National Tyre & Wheel
Annual Report 2019

Plain-text annual report

Annual Report 2019 For personal use onlyContents Chairman’s Letter Managing Director’s report Directors’ report Auditor’s independence declaration Financial statements Notes to the financial statements Directors’ declaration Independent Auditor’s report Shareholder information Corporate Directory Page iv vi 2 21 22 26 70 71 75 77 ii For personal use only 4WD & SUV For personal use onlyChairman’s Letter Dear Shareholder Over the past few years, your Company has been pursuing strategies to diversify into new tyre and wheel segments and to build scale that will deliver operating synergies. Being a larger, more diversified business enhances our ability to build brands as well as deliver outstanding experiences and value to our customers. During the 2019 financial year, and in pursuit of these objectives, the Company: • • • • • Introduced upgraded and new products; Advanced the development of further products for release in the 2020 financial year; Expanded its wheel distribution into New Zealand and South Africa; Leased new premises in Melbourne, blending logistics for Exclusive Tyre Distributors and Dynamic Wheel Company in Victoria; Moved customer service operations to Brisbane, investing in people and technology to enhance the value of those services; and • Launched the Dynamix customer loyalty program in South Africa. Unfortunately, the positive impact of these initiatives was offset by adverse trading conditions. In particular: • • • • Import prices rose because of higher raw material costs and a falling AUD:USD exchange rate; Gross profit margins fell with competitor responses to higher import prices being unusually erratic and supplier assistance to competitiveness concerns being less than we expected; Consumer sentiment deteriorated, reducing demand for tyres generally and for premium products in particular; and The South African business was adversely impacted when the production of a key product suddenly ceased during the year. During the 2019 financial year, the Company generated annual revenue of $168.4 million from its business base covering tyre and wheel importing and original equipment supplying, with a sectoral focus on 4WD, SUV and cars. The Company converted this activity to an EBITDA of $12.8 million. The Company’s balance sheet is strong with net cash at 30 June 2019 of $6.2 million and a debt to equity ratio of 19%. Directors declared a final dividend of 2.05 cents per share and a special dividend of 1.5 cents per share (both fully franked) which were paid to shareholders on 13 September 2019, bringing the full year dividend to 4.8 cents (fully franked). The full year dividend (including the special dividend) represents a payout ratio of 62% of net profit after tax but before amortisation (NPATA), which is slightly higher than the Company’s policy of paying out 40% - 60% of NPATA. The Company now employs more than 180 people in three countries (Australia, New Zealand and South Africa), operates 11 distribution centres and utilises another seven third-party distribution facilities. The business now sells more than 1,000,000 tyres and wheels annually to over 2,000 customers. The difficult trading environment encountered in the 2019 financial year is likely to continue. The Company remains committed to delivering diversity and scale. Rather than changing course, the 2019 financial year result has brought about an acceleration of existing plans to return the Company to a growth trajectory. These initiatives include: • • • increasing the scope of our new product development program to have more affordable offerings in all our target segments; continuing to shift the source of the product mix to match the source of competing products; accelerating the rate at which these new products are released; • more refined promotional activity in the SUV category; • accessing new distribution channels; • driving synergies within the different business units; • • increased investment in technology; and increasing the range and sophistication of value adding services offered to customers, especially as they relate to contemporary consumer purchase pathways. The Company remains committed to delivering diversity and scale iv v For personal use onlyThe Company expects the 2020 financial year to deliver profits similar to the 2019 financial year with the strategic initiatives forecast to provide a foundation for a return to growth in the 2021 financial year. While the Company continues to engage with potential acquisition targets, given current market conditions and the Company’s share price, potential acquisitions would have to pass a very rigorous risk assessment and be capable of execution without distracting management’s attention from completing essential organic growth projects. I would like to welcome Mr. Colin Skead who joined Exclusive Tyre Distributors Australia as Chief Operating Officer in April 2019. Staff and management have worked diligently and constructively during a difficult period and that effort is appreciated. I would also like to thank our customers, suppliers and shareholders, as well as my co-directors, for the support they have delivered over the past year. Yours faithfully Murray Boyte Chairman v For personal use onlyManaging Director’s Report Introduction FY19 was the Company’s first full year as an Australian listed public company (ASX Code NTD). The Company completed an initial public offering (IPO) and was first listed on the ASX in December 2017. Operations - Overview The Company carries on the business of importing and wholesaling tyres and wheels in Australia, New Zealand and South Africa. We employ over 180 people and sell to over 2,000 customers. The Company did not change the nature of its business during the 2019 financial year. Figure A (below) describes our distribution footprint. During the year, we leased premises in Melbourne to combine the warehouse operations of Dynamic Wheel Company and Exclusive Tyre Distributors in Victoria. The Group is engaged in the following businesses: • • • importing and wholesaling wheel Company); (Dynamic Wheel supplying tyres and wheels as original equipment to caravan manufacturers (MPC); and broad based and budget tyre importing and wholesaling (Statewide). Figure B (right) illustrates these entities, the brands they sell and some logos used in connection with promotions: The Company focuses on addressing the needs of the following segments within the broad tyre and wheel industry: • premium 4WD, SUV and passenger tyres; • steel and alloy wheels for 4WD vehicles; • original equipment wheels and tyres for caravans and trailers; and • lower priced tyres. The Company is dedicated to being a value adding, trusted supplier to its customers. • premium 4WD, SUV and passenger tyre importing and wholesaling (Exclusive Tyre Distributors in Australia and New Zealand, as well as TyreLife Solutions in South Africa, which is referred to as Top Draw Tyres in the accompanying financial report); Extensive Distribution Platform Senior Management team with over 200 years combined tyre and wheel industry experience Over 185 employees in 3 countries Figure A vi vii 14 For personal use onlyA diversified tyre and wheel wholesaler Figure B Operations – 2019 Financial Year The Group has been executing various projects to respond to changes in our operating environment (e.g. the rise of SUV vehicles, the growing number of 4WD tyre choices, changes to consumer purchase pathways, surplus capacity in the industry and the emergence of retailers challenging incumbent tyre specialty stores). During FY19, the Group: released an upgraded version of the popular Cooper AT3 all-terrain 4WD tyre; launched the new Cooper ATT SUV tyre; continued the development of more new products to be released in FY20; launched the new “Trilogy” and “Dirty Life” wheels; commenced selling wheels in South Africa and expanded the range of wheels sold in New Zealand; consolidated customer service activities (e.g. call centres) in Brisbane, recruited experienced call centre personnel and invested in relevant new technology; re-organised some sales team structures with some related cost savings; launched Dynamix, a new customer loyalty program in South Africa; • • • • • • • • • • grew membership of existing customer loyalty programs, including the movement of many customers to higher levels within those programs; • grew our overall customer base; and • increased the volume of cross sold products. The benefits that might have otherwise flowed from the completion of these tasks in the FY19 result were diminished by the following changes to our operating environment: • • • • • Import prices rose with AUD falling ≈ 10% against the USD and factory prices rising with the increased cost of some raw materials (especially carbon black); US sourced products became more expensive relative to products sourced from Asian manufacturers as those near sourced producers elected to absorb more of the higher raw material costs; Inventory building throughout the industry in calendar 2018 maintained pressure on wholesale prices, despite the falling AUD; Negative consumer sentiment in Australia and South Africa, with sales of premium products particularly affected; Changing consumer preferences – demand for premium mud tyres shifting to all terrain and rugged terrain tyres, with challenges exacerbated by the wide array of 4WD tyres now available with various price/quality levels; and completed a consumer segmentation project to better inform promotional choices, especially in the SUV category; • The discontinuation of a key product in South Africa (due to a factory closure). vii For personal use onlyManaging Director’s Report cont... FY19 Results This FY19 Annual Report contains some comparison of the FY19 results to the FY18 pro forma results published last year. The FY18 pro forma results were prepared to provide a normalised basis for comparing that year’s results to financial information included in the IPO prospectus. The Company acquired Statewide Tyre Distribution (Statewide) in May 2018 and the FY19 results include a full year’s trading from that business that was not included in the FY18 pro forma results. Apart from the inclusion of the Statewide business, the FY19 financial statements do not include any business that was not included in the FY18 pro forma financial statements. Results summary: Tyre Units $’000 Revenue Gross Profit Gross Profit (%) Operating Costs as % of total revenue EBITDA EBITDA Margin NPAT NPATA attributable to shareholders FY18 Pro forma FY19 Actual 776,123 982,696 153,402 168,376 50,078 48,418 32.6% 21.8% 28.8% 21.2% 16,940 12,821 11.0% 9,741 10,740 7.6% 6,676 7,967 viii ix For personal use onlyThe key financial outcomes in FY19 were: • Volumes and revenue (excluding Statewide) were both lower than the FY18 pro forma due to falls in premium product sales, weakness in truck and budget products and issues arising from a key product being discontinued in South Africa. • Total revenue for FY19 was $168.4 million. • • • • Gross Profit (excluding Statewide) fell with higher import prices, falling volumes and despite price increases. Concerns about competitiveness meant the Group had to absorb higher cost of sales, with gross margin falling to 28.8% compared to 32.6% in the FY18 pro forma. Expenses in FY19 (allowing for Statewide) were approximately the same as the FY18 pro forma. FY19 EBITDA was $12.8 million compared to a FY18 pro forma EBITDA of $16.9 million. FY19 NPATA was $7.97 million compared to FY18 pro forma NPATA of $10.7 million. • At 30 June 2019, the Group had: - Net assets of $70.7 million; - Net tangible assets of $50.4 million; and - Cash of $19.5 million and net cash of $6.2 million. • • • Continuing investment in IT platforms as part of offering additional services and to tap into new consumer purchase pathways; Focussing more on brand building promotional activity to build consumer awareness and consideration; Increasing revenue from cross selling within the group and identifying cost synergies. The Group is not expecting profit growth in FY20 because: • • • • Market conditions are not likely to improve. In particular, pressure on the supply side (surplus capacity, import pricing from Asia and USA import prices decoupling from Asia together with continued discounting by competitors) as well as sluggish consumer demand (impacting premium products) will continue to affect volume and margins; The Group’s solutions (new products, near source procurement, operating improvements and accessing new distribution channels) will take time to implement; Customer gains and losses are expected as the Group seeks customers willing to distribute an expanded array of products, with the full benefit of the expanded distribution footprint likely to contribute more in FY21; and Additional costs associated with the accelerated execution of various projects will be incurred in FY20 but will not generate returns until Q4 of FY20 and into FY21. • The Company has paid a final dividend of 2.05 cents per share and a special dividend of 1.5 cents per share (both fully franked) to shareholders on 13 September 2019, bringing the full year dividend to 4.8 cents (fully franked). The Group is therefore treating FY20 as a year of transition to a broader product and customer base substantially reducing dependency on premium products and positioning all businesses for more robust and sustainable growth after FY20. Outlook The following activities represent the Group’s response to the operating environment that emerged in FY19: • • • With the use of pricing levers for premium products apparently diminished by other market forces, the Group will accelerate the reconfiguration of the product mix to more affordable alternatives in all segments; Changing the product mix will include a focus on near sourced manufacturing, with supplies coming from the same countries as our competitors; Enhanced value adding services for our customers to encourage the adoption of new products and to attract new customers; ix The Company has paid a final dividend of 2.05 cents per share and a special dividend of 1.5 cents per share (both fully franked) to shareholders on 13 September 2019, bringing the full year dividend to 4.8 cents (fully franked). For personal use only Managing Director’s Report cont... Acknowledgements FY19 was a disappointing year. While the Group has been executing various strategies in response to a changing operating environment, the headwinds experienced in FY19 negated the expected growth from those measures. Our people, suppliers and customers continued to support the Group in FY19 and we remain grateful for those contributions. During FY19, the Group consolidated customer service activities (e.g. call centres) in Brisbane, recruited experienced call centre personnel and invested in relevant new technology Peter Ludemann Managing Director WHY CHOOSE COOPER® SUV TYRES? WHY CHOOSE COOPER® 4WD TYRES? 1300 COOPER (266 737) coopertires.com.au Effective as at August 2019 1300 COOPER (266 737) coopertires.com.au Effective as at August 2019 x For personal use only Financial Report 2019 For personal use onlyDirectors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the 'Group') consisting of National Tyre & Wheel Limited (referred to hereafter as the 'Company', 'NTAW' or 'parent entity') and the entities it controlled at the end of, or during, the year ended 30 June 2019. Directors The following persons were directors of National Tyre & Wheel Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Murray Boyte (John) Peter Ludemann Terence (Terry) Smith William (Bill) Cook Robert Kent Non-Executive Chairman Chief Executive Officer and Managing Director Executive Director Non-Executive Director Non-Executive Director Principal activities The principal activity of the Group during the financial year ended 30 June 2019 was the distribution and marketing of motor vehicle tyres, wheels, tubes and related products in Australia, New Zealand and South Africa. NTAW is the holding company for the following operating subsidiaries: ● ● ● ● ● ● Exclusive Tyre Distributors Pty Ltd (“ETD”); Exclusive Tyre Distributors (NZ) Limited (“ETDNZ”); Dynamic Wheel Co Pty Ltd (“Dynamic”); M.P.C. Mags and Tyres Pty Ltd (“MPC”); Statewide Tyre Distribution Pty Ltd (“Statewide”); and Top Draw Tyres Proprietary Limited (“Top Draw Tyres”) The tyre and wheel industries are large with retail revenue in Australia estimated to exceed $5bn. NTAW segments the tyre and wheel market by vehicle type, geography and consumer behaviour. The subsidiary entities seek to operate in segments with products and business models that offer competitive advantages. ETD and ETDNZ are the exclusive importers and wholesale distributors of Cooper, Mickey Thompson, Starfire and Mastercraft branded 4WD, SUV and passenger tyres in Australia and New Zealand. They also import Federal branded tyres in Australia (excluding Queensland) and New Zealand. Cooper and Mickey Thompson products are well known to consumers for their reliability and performance. ETD and ETDNZ offer value adding services to retail customers and these services underpin strong retail support for the promotion of their products. Dynamic has a leading position in Australia for the importation and wholesale distribution of steel wheels, including the proprietary Dynamic brand. MPC specialises in supplying wheel and tyre packages for caravan and trailer manufacturers in Australia including the proprietary MPC brand. Statewide Tyre Distributors has a leading position in South Australia for the importation and wholesale distribution of tyres and wheels, supplying less expensive products than the Group’s other wholesale businesses and operating in the truck and bus tyre segment. Top Draw Tyres is the exclusive importer and wholesale distributor for Cooper and Mickey Thompson branded 4WD, SUV and passenger tyres in South Africa and neighbouring countries. In addition to the results from the operation of these well established businesses, the Group is executing growth strategies described below under the heading “Review of Operations”. NTAW management believes there have been no significant changes in the nature of the Group’s activities during this period. 