - 151.4 Total $’m 203.6 5.9 6.4 34.1 (40.8) (22.4) 5.8 13.4 206.0 38.4 1.5 54.8 144.4 (28.9) (11.3) 2.0 2.7 203.6 In certain situations, Metcash will take the head lease on a retail property. When this occurs, the properties are typically sub leased to the retail customers on commercial terms and conditions which equate to ‘back-to-back’ arrangements whereby the lease expense to the landlord matches the lease rental to the retailer. Atypically, Metcash has assumed leases through acquisitions whereby the lease rental is considered ‘onerous’. In these situations, where the head lease rental expense exceeds the expected sub lease rental income, a provision is raised for the difference in rental streams for the period of the actual or expected sub lease. 98 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 19. PROVISIONS (Continued) (ii) Restructure provision The provision represents obligations recognised by the Group as a result of the various restructuring initiatives announced in April 2012 and the decision to vacate the Silverwater and Blacktown distribution centres. 20. OTHER FINANCIAL LIABILITIES Current Financial guarantee contracts Lease incentives Non - current Put options written over non controlling interests (a) Financial guarantee contracts Lease incentives Other payables 2013 $’m 2012 $’m 1.5 0.2 1.7 31.0 2.3 1.4 2.5 37.2 0.2 0.4 0.6 - - 1.4 - 1.4 (a) Certain minority shareholders have the right under put options to require Metcash to acquire their shareholding, subject to specific terms and conditions. Where such an arrangement is deemed to be part of the business combination a financial liability is recognised on the acquisition date measured at the present value of the redemption amount under the option. The liability is subsequently remeasured at each reporting date at the estimated redemption value, with any change in redemption value recorded in Administration costs within profit and loss and the net present value unwind is recorded as a finance cost. Refer Note 29(b) for more details. 21. (a) CONTRIBUTED EQUITY AND RESERVES Ordinary shares: Ordinary shares issued and fully paid Movements in ordinary shares on issue At 1 May Issued during the year: 2013 $'m 2012 $'m 2,284.9 1,914.7 2013 2012 NUMBER OF SHARES NUMBER OF SHARES $'m $'m 771,345,864 1,914.7 768,853,644 1,904.9 Exercise of employee options – at 392.5 cents per share Exercise of employee options – at 426.7 cents per share Institutional placement – at 350.0 cents per share Share placement plan – at 303.0 cents per share Equity raising costs net of tax - - - - - At 30 April - - 92,857,143 16,501,779 - 880,704,786 - - 325.0 50.0 (4.8) 2,284.9 9.8 2,489,364 - 2,856 - - - - - - 771,345,864 1,914.7 Fully paid ordinary shares carry one vote per share and carry the right to dividends. Metcash Annual Report 2013 99 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 21. CONTRIBUTED EQUITY AND RESERVES (Continued) (b) Reserves: SHARE- BASED PAYMENTS RESERVE $'m CAPITAL RESERVE $'m CASH FLOW HEDGE RESERVE $'m FOREIGN CURRENCY TRANSLATION RESERVE $'m 22.3 - 1.3 - 23.6 - 0.4 - - - - (23.4) 0.6 12.8 - - - 12.8 - - 22.1 - - - (34.9) - - - - (4.5) (4.5) - - - 0.6 3.0 (0.9) - (1.8) (6.9) 1.0 - - (5.9) 0.3 - - - - - - (5.6) TOTAL $'m 28.2 1.0 1.3 (4.5) 26.0 0.3 0.4 22.1 0.6 3.0 (0.9) (58.3) (6.8) At 1 May 2011 Foreign currency translation adjustments Share-based payments Movement in fair value of derivatives At 30 April 2012 Foreign currency translation adjustments Share-based payments Acquisition of non controlling interest* Reclassified to profit or loss during the year Movement in fair value of derivatives Tax expense related to fair value movements Transfer to retained earnings At 30 April 2013 Nature and purpose of reserves Share-based payments reserve This reserve is used to record the value of equity benefits provided to employees and executive directors as part of their remuneration. Refer to Note 25 for further details of these plans. Once a share option has lapsed the Group no longer has any obligation to convert these options into share capital. The amount transferred to retained earnings represents the value of options previously recognised as an expense through the Statement of Comprehensive Income that have now lapsed. Capital reserve The capital reserve is used to accumulate realised capital profits. The reserve can be used to pay dividends or issue bonus shares. * On 31 July 2012 Metcash Limited effectively acquired, through its wholly owned subsidiary Mittenmet Limited, the remaining 49.9% equity interest in the Mitre 10 Group. As part of the initial 50.1% acquisition a series of Redeemable Convertible Preference Shares (RCPS) were issued by Mittenmet to former Mitre 10 shareholders. The RCPS entitled the holders to a 49.9% equity interest in Mittenmet and gave Metcash the right to request Mittenmet redeem the RCPS for cash. On 31 July 2012 Metcash exercised its right and the RCPS were redeemed for a consideration of $46.5 million. The redemption is treated as a transaction between equity holders in accordance with AASB 127 Consolidated and Separate Financial Statements. The difference between the non controlling interest of $70 million assumed, the redemption consideration of $46.5 million and transaction costs of $1.4 million has been recognised as a credit to the capital reserve. The capital reserve consisted of a combination of residual retained profits relating to the non controlling interest of Mittenmet which was acquired by the Group and legacy amounts relating to profits on disposals of capital assets. These realised amounts have been transferred to retained earnings. Cash flow hedge reserve This reserve records the portion of the unrealised gain or loss on a hedging instrument in a cash flow hedge that is determined to be an effective hedge. 100 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 21. CONTRIBUTED EQUITY AND RESERVES (Continued) Foreign currency translation reserve The foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of foreign subsidiaries. It is also used to record the effect of hedging net investments in foreign operations. Retained earnings At 1 May Profit for the year Transfer from Capital Reserve and Share Based Payments Reserve Dividends paid At 30 April Other equity At 30 April 2013 $'m 2012 $'m 86.3 206.0 58.3 (243.9) 106.7 208.0 90.0 - (211.7) 86.3 (765.9) (765.9) The other equity account is used to record the reverse acquisition adjustment on application of AASB 3 Business Combinations in 2005. Refer also Note 2(b)(iv). 22. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group’s principal financial instruments comprise bank loans, bonds and overdrafts, finance and operating leases, cash and short-term deposits and derivatives. The main purpose of these instruments is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables and payables, which arise directly from its operations. The Group manages its exposure to key financial risks including interest rate and credit risks in accordance with the Group's financial risk management policies. The objective of the policy is to support delivery of the Group's financial targets while protecting future financial security. The Group enters into a limited number of derivative transactions from time to time principally to manage interest rate and foreign currency risks arising from the Group’s operations and its sources of finance. The main risks arising from the Group’s financial instruments are cash flow interest rate risk, foreign exchange risk and credit risk. The Board reviews and agrees policies for managing each of these risks and they are detailed below. Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial instrument, financial liability and equity instrument are disclosed in Note 2 Summary of Significant Accounting Policies. RISK EXPOSURES AND LIQUIDITY RISK EXPOSURES Interest rate risk The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s bank debt obligations with a floating interest rate. Metcash manages this risk by entering into interest rate swap contracts with various major Australian banks. At 30 April 2013 the principal hedged was $200 million with a weighted average hedge maturity of 1 year and a weighted average interest rate of 5.14%. The Group considers these derivatives to be effective hedges in accordance with AASB 139 Financial Instruments: Recognition and Measurement and therefore treats them as cash flow hedges. These interest rate swap contracts, which had a notional principal value of $200 million (2012: $370 million) had a fair value at the end of the financial year of negative $3.4 million (2012: negative $4.9 million). These contracts are exposed to fair value movements if the interest rate curve changes. Metcash Annual Report 2013 101 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 22. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) At balance date, the Group had the following mix of financial assets and liabilities exposed to Australian variable interest rate risk that, except as indicated, are not designated in cash flow hedges: Financial assets Cash and cash equivalents Financial liabilities Bank overdrafts – working capital Bank loans - working capital Bank loans – syndicated Debt securitisation US private placement(i) Less: Interest rate swaps notional principal value - designated as cash flow hedges Net exposure 2013 $’m 2012 $’m 50.3 51.5 (29.8) (22.0) (500.0) - (210.1) 200.0 (561.9) (511.6) - (11.0) (600.0) (130.0) (210.1) 370.0 (581.1) (529.6) (i) The US private placement liability is presented inclusive of the associated cross currency interest rate swap hedge contracts which effectively convert the US$225 million facility into $210.1 million of variable rate funding (Note 17(v)). Refer to Note 17 for details of bank loans, debt securitisation and US private placement. The Group's treasury policy requires core debt to be hedged between a minimum and maximum range over certain maturity periods. Core debt is defined as the minimum level of drawn debt which is expected to occur over the year. As at 30 April 2013, the interest rate swap hedges of $200 million fell within the required range. Subsequent to the balance sheet date, the Group entered into a number of interest rate swaps and forward rate agreement (FRA) contracts with various major Australian banks. The additional principal hedged is $175.0 million of interest rate swaps with a weighted hedge maturity of 2.8 years and a weighted average interest rate of 2.87%. A further $100.0 million of FRAs were executed with a weighted average maturity of 0.4 years and a weighted average rate of 2.55%. Sensitivity analysis The Group constantly analyses its interest rate exposure. Within this analysis, consideration is given to potential renewal of existing positions, alternative financing, alternative hedging positions and the mix of fixed and floating interest rates. The table below shows the effect on post tax profit and other comprehensive income at balance date if interest rates had moved by either 0.25% higher or 0.25% lower. These movements have been selected as they are considered reasonable, given the current economic climate and the current levels of short and long term Australian interest rates. It is assumed within this calculation that all other variables have been held constant and that the borrowings are in Australian dollars. It also includes the impact of the Group’s interest rate derivatives that hedge core debt. If interest rates were to increase by 0.25% (25 basis points) If interest rates were to decrease by 0.25% (25 basis points) PROFIT AFTER TAX HIGHER/(LOWER) OTHER COMPREHENSIVE INCOME HIGHER/(LOWER) 2013 $’m (0.9) 0.9 2012 $’m (0.9) 0.9 2013 $’m 0.2 (0.2) 2012 $’m 0.6 (0.6) The movements in profit are due to higher/lower interest costs from variable rate bank debt and other loans net of interest rate derivatives that hedge core debt. The movement in other comprehensive income is due to cash flow hedge fair value adjustments on interest rate swap contracts. 102 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 22. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) Liquidity risk and funding management Liquidity risk is the risk that the Group will be unable to meet its payment obligations when they fall due under normal and stress circumstances. To limit this risk, the Group manages assets with liquidity in mind, and monitors future cash flows and liquidity on a daily basis. The Group has five different sources of primary debt funding, of which 53.0% have been utilised at 30 April 2013. The Group monitors forecasts of liquidity reserves on the basis of expected cash flow. Remaining contractual maturities Remaining contractual liabilities consist of non-interest bearing trade and other payables amounting to $1,335.3 million (2012: $1,369.5 million) (Note 16) for the Group and are due in one year or less. Maturity analysis of financial assets and liabilities based on contracted date The risk implied from the values shown in the table below reflects a balanced view of cash inflows and outflows. Leasing obligations, trade payables and other financial liabilities mainly originate from the financing of assets that are used in ongoing operations such as property, plant, equipment and investments in working capital such as inventories and trade receivables. These assets are considered in the Group's overall liquidity risk. The following table reflects the contracted dates of settlement of financial assets and liabilities. Except where these exposures are provided for, these are also the expected dates of settlement. Year ended 30 April 2013 Financial assets Cash and cash equivalents Trade and other receivables Derivative financial instruments Financial liabilities Trade and other payables Finance lease liability Financial guarantee contracts Put options written over non controlling interests Bank and other loans Derivative financial instruments Year ended 30 April 2012 Financial assets Cash and cash equivalents Trade and other receivables Derivative financial instruments Financial liabilities Trade and other payables Finance lease liability Financial guarantee contracts Bank and other loans Derivative financial instruments 1 YEAR OR LESS 1-5 YEARS MORE THAN 5 YEARS $’m $’m $’m 50.3 1,066.8 0.6 1,117.7 1,335.6 5.7 1.5 - 51.8 0.5 1,395.1 - 60.4 - 60.4 - 6.3 2.3 31.0 500.0 2.7 542.3 - - 37.7 37.7 - - - - 248.9 - 248.9 1 YEAR OR LESS 1-5 YEARS MORE THAN 5 YEARS $’m $’m $’m TOTAL $’m 50.3 1,127.2 38.3 1,215.8 1,335.6 12.0 3.8 31.0 800.7 3.2 2,186.3 TOTAL $’m 51.5 1,031.1 - 1,082.6 - 82.8 - 82.8 - - 27.8 27.8 51.5 1,113.9 27.8 1,193.2 1,369.5 6.8 0.2 11.0 0.9 1,388.4 - 9.1 - 730.0 4.3 743.4 - - - 240.0 - 240.0 1,369.5 15.9 0.2 981.0 5.2 2,371.8 Metcash Annual Report 2013 103 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 22. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) At balance date, the Group had unused credit facilities available for its immediate use as follows: TOTAL FACILITY $’m DEBT USAGE $’m GUARANTEES & OTHER USAGE $’m CASH $’m FACILITY AVAILABLE $’m Syndicated facility Securitisation facility US private placement (i) Bank guarantee facility (ii) Working capital/guarantees Working capital Cash & cash equivalents 700.0 400.0 210.1 25.3 150.0 75.0 1,560.4 - 1,560.4 500.0 - 210.1 - 29.8 22.0 761.9 - 761.9 - - - 24.4 41.1 - 65.5 - 65.5 - - - - - - - 50.3 50.3 200.0 400.0 - 0.9 79.1 53.0 733.0 50.3 783.3 (i) The US Private Placement liability is presented inclusive of the associated cross currency interest rate swap hedge contracts which effectively convert the US$225 million facility into $210.1 million of variable rate funding. (Note 17(v)). (ii) Bank guarantee facility is used by Franklins Pty Limited to issue bank guarantees for leases and Work Cover obligations. The facility is indemnified by Metcash Trading Limited. Derivative financial liabilities The table below details the liquidity risk arising from derivative liabilities held by the Group at the reporting date. Year ended 30 April 2013 Derivative liabilities - net settled Derivative liabilities - gross settled - Inflows - Outflows Net maturity Year ended 30 April 2012 Derivative liabilities - net settled Derivative liabilities - gross settled - Inflows - Outflows Net maturity 1-6 MTHS 6-12 MTHS 1-5 YEARS >5 YEARS TOTAL $’m $’m $’m $’m $’m (1.0) 37.0 (37.2) (1.2) (1.4) 19.4 (19.7) (1.7) (1.2) 9.5 (9.6) (1.3) (1.8) 3.3 (3.3) (1.8) (0.6) 11.8 (11.9) (0.7) (2.0) - - - - - - - (2.0) - - - (2.8) 58.3 (58.7) (3.2) (5.2) 22.7 (23.0) (5.5) Net settled derivatives comprise interest rate swap contracts that are used to hedge floating rate interest payable on bank debts. Gross settled derivatives comprise forward exchange contracts that are used to hedge anticipated purchase commitments. Credit risk The Group trades with a large number of customers and it is Group policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, where a loan has been provided, the Group will obtain security over certain assets of the customer wherever possible. The management of the receivables balance is the key in the minimisation of the Group’s potential bad debt exposure. Receivables balances are monitored on an ongoing basis and a formal review of all balances occurs every 6 months. Where necessary, appropriate provisions are established. As identified in Note 8 (Trade and Other Receivables), the current level of impairment provision represents 4.4% of the receivables balance. All derivatives are transacted with financial institutions that have high investment grade credit ratings. As at 30 April 2013, all derivative counterparts had a credit rating of AA- or better. 104 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 22. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) The Group has granted a financial guarantee relating to the bank loan of its associate, Adcome Pty Ltd. The guarantee represents a put option held by Adcome's bank, whereby the holder has the right to require the non Metcash shareholders to ‘put’ their remaining shares in Adcome Pty Ltd back to Metcash within an agreed period and under certain prescribed circumstances in return for repayment of the debt by Adcome Pty Ltd to the holder. The estimate of the maximum amount payable in respect of the put option, if exercised, is $52.8 million (2012: $58.3 million), as defined in the option deed. The fair value of the financial guarantee contract at the reporting date was $3.6 million (2012: $0.2 million) and is recognised as a financial liability (Note 20). There are no significant concentrations of credit risk within the Group. Foreign currency risk The Group is exposed to foreign exchange fluctuations on transactions and balances in New Zealand dollars in respect of the Tasman Liquor business unit. These operations represent less than 5% of total sales and total profit after tax, and as such the exposure is minimal. In addition, the Group undertakes some foreign currency transactions when purchasing goods and services. The Group enters into forward foreign exchange contracts to manage the risk associated with anticipated purchase commitments denominated in foreign currencies. The amount of foreign exchange cover is based on anticipated future purchases in light of current conditions in foreign markets, commitments from customers and experience. The Group’s exposure to foreign exchange risk on principal and interest payments in relation to the US$225 million USPP facility have been hedged using cross currency interest rate swaps (Note 17(v)). Price risk The Group purchases energy in the form of electricity, petrol and oil, LPG and water from various sources. These costs represent less than 5% of combined Distribution and Administrative expenses. The group enters into periodic contracts for supply of these products via third party tender. No derivative price instruments are used to manage price risk associated with these commodities as the Group's exposure to commodity price risk is minimal. Capital management The Board’s intention is to return earnings to shareholders while retaining adequate funds within the business to reinvest in future growth opportunities. A minimum payout ratio of 60% of underlying earnings per share has been set by the Board. A dividend reinvestment plan is in existence, but has been suspended by the Board. The plan is able to be reinstituted at any time. The Group provides benefits to employees of the Group in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions). The Group provides these benefits in the form of the Metcash Executive and Senior Managers Performance Rights Plan (Rights Plan) and the Metcash Employee Option Plan (MEOP). Details are disclosed in Note 25. The Board and management set out to achieve and maintain Statement of Financial Position ratios that would satisfy an investment grade rating. Certain Statement of Financial Position ratios are imposed under the Group’s banking facilities, as summarised in Note 17. Management monitor capital through the gearing ratio (debt / debt plus total equity). The gearing ratios at 30 April 2013 and 2012 were 33.3% and 42.6% respectively. This is within an acceptable target range. Metcash Annual Report 2013 105 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 22. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (Continued) Fair value The Group uses various methods in estimating the fair value of a financial instrument. The different methods have been defined as follows: • • • Level 1: the fair value is calculated using quoted prices in active markets Level 2: the fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices ) or indirectly (derived from prices) Level 3: the fair value is estimated using inputs for the asset or liability that are not based on observable market data. The table below analyses financial instruments carried at fair value, by valuation method: Year ended 30 April 2013 Derivative financial assets Derivative financial liabilities Financial guarantee contracts Year ended 30 April 2012 Derivative financial assets Derivative financial liabilities Financial guarantee contracts LEVEL 1 LEVEL 2 LEVEL 3 TOTAL $’m $’m $’m $’m - - - - 38.3 (3.2) (3.8) 31.3 - - - - - - - - 27.8 (5.2) (0.2) 22.4 - - - - 38.3 (3.2) (3.8) 31.3 27.8 (5.2) (0.2) 22.4 The carrying amount of the financial assets and liabilities recorded in the financial statements approximates their fair value as at the reporting date. 23. COMMITMENTS (a) Operating lease commitments The Group has entered into commercial leases on certain forklifts, land and buildings. Contingent rentals are payable to reflect movements in the Consumer Price Index on certain leases and to reflect the turnover of certain stores occupying the land and buildings. Future minimum rentals payable under non-cancellable operating leases as at 30 April are as follows: Within 1 year After 1 year but not more than 5 years More than 5 years Aggregate lease expenditure contracted for at reporting date (b) Operating lease receivables 2013 $’m 206.1 641.3 750.2 1,597.6 2012 $’m 209.5 622.9 691.1 1,523.5 Certain properties under operating lease have been sublet to third parties. The future lease payments expected to be received at the reporting date are: Within 1 year After 1 year but not more than 5 years More than 5 years Aggregate lease income contracted for at the reporting date. 106 Metcash Annual Report 2013 2013 $’m 91.6 279.9 390.1 761.6 2012 $’m 83.9 263.2 372.4 719.5 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 23. COMMITMENTS (Continued) (c) Finance lease commitments The Group has finance leases for various vehicles and equipment. The weighted average interest rate implicit in the leases is 8.52% (2012: 9.19%). Future minimum lease payments under finance leases together with the present value of the net minimum lease payments for the Group are as follows: Within 1 year After 1 year but not more than 5 years More than 5 years Less amounts representing finance charges Present value of minimum lease payments (d) Capital expenditure commitments FUTURE MINIMUM LEASE PAYMENTS 2013 $’m 6.6 7.0 - 13.6 (1.6) 12.0 2012 $’m 7.7 10.4 - 18.1 (2.2) 15.9 PRESENT VALUE OF MINIMUM LEASE PAYMENTS 2013 $’m 2012 $’m 5.7 6.3 - 12.0 - 12.0 6.8 9.1 - 15.9 - 15.9 At 30 April 2013, the Group has committed $51.0 million (2012: $Nil) towards significant capital expenditure on the Project Mustang NSW warehouse automation project. These commitments are not provided for at the reporting date and are estimated to be due within the next 2 years. Metcash Annual Report 2013 107 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 24. RELATED PARTY DISCLOSURES (a) Subsidiaries The consolidated financial statements include the financial statements of Metcash Limited and the subsidiaries listed in the following table. NAME A.C.N. 131 933 376 Pty Ltd Action Holdco Pty Limited Action Holdings Pty Ltd (i) Action Projects Proprietary Limited Action Supermarkets Pty Ltd (i) Amalgamated Confectionery Wholesalers Pty. Ltd. (i) Arrow Pty Limited Australian Asia Pacific Wholesalers Pty Ltd Australian Liquor Marketers (QLD) Pty Ltd (i) Australian Liquor Marketers (WA) Pty Ltd (i) Australian Liquor Marketers Pty Limited (i) Blue Lake Exporters Pty Ltd Bofeme Pty Ltd Casuarina Village Shopping Centre Pty. Ltd. City Ice and Cold Storage Company Proprietary Limited Clancy’s Food Stores Pty Limited Composite Buyers Finance Pty. Ltd. Composite Buyers Pty Limited Composite Pty. Ltd. Cornerstone Retail Pty Ltd Davids Food Services Pty Ltd Davids Group Staff Superannuation Fund Pty. Ltd. Denham Bros. Pty Limited Drumstar V2 Pty Ltd FAL Properties Pty. Ltd. FAL Share Plan Nominees Pty Ltd FAL Superannuation Fund Pty Ltd Five Star Wholesalers Pty. Ltd. Foodchain Holdings Pty Ltd Foodland Properties Pty Ltd Foodland Property Holdings Pty. Ltd. Foodland Property Unit Trust Garden Fresh Produce Pty Ltd Garden Fresh Produce Trust Gawler Supermarkets Pty. Ltd. Global Liquor Wholesalers Pty Limited (i) GP New Co Pty Ltd Green Triangle Meatworks Pty Limited Harvest Liquor Pty. Ltd. IGA Community Chest Limited (ii) IGA Distribution (SA) Pty Limited (i) IGA Distribution (Vic) Pty Limited (i) IGA Distribution (WA) Pty Limited (i) IGA Fresh (Northern Queensland) Pty Limited (i) IGA Fresh (NSW) Pty Limited (i) IGA Pacific Pty Limited IGA Retail Network Limited IGA Retail Services Pty Limited (i) Independent Brands Australia Pty Limited (i) Interfrank Group Holdings Pty Ltd**(i) Jewel Food Stores Pty. Ltd. Jewel Superannuation Fund Pty Ltd Jorgensens Confectionery Pty. Limited JV Pub Group Pty Ltd COUNTRY OF INCORPORATION Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia EQUITY INTEREST HELD BY THE GROUP 2012 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 2013 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 108 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 24. RELATED PARTY DISCLOSURES (Continued) NAME Keithara Pty. Ltd. Knoxfield Transport Service Pty. Ltd. M C International Australia Pty Limited Melton New Co Pty Ltd Mermaid Tavern (Freehold) Pty Ltd Metcash Automotive Holdings Pty Ltd*** (previously Automotive Brands Holdings Pty Ltd) Metcash Export Services Pty Ltd Metcash Food & Grocery Pty Ltd (i) Metcash Food & Grocery Convenience Division Pty Limited (i) (previously Campbells Cash and Carry Pty. Limited) Metcash Holdings Pty Ltd Metcash Management Pty Limited Metcash Services Proprietary Limited Metcash Storage Pty Limited Metcash Trading Limited (i) Metoz Holding Limited Metro Cash & Carry Pty Limited Mirren (Australia) Pty. Ltd. Mittenmet Pty. Ltd. (i)* Moorebank Transport Pty Ltd Moucharo Pty. Ltd. Newton Cellars Pty Ltd NFRF Developments Pty Ltd Nu Fruit Pty. Ltd. Payless Superbarn (N.S.W.) Pty Ltd Payless Superbarn (VIC.) Pty. Ltd. Pinnacle Holdings Corporation Pty Limited Plympton Properties Pty. Ltd. Property Reference Pty. Limited QIW Pty Limited Queensland Independent Wholesalers Pty Limited Quickstop Pty Ltd (i) Rainbow Supermarkets Pty Ltd Rainbow Unit Trust Rainfresh Vic Pty. Ltd. Regeno Pty Limited Regzem (No 3) Pty. Ltd. Regzem (No 4) Pty. Ltd. Rennet Pty. Ltd. Retail Merchandise Services Pty. Limited Retail Stores Development Finance Pty. Limited Rockblock Pty. Ltd. R.S.D.F. Nominees Pty. Ltd. Soetensteeg 2 61 Exploitatiemaatschappij BV SR Brands Pty Ltd SSA Holdings Pty Ltd (Scanning Systems Australia) Scanning Systems (Aust) Pty Ltd Smart IP Co Pty Ltd Scanning Systems (Fuel) Pty Ltd Stonemans (Management) Proprietary Limited Stonemans Self Service Pty. Ltd. Tasher No 8 Pty. Ltd. Tasman Liquor Company Limited Vawn No 3 Pty. Ltd. Wickson Corporation Pty Limited(i) Wimbledon Unit Trust COUNTRY OF INCORPORATION Australia Australia Australia Australia Australia Australia EQUITY INTEREST HELD BY THE GROUP 2013 % 100 100 100 100 100 75.1 2012 % 100 100 100 100 - - Australia Australia Australia Australia Australia Australia Australia Australia South Africa Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Netherlands Australia Australia Australia Australia Australia Australia Australia Australia New Zealand Australia Australia Australia 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 51 51 100 100 100 100 100 100 100 100 100 100 51 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50.1 100 100 100 51 51 100 100 100 100 100 100 100 100 100 100 51 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Metcash Annual Report 2013 109 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 24. RELATED PARTY DISCLOSURES (Continued) * Mittenmet Pty Ltd The consolidated financial statements include the financial statements of Mittenmet Pty Ltd and the subsidiaries listed in the following table. NAME ACN 008 698 093 (WA) Pty Ltd Anzam (Aust.) Pty Ltd (i) Australian Hardware Support Services Pty Ltd (i) Capeview Hardware Pty Ltd. Chelsea Heights Operations Pty Limited (i) DIY Superannuation Pty Ltd (i) Echuca Hardware Pty Ltd (i) Faggs Geelong Pty Ltd Handyman Stores Pty Ltd (i) Hardware Property Trust Himaco Pty Ltd (i) Lilydale Operations Pty Limited (i) Mega Property Management Pty Ltd (i) Mitre 10 Pty Ltd (i) Mitre 10 Australia Pty Ltd (i) Mitre 10 Mega Pty Ltd (i) Narellan Hardware Pty Ltd (i) National Retail Support Services Pty Ltd (i) Northern NSW Timber and Hardware Pty Ltd Roma Hardware Pty Ltd (previously Portland Hardware Pty Ltd) South Coast Operations Pty Ltd (i) South West Operations Pty Ltd (i) Sydney Importing Co Limited (In Liquidation) Tasmania Hardware Pty Ltd Trevisan Pty Ltd Timber and Hardware Exchange Pty Ltd WA Hardware Services Pty Ltd (i) COUNTRY OF INCORPORATION Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia EQUITY INTEREST HELD BY THE GROUP 2013 % 99.44 100 100 100 100 100 100 75 100 100 100 100 100 100 100 100 100 100 100 100 2012 % 99.44 100 100 - 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 - 100 100 97.65 80 100 52 100 100 100 97.65 - - 52 100 (i) These entities entered into a Deed of Assumption with Metcash Limited on 27 February 2013, a copy of which was lodged with ASIC on 5 March 2013. In accordance with the Deed of Assumption each entity identified above joined the Deed of Cross Guarantee (refer Note 24(c)) on 27 February 2013. ** Interfrank Group Holdings Pty