2 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 Dividends Dividends paid during the financial year were as follows: Final dividend for the year ended 30 June 2018 of 2.30 cents per ordinary share Interim dividend for the year ended 30 June 2019 of 1.25 cents per ordinary share Final dividend for the year ended 30 June 2017 (declared and paid prior to the IPO) Interim dividend for the year ended 30 June 2018 of 1.00 cents per ordinary share Dividends to non-controlling interests Consolidated 2019 $'000 2018 $'000 2,353 1,283 - - - - - 15,000 1,011 656 3,636 16,667 At the date of signing these financial statements, the Company has declared a fully franked final dividend of 2.05 cents per share and a fully franked special dividend of 1.50 cents per share with a record date of 3 September 2019 and a payment date of 13 September 2019. The total dividends payable are $2.1 million and $1.5 million. The financial effect of these dividends have not been brought to account in the financial statements for the year ended 30 June 2019 and will be recognised in subsequent financial reports. Review of operations NTAW’s Board and management are pleased to report that the result for the financial year is ahead of the FY2019 trading update issued to the market on 2 May 2019. Results highlights Statutory results NTAW has reported total revenue of $168.4 million (2018: $146.3 million) for the financial year, an increase of $22.1 million (15.1%) on the prior year resulting from the acquisition of several entities during the prior period. NTAW’s statutory profit for the Group after providing for income tax and non-controlling interest amounted to $6.4 million (30 June 2018: $4.5 million). The FY2019 year results are representative of a full reporting period for the Group in its current operating structure. The result for the previous year was impacted by the one-off costs associated with the initial public offer (“IPO”) of NTAW, pre- IPO acquisition expenses, recognition of share-based payment expenses relating to the former option plan and other items as described the in FY2018 accounts. NTAW has a strong balance sheet with net assets of $70.7 million (2018: $66.7m). The shareholders’ funds to total assets is 59.8% (2018: 54.8%) and net cash of $6.2 million (2018: $5.2 million). Pro forma results In addition to the statutory results, pro forma financial information for the prior year is presented below to enable the result for the year to be compared to the financial information contained in NTAW’s Prospectus and prior year result. The pro forma information is provided on an unaudited basis and Table 3 provides a reconciliation between the statutory and pro forma performance information. NTAW’s result for the year was a profit after providing for income tax and non-controlling interests and excluding amortisation (‘NPATA’) of $8.0 million compared with an actual pro forma NPATA for the prior year of $10.7 million. Pro forma adjustments were made in the prior year to reflect the inclusion of the acquired interests in Cotton and Top Draw Tyres with effect from 1 July 2017, and to reflect the cost structure of the Group as a listed entity. Statewide’s results are included in the statutory results for the year but have been excluded from the prior year pro forma results in each of the following tables as it was not acquired until 31 May 2018. Overall performance The results have been adversely affected by sluggish consumer demand, import price rises and increased price competition which has had a consequential effect on gross margins. 3 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 NTAW management has proactively responded to changing market conditions and introduced a number of new initiatives and growth strategies that are expected to have a positive impact in the future. These include: ● ● ● ● ● ● ● ● ● ● ● New products to both replace existing models and target new segments (based on vehicle type, consumer characteristics and/or price (value) position); NTAW is accelerating the pace at which new products are released. Examples include Cooper’s AT3, ATT and Evolution MT tyres, the Dick Cepek EXP, Dirty Life Alloy wheels, Dynamic’s Liberty wheel and the Momo tyre brand in South Africa; Promoting a new range of SUV and passenger tyres launched in Australia in 2016 targeting an increase in the Group’s share of these markets from a low base; Customer loyalty programs to support value adding relationships with existing customers and provide a platform for developing new customers; A communication plan and a distribution model compatible with contemporary consumer purchase pathways; Introducing new wheel products from the Dynamic stable of products to New Zealand and South Africa; Expanding the business presently only operated by Statewide in South Australia and the NT; Various business improvement initiatives, including: - Upgrading customer contact centres with new technology and the recruitment of people who specialise in customer contact services; - Having field sales teams concentrate more on key accounts and business development; - Harmonising financial reporting and enterprise management throughout the Group; - Accelerating the movement of inventory; and - Increasing the range and depth of value adding services supplied by each business. Seeking access to near source manufacture from our suppliers; Achieving synergies within the group from cross selling and shared services; Continuing to seek diversity and scale by building a pipeline of other tyre and/or wheel importers NTAW could potentially acquire. NTAW’s core business is very sound and well positioned to capitalise on market opportunities. Management is working on a number of strategic initiatives covering supply chain management and new product development (especially in the SUV segment) that will enhance the future development of NTAW’s core business. Key operating metrics of NTAW Table 1 below shows some of the key operating metrics and ratios for NTAW for the financial year. NTAW sold 982,696 tyre units in the financial year compared with 776,123 in the 2018 financial year. While the Group achieved year on year growth, 4WD tyre unit sales growth in Australia was below expectations due to sluggish consumer demand and intense price competition. FY2019 volumes include units that were not included for a full year in the FY2018 accounts because Statewide was not a subsidiary for all of FY2018. The Group has reported a full year gross profit margin of 28.8% (2018: 32.6% pro-forma) and an EBITDA margin of 7.6% (2018: 11.0% pro-forma). The gross profit margin reduction was driven by higher than expected USD import prices, less favourable than expected exchange rates between the AUD and USD and price discounting by competitors. The Group’s operating costs as a percentage of sales were 21.2%, down from 21.8% in the prior year. Table 1 Number of tyres sold Gross profit margin Operating costs as % of total revenue EBITDA margin Pro forma Statutory Statutory Actual FY2018 Actual FY2018 Actual FY2019 776,123 - 982,696 32.6% 21.8% 11.0% 32.6% 24.8% 7.8% 28.8% 21.2% 7.6% 4 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 Pro forma Historical Income Statements, Pro forma Forecast and Statutory Forecast Income Statements Table 2 below compares the result for the year with the Pro forma Actual FY2018 result. NTAW has reported full year sales revenue of $168.4 million (FY2018 pro forma actual $153.4 million) and gross profit on sales of $48.4 million (FY2018 pro forma actual $50.1 million). The Group has reported a full year EBITDA of $12.8 million (FY2018 pro forma actual $16.9 million). The result for FY2019 contains an unrealised foreign exchange gain on foreign exchange contracts and foreign currency denominated suppliers of $0.1 million, a share-based payment expense for shares gifted to employees by key management personnel of $0.13 million (refer to note 36) and one off due diligence costs of $0.15 million resulting in an underlying EBITDA for the year of $13.0 million. Pro forma Statutory Statutory Actual FY2018 Actual FY2018 Actual FY2019 153,402 (103,324) 146,158 (98,507) 168,376 (119,958) 50,078 227 (16,826) (5,761) (3,749) (7,029) 16,940 (707) (1,639) 14,594 - (357) 14,237 (4,496) 9,741 (427) 9,314 1,426 47,651 11 (18,357) (5,094) (3,657) (9,166) 11,388 (696) (1,431) 9,261 133 (339) 9,055 (3,700) 5,355 (878) 4,477 1,280 48,418 43 (18,088) (5,813) (4,410) (7,329) 12,821 (774) (1,854) 10,193 - (542) 9,651 (2,975) 6,676 (286) 6,390 1,577 10,740 5,757 7,967 Table 2 $'000 Sales revenue1 Cost of sales Gross profit Other revenue Employee benefits expense Advertising & promotions Occupancy expense Other expenses EBITDA Depreciation Amortisation of intangibles EBIT Share of net profit of associate Interest (net) Profit before tax Income tax expense NPAT Non-controlling interests NPAT attributable to NTAW Amortisation [addback] NPATA attributable to NTAW Notes to Table 2: 1 Revenue from sale of goods only, excluding interest income, share in associates and other revenue. 5 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 Table 3 provides a reconciliation between the prior year statutory and pro forma performance information. Table 3 $'000 Pro forma amount Acquired businesses - Cotton - Top Draw Tyres - Statewide Inter-company eliminations Equity accounting Top Draw Tyres Unrealised FX Translation Offer costs Public company costs Share based payments Other pro forma adjustments Net interest Taxation adjustment Statutory amount FY2018 Actual Notes Revenue FY2018 Actual NPAT 153,402 9,741 1 1 1 2 3 4 5 6 7 8 9 10 (3,193) (8,804) 1,968 2,785 - - - - - - - - (140) (414) - - 133 (628) (1,455) 28 (2,057) (44) 18 172 146,158 5,354 Notes to Table 3: 1 Revenue and NPAT relating to acquired businesses - reflects the trading of the Group from 1 July 2017 to the dates on which they became controlled (to the extent such trading was not already included in the FY2018 statutory financials for NTAW). Inter-company eliminations – reflects transactions by NTAW with the acquired businesses from 1 July 2017 to the dates on which they became controlled which are required to be eliminated (to the extent such trading was not already included in the FY2018 statutory financials for NTAW) Equity accounting Top Draw Tyres - reflects the equity accounted share of Top Draw Tyres’ profit for the period from 1 November 2017 until the date of control 13 December 2017. Unrealised FX translations – reflects the non-cash accounting for foreign exchange translations at 30 June 2018 in accordance with AASB 121. Offer costs – reflects the amounts expensed in FY2018 in relation to the IPO. $1.475 million of the offer costs were tax effected and netted off against issued capital. Public company costs – reflects the increase in corporate costs expected as a consequence of the Company becoming ASX listed. Share based payments – reflects a share based payments remuneration expense based upon the LTI scheme operating prior to the IPO. Other pro forma adjustments – includes one-off costs that are considered to be non-recurring as well as Group elimination entries. Interest (net) – Interest (net) reflects the expense on the corporate debt facility and finance leases at completion of the IPO, offset by interest income on cash. Taxation adjustment – Net taxation effect of other residual items between forecast pro forma taxation expense (including recurring non-deductible items) and taxation statutory expense. 2 3 4 5 6 7 8 9 10 Significant changes in the state of affairs There were no significant changes in the state of affairs of the Group during the financial year. Financial position Key financial information in relation to the Group’s financial position at year end is shown below: Total Assets ($’000) Net Assets ($’000) Cash and cash equivalents ($’000) Debt ($’000) Shares on issue (’000) 30 Jun 2019 30 Jun 2018 118,205 70,744 19,554 13,335 102,891 121,588 66,663 19,608 14,435 102,321 Dividends per security (cents) – post IPO only, including final dividend declared 4.8 3.3 Significant balance sheet movements during the financial year were as follows: ● Total assets decreased by $3.3 million, driven by the amortisation of intangibles in the period of $1.85 million and a decrease in trade and other receivables of $1.1 million. Total liabilities decreased by $7.4 million driven by a reduction in trade creditors of $5.6 million and a decrease in net borrowings of $1.1 million. Issued capital increased by $0.5 million which included the issue of new shares under the DRP. ● ● 6 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 Matters subsequent to the end of the financial year Apart from the dividend declared as disclosed above and the lapsing of 1.63 million options as noted in the Remuneration Report and note 36, no other matter or circumstance has arisen since 30 June 2019 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years. Likely developments and expected results of operations The Group will continue to pursue growth in revenue in the next financial year as it seeks to further diversify its business and build the scale of its operations in the importation and wholesale distribution of tyres and wheels in Australia, New Zealand and South Africa. Focus areas will include organic growth in the markets within which it operates, including capitalising on the opportunities for revenue and cost synergies associated from the businesses already acquired, and considering further acquisition growth over time. The Group is not expecting profit to grow in FY2020 because it will be investing in new products and other operational improvements that are expected to deliver returns that will grow profits after FY2020. Material business risks The Board is committed to monitoring and mitigating business risks faced by the Group, including the following key risks that have the potential to materially impact its financial prospects: ● ● ● ● ● ● Supplier risk - the Group is reliant on long-term formal distribution and licence agreements with key suppliers, including Cooper Tire and Mickey Thompson for the supply of many products it wholesales. The Group owns customer relationships and controls the marketing of brands, but it relies on rights under formal long-term agreements granted by Cooper Tire and other suppliers to access those brands. The Group proactively engages in maximising its key relationships to mitigate such risks. Foreign exchange risk - a significant proportion of the Group’s costs and expenses are transacted in foreign currencies. Adverse movements between the Australian dollar, New Zealand dollar and South African Rand against the US dollar may increase the price at which the Group acquires its trading stock and result in volatility in profitability to the extent that the Group may or may not be able to pass on price changes to its customers (after allowing for the impact inventory cycles have on the time it takes for exchange rate movements to impact on cost of goods sold and the behaviour of competitors). The Company also seeks to use foreign exchange contracts to mitigate its foreign exchange exposures. The effect of foreign currency translation on operating results from offshore operations remains inherent in the Group’s business. Business integration risk – the Group has acquired interests in several businesses during the FY2018 year. Successfully integrating and extracting synergies from acquisitions and managing growth is critical to the Group’s continued performance and earnings from the acquisitions. The Group’s Board and management is experienced in acquiring and integrating businesses, conducts comprehensive due diligence and ensures an integration plan is followed. Retention of key personnel - the Group’s future success is significantly dependent on the expertise and experience of its key personnel and management. The loss of services of key members of management, and any delay in their replacement, or the failure to attract additional key managers to new roles could have a material adverse effect on NTAW’s financial performance and ability to deliver on its growth strategies. Customer risk – the Group is dependent on its ability to retain its existing customers and attract new customers. Although customer concentration is low, sales revenue would be adversely affected if all members of a chain or group decided not to purchase products from the Group. The Group proactively manages its customer relationships and has established value adding customer loyalty programs. Risk of competition - the tyre and wheel wholesale market is highly competitive. Competition is based on factors including price, service, quality, performance standards, range and the ability to provide customers with an appropriate range of quality products in a timely manner. A failure by the Group to effectively compete with its competitors may adversely affect the Group’s future financial performance and position. Environmental regulation The Group is not subject to any significant environmental regulation under Australian Commonwealth or State law. 7 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 Information on directors Name: Title: Experience and expertise: Other current directorships: Murray Boyte Independent, Non-Executive Chairman Mr Boyte has over 35 years' experience in merchant banking and finance, undertaking company reconstructions, mergers and acquisitions in Australia, New Zealand, North America and Hong Kong. In addition, he has held executive positions and Directorships in the transport, horticultural, financial services, investment, health services and property industries. Abano Healthcare Group Limited (NZX); Eureka Group Holdings Limited (ASX: EGH); Hillgrove Resources Limited (ASX: HGO) Former directorships (last 3 years): Unity Pacific Group (ASX: UPG) Special responsibilities: Interests in shares: Interests in options: Member of Audit and Risk Committee; Member of Remuneration and Nominations Committee 156,237 ordinary shares Nil Experience and expertise: Name: Title: Qualifications: John (Peter) Ludemann Chief Executive Officer ('CEO') and Managing Director Degrees in Law and Commerce (Marketing) from University of New South Wales ('UNSW') Mr Ludemann joined the Group as a director in 2012 and become full time CEO of NTAW in July 2013. He has worked as a commercial lawyer, a director of numerous private companies, the Managing Director of a Life Science Investment firm and as a Private Equity Investment Manager at AMP Capital. He has been the driving force behind the evolution of NTAW