Ltd The consolidated financial statements include the financial statements of Interfrank Group Holdings Pty Ltd and the subsidiaries listed in the following table: NAME Franklins Pty Ltd (i) Franklins Supermarket Holdings Pty Ltd (i) Franklins Franchising Pty Ltd (i) Franklins Bankstown Square Pty Ltd (i) Franklins Bass Hill Pty Ltd (i) Franklins Blacktown Pty Ltd (i) Franklins Bonnyrigg Pty Ltd (i) Franklins Ulladulla Pty Ltd (i) Franklins Casula Pty Ltd (i) Franklins Cronulla Pty Ltd (i) COUNTRY OF INCORPORATION Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia EQUITY INTEREST HELD BY THE GROUP 2013 % 100 100 100 100 100 100 100 100 100 100 2012 % 100 100 100 100 100 100 100 100 100 100 110 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 24. RELATED PARTY DISCLOSURES (Continued) NAME Franklins Drummoyne Pty Ltd (i) Franklins Liverpool Pty Ltd (i) Franklins Macquarie Pty Ltd (i) Franklins Maroubra Pty Ltd (i) Franklins Merrylands Pty Limited (i) Franklins Moorebank Pty Limited (i) Franklins North Rocks Pty Ltd (i) Franklins Pennant Hills Pty Ltd (i) Franklins Penrith Nepean Pty Ltd (i) Franklins Penrith Plaza Pty Ltd (i) Franklins Rockdale Plaza Pty Ltd (i) Franklins Singleton Pty Ltd (i) Franklins Spit Junction Pty Ltd (i) Franklins Westleigh Pty Ltd (i) Franklins Wetherill Park Pty Ltd (i) Franklins Wentworthville Pty Ltd (i) Fresco Supermarket Holdings Pty Ltd (i) FW Viva 3 Pty Ltd (i) COUNTRY OF INCORPORATION Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia EQUITY INTEREST HELD BY THE GROUP 2013 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 2012 % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 *** Metcash Automotive Holdings Pty Ltd (previously Automotive Brands Holdings Pty Ltd) The consolidated financial statements include the financial statements of Metcash Automotive Holdings Pty Ltd (previously Automotive Brands Holdings Pty Ltd) and the subsidiaries listed in the following table. NAME Australian Automotive Distribution Pty Limited Automotive Brands Group Pty Ltd COUNTRY OF INCORPORATION Australia Australia 2013 % 100 100 2012 % - - EQUITY INTEREST HELD BY ABH GROUP (b) Ultimate parent Metcash Limited is the ultimate parent entity. (c) Entities subject to class order relief Metcash Limited Pursuant to an order from ASIC under section 340(1) of the Corporations Act 2001 dated 23 April 2012 which is based on Class Order 98/1418 (Order), relief has been granted to certain controlled entities of Metcash Limited, being those marked (i), from the Corporations Act requirements for preparation, audit and lodgement of their financial reports. As a condition of the Order, Metcash Limited and the controlled entities, being those marked as (i) (the Closed Group) entered into a Deed of Cross Guarantee on 18 April 2012. The entities marked (ii) are also party to the Deed of Cross Guarantee, but are not eligible for inclusion in the financial reporting relief. The effect of the deed is that Metcash Limited has guaranteed to pay any deficiency in the event of winding up of these controlled entities. These controlled entities have also given similar guarantees in the event that Metcash Limited is wound up. Mittenmet Pty Limited and Interfrank Group Holdings Pty Ltd were added to the Closed Group during the 2013 and 2012, respectively, including their subsidiaries identified in Note 24(a) and marked (i). Metcash Annual Report 2013 111 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 24. RELATED PARTY DISCLOSURES (Continued) The Statement of Comprehensive Income and Statement of Financial Position of the entities that are members of the ‘Closed Group’ are as follows: CLOSED GROUP 2013 $’m 2012 $’m 272.1 (82.2) 189.9 (536.7) (243.9) 34.6 (556.1) 29.5 958.8 710.3 47.6 0.6 28.8 1,775.6 37.7 36.9 2,591.5 249.8 68.1 1,356.9 4,340.9 6,116.5 1,207.1 0.5 57.5 12.0 142.8 1,419.9 3,565.1 2.7 167.1 3,734.9 5,154.8 961.7 2,284.9 (765.9) (1.2) (556.1) 961.7 157.5 (54.2) 103.3 (428.3) (211.7) - (536.7) 24.1 869.1 778.7 116.5 - 29.9 1,818.3 27.8 51.3 2,521.1 190.4 95.6 1,306.7 4,192.9 6,011.2 1,236.6 0.9 17.7 20.9 146.9 1,423.0 3,787.7 4.3 151.1 3,943.1 5,366.1 645.1 1,914.7 (765.9) 33.0 (536.7) 645.1 (i) Statement of Comprehensive Income Profit before income tax Income tax expense Net profit for the year Retained profits at the beginning of the financial year Dividends provided for or paid Reserves transferred Retained profits at the end of the financial year (ii) Statement of Financial Position Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Disposal group assets held for sale Derivative financial instruments Other Total current assets Non-current assets Derivative financial instruments Receivables Investments Property, plant and equipment Net deferred tax assets Intangible assets and goodwill Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Derivative financial instruments Interest-bearing loans and borrowings Income tax payable Provisions Total current liabilities Non-current liabilities Interest-bearing loans and borrowings Derivative financial instruments Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Other equity Reserves Retained profits Total equity 112 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 24. RELATED PARTY DISCLOSURES (Continued) (d) Transactions with related parties SALES TO RELATED PARTIES $’m PURCHASES FROM RELATED PARTIES $’m OTHER TRANSACTIONS WITH RELATED PARTIES $’m - - - - - - - - - - - - - - 27.3 25.7 0.6 1.1 22.1 - 500.0 350.0 203.4 240.5 RELATED PARTY Group Associates Sales to associates Lease charges to associates Dividends received from associates Sale of businesses to associates 2013 2012 2013 2012 2013 2012 2013 2012 1,326.7 1,152.9 - - - - - - Parent Associates There were no transactions between the parent and its associates during the year (2012: nil). Subsidiaries Dividend received Interest expense 2013 2012 2013 2012 - - - - Terms and conditions of transactions with related parties All transactions with related parties are made on normal commercial terms and conditions. Terms and conditions of the tax funding agreement are set out in Note 5. Other transactions with Key Management Personnel Mr Barnes is Chairman of Samuel Smith and Sons Pty Ltd. Mrs Balfour is a director of Salmat Limited. Mr Butler is Chairman of AMP Superannuation Ltd. All organisations are suppliers to the Group under normal commercial terms and conditions. The total level of purchases from all companies is less than 0.2% of Metcash’s annual purchases and is not considered material. During the year Metcash entered into arrangements in respect of two retail stores with Cheswell Capital Pty Limited (“Cheswell”). Cheswell is a wholly owned subsidiary of Chester Capital Pty Limited (“Chester”). Mr Jankelowitz is a Non Executive Director of Chester. The arrangements were concluded on an arm’s length basis under normal commercial terms and conditions. As part of the arrangements Metcash provided loan funding of $500,000, repayable over 24 months, to Cheswell. The following details relate to the loan: Balance at the reporting date Interest paid (17/12/2012 to 30/04/2013) Interest rate $478,114 $ 22,395 10.0% p.a. Other than noted above there were no loans outstanding to Key Management Personnel or their related entities. Metcash Annual Report 2013 113 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 24. RELATED PARTY DISCLOSURES (Continued) (e) Amounts due from and payable to related parties Related party Group Associates Trade receivables - gross Provision for impairment Loans receivable – gross Provision for impairment Parent Subsidiaries Loans receivable Loans payable 2013 $’m 2012 $’m 114.0 (14.5) 99.5 15.9 (6.5) 9.4 111.5 (17.7) 93.8 48.8 (33.1) 15.7 2,428.6 3,889.5 1,825.5 3,686.6 Terms and conditions of amounts due from and payable to related parties Loans and trade receivables are due and payable on normal commercial terms and conditions. 25. SHARE-BASED PAYMENTS (a) Types of share-based payment plans The Group has two share-based incentive plans for employees and executive directors of the Group: the Metcash Executives and Senior Managers Performance Rights Plan (Rights Plan) and the legacy Metcash Employees Option Plan (MEOP). Fully paid ordinary shares issued under these plans rank equally with all other existing fully paid ordinary shares, in respect of voting and dividends rights. Metcash Executives and Senior Managers Performance Rights Plan (Rights Plan) Metcash has two incentive schemes that operate within the Rights Plan structure: i. The Short Term Incentive (‘STI’) Rights Plan; and ii. The Long Term Incentive (‘LTI’) Rights Plan. i. The Short Term Incentive (‘STI’) Rights Plan The STI program focuses behaviour towards achieving superior Company and business unit performance, which deliver better results to shareholders. Key Performance Indicators are established and measured at different levels throughout the business: • Corporate level - applies to most KMP and executives • Business level - applies to the KMP and executives from each business pillar After the end of each financial year, Executive performance is assessed against their individual KPIs to determine the amount of STI to be awarded. If these KPI are met, 75% of the STI reward amount is paid in July of each year after the release of the audited accounts. The remaining 25% is deferred for 15 months and released through the issue of Metcash ordinary shares, conditional upon the Executive being employed by the Company on 15 April of the year subsequent to the performance year. Any STI not paid is forfeited. For FY2013, the number of shares to be issued will be calculated by dividing the 25% STI reward dollar value by the Metcash VWAP for the five days ending 31 July 2013. These shares will be issued by 30 April 2014, but will be restricted from trading until 31 July 2014. 114 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 25. SHARE-BASED PAYMENTS (Continued) (a) Types of share-based payment plans (continued) ii. The Long Term Incentive (‘LTI’) Rights Plan The Rights Plan provides selected employees with the opportunity to be rewarded with fully paid ordinary shares as an incentive to create long term growth in value for Metcash shareholders. The plan is administered by a trustee who may acquire (and hold in trust) shares for the benefit of participants. These shares are purchased on market or issued to the trustee once the performance rights vest. The essential elements of the Rights Plan are as follows: • each Performance Right is an entitlement to receive a fully paid ordinary share in the Company on terms and conditions determined by the Board, including vesting conditions linked to service and performance over a 3 year period; • Performance Rights are offered at no cost to the employee and as such, significantly fewer Performance Rights are • offered than was the case with options; persons offered Performance Rights will not be offered options under the MEOP or any other form of long term incentive; • Performance Rights do not carry voting or dividend rights, however shares issued upon vesting of Performance • • • • Rights will carry the same rights as other ordinary shares; the number of Performance Rights granted is determined by dividing the value of an employee’s long term incentive entitlement by the Company’s share price at the time of issue; the FY2013 plan hurdles were set at between 4% (‘lower bound hurdle rate’) and 7% (‘upper bound hurdle rate’) compound underlying EPS growth, both adjusted up or down for the effects of actual year-on-year inflation/deflation, over a three year vesting period as follows: (cid:882) (cid:882) Achieving an underlying EPS growth rate equivalent to the lower bound hurdle rate results in 0% vesting. Achieving an underlying EPS growth rate equivalent to the upper bound hurdle rate results in 100% vesting. Pro-rata vesting occurs for EPS growth between the lower and upper bound hurdle rates. Any LTIs that do not vest are forfeited; the FY2012 and FY2011 plan hurdles, which are not adjusted for the effects of inflation/deflation, were set at between 5% and 10% compound underlying EPS growth over a three year vesting period as follows: (cid:882) (cid:882) Achieving 5% underlying EPS growth results in 50% vesting. Achieving 10% underlying EPS growth results in 100% vesting. Pro-rata vesting occurs for EPS growth over 5% and under 10%. Any LTIs that do not vest are forfeited; and underlying earnings per share is calculated on the Group’s underlying profit, adjusted for non-recurring and significant items such as goodwill impairment or amortisation, or other non cash accounting items. Metcash Employee Option Plan (MEOP) (Legacy Plan) Metcash previously issued invitations to eligible employees and executive directors to participate in the Employee Share Option Plan. The last tranche of options was issued in 2008 and vested on 7 February 2013. The plan will cease in February 2014 when the last options expire. The exercise price of options was determined as the closing price on the Stock Exchange Automated Trading System (SEATS), excluding special crossings, overnight sales and exchange traded option exercises of the shares on the grant date, or such other price as determined by the Board. The vesting of options occurs as follows: • 60% of the options issued to a participant become exercisable from the third anniversary of the grant date; • a further 20% become exercisable from the fourth anniversary of the grant date; and • the remaining 20% become exercisable from the fifth anniversary of the grant date. Options must be exercised prior to the sixth anniversary of the grant date, at which time they expire. Metcash Annual Report 2013 115 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 25. SHARE-BASED PAYMENTS (Continued) (a) Types of share-based payment plans (continued) Where an employee ceases to be employed by any Group company the options issued to that participant will automatically lapse, except where the employee has ceased to be an employee by reason of total and permanent disability, death, retirement and such other circumstances as the Board may determine. In these circumstances, the Board may give its written approval to the participant or their personal representative to exercise the options during such further period as the Board may determine. In addition, options will lapse on the winding up of the Company or where the participant has acted fraudulently or dishonestly. An option may be exercised immediately in the event of: • any party becoming entitled to acquire shares by way of a compulsory acquisition; or • a resolution being passed by the Company to which any party becomes or will become “entitled” to 100% of the issued shares; or • a participant's employment being terminated by any Group company at any time within the period of six months after any party who is not at the grant date “entitled” to 50% or more of the shares becomes so entitled. Exercise prices or option holdings will be pro-rated in the event of a bonus issue, rights issue or reorganisation of the share capital of the Company. (b) Summary of rights and options granted Rights Plan The following table illustrates the movement in the number of Performance Rights during the year: Outstanding at the beginning of the year Granted during the year – LTI Vested during the year Reinstated/(expired/forfeited) during the year Outstanding at the end of the year The outstanding balance as at 30 April 2013 is represented by: 2013 NUMBER 2012 NUMBER 2,785,319 1,806,964 - (103,018) 4,489,265 1,399,385 1,512,804 - (126,870) 2,785,319 VESTING DATE 30 June 2013 – LTI 30 June 2014 – LTI 7 September 2015 – LTI Total TOTAL OUTSTANDING (NUMBER) EXERCISABLE (NUMBER) REMAINING CONTRACTUAL LIFE 1,285,000 1,397,301 1,806,964 4,489,265 2 months 1 year 2 months 2 years 4 months - - - - Weighted average fair value The weighted average fair value of LTI Performance Rights granted during the year was $2.30 per Performance Right (2012: $3.62). 116 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 25. SHARE-BASED PAYMENTS (Continued) (b) Summary of rights and options granted (continued) Pricing model The LTI performance rights issued were valued on the grant date using either the Black-Scholes or the binomial options pricing models. The following table lists the inputs to the valuations. Dividend yield Risk free rate Expected volatility Days to vesting Exercise price Share price at measurement date FY2013 Plan LTI FY2012 Plan LTI FY2011 Plan LTI 7.55% 3.06% 18.74% 994 - $3.22 6.41% 3.69% 17.64% 927 - $4.21 6.19% 5.36% 16.63% 940 - $4.20 The FY2013 STI performance rights will be issued based on the volume-weighted average price (VWAP) of Metcash’s shares for the five days ending 31 July 2013. The rights were valued at $1.2 million, represented by the nominal value of the STI entitlement of the executives as calculated in accordance with the STI Plan rules. MEOP The following table illustrates the number of options, exercise prices and movements during the year ended 30 April 2013 and 30 April 2012: Outstanding at the beginning of the year Reinstated during the year Exercised during the year: Expired during the year Outstanding at the end of the year The outstanding balance as at 30 April 2013 is represented by: 2013 EXERCISE PRICE $ Various - - Various 2012 EXERCISE PRICE $ Various 3.925 4.267 Various 2012 NUMBER 24,126,321 122,150 (2,489,364) (2,856) (6,394,266) 15,361,985 2013 NUMBER 15,361,985 500,000 - - (2,466,489) 13,395,496 EXPIRY DATE 7 February 2014 EXERCISE PRICE $ TOTAL OUTSTANDING (NUMBER) EXERCISABLE (NUMBER) REMAINING CONTRACTUAL LIFE 4.267 13,395,496 13,395,496 9 months Metcash Annual Report 2013 117 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 26. DIRECTORS’ AND EXECUTIVES DISCLOSURES a) Details of Key Management Personnel Executives Fergus Collins Adrian Gratwicke Silvestro Morabito Mark Laidlaw CEO Australian Liquor Marketers Chief Financial Officer COO Food & Grocery CEO Hardware Directors Peter L Barnes Andrew Reitzer(i) Ian R Morrice(i) Patrick N J Allaway(ii) Fiona E Balfour Michael R Butler Neil D Hamilton Edwin M Jankelowitz Richard A Longes(iii) V Dudley Rubin Non-executive Chairman Chief Executive Officer Executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director Non-executive Director (i) Mr Morrice was appointed as a non-executive Director on 12 June 2012 and was appointed Executive Director on 1 March 2013. Mr Morrice will replace Mr Reitzer who retires as Group CEO on 30 June 2013. (ii) Mr Allaway was appointed as a non-executive Director on 7 November 2012. (iii) Mr Longes retired from the Board on 30 August 2012. b) Performance Rights holding of Key Management Personnel Name Directors P Barnes A Reitzer I Morrice P Allaway F Balfour M Butler N Hamilton E Jankelowitz R Longes D Rubin Executives F Collins A Gratwicke M Laidlaw S Morabito Total Balance 1 May 2012 Granted as remuneration - LTI Vested during the year Changed, forfeited or lapsed during the year Balance 30 April 2013 Balance at report date - - - - - - - - - - - - - - - - - - - - 109,648 132,974 95,367 142,687 480,676 87,488 100,841 81,239 135,169 404,737 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 197,136 233,815 176,606 277,856 885,413 197,136 233,815 176,606 277,856 885,413 118 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 26. DIRECTORS’ AND EXECUTIVES DISCLOSURES (Continued) b) Performance Rights holding of Key Management Personnel (Continued) Name Directors P Barnes A Reitzer F Balfour M Butler N Hamilton E Jankelowitz R Longes I Morrice D Rubin Executives F Collins A Gratwicke M Laidlaw S Morabito Total Balance 1 May 2011 Granted during the year Vested during the year Changed, forfeited or lapsed during the year Balance 30 April 2012 Balance at report date - - - - - - - - - - - - - - - - - - 53,923 59,770 49,166 70,171 233,030 55,725 73,204 46,201 72,516 247,646 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 109,648 132,974 95,367 142,687 480,676 109,648 132,974 95,367 142,687 480,676 c) Option holding of Key Management Personnel (MEOP) Balance 1 May 2012 Granted during the year Exercised during the year Disposed, forfeited or lapsed during the year Balance at 30 Apr 2013 Vested during the year Vested and Exercisable at 30 Apr 2013 Balance at report date - - - - - - - - - - - 500,000 350,000 350,000 1,200,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 500,000 - 350,000 - - 350,000 - 1,200,000 - 100,000 70,000 70,000 240,000 - 500,000 350,000 350,000 - 500,000 350,000 350,000 1,200,000 1,200,000 Name Directors P Barnes A Reitzer I Morrice P Allaway F Balfour M Butler N Hamilton E Jankelowitz R Longes D Rubin Executives F Collins A Gratwicke M Laidlaw S Morabito Total Metcash Annual Report 2013 119 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 