from a closely held family trust carrying on a niche 4WD tyre wholesale business to a more widely held entity operating in the car, SUV and 4WD tyre segments. He has managed the acquisition and integration of Dynamic, MPC, National Tyre Wholesalers, Statewide and Top Draw. Mr Ludemann has been responsible for the execution of a succession plan for NTAW founders that has included the distribution of retained earnings, the creation of a public company corporate structure, the IPO and listing of NTAW as well as generational change within the Group. Nil Other current directorships: Former directorships (last 3 years): Nil Nil Special responsibilities: 2,759,928 ordinary shares Interests in shares: Nil Interests in options: Name: Title: Experience and expertise: Terence (Terry) Smith Executive Director Mr Smith has over 40 years' experience in tyre importing, wholesaling and retailing. Terry’s career is one of successful entrepreneurship, as he and wife Susanne, were responsible for taking Exclusive Tyre Distributors ('ETD') from a start-up business to one of the largest independent national tyre wholesalers in Australia. Nil Other current directorships: Former directorships (last 3 years): Nil Special responsibilities: Interests in shares: Interests in options: Member of Remuneration and Nominations Committee 27,255,297 ordinary shares Nil 8 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 Name: Title: Experience and expertise: William (Bill) Cook Independent, Non-Executive Director Mr Cook is an Independent Non-Executive Director of NTAW. Mr Cook commenced his career at Ford Motor Company in finance. He worked for Consolidated Press Holdings with the late Kerry Packer from 1983 to 1996 as Head of M&A and worldwide reporting. After two years as General Manager of Qantas Flight Catering’s Sydney business he undertook Private Equity investment consulting roles, and subsequently joined AMP Capital as an investment manager in the Private Equity team. Since leaving AMP, Mr Cook has served as non-executive director for a number of companies, including NTAW since 2013. Nil Other current directorships: Former directorships (last 3 years): Nil Special responsibilities: Chair of Audit and Risk Committee; Member of Remuneration and Nominations Committee 303,132 ordinary shares Nil Interests in shares: Interests in options: Experience and expertise: Name: Title: Qualifications: Robert (Rob) Kent Independent, Non-Executive Director Bachelor of Business degree (Marketing) from the Queensland University of Technology and is a Graduate of the Australian Institute of Company Directors. Mr Kent was the Managing Director of Publicis Mojo (Queensland), part of a global advertising firm, from 2000 to 2017. He was also a member of the Publicis National Board of Management. Rob is an experienced marketing executive who has managed many campaigns involving sales, promotion and brand building. He was also Managing Director of Personalised Plates Queensland from 2013 to 2017. Under his management, sales grew by 34% over 4 years with internet traffic providing 75% of revenue. Mr Kent was a Director of ACT for Kids (a charity) from 2001 to 2013 and member of the Board of South Bank Business Association in Brisbane from 2002 to 2009. Nil Other current directorships: Former directorships (last 3 years): Nil Special responsibilities: Chair of Remuneration and Nominations Committee; Member of Audit and Risk Committee 204,901 ordinary shares Nil Interests in shares: Interests in options: 'Other current directorships' quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 'Former directorships (last 3 years)' quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. Company secretaries Jason Lamb Mr Lamb is the Chief Financial Officer and joint Company Secretary. Mr Lamb has nearly 20 years’ accountancy experience. He is a Certified Practicing Accountant with a Bachelor of Commerce (Accounting) and a Bachelor of Economics from the University of Queensland. Mr Lamb was responsible for setting up the financial accounting systems for NTAW. He has also been responsible for all financial due diligence work relating to business acquisitions and the establishment of financial reporting systems for those operating entities. He participates in all Board meetings for NTAW and each operating entity as well as overseeing the production of financial reports for all entities. Laura Fanning Mrs Fanning is the joint Company Secretary and was appointed on 8 February 2018. Mrs Fanning is a Chartered Accountant and Chartered Secretary with more than 20 years’ financial, governance and commercial experience. She has held Company Secretary and senior finance position positions in several listed and unlisted companies. 9 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 Meetings of directors The number of meetings of the Company's Board of Directors ('the Board') and of each Board committee held during the year ended 30 June 2019, and the number of meetings attended by each director were: Full Board Remuneration and Nominations Committee Audit and Risk Committee Attended Held Attended Held Attended Held Murray Boyte John Peter Ludemann Terence Smith William Cook Robert Kent 15 15 15 14 14 15 15 15 15 15 1 1* 2 2 2 2 1* 2 2 2 4 1* 3* 4 4 4 1* 3* 4 4 Held: represents the number of meetings held during the time the director held office or was a member of the relevant committee. * Attended by invitation only Remuneration report (audited) The Board is pleased to present the Company’s remuneration report. The remuneration report details the key management personnel remuneration arrangements for the Group, in accordance with the requirements of the Corporations Act 2001 and its Regulations. Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all directors. The remuneration report is set out under the following main headings: (a) Principles used to determine the nature and amount of remuneration (b) Details of remuneration (c) Relationship between remuneration and Company performance (d) Service agreements (e) Share-based compensation (f) (g) Other transactions with key management personnel Equity instruments held by key management personnel (a) Principles used to determine the nature and amount of remuneration The objective of the Group's executive remuneration framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive remuneration with the achievement of strategic objectives and the creation of value for shareholders, and it is considered to conform with accepted market practice for remuneration and reward. The Board of Directors ('the Board') ensures that executive remuneration satisfies the following key criteria for good remuneration governance practices: ● ● ● ● competitiveness and reasonableness; acceptability to shareholders; performance linkage / alignment of executive compensation; and transparency. The Remuneration and Nominations Committee is responsible for reviewing remuneration arrangements for its directors and executives and making recommendations to the Board for consideration and approval. The performance of the Group depends on the quality of its directors and executives. The remuneration philosophy is to attract, motivate and retain high performance and high quality personnel. The Remuneration and Nominations Committee has structured an executive remuneration framework that is market competitive and complementary to the reward strategy of the Group, as determined by the Board. 10 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 The reward framework is designed to align executive reward to shareholders' interests. The Board considers that it should seek to enhance shareholders' interests by: ● ● having economic profit as a core component of plan design; focusing on sustained growth in shareholder wealth, consisting of dividends and growth in share price, and delivering constant or increasing return on assets as well as focusing the executive on key non-financial drivers of value; and attracting and retaining high calibre executives. ● Additionally, the reward framework should seek to enhance executives' interests by: ● ● ● rewarding capability and experience; reflecting competitive reward for contribution to growth in shareholder wealth; and providing a clear structure for earning rewards. Since the Group’s listing on the ASX, in accordance with best practice corporate governance, the structure of non- executive director and executive director remuneration is separate. Non-executive directors' remuneration Fees and payments to non-executive directors reflect the demands and responsibilities of their role. Non-executive directors' fees and payments are reviewed annually by the Remuneration and Nominations Committee. The chairman's fees are determined independently to the fees of other non-executive directors based on comparative roles in the external market. The chairman is not present at any discussions relating to the determination of his own remuneration. Since the Group’s IPO, non-executive directors do not receive share options or other incentives. Under NTAW’s constitution, the directors decide the total amount paid to all directors as remuneration for their services. However, under the ASX listing rules, the aggregate non-executive directors' remuneration (ie excluding the Managing Director and executive directors, if any) for a financial year must not exceed the amount fixed by the Company in general meeting. This amount has been fixed at $750,000 per annum. Any changes to the aggregate remuneration will be put to a general meeting where the shareholders will be asked to approve a maximum annual aggregate remuneration. The annual base non-executive director fees paid by the Company are $90,000 per annum for the chairman and $70,000 per annum for other non-executive Directors. From 1 July 2018, an additional fee of $10,000 per annum has been paid to the chairman of each Board committee. Directors may also be reimbursed for all travelling and other expenses incurred in connection with their Company duties. Executive director remuneration Fees and payments to executive directors reflect the demands and responsibilities of their role. Executive directors' fees and payments are reviewed annually by the Remuneration and Nominations Committee. Details of executive director remuneration are contained in section (d) Service Agreements. Executive remuneration The Group aims to reward executives based on their position and responsibilities, with a level and mix of remuneration which has both fixed and variable components. The Board adopted a new executive remuneration framework, including new short term incentive (STI) and long term incentive (LTI) programs with effect from and including the financial year ending 30 June 2019. The new framework includes the following components: ● Fixed remuneration – comprising base salary, superannuation contributions and other benefits, having regard to comparable market benchmarks. Executives may receive their fixed remuneration in the form of cash or other fringe benefits (for example motor vehicle benefits) where it does not create any additional costs to the Group and provides additional value to the executive; ● ● STI program – an ‘at risk’ component of remuneration where, if individual, business unit and Group performance measures are met, senior executives will be awarded cash bonuses equal to a percentage of their fixed remuneration. Performance measures will include a financial gateway hurdle and non-financial KPIs. The percentage of fixed remuneration received as an STI will be capped, but may vary, between individuals and depending on the level of performance achieved; and LTI program – an ‘at risk’ component of remuneration where senior executives are awarded options which are subject to an earnings per share (EPS) performance condition and a service condition. The number of options to be awarded will be determined by the Board having regard to the overall amount of executive remuneration and the annual profit impact of the options awarded. 11 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 The combination of these comprises the executive's total remuneration. The Board believes that this remuneration framework ensures that remuneration outcomes link to Company performance and the long-term interests of Shareholders. 2019 STI Program During FY2019, senior executives’ entitlement to an STI was based on achievement of agreed performance objectives including: ● ● ● ● ● Financial performance Operational performance Strategy and innovative initiatives Workplace health and safety Stakeholder satisfaction. Actual performance criteria varied between executives, having regard to their roles and responsibilities. No STIs were awarded to key management personnel during the year pursuant to this program as the financial gateway hurdle was not satisfied. Two discretionary bonuses were awarded for specific business unit achievements. 2019 LTI Program Options may be granted under the Employee Share Option Plan which was adopted on 6 November 2017. Each option entitles the participant to subscribe for one ordinary share in the Company. The specific terms relevant to the grant of options are set out in an offer from the Company to the Eligible Person which contains details of the application price (if any) (which must not be for more than nominal consideration), the expiry date, the exercise price, the vesting date, any applicable performance conditions and other specific terms relevant to those options. During FY2019, 1.63 million options were granted to senior executives, including certain members of the key management personnel, pursuant to the ESOP on the specific key terms: ● The Vesting Date of the options was 30 September 2021 or three years from the Grant Date, whichever is earlier, subject to meeting the Performance Conditions. The Performance Period for the Performance Conditions is the period from the Grant Date until the Vesting Date (inclusive of each of those dates). The performance conditions were as follows: ● ● 1) Earnings per share condition – the Company’s earnings per share (EPS) for the year ended 30 June 2019 was to be at least 10% higher than its EPS for the year ended 30 June 2018. Calculation of the EPS growth rate is based upon the EPS results reported in NTAW’s audited financial statements for the above years. The Basic EPS reported may be adjusted for items which the Board, in its discretion, considers should be included in, or excluded from, the result. The Board determined that the FY2018 base EPS for the Options would be 11.5 cents per share. This was based upon the Company’s pro forma NPATA attributable to NTAW shareholders, adjusted for the pro forma impact of the impact of Statewide. 2) Service condition – continuous employment of the employee with NTAW or one of its subsidiaries from the Grant Date until the Vesting Date. ● ● The Expiry Date of the options was 30 September 2023 which is two years after the Vesting Date, if not lapsed earlier. If the Performance Conditions are not met before the end of the Performance Period, the options will lapse. The options granted in FY2019 have now lapsed because the EPS condition was not met. As at the date of this report, there were no options outstanding (2018: nil). It is the Board’s intention to grant options to senior executives for the FY2020 LTI. The specific terms of the grant are expected to be finalised in September 2019, and, in the case of the Managing Director, will be subject to shareholder approval. 12 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 (b) Details of remuneration The key management personnel of the Group in FY2019 consisted of the following directors of National Tyre & Wheel Limited: ● ● ● ● ● Murray Boyte - Chairman John Peter Ludemann - Chief Executive Officer and Managing Director Terence Smith - Executive Director William Cook - Non Executive Director Robert Kent - Non Executive Director And the following persons: ● ● ● ● ● Jason Lamb - Chief Financial Officer and Joint Company Secretary Chris Hummer - Managing Director, Dynamic Georg Schramm - Managing Director, Top Draw Tyres (South Africa) Trevor Wren - Managing Director, Statewide Roshan Chelvaratnam - Managing Director, MPC Amounts of remuneration Details of the remuneration of key management personnel of the Group are set out in the following tables. Short-term benefits Cash bonus FY193 $ Cash bonus FY181 $ Cash salary and fees4 $ Post- employment benefits Long-term benefits Share- based payments Non- Super- monetary annuation $ $ Long service leave $ Equity- settled2 $ Total $ 82,192 73,060 55,000 83,014 464,215 - - - - - - - - - - - 7,808 6,940 25,000 - - - - 138,806 - 7,059 8,192 25,000 - 16,522 278,627 151,502 364,054 165,312 157,944 1,874,920 - - 20,488 20,000 - 40,488 65,506 - - - - 204,312 - - 20,119 - - 27,178 25,000 15,502 - 16,594 16,461 146,497 13,673 10,614 - 16,755 3,998 61,562 - - - - - 90,000 80,000 80,000 91,206 651,602 382,806 - 177,618 - 404,661 - 218,661 - - 178,403 - 2,354,957 2019 Non-Executive Directors: M Boyte W Cook R Kent Executive Directors: T Smith J Ludemann Other Key Management Personnel: J Lamb C Hummer G Schramm T Wren R Chelvaratnam 1 2 3 4 Bonuses accrued in FY2018 and paid in FY2019. The 2018 STIs were determined by the Board, having regard to the Company’s strategy and ability to achieve the pro forma net profit targets contained in the Prospectus. All options issued during the year and outstanding as at 30 June 2019 lapse as at the date of this report as the performance conditions were not met (therefore no expense was recorded). Discretionary cash bonus resulting from specific business unit achievements which were accrued in FY2019. Including movement in annual leave provisions. 