26. DIRECTORS’ AND EXECUTIVES DISCLOSURES (Continued) c) Option holding of Key Management Personnel (MEOP) (continued) Balance 1 May 2011 Granted during the year Exercised during the year Disposed, forfeited or lapsed during the year Balance at 30 Apr 2012 Vested during the year Vested and Exercisable at 30 Apr 2012 Balance at report date - 1,200,000 - - - 130,000 - - - 50,000 510,000 400,000 387,125 2,677,125 - - - - - - - - - - - - - - - - - - - - - - - - (1,200,000) - - - (130,000) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (50,000) (10,000) - (37,125) (97,125) - - 500,000 - 350,000 (50,000) - 350,000 (1,380,000) 1,200,000 - 100,000 70,000 70,000 240,000 - - 500,000 400,000 350,000 280,000 280,000 350,000 960,000 1,200,000 Name Directors P Barnes A Reitzer F Balfour M Butler N Hamilton E Jankelowitz R Longes I Morrice D Rubin Executives F Collins A Gratwicke M Laidlaw S Morabito Total d) Shareholding of Key Management Personnel Name Directors P Barnes A Reitzer I Morrice P Allaway F Balfour M Butler N Hamilton E Jankelowitz R Longes D Rubin Executives F Collins A Gratwicke M Laidlaw S Morabito Total Balance at 1 May 2012 177,083 1,750,000 - - 13,600 50,000 20,000 320,000 128,154 15,000 1,600 63,950 - 32,575 2,571,962 Granted as remuneration On market trade Options exercised Other adjustments(i) Balance at 30 April 2013 Balance at report date - - - - - - - - - - - - - - - - (929,951) 21,000 54,000 11,910 - - - - 2,500 - - - - (840,541) - - - - - - - - - - - - - - - 4,951 9,902 - - 4,163 4,951 - - 9,902 - 182,034 829,951 21,000 54,000 29,673 54,951 20,000 320,000 138,056 17,500 182,034 829,951 21,000 54,000 29,673 54,951 20,000 320,000 138,056 17,500 490 9,528 - 6,604 50,491 2,090 73,478 - 39,179 1,781,912 2,090 73,478 - 39,179 1,781,912 (i) Other adjustments represent shares acquired by key management personnel as part of the Share Purchase Plan completed in July 2012. 120 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 26. DIRECTORS’ AND EXECUTIVES DISCLOSURES (Continued) d) Shareholding of Key Management Personnel (continued) Name Directors P Barnes A Reitzer F Balfour M Butler N Hamilton E Jankelowitz R Longes I Morrice D Rubin Executives F Collins A Gratwicke M Laidlaw S Morabito Total Balance at 1 May 2011 177,083 1,750,000 13,600 50,000 20,000 320,000 128,154 - 15,000 1,600 53,950 - 18,275 2,547,662 e) Compensation by category Short-term Long-term Post employment Termination benefits Share-based payments Total Granted as remuneration On market trade Options exercised Other adjustments Balance at 30 April 2012 Balance at report date - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (50,000) - - (22,825) (72,825) 50,000 10,000 - 37,125 97,125 - - - - - - - - - - - - - - 177,083 1,750,000 13,600 50,000 20,000 320,000 128,154 - 15,000 1,600 63,950 - 32,575 2,571,962 177,083 1,750,000 13,600 50,000 20,000 320,000 128,154 - 15,000 1,600 63,950 - 32,575 2,571,962 2013 $’m 10.0 (0.2) 0.2 0.2 0.3 10.5 2012 $’m 7.4 (1.5) 0.2 - 0.2 6.3 There were no other transactions and balances with key management personnel other than as disclosed in Note 24. 27. INFORMATION RELATING TO METCASH LIMITED (THE PARENT ENTITY) In accordance with the amendment to the Corporations Act 2001, the Company has replaced the separate entity financial statements with the following note. Current assets Total assets Current liabilities Total liabilities Net assets Contributed equity Retained earnings Share based payments reserve Total equity Net profit for the year Total comprehensive income for the year, net of tax METCASH LIMITED 2013 $’m 2,428.6 7,058.2 3,901.5 3,901.5 3,156.7 2,950.9 205.2 0.6 3,156.7 296.1 296.1 2012 $’m 1,825.5 6,441.6 3,707.7 3,707.7 2,733.9 2,580.7 129.6 23.6 2,733.9 218.3 218.3 Metcash Limited has provided guarantees as part of the Closed Group arrangements as disclosed in Note 24(c). Metcash Annual Report 2013 121 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 28. AUDITORS REMUNERATION Amounts received or due and receivable by Ernst & Young (Australia) for: - an audit or review of the financial statements of the entity and any other entity in the Group - assurance related Other services in relation to the entity and any other entity in the Group - tax compliance and advisory - tax ATO audit - tax acquisitions/other 29. BUSINESS COMBINATIONS During the year the Metcash Group acquired the following entities or assets: Date of acquisition 10 May 2012 11 May 2012 1 July 2012 1 October 2012 14 February 2013 2 April 2013 (i) Acquisition of business assets Acquiree Trevisan Pty Ltd Fagg’s Geelong Pty Ltd Automotive Brands Holdings Pty Ltd (ABG) Tasmania Hardware Pty Ltd Envy Hotel(i) Miscamble Bros Mitre 10(i) Details of the fair value of the assets and liabilities acquired are as follows: (a) Purchase consideration: Total purchase consideration Less: cash acquired Net purchase consideration Less: fair value of net identifiable assets acquired (b) Goodwill (b) Assets acquired and liabilities assumed: The assets and liabilities arising from the acquisitions are as follows: Receivables Inventories Property, plant and equipment Intangibles Deferred tax (liability)/asset Provisions and creditors Put option written over non controlling interests Interest bearing loans and borrowings Fair value of net identifiable assets on acquisition date 2013 $ 2012 $ 2,587,000 37,000 2,624,000 1,845,000 216,958 2,061,958 946,493 998,155 398,543 2,343,191 4,967,191 1,136,292 1,171,504 57,000 2,364,796 4,426,754 % Acquired 100.0% (d) 75.0% (d) 75.1% (c) 80.0% (d) 100.0% (d) 100.0% (d) ABG $’m Other $’m Total $’m 54.7 - 54.7 (32.3) 22.4 15.7 16.7 3.2 45.1 (9.1) (21.5) (17.8) - 32.3 55.0 (2.3) 52.7 (5.1) 47.6 3.1 13.1 5.4 2.0 0.3 (5.4) (8.1) (5.3) 5.1 109.7 (2.3) 107.4 (37.4) 70.0 18.8 29.8 8.6 47.1 (8.8) (26.9) (25.9) (5.3) 37.4 The carrying amounts of acquired receivables approximated their gross contractual amounts and the estimated collectible amounts at the dates of acquisition. The fair value of all identifiable assets and liabilities acquired approximated their carrying values at the dates of acquisition. The goodwill recognised on the above acquisitions is attributed to the expected synergies and other benefits from combining the assets and activities of the acquired entities with those of the Group. 122 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 29. BUSINESS COMBINATIONS (Continued) Details of revenue and profit and loss attributable to the business combinations are as follows: Revenue since acquisition to the reporting date Profit/(loss) since acquisition to the reporting date ABG $’m 83.5 2.5 Other $’m 62.3 2.8 Total $’m 145.8 4.7 The Group has not been able to reliably determine the revenue and profit and loss of the acquired entities from the beginning of the reporting period to the acquisition date and therefore cannot disclose the revenue and profit and loss had the entities been acquired effective 1 May 2012. (c) Automotive Brands Group (ABG) Metcash acquired 75.1% of the equity of Automotive Brands Holdings Pty Ltd (ABG) on 1 July 2012. The name of the acquired entity was subsequently changed to Metcash Automotive Holdings Pty Ltd. The acquisition positions Metcash firmly in the automotive parts aftermarket sector. ABG is the third largest in the sector and manages the Autobarn franchise and Autopro dealership groups. Costs amounting to $2.4m were incurred in completing the acquisition. These costs have been disclosed as part of Significant Items in the Statement of Comprehensive Income (refer Note 4(vi)) as they relate to a material acquisition. The accounting for the ABG business combination is final as at 30 April 2013. In accordance with the acquisition agreement, Metcash has under certain circumstances the right to acquire the remaining 24.9% equity interest in ABG. The minority shareholder also has the right under certain circumstances to require Metcash to acquire its shareholding in ABG. The purchase consideration is broadly based on an EBITDA multiple calculation. The redemption amount of $17.8 million under the put option was recorded as a financial liability at fair value on the acquisition date. (d) Other business combinations During the current year Mitre 10 acquired various businesses in order to broaden its footprint as one of the leading hardware and home improvement businesses and the Group acquired an interest in a hotel. The total purchase consideration for these businesses was $55.0 million which resulted in goodwill of $47.6 million being recognised. The business combinations were not individually significant, and are disclosed above in aggregate. The costs incurred in completing these acquisitions have been included within Administrative Costs in the Statement of Comprehensive Income as they do not relate to material acquisitions. The accounting for the above business combinations is provisional as at 30 April 2013. (e) Prior period acquisitions On 30 September 2011 Metcash acquired 100% of the equity in the Franklins Group from Pick n Pay Retailers Pty Ltd. The fair value of the net assets acquired recognised in the 30 April 2012 financial statements were based on a preliminary accounting assessment. The final acquisition accounting is as follows: (i) Purchase consideration: Cash paid during the current and prior periods Cash consideration accrued at the end of the year Total purchase consideration Less: cash acquired Net purchase consideration Add: fair value of net identifiable liabilities assumed (ii) Goodwill $’m 188.4 1.2 189.6 - 189.6 66.5 256.1 Metcash Annual Report 2013 123 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 29. BUSINESS COMBINATIONS (Continued) (ii) Assets acquired and liabilities assumed: The assets and liabilities arising from the acquisition are as follows: Receivables Inventories Other current assets Disposal group assets Property, plant and equipment Intangibles Deferred tax asset Provisions and creditors Provision for rental subsidy Interest bearing loans and borrowings Fair value of net identifiable liabilities assumed $’m 7.9 29.3 1.3 104.7 - 23.5 74.5 (98.9) (178.5) (30.3) (66.5) The preliminary accounting assessment has been adjusted for a decrease of $4.7 million in disposal group assets, an increase of $34.1 million in the provision for rental subsidy and an increase of $22.8 million in deferred tax assets. Inclusive of other minor changes, this has resulted in a corresponding increase in goodwill of $16.2 million. In the prior period the Group acquired a number of businesses for a total cash consideration of $18.5million. There have been no changes to the accounting for these acquisitions. (f) Business combinations after the reporting date On 16 May 2013 Metcash announced the acquisition, through Automotive Brands Group (ABG), of 100% of Australian Truck & Auto Parts Group (ATAP) for approximately $84.0 million (including acquisition costs) with effect from 20 May 2013. The acquisition increases Metcash’s market share in the automotive parts aftermarket sector. The purchase consideration will be contributed fully by Metcash and will not involve any funding from the non-controlling interests in ABG. Therefore, the acquisition will result in a dilution of the non-controlling interests in ABG to reflect the additional contribution by Metcash. At the date this report was authorised for issue the completion audit of the financial information of ATAP was in progress therefore the Group is not in a position to disclose the details of the fair value of the assets and liabilities acquired. 