13 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 Short-term benefits Post- employment benefits Long-term benefits Share- based payments Cash salary and fees $ Cash bonus $ Non- Super- monetary annuation $ $ Long service leave $ Equity- settled4 $ Total $ 55,953 68,650 48,191 - - - - - - 5,316 6,522 2,910 - - - - 98,000 - 61,269 173,172 51,101 125,965 366,613 50,068 - 227,858 - 15,417 12,329 - 11,764 25,000 4,659 235,490 174,268 199,449 181,147 1,505,794 104,678 - - 50,790 383,326 12,830 - - - 40,576 32,283 14,897 179 22,894 126,424 (38,946) 114,200 7,612 1,331,839 1,971,251 55,640 913 - - 7,929 3,276 - 4,411 572,708 192,441 199,628 259,242 (14,805) 1,609,337 3,650,652 179,498 - - - 2018 Non-Executive Directors: M Boyte1 W Cook R Kent1 Executive Directors: T Smith J Ludemann S Smith2 Other Key Management Personnel: J Lamb C Hummer G Schramm3 R Chelvaratnam 1 2 3 4 Remuneration is from date of appointment to 30 June 2018 Remuneration is from 1 July 2017 to date of resignation Remuneration is from 31 December 2017 (date of Top Draw Tyres consolidation) to 30 June 2018 Equity settled share based payments comprise the options that vested and were exercised prior to the IPO The proportion of remuneration linked to performance and the fixed proportion (at target performance levels) are as follows: Name Non-Executive Directors: M Boyte W Cook1/2 R Kent Executive Directors: T Smith J Ludemann1 S Smith Other Key Management Personnel: J Lamb1 C Hummer G Schramm T Wren R Chelvaratnam Fixed remuneration 2018 2019 At risk - STI 2019 2018 At risk - LTI 20193 2018 100% 100% 100% 100% 77% - 80% 80% 100% 87% 82% 100% 43% 100% 100% 21% 100% 51% 100% 100% - 80% - - - - 23% - 20% 20% - 13% 18% - - - - 11% - 18% - - - 20% - - - - - - - - - - - - 57% - - 68% - 31% - - - - 1 2 3 2018 LTI comprises the options that vested and were exercised prior to the IPO, and does not reflect the current LTI program. Fixed remuneration comprised 100% of amounts received from the date of listing to 30 June 2018. 2019 LTI have no expensed value as the performance conditions have not been met. 14 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 The proportion of the cash bonus paid/payable or forfeited is as follows: Name Executive Directors: P Ludemann Other Key Management Personnel: J Lamb C Hummer G Schramm T Wren R Chelvaratnam 1 Forfeited 2019 cash bonuses are not accrued in the FY2019 result. Cash bonus paid/payable 2019 2018 Cash bonus forfeited 20191 2018 - 100% 100% - - 100% 78% - 100% - - - 100% 100% 100% - 22% 100% - - - - - - (c) Relationship between remuneration and Company performance The table below summarises the Group’s performance and correlates it to the total key management personnel remuneration for the financial year: Metric Sales revenue ($) Statutory net profit after tax attributable to shareholders ($) Pro forma net profit after tax attributable to shareholders ($) Change in share price (%)2 Earnings per share (cents) Total dividends paid ($) Key management personnel remuneration ($) 30 June 2019 30 June 2018 168,376,000 153,402,0001 4,477,000 9,314,0001 23 5.25 1,011,121 3,650,6523 6,390,000 6,390,000 (70) 6.22 3,636,561 2,354,957 1 2 3 Pro forma results are as presented on page 5 of the Directors’ Report. NTAW listed on the ASX on 15 December 2017 with a share price of $1.00. Closing price as at 29 June 2018 was $1.23. Closing price as at 28 June 2019 was $0.37. Including the cost of options granted and exercised prior to the IPO ($1,609,337). (d) Service agreements Remuneration and other terms of employment for key management personnel are formalised in service agreements with no fixed tenure requirements. Details of these agreements for the FY2019 year are as follows: Name: Title: Details: John Peter Ludemann Chief Executive Officer and Managing Director Mr Ludemann has an annual total fixed remuneration (TFR) of $503,700 consisting of base salary, superannuation and other benefits. Under the terms of his employment contract, he is eligible to receive short term incentives (STI) with a maximum opportunity of 50% of TFR per annum (at maximum performance levels). The STI will be in the form of an annual cash bonus, subject to the achievement of key performance indicators as determined by the Board. Subject to shareholder approval, Mr Ludemann will also be awarded long term incentives (LTI) under NTAW’s Employee Share Option Plan. He has statutory leave entitlements and is entitled to 5 weeks annual leave per year. Either party may terminate the contract on 6 months’ notice. In the case of termination by NTAW, NTAW may provide payment in lieu of notice. Mr Ludemann’s employment contract does not contain any express redundancy provisions. Mr Ludemann’s contract contains a 5 year non-compete restraint within Australia and New Zealand and a 12 month non-solicitation of employees, contractors and clients who deal with NTAW. 15 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 Name: Title: Details: Name: Title: Details: Name: Title: Details: Name: Title: Details: remuneration package Terry Smith Executive Director inclusive of statutory fixed Mr Smith’s superannuation contribution and a car allowance of $22,300. He has statutory leave entitlements. Mr Smith is employed on a part time basis. Either party may terminate the contract on 6 months’ notice. In the case of termination by NTAW, NTAW may provide payment in lieu of notice. Mr Smith is entitled to redundancy pay in accordance with the NTAW’s legal obligations. Mr Smith’s contract contains a 6 month non-compete restraint within Australia and a 6 month non-solicitation of employees, contacts and clients with whom he has contact with, or influence over. is $70,000 Jason Lamb Chief Financial Officer and joint Company Secretary Mr Lamb has an annual total fixed remuneration (TFR) of $303,644 consisting of base salary, superannuation and other benefits. Under the terms of his employment contract, he is eligible to receive short term incentives (STI) with a maximum opportunity of 40% of TFR per annum (at maximum performance levels). The STI will be in the form of an annual cash bonus, subject to the achievement of key performance indicators as determined by the Board. Mr Lamb will also be awarded long term incentives (LTI) under NTAW’s Employee Share Option Plan. He is eligible for short term incentives as determined by the Board. Mr Lamb has statutory leave entitlements. Either party may terminate the contract on 6 months’ notice. In the case of termination by NTAW, NTAW may provide payment in lieu of notice. He is entitled to redundancy pay in accordance with NTAW’s legal obligations. Mr Lamb’s contract contains a 6 month non-compete restraint within Australia and a 6 month non- solicitation of employees, contacts and clients with whom he has contact with, or influence over. Chris Hummer Managing Director, Dynamic Mr Hummer has an annual total fixed remuneration (TFR) of $181,770 consisting of base salary, superannuation and other benefits. Under the terms of his employment contract, he is eligible to receive short term incentives (STI) with a maximum opportunity of 40% of TFR per annum (at maximum performance levels). The STI will be in the form of an annual cash bonus, subject to the achievement of key performance indicators as determined by the Board. Mr Hummer will also be awarded long term incentives (LTI) under NTAW’s Employee Share Option Plan. He has statutory leave entitlements. Either party may terminate the contract on 3 months’ notice. In the case of termination by Dynamic, Dynamic may provide payment in lieu of notice. Mr Hummer is entitled to redundancy pay in accordance with the Company’s legal obligations. Mr Hummer’s contract contains a 12 month non- compete restraint within as specified geographical area and a 12 month non- solicitation of employees, contacts and clients with whom he has contact with, or influence over. Georg Schramm Managing Director, Top Draw (South Africa) Mr Schramm’s employment contract is governed by South African law. His fixed remuneration package is R278,000 per month and he is entitled to car and mobile phone allowances totalling R22,300 per month. Either party may terminate the contract on 6 months’ notice. Where Mr Schramm is terminated due to operational requirements, the termination will be governed by Top Draw (South Africa) policies or practices or, if no policy or practice exists, in accordance with the law. 16 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 Name: Title: Details: Name: Title: Details: Trevor Wren Managing Director, Statewide Mr Wren has an annual total fixed remuneration (TFR) of $171,915 consisting of base salary, superannuation and other benefits. Under the terms of his employment contract, he is eligible to receive short term incentives (STI) with a maximum opportunity of 20% of TFR per annum (at maximum performance levels). The STI will be in the form of an annual cash bonus, subject to the achievement of key performance indicators as determined by the Board. Mr Wren will also be awarded long term incentives (LTI) under NTAW’s Employee Share Option Plan. He has statutory leave entitlements. Either party may terminate the contract on 3 months’ notice. In the case of termination by Statewide, Statewide may provide payment in lieu of notice. Mr Wren is entitled to redundancy pay in accordance with the Company’s legal obligations. Mr Wren’s contract contains a 6 month non-compete restraint within as specified geographical area and a 6 month non-solicitation of employees, contacts and clients with whom he has contact with, or influence over. Roshan Chelvaratnam Managing Director, MPC Mr Chelvaratnam has an annual total fixed remuneration (TFR) of $181,770 consisting of base salary, superannuation and other benefits. Under the terms of his employment contract, he is eligible to receive short term incentives (STI) with a maximum opportunity of 25% of TFR per annum (at maximum performance levels). The STI will be in the form of an annual cash bonus, subject to the achievement of key performance indicators as determined by the Board. Mr Chelvaratnam will also be awarded long term incentives (LTI) under NTAW’s Employee Share Option Plan. He has statutory leave entitlements. Either party may terminate the contract on 6 months’ notice after the expiry of the initial term of 3 years (from 1 April 2017). In the case of termination by MPC, MPC may provide payment in lieu of notice. He may not terminate within the first 3 years of his employment. Mr Chelvaratnam is entitled to redundancy pay legal obligations. Mr Chelvaratnam’s contract contains a 6 month non-compete restraint within Australia and a 12 month non-solicitation of employees, contacts and clients with whom he has contact with, or influence over. in accordance with the Company’s Key management personnel have no entitlement to termination payments in the event of removal for misconduct. All key management personnel are required to keep information obtained during their employment confidential, both during their employment and after their employment ends. Employment contracts contains an assignment of intellectual property created during the course of their employment. 17 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 (e) Share-based compensation Issue of shares There were no shares issued to directors and other key management personnel as part of compensation during the year ended 30 June 2019. Options The terms and conditions of each grant of options over ordinary shares affecting remuneration of directors and other key management personnel in this financial year or future reporting years are as follows: Name J Ludemann J Lamb C Hummer R Chelvaratnam T Wren Number of options granted Grant date Vesting date and exercise date Expiry date Exercise price1 Fair value per option at grant date 180,000 7 Dec 18 160,000 7 Dec 18 140,000 7 Dec 18 110,000 7 Dec 18 100,000 7 Dec 18 30 Sep 21 30 Sep 21 30 Sep 21 30 Sep 21 30 Sep 21 30 Sep 23 30 Sep 23 30 Sep 23 30 Sep 23 30 Sep 23 $1.1724 $1.1724 $1.1724 $1.1724 $1.1724 $0.081 $0.081 $0.081 $0.081 $0.081 1 All options outstanding at 30 June 2019 have lapsed as at the date of this report as the performance conditions have not been met. (f) Equity instruments held by key management personnel Shareholding The number of shares in the Company held during the financial year by each director and other members of key management personnel of the Group, including their personally related parties, is set out below: Balance at the start of the year Received as part of remun- eration Additions Disposals Balance at the end of the year Ordinary shares Murray Boyte John Peter Ludemann Terence Smith William Cook Robert Kent Jason Lamb Chris Hummer Roshan Chelvaratnam Trevor Wren 112,500 2,589,928 27,032,371 203,132 100,000 358,602 4,261,714 3,929,250 655,737 39,243,234 - - - - - - - - - - 53,737 170,000 505,000 100,000 104,901 5,120 428,400 - - (10,000) - 156,237 2,759,928 (282,074)1 27,255,297 303,132 204,901 363,722 4,652,522 3,929,250 655,737 - - - (37,592)1 - - 1,367,158 (329,666) 40,280,726 1 Personally owned shares gifted to employees during the year (g) Other transactions with key management personnel Related party leases During the financial year, a Group entity leased business premises owned by a closely related party of Chris Hummer on commercial terms. The lease expired on 30 April 2017 and the parties are ‘holding over’ until new premises are available. Rent payments for the financial year totalled $126,421 (2018: $123,598), with $nil outstanding at 30 June 2019 (2018: $nil). During the financial year, a Group entity leased business premises owned by a closely related party of Trevor Wren on commercial terms. The lease expired on 30 May 2023 and has two by 5-year renewal options. Rent payments for the financial year totalled $203,497 (2018: $14,167), with $nil outstanding at 30 June 2019 (2018: $nil). 18 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 During the year, Terry and Susanne Smith (co-founders of Exclusive Tyre Distributors Australia Pty Ltd) and Chris and Christine Hummer (co-founders of Dynamic Wheel Co Pty Ltd), transferred a total of 319,666 of their personally owned National Tyre & Wheel Limited (NTD) shares to a number of employees of the Group. The gifts were made as a gesture of thanks and appreciation for the employees’ efforts and support for the business, prior to NTD’s listing on the ASX in December 2017. The transfers occurred following the release of the shares from voluntary escrow during the year and were valued at 45 cents per share at that time. Loans to key management personnel There were no loans to key management personnel and their related parties during the financial year. This concludes the remuneration report, which has been audited. Shares under option There were no unissued ordinary shares of National Tyre & Wheel Limited under option outstanding at the date of this report. 1.63 million options over unissued ordinary shares that were outstanding at 30 June 2019 have now lapsed. Shares issued on the exercise of options There were no ordinary shares of National Tyre & Wheel Limited issued on the exercise of options during the year ended 30 June 2019 and up to the date of this report. Indemnity and insurance of officers The Company has indemnified the directors and executives of the Company for costs incurred, in their capacity as a director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the Company paid a premium in respect of a contract to insure the directors and executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The Company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the financial year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 25 to the financial statements. The directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor's behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in note 25 to the financial statements do not compromise the external auditor's independence requirements of the Corporations Act 2001 for the following reasons: ● all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor's own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. ● Officers of the Company who are former partners of Pitcher Partners There are no officers of the Company who are former partners of Pitcher Partners. 19 For personal use only Directors’ Report National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' report 30 June 2019 Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to 'rounding-off'. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Auditor's independence declaration A copy of the auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this directors' report. Auditor Pitcher Partners continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the directors ___________________________ Murray Boyte Chairman 23 August 2019 Brisbane 20 For personal use only The Directors National Tyre & Wheel Limited 30 Gow Street MOOROOKA QLD 4105 Auditor’s Independence Declaration As lead auditor for the audit of National Tyre & Wheel Limited for the year ended 30 June 2019, I declare that, to the best of my knowledge and belief, there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of APES 110 Code of Ethics for Professional Accountants. This declaration is in respect of National Tyre & Wheel Limited and entities it controlled during the year. PITCHER PARTNERS Warwick Face Partner Brisbane, Queensland 23 August 2019 21 For personal use onlyStatement of profit or loss and other comprehensive income National Tyre & Wheel Limited and its controlled entities For the year ended 30 June 2019 Statement of profit or loss and other comprehensive income For the year ended 30 June 2019 Revenue from contracts with customers 5 168,462 146,300 Interest revenue calculated using the effective interest method 123 120 Note Consolidated 2019 $'000 2018 $'000 Expenses Cost of goods sold Employee benefits and other related costs Depreciation and amortisation Legal and professional fees Marketing Occupancy Insurance Listing Other Finance Profit before income tax expense Income tax expense Profit after income tax expense for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year Profit for the year is attributable to: Non-controlling interest Owners of National Tyre & Wheel Limited Total comprehensive income for the year is attributable to: Non-controlling interest Owners of National Tyre & Wheel Limited 6 6 6 7 (119,846) (18,088) (2,628) (791) (5,813) (4,479) (797) - (5,827) (665) (98,595) (18,357) (2,127) (807) (5,094) (3,699) (540) (2,078) (5,609) (459) 9,651 9,055 (2,975) (3,700) 6,676 5,355 400 400 (446) (446) 7,076 4,909 286 6,390 878 4,477 6,676 5,355 286 6,790 878 4,031 7,076 4,909 Basic earnings per share Diluted earnings per share Cents Cents 35 35 6.22 6.22 5.25 5.05 The above statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes 22 For personal use only Statement of financial position National Tyre & Wheel Limited and its controlled entities As at 30 June 2019 Statement of financial position As at 30 June 2019 Assets Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Income tax refund due Other Total current assets Non-current assets Property, plant and equipment Intangibles Deferred tax Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Income tax payable Provisions Total current liabilities Non-current liabilities Borrowings Deferred tax Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits/(accumulated losses) Equity attributable to the owners of National Tyre & Wheel Limited Non-controlling interest Total equity Note Consolidated 2019 $'000 2018 $'000 8 9 10 11 7 12 13 14 7 15 16 7 17 18 7 19 20 21 19,554 24,679 48,563 24 212 1,281 94,313 3,579 20,313 - 23,892 19,608 25,900 47,750 463 - 1,779 95,500 3,917 22,167 4 26,088 118,205 121,588 29,425 2,040 - 3,192 34,657 11,295 152 1,357 12,804 35,014 1,615 1,069 3,107 40,805 12,820 - 1,300 14,120 47,461 54,925 70,744 66,663 65,271 185 1,911 67,367 3,377 64,761 (215) (974) 63,572 3,091 70,744 66,663 The above statement of financial position should be read in conjunction with the accompanying notes 23 For personal use only Statement of changes in equity National Tyre & Wheel Limited and its controlled entities For the year ended 30 June 2019 Statement of changes in equity For the year ended 30 June 2019 Consolidated Foreign currency translation reserve $'000 Share- based payments reserve $'000 Issued capital $'000 Other reserves $'000 Accumu- lated losses $'000 Non- controlling interest $'000 Total equity $'000 Balance at 1 July 2017 18,942 231 2,092 (356) 16,025 6,439 43,373 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (note 20) Options issued Options exercised Reversal of option forfeiture Non-controlling interest on acquisition of subsidiary Acquisition of non-controlling interest of existing subsidiaries Transfers Dividends paid (note 22) - - - - (446) (446) - - - 39,907 - 5,912 - - - - - - - - - - - - - - 2,657 (4,601) 400 - - (548) - - - - - - - - - 4,477 878 5,355 - - (446) 4,477 878 4,909 - - - - - - - - - 39,907 2,657 1,311 400 2,828 2,828 - 356 - (5,657) 192 (16,011) (6,398) - (656) (12,055) - (16,667) Balance at 30 June 2018 64,761 (215) - - (974) 3,091 66,663 Consolidated Foreign currency translation reserve $'000 Share- based payments reserve $'000 Issued capital $'000 Other Retained reserves profits $'000 $'000 Non- controlling interest $'000 Total equity $'000 Balance at 1 July 2018 64,761 (215) Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Share-based payments (note 36) Transfers Dividends reinvested Dividends paid (note 22) - - - - - 510 - - - - - - 400 400 - - - - 132 (132) - - Balance at 30 June 2019 65,271 185 - - (974) 3,091 66,663 - - - - - - - - 6,390 286 6,676 - - 400 6,390 286 7,076 - 132 - (3,637) - - - - 132 - 510 (3,637) 1,911 3,377 70,744 The above statement of changes in equity should be read in conjunction with the accompanying notes 24 For personal use only Statement of cash flows National Tyre & Wheel Limited and its controlled entities For the year ended 30 June 2019 Statement of cash flows For the year ended 30 June 2019 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest and other finance costs paid Income taxes paid Note Consolidated 2019 $'000 2018 $'000 186,025 (177,306) 162,009 (148,475) 8,719 123 (665) (4,100) 13,534 120 (291) (4,461) Net cash from operating activities 34 4,077 8,902 Cash flows from investing activities Payment for purchase of business, net of cash acquired Final payments for prior year business acquisition Payments for property, plant and equipment Proceeds from disposal of property, plant and equipment Transfers from term deposits Net cash from/(used in) investing activities Cash flows from financing activities Proceeds from issue of shares Listing costs Proceeds from borrowings Repayment of borrowings Dividends paid Net cash from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents 31 22 - - (721) 329 600 (13,355) (2,051) (845) 228 - 208 (16,023) - - - (1,577) (3,127) 26,234 (3,552) 7,471 (1,583) (16,667) (4,704) 11,903 (419) 19,608 (112) 4,782 14,765 61 Cash and cash equivalents at the end of the financial year 8 19,077 19,608 The above statement of cash flows should be read in conjunction with the accompanying notes 25 For personal use only 27 27 38 39 39 40 41 42 43 43 43 44 44 45 47 47 47 48 49 50 51 51 52 56 57 57 58 58 59 59 60 62 62 65 65 66 69 Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 1. General information Note 2. Significant accounting policies Note 3. Critical accounting judgements, estimates and assumptions Note 4. Operating segments Note 5. Revenue from contracts with customers Note 6. Expenses Note 7. Income tax Note 8. Current assets - cash and cash equivalents Note 9. Current assets - trade and other receivables Note 10. Current assets - inventories Note 11. Current assets - derivative financial instruments Note 12. Current assets - other Note 13. Non-current assets - property, plant and equipment Note 14. Non-current assets - intangibles Note 15. Current liabilities - trade and other payables Note 16. Current liabilities - borrowings Note 17. Current liabilities - provisions Note 18. Non-current liabilities - borrowings Note 19. Non-current liabilities - provisions Note 20. Equity - issued capital Note 21. Equity - reserves Note 22. Equity - dividends Note 23. Financial instruments Note 24. Fair value measurement Note 25. Remuneration of auditors Note 26. Contingent liabilities Note 27. Commitments Note 28. Key management personnel disclosures Note 29. Related party transactions Note 30. Parent entity information Note 31. Business combinations Note 32. Interests in subsidiaries Note 33. Deed of cross guarantee Note 34. Cash flow information Note 35. Earnings per share Note 36. Share-based payments Note 37. Events after the reporting period 26 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 1. General information The financial statements cover National Tyre & Wheel Limited as a Group consisting of National Tyre & Wheel Limited ('Company' or 'parent entity') and the entities it controlled at the end of, or during, the year ('Group' or "NTAW'). The financial statements are presented in Australian dollars, which is National Tyre & Wheel Limited's functional and presentation currency. National Tyre & Wheel Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: 30 Gow Street Moorooka QLD 4105 A description of the nature of the Group's operations and its principal activities are included in the directors' report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of directors, on 23 August 2019. The directors have the power to amend and reissue the financial statements. Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board ('IASB'). Historical cost convention The financial statements have been prepared under the historical cost convention, except for, where applicable, the revaluation of available-for-sale financial assets and derivative financial instruments. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group's accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. New or amended Accounting Standards and Interpretations adopted The Group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board ('AASB') that are mandatory for the current reporting period. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Group. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Group. 27 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 2. Significant accounting policies (continued) The following Accounting Standards and Interpretations are most relevant to the Group: AASB 9 Financial Instruments The Group has adopted AASB 9 from 1 July 2018. The standard introduced new classification and measurement models for financial assets. A financial asset shall be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows which arise on specified dates and that are solely principal and interest. A debt investment shall be measured at fair value through other comprehensive income if it is held within a business model whose objective is to both hold assets in order to collect contractual cash flows which arise on specified dates that are solely principal and interest as well as selling the asset on the basis of its fair value. All other financial assets are classified and measured at fair value through profit or loss unless the entity makes an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading or contingent consideration recognised in a business combination) in other comprehensive income ('OCI'). Despite these requirements, a financial asset may be irrevocably designated as measured at fair value through profit or loss to reduce the effect of, or eliminate, an accounting mismatch. For financial liabilities designated at fair value through profit or loss, the standard requires the portion of the change in fair value that relates to the entity's own credit risk to be presented in OCI (unless it would create an accounting mismatch). New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements use an 'expected credit loss' ('ECL') model to recognise an allowance. Impairment is measured using a 12-month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. For receivables, a simplified approach to measuring expected credit losses using a lifetime expected loss allowance is available. AASB 15 Revenue from Contracts with Customers The Group has adopted AASB 15 from 1 July 2018. The standard provides a single comprehensive model for revenue recognition. The core principle of the standard is that an entity shall recognise revenue to depict the transfer of promised goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard introduced a new contract-based revenue recognition model with a measurement approach that is based on an allocation of the transaction price. This is described further in the accounting policies below. Credit risk is presented separately as an expense rather than adjusted against revenue. Contracts with customers are presented in an entity's statement of financial position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity's performance and the customer's payment. Customer acquisition costs and costs to fulfil a contract can, subject to certain criteria, be capitalised as an asset and amortised over the contract period. Impact of adoption AASB 9 and AASB 15 were adopted using the retrospective approach and as such comparatives have been restated. There was no impact of the adoption on opening retained earnings as at 1 July 2018. The impact of the new Accounting Standards compared with the previous Accounting Standards on the current reporting period is as follows: Current standards (as reported) $'000 Previous standards Change $'000 $'000 Statement of profit or loss (extract) Revenue Interest revenue calculated using the effective interest method Profit before income tax expense Income tax expense Profit for the year 168,462 123 9,651 (2,975) 168,585 - 9,651 (2,975) 6,676 6,676 (123) 123 - - - Changes to the significant accounting policies as a result of the new standards adopted are detailed below. 28 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 2. Significant accounting policies (continued) Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in note 30. Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of National Tyre & Wheel Limited as at 30 June 2019 and the results of all subsidiaries for the year then ended. Subsidiaries are all those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Non-controlling interest in the results and equity of subsidiaries are shown separately in the statement of profit or loss and other comprehensive income, statement of financial position and statement of changes in equity of the Group. Losses incurred by the Group are attributed to the non-controlling interest in full, even if that results in a deficit balance. Where the Group loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non- controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Group recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. Operating segments Operating segments are presented using the 'management approach', where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers ('CODM'). The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Foreign currency translation Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. 29 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 2. Significant accounting policies (continued) Revenue recognition The Group recognises revenue as follows: Revenue from contracts with customers Revenue is recognised at an amount that reflects the consideration to which the Group is expected to be entitled in exchange for transferring goods or services to a customer. For each contract with a customer, the Group: identifies the contract with a customer; identifies the performance obligations in the contract; determines the transaction price which takes into account estimates of variable consideration and the time value of money; allocates the transaction price to the separate performance obligations on the basis of the relative stand-alone selling price of each distinct good or service to be delivered; and recognises revenue when or as each performance obligation is satisfied in a manner that depicts the transfer to the customer of the goods or services promised. Variable consideration within the transaction price, if any, reflects concessions provided to the customer such as discounts, rebates and refunds, any potential bonuses receivable from the customer and any other contingent events. Such estimates are determined using either the 'expected value' or 'most likely amount' method. The measurement of variable consideration is subject to a constraining principle whereby revenue will only be recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The measurement constraint continues until the uncertainty associated with the variable consideration is subsequently resolved. Amounts received that are subject to the constraining principle are recognised as a refund liability. Sale of goods Revenue from the sale of goods is recognised at the point in time when the customer obtains control of the goods, which is generally at the time of delivery. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. Income tax The income tax expense or benefit for the period is the tax payable on that period's taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: ● When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. ● Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. 30 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 2. Significant accounting policies (continued) Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. National Tyre & Wheel Limited (the 'head entity') and its wholly-owned Australian subsidiaries (Exclusive Tyre Distributors Pty Ltd, MPC Mags & Tyres Pty Ltd, Dynamic Wheel Co Pty Limited and Statewide Tyre Distribution Pty Ltd), have formed an income tax consolidated group under the tax consolidation regime. The head entity and subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the 'separate taxpayer within group' approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the Group's normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the Group's normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Cash and cash equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. For the statement of cash flows presentation purposes, cash and cash equivalents also includes bank overdrafts, which are shown within borrowings in current liabilities on the statement of financial position. Trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses. Trade receivables are generally due for settlement within 30 days. The Group has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. Other receivables are recognised at amortised cost, less any allowance for expected credit losses. Inventories Finished goods are stated at the lower of cost and net realisable value on a 'first in first out' basis. Cost comprises of purchase and delivery costs, net of rebates and discounts received or receivable. Stock in transit is stated at the lower of cost and net realisable value. Cost comprises of purchase and delivery costs, net of rebates and discounts received or receivable. 31 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 2. Significant accounting policies (continued) Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. Derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group has not satisfied the documentation, designation and effectiveness tests required by Australian Accounting Standards, as such they do not qualify for hedge accounting and gains or losses arising from changes in fair value are recognised immediately in profit or loss. Derivatives are classified as current or non-current depending on the expected period of realisation. Investments and other financial assets Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. Such assets are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on both the business model within which such assets are held and the contractual cash flow characteristics of the financial asset unless, an accounting mismatch is being avoided. Financial assets are derecognised when the rights to receive cash flows have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. When there is no reasonable expectation of recovering part or all of a financial asset, it's carrying value is written off. Impairment of financial assets (excluding trade and other receivables) The Group recognises a loss allowance for expected credit losses on financial assets which are either measured at amortised cost or fair value through other comprehensive income. The measurement of the loss allowance depends upon the Group's assessment at the end of each reporting period as to whether the financial instrument's credit risk has increased significantly since initial recognition, based on reasonable and supportable information that is available, without undue cost or effort to obtain. Where there has not been a significant increase in exposure to credit risk since initial recognition, a 12-month expected credit loss allowance is estimated. This represents a portion of the asset's lifetime expected credit losses that is attributable to a default event that is possible within the next 12 months. Where a financial asset has become credit impaired or where it is determined that credit risk has increased significantly, the loss allowance is based on the asset's lifetime expected credit losses. The amount of expected credit loss recognised is measured on the basis of the probability weighted present value of anticipated cash shortfalls over the life of the instrument discounted at the original effective interest rate. Property, plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a diminishing value basis to write off the net cost of each item of property, plant and equipment over their expected useful lives as follows: Leasehold improvements Plant and equipment Motor vehicles Capital work in progress 2.5% to 15% 5% to 60% 13.5% to 25% 0% until in use The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. 