124 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 30. EARNINGS PER SHARE The following reflects the income data used in the basic and diluted earnings per share computations: Net profit from continuing operations Earnings used in calculating basic and diluted earnings per share from continuing operations Net profit/(loss) from discontinued operations Earnings used in calculating basic and diluted earnings per share from discontinued operations Net profit attributable to ordinary equity holders of Metcash Limited Earnings used in calculating basic and diluted earnings per share The following reflects the share data used in the basic and diluted earnings per share computations: 2013 $’m 2012 $’m 265.9 117.2 265.9 117.2 (59.9) (27.2) (59.9) (27.2) 206.0 206.0 90.0 90.0 Weighted average number of ordinary shares used in calculating basic earnings per share Effect of dilutive securities: Share options and performance rights Weighted average number of ordinary shares used in calculating diluted earnings per share 31. DISPOSAL GROUPS AND ASSETS HELD FOR SALE Discontinued operations (a) Retail development assets (a) Discontinued operations 2013 NUMBER 2012 NUMBER 859,742,607 770,441,432 3,001,697 2,036,999 862,744,304 772,478,431 2013 $’m 2012 $’m 18.1 29.5 47.6 109.5 7.0 116.5 On 30 September 2011, being the date of acquisition of the Franklins Group, Metcash announced its intention to dispose of Franklins corporate retail stores to independent retailers. These retail operations, along with a surplus property development joint venture, have been classified as discontinued operations. Accordingly, the inventory, property, plant and equipment, software intangibles and goodwill associated with the 80 corporate retail stores and the loans and equity accounted investment in the property joint venture were classified as disposal group assets. Metcash has, either through sale or closure, disposed of 70 of the 80 stores and believes that it is highly probable that the remaining stores will be disposed of within 12 months of the reporting date. Otherwise, the wholesale operations of the Franklins Group have been classified as continuing operations within the Food Distribution segment. Metcash Annual Report 2013 125 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 31. DISPOSAL GROUPS AND ASSETS HELD FOR SALE (Continued) The results of the disposal group are as follows. Revenue from sale of goods Cost of sales and other costs Finance costs attributable to discounting of provisions Operating loss before income tax Income tax benefit related to operating loss Operating loss after income tax Gain on disposal of assets Income tax expense related to gain on disposal of assets Net loss from discontinued operations Net loss is attributable to: Equity holders of the parent 2013 $'m 109.2 (184.2) (13.4) (88.4) 26.8 (61.6) 2.5 (0.8) (59.9) 2012 $'m 139.2 (175.3) (2.8) (38.9) 11.7 (27.2) - - (27.2) (59.9) (27.2) The net cash inflow from operations, per the Statement of Cash Flows, includes cash outflows of $54.2 million (2012: $43.7 million) from discontinued operations. The net cash outflow from investing activities, per the Statement of Cash Flows, includes cash inflows of $58.3 million (2012: $Nil) from discontinued operations. There were no financing cash flows specifically related to discontinued operations. 32. CONTINGENT ASSETS AND LIABILITIES Bank guarantees to third parties in respect of property lease obligations Bank guarantees in respect of Work Cover Standby letter of credit Face value of the outstanding charges due to American Express (a) Put options to third parties (b) Contingent loan to a third party (a) American Express charge card 2013 $’m 32.3 32.0 1.2 204.8 15.4 - 2012 $’m 30.1 30.0 1.2 281.0 13.3 0.3 On 9 May 2007 Metcash Trading Limited entered into an agreement with American Express (Amex), due to expire on 30 September 2013, in relation to Customer Charge Cards. Under the agreement, should a customer default on payment, where Amex has previously made a payment to Metcash Trading Limited, then Metcash Trading Limited must pay Amex an amount equal to the charge outstanding. The maximum amount payable shall be limited to the actual face value of the outstanding charge due to Amex. This does not include any interest or other fees payable by the customer to Amex. Metcash Trading Limited shall have no other obligation to Amex in respect of the outstanding charge and shall not be liable for any costs, loss or liability of any nature whatsoever incurred by Amex as a result of the failure by the customer to make payment. (b) Put options The Group has granted put options relating to the sale of retail store assets to certain customers and associates. The holders of the put option have the right to "put" these non-financial assets back to the Group within an agreed period and under certain prescribed circumstances. The estimate of the financial effect of the put options, if exercised, is the aggregate of the purchase price as defined in the option deed or business sale agreement. This amount is recorded as a contingent liability in the above table. The Group has entered into certain put option arrangements with joint venture partners which if exercised would result in an increase in Metcash’s ownership interest in the joint venture. The estimate of the financial effect of the put options, if exercised, is the aggregate of the purchase price as defined in the option deed or business sale agreement. This amount is recorded as a contingent liability in the above table. 126 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 32. CONTINGENT ASSETS AND LIABILITIES (Continued) (b) Put options (Continued) Certain put option arrangements with minority shareholders of partially owned subsidiaries, if exercised, would result in an increase in Metcash’s ownership interest in the subsidiaries, subject to specific terms and conditions. Where such an arrangement is deemed to be part of the business combination a financial liability is recognised on the acquisition date measured at the present value of the redemption amount under the option. Refer Note 20 for more details. Certain put options granted to third parties represent financial guarantees provided by the Group. These are measured at fair value and recognised as a financial guarantee contract liability. Refer Note 22 for more details. (c) Australian Tax Office Metcash has been subject to an income tax audit by the Australian Tax Office (ATO) covering the 2005 - 2008 income years, which has resulted in the following two disputed items. The ATO have advised Metcash that there are no other areas under consideration and that the audit has otherwise been concluded. Action Stores Metcash received notices of amended assessments dated 26 May 2011 and 13 June 2011 from the Australian Taxation Office (ATO) seeking payment of a total of $48.8 million. The amended assessments are in relation to a disputed tax liability arising from the sale of various ex-Action Supermarket retail businesses (Action Stores) during the 2007 and 2008 fiscal years that resulted in a net tax loss. The Action Stores were acquired by Metcash in fiscal 2006 as a part of the acquisition of Foodland Associated Limited (FAL), and were sold as part of Metcash’s ongoing business activities to enhance Australia’s independent retailer network. The total amount in dispute comprises primary tax of $32.9 million and then flowing from that, interest and penalties of $15.9 million. Metcash intends to challenge the amended assessments, which assert that the net tax losses from the sale of the Action Stores should be treated as being on capital account. These net tax losses were incurred as part of Metcash’s ordinary business activities and as such, Metcash has always considered the correct treatment to be on revenue account. Metcash has received external advice in relation to the dispute. Metcash has lodged objections to these amended assessments, and if necessary will appeal the decision to the Federal Court. Metcash is firmly of the opinion that the treatment it has adopted is appropriate to the circumstances. Based on the strength of its position, Metcash has not recorded an expense in relation to the amended assessments in the current or prior year results presented in these financial statements. In accordance with ATO policy, Metcash entered into a 50/50 payment agreement with the ATO in relation to the disputed tax liability of $48.8 million. Under the agreement, Metcash has paid the ATO 50% of the disputed tax liability ($24.4 million) in June/July 2011 and in return the ATO has agreed not to seek recovery of the balance until the Commissioner has determined the objection or when a decision is handed down by the relevant appellate tribune or court (as appropriate). The payment amount of $24.4 million has been disclosed as income tax receivable in the statement of financial position. Foreign Tax Credits Metcash received notices of amended foreign tax credit (FTC) determinations dated 29 May 2012 from the ATO seeking payment of a total of $23.4 million. The amended determinations are in relation to the imposition of what is effectively double taxation on interest income derived by Metcash’s foreign subsidiaries on intercompany loans during