32 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 2. Significant accounting policies (continued) An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the Group. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to the ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. Finance leases are capitalised. A lease asset and liability are established at the fair value of the leased assets, or if lower, the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the finance costs, so as to achieve a constant rate of interest on the remaining balance of the liability. Leased assets acquired under a finance lease are depreciated over the asset's useful life or over the shorter of the asset's useful life and the lease term if there is no reasonable certainty that the Group will obtain ownership at the end of the lease term. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. Intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Brand name Brand names are assessed as having an indefinite useful life on the basis of brand strength, ongoing expected profitability and continuing support. Brand names are not amortised, but are instead tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired. Customer relationships Customer relationships acquired in a business combination are amortised on a straight-line basis over the period of their expected benefit, being their finite useful life of 7 to 10 years. Importation rights Importation rights are amortised on a straight line basis over the term of the distribution agreement, being between 7 to 10 years. Importation rights are tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired. 33 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 2. Significant accounting policies (continued) Impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset's carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset's fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Finance costs Finance costs attributable to qualifying assets are capitalised as part of the asset. All other finance costs are expensed in the period in which they are incurred. Provisions Provisions are recognised when the Group has a present (legal or constructive) obligation as a result of a past event, it is probable the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for annual leave and long service leave not expected to be settled wholly within 12 months of the reporting date are measured at the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. 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 high-quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Equity-settled share-based compensation benefits are provided to employees. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. 34 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 2. Significant accounting policies (continued) The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using either the Binomial or Black-Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Group receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the Group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Group or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. Fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. Issued capital 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. 35 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 2. Significant accounting policies (continued) Dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the Company. Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree's identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the Group assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the Group's operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the Group remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition-date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer's previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of National Tyre & Wheel Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Goods and Services Tax ('GST') and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. 36 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 2. Significant accounting policies (continued) Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. Comparative information Comparatives have been reclassified, where applicable, to align with current year presentation. There was no impact on the results or financial position of the Group. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to 'rounding-off'. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group for the annual reporting period ended 30 June 2019. The Group's assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the Group, are set out below. Accounting Standard Nature of change Impact on the financial statements AASB 16 'Leases' (effective for the accounting period starting 1 July 2019) AASB 16 requires recognition of a right-of-use asset along with the associated lease liability where the entity is a lessee. An interest expense will be recognised in the profit or loss using the effective interest rate method, and the right-of use asset will be depreciated. Lessor accounting will largely remain unchanged. On adoption, AASB 16 will have the following impact from 1 July 2019, specifically: - Right-of-use assets and lease liabilities on the balance sheet will increase on 1 July 2019 by approximately $7.6m and $8.2m, respectively; and - Retained earnings will reduce on 1 July 2019 by approximately $0.6m because the carrying value of the assets reduce more quickly than the carrying amount of the lease liabilities. New Conceptual Framework for Financial Reporting A revised Conceptual Framework for Financial Reporting has been issued by the AASB and is applicable for annual reporting periods beginning on or after 1 January 2020. This release impacts for-profit private sector entities that have public accountability that are required by legislation to comply with Australian Accounting Standards and other for-profit entities that voluntarily elect to apply the Conceptual Framework. Phase 2 of the framework is yet to be released which will impact for-profit private sector entities. The application of new definition and recognition criteria as well as new guidance on measurement will result in amendments to several accounting standards. The issue of AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework, also applicable from 1 January 2020, includes such amendments. Where the Group has relied on the conceptual framework in determining its accounting policies for transactions, events or conditions that are not otherwise dealt with under Australian Accounting Standards, the Group may need to revisit such policies. The Group will apply the revised conceptual framework from 1 July 2020 and is yet to assess its impact. 37 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 3. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Business combinations As discussed in note 2, business combinations are initially accounted for on a provisional basis. The fair value of assets acquired, liabilities and contingent liabilities assumed are initially estimated by the Group taking into consideration all available information at the reporting date. Fair value adjustments on the finalisation of the business combination accounting is retrospective, where applicable, to the period the combination occurred and may have an impact on the assets and liabilities, depreciation and amortisation reported. Recognition of identifiable intangible assets on acquisition Brand names, importation rights and customer relationships have been recognised on the acquisition of subsidiaries. The valuation of these assets is based on the present value of expected future cash flows associated with the brand and the recurring current customers covering a period of 5 to 12 years. These cash flows have been calculated using sales growth rates of between 3.8%-6.9% (2018: 3%-6.3%) and a pre-tax discount rate of between 16.3%-18.6% (2018:17%-20%). Goodwill and other indefinite life intangible assets The Group tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill and other indefinite life intangible assets have suffered any impairment, in accordance with the accounting policy stated in note 2. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. Impairment of non-financial assets other than goodwill and other indefinite life intangible assets The Group assesses impairment of non-financial assets other than goodwill and other indefinite life intangible assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by using the Binomial model taking into account the terms and conditions upon which the instruments were granted. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact profit or loss and equity. Share-based payments expense under the employee share option plan has been recognised over the expected vesting period of the options. The share-based payment expense incurred is equal to the value of the options and management have assessed the fair value of the options using a Binominal model with the following key criteria: pre-determined exercise price, share price at grant date based on estimated enterprise value of the company, risk-free rate of 2% (2018: 1.5%), volatility of share price of 65% (2018: 60%) and assumed vesting period from grant date. Income tax The Group is subject to income taxes in the jurisdictions in which it operates. Significant judgement is required in determining the provision for income tax. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on the Group's current understanding of the tax law. Where the final tax outcome of these matters is different from the carrying amounts, such differences will impact the current and deferred tax provisions in the period in which such determination is made. 38 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 3. Critical accounting judgements, estimates and assumptions (continued) Warranty provision In determining the level of provision required for warranties the Group has made judgements in respect of the expected performance of the products, the number of customers who will actually claim under the warranty and how often, and the costs of fulfilling the conditions of the warranty. Note 4. Operating segments Identification of reportable operating segments The Group's operating segments are based on the internal reports that are reviewed and used by the Board of Directors (who are identified as the Chief Operating Decision Makers ('CODM')) in assessing performance and in determining the allocation of resources. The Directors are of the opinion that there is one reportable segment in the Group as the CODM reviews results, assesses performance and allocates resources at a Group level. As the information reported to the CODM is the consolidated results of the Group, the segment results are shown throughout these financial statements and are not duplicated here. Major customers During the year ended 30 June 2019, none of the Group's external revenue was derived from sales of greater than 10% to any customer (2018: none). Note 5. Revenue from contracts with customers Consolidated 2019 $'000 2018 $'000 168,376 146,158 86 142 168,462 146,300 Consolidated 2019 $'000 2018 $'000 136,726 16,417 15,233 123,193 14,704 8,261 168,376 146,158 168,376 146,158 Revenue from contracts with customers Sale of goods Other revenue Other revenue Revenue from contracts with customers Disaggregation of revenue The disaggregation of revenue from contracts with customers is as follows: Geographical regions Australia New Zealand South Africa Timing of revenue recognition Goods transferred at a point in time 39 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 6. Expenses Profit before income tax includes the following specific expenses: Cost of sales Cost of sales Depreciation Leasehold improvements Plant and equipment Motor vehicles Total depreciation Amortisation Customer relationships Importation rights Other intangibles Total amortisation Total depreciation and amortisation Finance costs Interest and finance charges paid/payable Finance lease charges Finance costs expensed Net foreign exchange loss Net foreign exchange loss Rental expense relating to operating leases Minimum lease payments Superannuation expense Defined contribution superannuation expense Share-based payments expense Share-based payments expense Bad debts Bad debts expense 40 Consolidated 2019 $'000 2018 $'000 119,958 98,507 4 377 393 774 6 361 329 696 644 1,204 6 361 1,067 3 1,854 1,431 2,628 2,127 623 42 665 437 22 459 51 657 4,196 3,398 1,126 1,026 132 2,657 160 42 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 7. Income tax Income tax expense Current tax Deferred tax - origination and reversal of temporary differences Adjustment recognised for prior periods Aggregate income tax expense Deferred tax included in income tax expense comprises: Decrease/(increase) in deferred tax assets Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Sundry items Adjustment recognised for prior periods Difference in overseas tax rates Income tax expense Amounts credited directly to equity Deferred tax assets Consolidated 2019 $'000 2018 $'000 3,066 156 (247) 4,623 (903) (20) 2,975 3,700 156 (903) 9,651 9,055 2,895 2,717 360 1,035 3,255 (247) (33) 3,752 (20) (32) 2,975 3,700 Consolidated 2019 $'000 2018 $'000 - (442) 41 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 7. Income tax (continued) Deferred tax Net deferred tax comprises temporary differences attributable to: Amounts recognised in profit or loss: Capital raising costs Employee benefits Property, plant and equipment Intangibles Accruals and provisions Other Finance lease liability Foreign currency exchange Deferred tax asset/(liability) Movements: Opening balance Credited/(charged) to profit or loss Credited to equity Additions through business combinations (note 31) Closing balance Income tax refund due/(payable) Note 8. Current assets - cash and cash equivalents Cash on hand Cash at bank Reconciliation to cash and cash equivalents at the end of the financial year The above figures are reconciled to cash and cash equivalents at the end of the financial year as shown in the statement of cash flows as follows: Balances as above Bank overdraft (note 16) Balance as per statement of cash flows 42 Consolidated 2019 $'000 2018 $'000 690 787 (116) (2,118) 604 (31) 63 (31) (152) 4 (156) - - (152) 837 789 (115) (2,321) 567 60 67 120 4 (636) 903 442 (705) 4 Consolidated 2019 $'000 2018 $'000 212 (1,069) Consolidated 2019 $'000 2018 $'000 2 19,552 2 19,606 19,554 19,608 19,554 (477) 19,608 - 19,077 19,608 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 9. Current assets - trade and other receivables Trade receivables Less: Allowance for expected credit losses Receivable from employees Consolidated 2019 $'000 2018 $'000 24,714 (35) 24,679 26,026 (127) 25,899 - 1 24,679 25,900 Allowance for expected credit losses The Group has recognised a net loss of $160,000 (2018: net loss of $42,000) in 'other' expenses for the current year for specific debtors for which such evidence exists. Trade receivables past due but not impaired amount to $4,535,000 (2018: $6,356,000). At 30 June 2019 an ageing analysis of those trade receivables are as follows: Not overdue 1 to 30 days overdue 31 to 60 days overdue 61 plus days overdue Refer to note 23 for further information on financial instruments. Note 10. Current assets - inventories Finished goods - at cost Less: Provision for impairment Stock in transit - at cost Note 11. Current assets - derivative financial instruments Forward foreign exchange contracts Refer to note 24 for further information on fair value measurement. 43 Consolidated 2019 $'000 2018 $'000 20,144 4,038 315 182 19,543 5,096 813 447 24,679 25,899 Consolidated 2019 $'000 2018 $'000 37,252 (22) 37,230 32,652 (150) 32,502 11,333 15,248 48,563 47,750 Consolidated 2019 $'000 2018 $'000 24 463 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 12. Current assets - other Prepayments Other deposits Other current assets Note 13. Non-current assets - property, plant and equipment Leasehold improvements - at cost Less: Accumulated depreciation Plant and equipment - at cost Less: Accumulated depreciation Motor vehicles - at cost Less: Accumulated depreciation Capital works in progress - at cost Consolidated 2019 $'000 2018 $'000 1,268 - 13 1,135 600 44 1,281 1,779 Consolidated 2019 $'000 2018 $'000 321 (266) 55 4,826 (3,067) 1,759 3,104 (1,395) 1,709 321 (262) 59 4,625 (2,761) 1,864 3,308 (1,314) 1,994 56 - 3,579 3,917 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2017 Additions Additions through business combinations (note 31) Disposals Exchange differences Depreciation expense Balance at 30 June 2018 Additions Disposals Exchange differences Depreciation expense Balance at 30 June 2019 Leasehold Plant and improvements equipment $'000 $'000 Motor vehicles $'000 Capital works in progress $'000 Total $'000 1,717 315 221 (16) (12) (361) 1,864 268 (8) 12 (377) 1,463 738 344 (210) (12) (329) 1,994 397 (303) 14 (393) 1,759 1,709 - - - - - - - 56 - - - 56 3,245 1,053 565 (226) (24) (696) 3,917 721 (311) 26 (774) 3,579 65 - - - - (6) 59 - - - (4) 55 44 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 13. Non-current assets - property, plant and equipment (continued) Property, plant and equipment secured under finance leases Refer to note 27 for further information on property, plant and equipment secured under finance leases. Note 14. Non-current assets - intangibles Goodwill - at cost Brand name - at cost Customer relationships - at cost Less: Accumulated amortisation Importation rights - at cost Less: Accumulated amortisation Other intangibles - at cost Less: Accumulated amortisation Consolidated 2019 $'000 2018 $'000 8,878 8,878 2,393 2,393 4,798 (1,062) 3,736 12,106 (6,800) 5,306 14 (14) - 4,798 (418) 4,380 12,106 (5,596) 6,510 14 (8) 6 20,313 22,167 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2017 Additions through business combinations (note 31) Amortisation expense Balance at 30 June 2018 Amortisation expense Goodwill $'000 Brand name $'000 Customer relation- ships $'000 Importation rights $'000 Other intangibles $'000 Total $'000 3,094 2,393 2,894 6,201 5,784 - 8,878 - - - 2,393 - 1,847 (361) 4,380 (644) 1,376 (1,067) 6,510 (1,204) 9 - (3) 6 (6) - 14,591 9,007 (1,431) 22,167 (1,854) 20,313 Balance at 30 June 2019 8,878 2,393 3,736 5,306 45 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 14. Non-current assets - intangibles (continued) Impairment testing For the purpose of impairment testing, goodwill and brand names are allocated to the respective operating entity's cash generating unit ('CGU'): Goodwill CGU: - Tyres and wheels - M.P.C Mags and Tyres Pty Ltd - Top Draw Tyres Pty Ltd Brand names CGU: - M.P.C Mags and Tyres Pty Ltd Consolidated 2019 $'000 2018 $'000 5,228 2,339 1,311 5,228 2,339 1,311 8,878 8,878 2,393 2,393 The Group tests whether goodwill and brand names have suffered any impairment on an annual basis. For the 2019 and 2018 reporting period, the recoverable amount of the CGUs was determined based on value-in-use calculations which require the use of assumptions. The calculations are conducted using a discount cash flow (DCF) methodology based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. These growth rates are consistent with forecasts included in industry reports specific to the industry in which each CGU operates. The following table sets out the key assumptions for those CGUs that have significant goodwill and brand names allocated to them: 2019 Sales growth (%) Terminal growth rate (%) Pre-tax discount rate (%) Tyres and wheels % MPC % Top Draw Tyres % 3.80% 1.50% 16.30% 1.90% 1.50% 16.80% 6.90% 2.00% 18.60% Management has determined the value assigned to each of the above key assumptions as follows: Assumption Approach used to determine values Sales growth Average annual growth rate over the five-year forecast period; based on past performance and management’s expectations of market development. Terminal growth rate The growth rate used to extrapolate cash flows beyond the 5 year forecasted period based off management's expectations of long-term growth. Pre-tax discount rate Reflect specific risks relating to the relevant segments and the countries in which they operate based off management's expectations for the future. Impact of possible changes in key assumptions A sensitivity analysis was performed on key assumptions, which included increasing the discount rate by 2% and reducing sales growth. Both scenarios did not result in an impairment. 46 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 15. Current liabilities - trade and other payables Trade payables GST payable Other payables and accruals Refer to note 23 for further information on financial instruments. Note 16. Current liabilities - borrowings Bank overdraft Bank loans Bank loan - equipment Lease liability Consolidated 2019 $'000 2018 $'000 27,383 197 1,845 32,536 133 2,345 29,425 35,014 Consolidated 2019 $'000 2018 $'000 477 1,438 17 108 - 1,436 - 179 2,040 1,615 Refer to note 18 for further information on assets pledged as security and financing arrangements. Refer to note 23 for further information on financial instruments. Note 17. Current liabilities - provisions Employee benefits Warranties Consolidated 2019 $'000 2018 $'000 2,305 887 2,343 764 3,192 3,107 Warranties The provision represents the estimated warranty claims in respect of products sold which are still under warranty at the reporting date. The provision is estimated based on historical warranty claim information, sales levels and any recent trends that may suggest future claims could differ from historical amounts. Amounts not expected to be settled within the next 12 months The current provision for employee benefits includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the Group does not have an unconditional right to defer settlement. Based on past experience, the Group expects all employees to take the full amount of accrued leave or require payment within the next 12 months. 47 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 18. Non-current liabilities - borrowings Bank loans Bank loan - equipment Lease liability Refer to note 23 for further information on financial instruments. Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank overdraft Bank loans Bank loan - equipment Lease liability Consolidated 2019 $'000 2018 $'000 11,145 47 103 12,585 - 235 11,295 12,820 Consolidated 2019 $'000 2018 $'000 477 12,583 64 211 - 14,021 - 414 13,335 14,435 The bank loan facility has an expiry date of 21 May 2021. Assets pledged as security The bank loans are secured over the assets of National Tyre & Wheel Limited and the following subsidiaries - Exclusive Tyre Distributors Pty Ltd, Exclusive Tyre Distributors (NZ) Ltd, MPC Mags & Tyres Pty Ltd, Statewide Tyre Distribution Pty Ltd and Dynamic Wheel Co Pty Limited. The lease liabilities are effectively secured as the rights to the leased assets, recognised in the statement of financial position, revert to the lessor in the event of default. 48 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 18. Non-current liabilities - borrowings (continued) Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Total facilities Bank overdraft Bank loans Bank loan - equipment Bank guarantee Used at the reporting date Bank overdraft Bank loans Bank loan - equipment Bank guarantee Unused at the reporting date Bank overdraft Bank loans Bank loan - equipment Bank guarantee Note 19. Non-current liabilities - provisions Employee benefits Warranties Consolidated 2019 $'000 2018 $'000 477 12,583 64 4,157 17,281 477 12,583 64 2,892 16,016 - - - 1,265 1,265 - 14,021 - 4,157 18,178 - 14,021 - 2,466 16,487 - - - 1,691 1,691 Consolidated 2019 $'000 2018 $'000 272 1,085 291 1,009 1,357 1,300 Warranties The provision represents the estimated warranty claims in respect of products sold which are still under warranty at the reporting date. The provision is estimated based on historical warranty claim information, sales levels and any recent trends that may suggest future claims could differ from historical amounts. Total warranty provision The total warranty provision (current and non-current) are as follows: Warranties Consolidated 2019 $'000 2018 $'000 1,972 1,773 49 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 19. Non-current liabilities - provisions (continued) Movements in provisions Movements in each class of provision (current and non-current) during the current financial year, other than employee benefits, are set out below: Consolidated - 2019 Carrying amount at the start of the year Additional provisions recognised Amounts used Carrying amount at the end of the year Note 20. Equity - issued capital Warranties $'000 1,773 1,012 (813) 1,972 Consolidated 2019 Shares 2018 Shares 2019 $'000 2018 $'000 Ordinary shares - fully paid 102,891,313 102,321,143 65,271 64,761 Movements in ordinary share capital Details Date Shares Issue price $'000 Balance Consolidation of existing shares (pre-IPO) Split of existing shares (pre-IPO) Issue of shares on IPO capital raising Issue of shares on acquisition of business Issue of shares per Employee Option Plan Issue of shares for acquisition of Statewide Tyre Distribution Pty Ltd Issue of shares for acquisition of Statewide Tyre Distribution Pty Ltd Share issue transaction costs, net of tax 1 July 2017 21 November 2017 21 November 2017 14 December 2017 14 December 2017 14 December 2017 68,000,002 (14,768,755) 833,495 24,922,767 14,541,654 7,582,964 $0.0000 $0.0000 $1.0000 $1.0000 $0.7800 18,942 - - 24,923 14,542 5,912 31 May 2018 553,279 $1.2200 675 18 June 2018 655,737 - $1.2200 $0.0000 Balance Issue of shares per Dividend Reinvestment Plan Issue of shares per Dividend Reinvestment Plan 30 June 2018 8 October 2018 4 April 2019 102,321,143 332,809 237,361 $1.1700 $0.5100 Balance 30 June 2019 102,891,313 800 (1,033) 64,761 389 121 65,271 Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Share buy-back There is no current on-market share buy-back. 50 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 20. Equity - issued capital (continued) Capital risk management The Group's objectives when managing capital is to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current Company's share price at the time of the investment. The Group is actively pursuing additional investments in the short term as it continues to integrate and grow its existing businesses in order to maximise synergies. The capital risk management policy remains unchanged from the 30 June 2018 Annual Report. Note 21. Equity - reserves Foreign currency reserve Consolidated 2019 $'000 2018 $'000 185 (215) Foreign currency reserve The reserve is used to recognise exchange differences arising from the translation of the financial statements of foreign operations to Australian dollars. It is also used to recognise gains and losses on hedges of the net investments in foreign operations. Note 22. Equity - dividends Dividends Dividends paid during the financial year were as follows: Final dividend for the year ended 30 June 2018 of 2.30 cents per ordinary share Interim dividend for the year ended 30 June 2019 of 1.25 cents per ordinary share Final dividend for the year ended 30 June 2017 (declared and paid prior to the IPO) Interim dividend for the year ended 30 June 2018 of 1.00 cents per ordinary share Dividends to non-controlling interests Consolidated 2019 $'000 2018 $'000 2,353 1,283 - - - - - 15,000 1,011 656 3,636 16,667 Refer to note 20 for details of shares issued pursuant to the Company's Dividend Reinvestment Plan. At the date of signing these financial statements, the Company has declared a fully franked final dividend of 2.05 cents per share and a fully franked special dividend of 1.50 cents per share with a record date of 3 September 2019 and a payment date of 13 September 2019. The total dividends payable are $2.1 million and $1.5 million. The financial effect of these dividend have not been brought to account in the financial statements for the year ended 30 June 2019 and will be recognised in subsequent financial reports. 51 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 22. Equity - dividends (continued) Franking credits Consolidated 2019 $'000 2018 $'000 Franking credits available for subsequent financial years based on a tax rate of 30% 15,350 14,831 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for franking credits or debits that will arise from the payment or refund of the amount of the provision for income tax or income tax refundable at the reporting date. Note 23. Financial instruments Financial risk management objectives The Group's activities expose it to a variety of financial risks: market risk (including foreign currency risk, price risk and interest rate risk), credit risk and liquidity risk. The Group's overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group uses derivative financial instruments such as forward foreign exchange contracts to hedge certain risk exposures. Derivatives are exclusively used for hedging purposes, i.e. not as trading or other speculative instruments. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks and ageing analysis for credit risk. Risk management is carried out by senior finance executives ('finance') under policies approved by the Board of Directors ('the Board'). These policies include identification and analysis of the risk exposure of the Group and appropriate procedures, controls and risk limits. Finance identifies, evaluates and hedges financial risks within the Group's operating units. Finance reports to the Board on a monthly basis. Market risk Foreign currency risk The Group undertakes certain transactions denominated in foreign currency and is exposed to foreign currency risk through foreign exchange rate fluctuations. Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the entity's functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. In order to protect against exchange rate movements, the Group has entered into forward foreign exchange contracts. These contracts are hedging highly probable forecasted cash flows for the ensuing financial year. Most of the Group’s transactions are carried out in $AUD. Exposures to currency exchange rates arise from the Group’s overseas purchases, which are primarily denominated in $US-Dollars ($USD). To mitigate the Group’s exposure to foreign currency risk, non- $AUD cash flows are monitored, and forward exchange contracts are entered into in accordance with the Group’s risk management policies. The usual length of forward contracts entered into are short term and cover known $USD exposures. Where the amounts to be paid and received in a specific currency are expected to largely offset one another, no further hedging activity is undertaken. At 30 June 2019, the Group had forward foreign exchange contracts to acquire $15,900,000 of USD (2018: $15,355,000). These are due to mature within 3 months of balance date. The fixed exchange rates on these contracts ranged from 0.6675 to 0.7154 (2018: 0.7335 to 0.8046). The Group's exposure to foreign currency risk at the end of the reporting period, expressed in AUD, was as follows: 52 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 23. Financial instruments (continued) Cash Trade payables Buy foreign currency (held for trading) Consolidated 2019 $'000 2018 $'000 - (20,094) 24 1 (29,984) 463 (20,070) (29,520) Based on this exposure, had the Australian dollar weakened or strengthened against these foreign currencies with all other variables held constant, the Group's profit before tax for the year would have been affected as follows: Consolidated - 2019 % change profit before tax Effect on equity % change profit before tax Effect on equity AUD strengthened Effect on AUD weakened Effect on USD 10% 1,825 1,277 10% (2,230) (1,561) Consolidated - 2018 % change profit before tax Effect on equity % change profit before tax Effect on equity AUD strengthened Effect on AUD weakened Effect on USD 10% 2,681 1,877 (10%) (3,277) (2,294) The percentage change is the expected overall volatility of the significant currencies, which is based on management's assessment of reasonable possible fluctuations. The actual foreign exchange loss for the year ended 30 June 2019 was $51,000 (2018: loss of $657,000). Price risk The Group is not exposed to any significant price risk. Interest rate risk The Group's main interest rate risk arises from long-term borrowings. Borrowings obtained at variable rates expose the Group to interest rate risk. Borrowings obtained at fixed rates expose the Group to fair value interest rate risk. As at the reporting date, the Group had the following variable rate borrowings outstanding: Consolidated Bank overdraft Borrowings Net exposure to cash flow interest rate risk 2019 2018 Balance Balance $'000 $'000 477 12,647 - 14,021 13,124 14,021 An analysis by remaining contractual maturities in shown in 'liquidity and interest rate risk management' below. The weighted average interest rate on borrowings during the year ended 30 June 2019 was 1.30% (2018: 2.20%). 53 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 23. Financial instruments (continued) For the Group the bank loans outstanding, totalling $12,647,000 (2018: $14,021,000), are principal and interest payment loans. An official increase/decrease in interest rates of 50 (2018: 50) basis points would have an adverse/favourable effect on profit before tax of $63,000 (2018: $70,000) per annum. The percentage change is based on the expected volatility of interest rates using market data and analysts forecasts. In addition, minimum principal repayments of $1,438,000 (2018: $1,438,000) are due during the subsequent 12 month period. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has a strict code of credit, including obtaining agency credit information, confirming references and setting appropriate credit limits. The Group obtains guarantees where appropriate to mitigate credit risk. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. The Group does not hold any collateral. The Group has adopted a lifetime expected loss allowance in estimating expected credit losses to trade receivables through the use of a provisions matrix using fixed rates of credit loss provisioning. These provisions are considered representative across all customers of the Group based on recent sales experience, historical collection rates and forward- looking information that is available. Generally, trade receivables are written off when there is no reasonable expectation of recovery. Indicators of this include the failure of a debtor to engage in a repayment plan, no active enforcement activity and a failure to make contractual payments for a period greater than 1 year. Liquidity risk Vigilant liquidity risk management requires the Group to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The Group manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Financing arrangements Unused borrowing facilities at the reporting date: Bank guarantee Consolidated 2019 $'000 2018 $'000 1,265 1,691 The bank guarantee facilities may be drawn at any time and have an average maturity of 2.21 years (2018: 2.75 years). 54 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 23. Financial instruments (continued) Remaining contractual maturities The following tables detail the Group's remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both principal cash flows disclosed as remaining contractual maturities. Consolidated - 2019 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Bank overdraft Bank loans Interest-bearing - fixed rate Lease liability Total non-derivatives Derivatives Forward foreign exchange contracts net settled Total derivatives Consolidated - 2018 Non-derivatives Non-interest bearing Trade payables Other payables Interest-bearing - variable Bank loans Interest-bearing - fixed rate Lease liability Total non-derivatives 1 year or less $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Over 5 years $'000 Remaining contractual maturities $'000 27,383 608 477 1,460 108 30,036 24 24 - - - 1,460 78 1,538 - - - - - 9,727 25 9,752 - - - - - - - - - - 27,383 608 477 12,647 211 41,326 24 24 1 year or less $'000 Between 1 and 2 years $'000 Between 2 and 5 years $'000 Over 5 years $'000 Remaining contractual maturities $'000 32,536 1,299 - - - - 1,438 1,438 11,145 179 35,452 68 1,506 167 11,312 - - - - - 32,536 1,299 14,021 414 48,270 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. 