the 2006 and 2007 fiscal years. The ATO contends that Metcash is not entitled to any credit for taxes it has already paid on this interest income in South Africa. The total amount in dispute comprises primary tax of $23.4 million. The ATO has not sought to impose any penalties or interest in respect of this amount. Metcash has received external advice in relation to its position. Metcash is firmly of the view that: the imposition of double taxation is both inconsistent with the law and contrary to public policy; and the Commissioner is in any event out of time to issue such amended FTC determinations given the period of time elapsed since the original determinations. Metcash Annual Report 2013 127 METCASH FINANCIAL REPORT 2013 NOTES TO THE FINANCIAL STATEMENTS Year ended 30 April 2013 32. CONTINGENT ASSETS AND LIABILITIES (Continued) (c) Australian Tax Office (Continued) During the year Metcash lodged objections to the amended determinations which were subsequently disallowed by the ATO. Metcash has appealed the decision to the Administrative Appeals Tribunal, which is expected to be heard during the 2014 fiscal year. Based on the strength of its position, Metcash has not recorded an expense in relation to the amended determinations in the current year results presented in these financial statements. As the relevant subsidiaries subsequently became members of the Australian tax group, the FTC dispute is restricted solely to the 2006 and 2007 income years. There will be no impact in respect of the 2008 and subsequent income years in connection with this matter. 33. SUBSEQUENT EVENTS Australian Truck & Auto Parts Group On 16 May 2013 Metcash announced the acquisition, through Automotive Brands Group (ABG), of 100% of the Australian Truck & Auto Parts Group (ATAP) for approximately $84.0 million including acquisition costs. The Group assumed control of ATAP on 20 May 2013 being the date of completion. ATAP is a national wholesaler of brake, clutch and under-car products and also includes: ABS, the franchisor of a national chain of 53 retail service and brake/clutch repair centres, with 4 corporate stores and 5 joint venture stores; IBS Auto Solutions, Garmax, Melbourne Clutch & Brake; and Brake Friction Technology. The acquisition will result in a dilution of the non-controlling interests in ABG to reflect the additional equity contribution by Metcash. Refer Note 29(f) of the financial statements for further details. Mitre 10 joint ventures On 6 May 2013, Metcash announced that Mitre 10 had entered into joint ventures with two hardware trade groups – Dahlsens and Capeview Building Supplies. Metcash acquired a 36% interest in the Dahlsens joint venture, which includes 11 stores in the Northern Territory, Western Australia and in Northern Queensland. Metcash acquired an 80% interest in Capeview Building Supplies, which includes 5 stores throughout Victoria, particularly in the Gippsland region. Except as noted above, there are no events that have occurred after the end of the financial year that would materially affect the reported results or would require disclosure in this report. 128 Metcash Annual Report 2013 METCASH FINANCIAL REPORT 2013 DIRECTORS’ DECLARATION Year ended 30 April 2013 In accordance with a resolution of the directors of Metcash Limited, I state that: 1. In the opinion of the directors: a. The financial statements, notes and the additional disclosures included in the directors’ report designated as audited, of Metcash Limited are in accordance with the Corporations Act 2001, including: i. ii. Giving a true and fair view of its financial position as at 30 April 2013 and of its performance for the year ended on that date; and Complying with Accounting Standards (including the Australian Accounting Interpretations) and Corporations Regulations 2001; and b. The financial statements and notes also comply with International Financial Reporting Standards as disclosed in Note 2(a) c. There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. This declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial year ending 30 April 2013. 3. In the opinion of the directors, as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in Note 24 will be able to meet any obligation or liabilities to which they are or may become subject, by virtue of the Deed of Cross Guarantee. On behalf of the Board Andrew Reitzer Director Sydney, 24 June 2013 Metcash Annual Report 2013 129 (cid:3)(cid:3)(cid:3)(cid:3) (cid:3)(cid:3)(cid:3)(cid:3) (cid:3)(cid:3)(cid:3)(cid:3) (cid:3)(cid:3)(cid:3)(cid:3) (cid:3)(cid:3)(cid:3)(cid:3) (cid:3)(cid:3)(cid:3)(cid:3) (cid:3)(cid:3)(cid:3)(cid:3) Auditor's Independence Declaration to the Directors of Metcash Limited In relation to our audit of the financial report of Metcash Limited for the year ended 30 April 2013, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. Ernst & Young (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) (cid:3) Michael J Wright Partner 24 June 2013 130 Metcash Annual Report 2013 Independent auditor's report to the members of Metcash Limited Report on the financial report We have audited the accompanying financial report of Metcash Limited, which comprises the consolidated statement of financial position as at 30 April 2013, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information, and the directors' declaration of the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year. Directors' responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 2, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor's responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal controls relevant to the entity's preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal controls. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit we have complied with the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included by reference in the directors’ report. Metcash Annual Report 2013 131 Opinion In our opinion: a. the financial report of Metcash Limited is in accordance with the Corporations Act 2001, including: i. giving a true and fair view of the consolidated entity's financial position as at 30 April 2013 and of its performance for the year ended on that date; and ii. complying with Australian Accounting Standards and the Corporations Regulations 2001; and b. the financial report also complies with International Financial Reporting Standards as disclosed in Note 2. Report on the remuneration report We have audited the Remuneration Report included in pages 47 to 62 of the directors' report for the year ended 30 April 2013. 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. Opinion In our opinion, the Remuneration Report of Metcash Limited for the year ended 30 April 2013, complies with section 300A of the Corporations Act 2001. Ernst & Young Michael J Wright Partner Sydney 24 June 2013 (cid:3) 132 Metcash Annual Report 2013 ASX Additional Information Year ended 30 April 2013 Additional information required by the Australian Securities Exchange and not shown elsewhere in this report is as follows: The information is current as at 10 July 2013: Distribution of Equity Securities The number of shareholders, by size of holding, in each class of share is: Size of Holding 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001-9,999,999,999 Total Number of shareholders 9,659 25,773 9,541 6,831 185 51,989 There were 3,610 shareholders less than a marketable parcel of Metcash ordinary shares. Twenty largest shareholders The names of the 20 largest holders of quoted shares are: Name HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED NATIONAL NOMINEES LIMITED CITICORP NOMINEES PTY LIMITED JP MORGAN NOMINEES AUSTRALIA LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED BNP PARIBAS NOMS PTY LTD CITICORP NOMINEES PTY LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED MILTON CORPORATION LIMITED AMP LIFE LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED NAVIGATOR AUSTRALIA LTD NULIS NOMINEES (AUSTRALIA) LIMITED BKI INVESTMENT COMPANY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED INVIA CUSTODIAN PTY LIMITED UBS WEALTH MANAGEMENT AUSTRALIA NOMINEES PTY LTD QUESTOR FINANCIAL SERVICES LIMITED AUST EXECUTOR TRUSTEES SA LTD Substantial Shareholders The following is extracted from the Company’s register of substantial shareholders: BlackRock Group UBS AG Number of Shares 46,960,476 46,029,290 Voting Rights All ordinary shares (whether fully paid or not) carry one vote per share without restriction. Number of Shares 178,034,891 133,990,627 112,531,330 42,096,871 14,967,454 12,040,471 11,048,485 6,777,227 4,905,913 4,657,560 4,377,772 3,769,414 3,661,684 3,249,493 3,011,000 1,745,897 1,677,710 1,468,721 1,443,271 1,253,006 Percentage of Shares 20.22 15.21 12.78 4.78 1.70 1.37 1.26 0.77 0.56 0.53 0.50 0.43 0.42 0.37 0.34 0.20 0.19 0.17 0.16 0.14 Metcash Annual Report 2013 133 Notes 134 Metcash Annual Report 2013 Notes Metcash Annual Report 2013 135 Notes 136 Metcash Annual Report 2013 Corporate Information ABN 32 112 073 480 Directors Peter L Barnes (Chairman) Patrick N J Allaway Fiona E Balfour Michael R Butler Neil D Hamilton Edwin M Jankelowitz Ian R Morrice V Dudley Rubin Company Secretary Gregory C Watson Registered Ofﬁce 50 Waterloo Road Macquarie Park NSW 2113 Telephone: 61 2 9751 8200 Share Register Boardroom Pty Limited GPO Box 3993 Sydney NSW 2001 Telephone: 61 2 9290 9600 Facsimile: 61 2 9279 0664 Auditor Ernst & Young Internet Address www.metcash.com . 1 0 0 0 T E M # u a m o c e v i t a e r c r e . i l l . o c w w w National Ofﬁce Telephone: 61 2 9751 8200 50 Waterloo Road Macquarie Park NSW 2113 Postal Address PO Box 6226 Silverwater Business Centre NSW 1811 Metcash Food & Grocery Head Ofﬁce Telephone: 61 2 9751 8200 Facsimile: 61 2 9741 3055 50 Waterloo Road Macquarie Park NSW 2113 Postal Address PO Box 6226 Silverwater Business Centre NSW 1811 Australian Liquor Marketers Head Ofﬁce Telephone: 61 2 9741 3000 Facsimile: 61 2 9741 3009 4 Newington Road Silverwater NSW 2128 Postal Address PO Box 6226 Silverwater Business Centre NSW 1811 Mitre 10 Head Ofﬁce Telephone: 61 3 9703 4200 Facsimile: 61 3 9703 4222 12 Dansu Court Hallam VIC 3803 Postal Address Locked Bag 10 Doveton VIC 3177 Automotive Brands Group Head Ofﬁce 72-92 Station Street Nunawading VIC 3131 Telephone: 61 3 8878 1111 Facsimile: 61 3 8878 2266 www.metcash.com

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