55 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 24. Fair value measurement Fair value hierarchy The following tables detail the Group's assets and liabilities, measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability Consolidated - 2019 Assets Forward foreign exchange contracts - derivatives Total assets Consolidated - 2018 Assets Forward foreign exchange contracts - derivatives Total assets Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 Level 1 $'000 - - - - 24 24 Level 2 $'000 Level 3 $'000 463 463 - - - - 24 24 Total $'000 463 463 There were no transfers between levels during the financial year. The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial liabilities. Valuation techniques for fair value measurements categorised within level 2 and level 3 Derivative financial instruments have been valued using quoted market rates, adjusted as appropriate. This valuation technique maximises the use of observable market data where it is available and relies as little as possible on entity specific estimates. 56 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 25. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by Pitcher Partners, the auditor of the Company, and its network firms: Audit services - Pitcher Partners Audit or review of the financial statements Other services - Pitcher Partners Investigating Accountant’s Report Transaction services Tax compliance services Audit services - network firms Audit or review of the financial statements Other services - network firms Other assurance services Note 26. Contingent liabilities Consolidated 2019 $ 2018 $ 200,000 200,000 - 145,451 128,612 276,236 248,486 113,000 274,063 637,722 474,063 837,722 18,882 592 19,474 - - - The Group has given bank guarantees as at 30 June 2019 of $2,892,000 (2018: $2,466,000) to various landlords and suppliers for standby letters of credit. 57 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 27. Commitments Capital commitments Committed at the reporting date but not recognised as liabilities, payable: Property, plant and equipment Lease commitments - operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years Lease commitments - finance Committed at the reporting date and recognised as liabilities, payable: Within one year One to five years Total commitment Less: Future finance charges Net commitment recognised as liabilities Representing: Lease liability - current (note 16) Lease liability - non-current (note 18) Consolidated 2019 $'000 2018 $'000 283 - 2,279 2,874 3,178 4,196 5,153 7,374 116 109 225 (14) 211 108 103 211 194 253 447 (33) 414 179 235 414 Operating lease commitments includes contracted amounts for various warehouses and offices under non-cancellable operating leases expiring within three years (2018: four years) with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases are renegotiated. Finance lease commitments includes contracted amounts for various motor vehicles with a written down value of $197,000 (2018: $617,000) under finance leases expiring within one to two years (2018: one to three years). Under the terms of the leases, the Group has the option to acquire the leased assets for predetermined residual values on the expiry of the leases. Note 28. Key management personnel disclosures Compensation The aggregate compensation made to directors and other members of key management personnel of the Group is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments 58 Consolidated 2019 $ 2018 $ 2,146,898 146,497 61,562 - 1,929,696 126,424 (14,805) 1,609,337 2,354,957 3,650,652 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 29. Related party transactions Parent entity National Tyre & Wheel Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 32. Key management personnel Disclosures relating to key management personnel are set out in note 28 and the remuneration report included in the directors' report. Transactions with related parties During the financial year, a Group entity leased business premises owned by a closely related party of Chris Hummer on commercial terms. The lease expired on 30 April 2017 and the parties are ‘holding over’ until new premises are available. Rent payments for the financial year totalled $126,421 (2018: $123,598), with $nil outstanding at 30 June 2019 (2018: $nil). During the financial year, a Group entity leased business premises owned by a closely related party of Trevor Wren on commercial terms. The lease expires on 30 May 2023 and has two 5 year renewal options. Rent payments for the financial year totalled $203,479 (2018: $14,167), with $nil outstanding at 30 June 2019 (2018: $nil). Receivable from and payable to related parties There were no trade receivables from or trade payables to related parties at the current and previous reporting date. Loans to/from related parties There were no loans to or from related parties at the current and previous reporting date. Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. Note 30. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Loss after income tax Total comprehensive income Parent 2019 $'000 2018 $'000 (524) (2,203) (524) (2,203) 59 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 30. Parent entity information (continued) Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Accumulated losses Total equity Parent 2019 $'000 2018 $'000 1,230 3,141 56,136 62,814 5,197 6,960 16,408 19,567 65,271 (25,543) 64,761 (21,514) 39,728 43,247 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity had a deed of cross guarantee in place in relation to certain subsidiaries at 30 June 2019 and 30 June 2018. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2019 and 30 June 2018. Capital commitments - Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2019 and 30 June 2018. Significant accounting policies The accounting policies of the parent entity are consistent with those of the Group, as disclosed in note 2, except for the following: ● ● ● Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. Investments in associates are accounted for at cost, less any impairment, in the parent entity. Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. Note 31. Business combinations 2018 Top Draw Tyres Proprietary Limited ('Top Draw Tyres') On 30 September 2017, the Group acquired 34% of the ordinary shares in Top Draw Tyres, the importer and distributor of tyres in South Africa. The Group subsequently acquired a further 16% on 13 December 2017. The Group now owns 50% of Top Draw Tyres and the remaining shares are held by the Top Draw Tyres vendors. Total consideration for the acquisition was $4,006,000 in cash. The acquired business has contributed revenue of $8,260,000 and profit before tax of $735,000 to the Group from the date of acquisition to 30 June 2018. If the acquisition occurred on 1 July 2017, the full year contributions would have been revenues of $17,060,000 and profit before tax of $1,190,000. NTAW recognised $133,000 as previously equity accounted profits for the period up until control was obtained. S.N Tyre Wholesaler Pty Ltd ('Cotton') On 31 October 2017, the Group acquired 100% of the business assets from Cotton, a distributor of tyres in South Australia and Northern Territory. Total consideration for the acquisition was $6,220,000, including $3,732,000 in cash consideration and $2,488,000 in Company shares, issued on 14 December 2017. The acquired business assets have been incorporated in Exclusive Tyre Distributors. The acquired business assets have contributed revenue of $5,780,000 and profit before tax of $920,000 to the Group from the date of acquisition to 30 June 2018. If the acquisition occurred on 1 July 2017, the full year contributions would have been revenues of $8,980,000 and profit before tax of $1,170,000. 60 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 31. Business combinations (continued) Statewide Tyre Distribution Pty Ltd ('Statewide') On 31 May 2018, the Group acquired 100% of the ordinary shares in Statewide, the importer and distributor of tyres in South Australia, New South Wales and the Northern Territory. Total consideration for the acquisition was $8,542,000, including $7,067,000 in cash consideration and $1,475,000 in Company shares, issued on 31 May 2018 and 18 June 2018. The acquired business has contributed revenue of $1,970,000 and profit before tax of $170,000 to the Group from the date of acquisition to 30 June 2018. Due to Statewide not maintaining accounting records in accordance with Australian Accounting Standards prior to the acquisition, it is impracticable to disclose the impact to revenue and profit and loss of the Group for the 2018 financial year if the acquisition had been at 1 July 2017. The goodwill on the above acquisitions comprise the value of the workforce, future revenues from those customers which are not current and expected and future synergies to be realised as part of the Group. Details of the acquisitions are as follows: Cash and cash equivalents Trade and other receivables Inventories Plant and equipment Motor vehicles Customer relationships Importation rights Deferred tax asset Trade payables Deferred tax liability Provisions Other liabilities Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Representing: Cash paid or payable to vendor National Tyre & Wheel Limited shares issued to vendor Non-controlling interest Share of previous equity accounted profit Pre-IPO Top Draw Pre-IPO Post-IPO Tyres Cotton Fair value Fair value Statewide Fair value Total Fair value $'000 $'000 $'000 $'000 1,246 1,812 6,266 35 44 327 1,376 55 (3,669) (511) (1,109) (216) 5,656 1,311 - 1,415 2,181 106 102 1,109 - - (945) (333) (150) - 3,485 2,735 204 2,819 4,300 80 198 411 - 206 (485) (123) (688) (118) 6,804 1,738 1,450 6,046 12,747 221 344 1,847 1,376 261 (5,099) (967) (1,947) (334) 15,945 5,784 6,967 6,220 8,542 21,729 4,006 - 2,828 133 3,732 2,488 - - 7,067 1,475 - - 14,805 3,963 2,828 133 6,967 6,220 8,542 21,729 Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: cash and cash equivalents Less: share of equity accounted profit from previous periods Less: shares issued by Company as part of consideration Less: non-controlling interest 6,967 (1,246) (133) - (2,828) 6,220 - - (2,488) - 8,542 (204) - (1,475) - 21,729 (1,450) (133) (3,963) (2,828) Net cash used 2,760 3,732 6,863 13,355 61 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 31. Business combinations (continued) Other On 14 December 2017, the Group acquired the remaining 45.6% of the shares in Dynamic Wheel Co Pty Ltd, a previously recognised controlled entity. Total consideration for the acquisition was $4,196,000 in Company shares. On 14 December 2017, the Group acquired the remaining 50% of the shares in M.P.C Mags and Tyres Pty Ltd, a previously recognised controlled entity. Total consideration for the acquisition of the remaining shares was $7,858,000 in Company shares. Note 32. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in note 2: Name Exclusive Tyres Distributors Pty Ltd Exclusive Tyres Distributors (NZ) Ltd Dynamic Wheel Co Pty Ltd M.P.C Mags and Tyres Pty Ltd Top Draw Tyres Proprietary Limited Statewide Tyre Distribution Pty Ltd Note 33. Deed of cross guarantee Principal place of business / Country of incorporation Australia New Zealand Australia Australia South Africa Australia Ownership interest 2018 2019 % % 100.00% 100.00% 100.00% 100.00% 50.00% 100.00% 100.00% 100.00% 100.00% 100.00% 50.00% 100.00% The following entities are party to a deed of cross guarantee under which each company guarantees the debts of the others: National Tyre & Wheel Limited Exclusive Tyres Distributors Pty Ltd Exclusive Tyres Distributors (NZ) Ltd By entering into the deed, the Australian wholly-owned entities have been relieved from the requirement to prepare financial statements and directors' report under Corporations Instrument 2016/785 issued by the Australian Securities and Investments Commission. The above companies represent a 'Closed Group' for the purposes of the Corporations Instrument, and as there are no other parties to the deed of cross guarantee that are controlled by National Tyre & Wheel Limited, they also represent the 'Extended Closed Group'. 62 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 33. Deed of cross guarantee (continued) Set out below is a consolidated statement of profit or loss and other comprehensive income and statement of financial position of the 'Closed Group'. 2019 $'000 2018 $'000 110,442 107 (78,409) (11,647) (1,625) (698) (5,176) (3,335) (512) - (3,465) (641) 113,283 183 (73,151) (14,079) (1,588) (719) (4,719) (3,121) (392) (2,078) (8,372) (485) 5,041 (2,576) 4,762 (1,516) 2,465 3,246 132 132 (133) (133) 2,597 3,113 2019 $'000 2018 $'000 2,374 2,465 (3,637) - - 14,947 3,246 (16,011) 548 (356) 1,202 2,374 Statement of profit or loss and other comprehensive income Revenue Interest revenue calculated using the effective interest method Cost of goods sold Employee benefits and other related costs Depreciation and amortisation Legal and professional fees Marketing Occupancy Insurance Listing Other Finance Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income Foreign currency translation Other comprehensive income for the year, net of tax Total comprehensive income for the year Equity - retained profits Retained profits at the beginning of the financial year Profit after income tax expense Dividends paid Transfer from share-based payments reserve Transfer from other reserves Retained profits at the end of the financial year 63 For personal use only 2019 $'000 2018 $'000 14,747 16,883 26,299 19 225 543 58,716 33,567 2,575 7,922 1,363 45,427 15,896 20,691 26,710 557 - 420 64,274 33,567 2,897 9,010 1,764 47,238 104,143 111,512 21,631 1,458 - 2,077 25,166 11,213 1,291 12,504 25,755 1,529 1,289 1,990 30,563 12,716 1,230 13,946 37,670 44,509 66,473 67,003 65,271 - 1,202 64,761 (132) 2,374 66,473 67,003 Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 33. Deed of cross guarantee (continued) Statement of financial position Current assets Cash and cash equivalents Trade and other receivables Inventories Derivative financial instruments Income tax refund due Other Non-current assets Other financial assets Property, plant and equipment Intangibles Deferred tax Total assets Current liabilities Trade and other payables Borrowings Income tax payable Provisions Non-current liabilities Borrowings Provisions Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity 64 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 34. Cash flow information Reconciliation of profit after income tax to net cash from operating activities Profit after income tax expense for the year Adjustments for: Depreciation and amortisation Net loss/(gain) on disposal of property, plant and equipment Share-based payments Listing costs recognised in profit after income tax Profit recognised for equity accounted investments Amortisation of capitalised borrowing costs Impairment of receivables Foreign exchange differences Change in operating assets and liabilities: Decrease/(increase) in trade and other receivables Increase in inventories Increase in income tax refund due Decrease/(increase) in deferred tax assets Increase in other operating assets Increase/(decrease) in trade and other payables Increase/(decrease) in provision for income tax Increase in deferred tax liabilities Increase/(decrease) in other provisions Decrease in other operating liabilities Consolidated 2019 $'000 2018 $'000 6,676 5,355 2,628 (44) 132 - - - 156 951 1,062 (813) (212) 4 (102) (5,586) (1,069) 152 142 - 2,129 2 2,657 2,078 (132) 167 42 (2,166) (546) (3,572) - (902) (884) 5,473 141 - (892) (48) Net cash from operating activities 4,077 8,902 Non-cash investing and financing activities Acquisition of plant and equipment by means of finance leases - 211 Consolidated 2019 $'000 2018 $'000 Note 35. Earnings per share Profit after income tax Non-controlling interest Consolidated 2019 $'000 2018 $'000 6,676 (286) 5,355 (878) Profit after income tax attributable to the owners of National Tyre & Wheel Limited 6,390 4,477 65 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 35. Earnings per share (continued) Weighted average number of ordinary shares used in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: 102,676,530 85,245,148 Options over ordinary shares - 3,402,889 Weighted average number of ordinary shares used in calculating diluted earnings per share 102,676,530 88,648,037 Number Number Basic earnings per share Diluted earnings per share Note 36. Share-based payments Cents Cents 6.22 6.22 5.25 5.05 NTAW Senior Executive Option Plan ('SEOP') The SEOP was used prior to the Company’s listing on the ASX to recognise senior executives contribution to the Group and to allow them to share in the growth in value of the Group. Under the terms of the SEOP, participants are granted options over ordinary shares of the Company which vest only if certain events occur. This plan has been discontinued following the IPO. Employee Share Option Plan ('ESOP') The Company adopted a new employee share option plan on 6 November 2017. The details of the ESOP are summarised as follows: Options may be granted under the ESOP to any person who is, or is proposed to be, a full-time or part-time employee, a non-executive director, a contractor (40% full-time equivalent ('FTE')) or a casual employee (40% FTE) of the Company or any of its associated bodies corporate, and whom the Board determines to be an eligible person for the purposes of participation in the ESOP (referred to as an 'Eligible Person'). An option may not be granted under the ESOP if, immediately following its grant, the shares to be received on exercise of the option, when aggregated with the number of shares which would be issued if each unvested option granted under the ESOP or any other employee incentive scheme of the Company were to vest and be exercised and the number of shares issued in the previous 3 years under the ESOP or any other employee incentive scheme of the Company, exceeds 5% of the total number of issued shares at the time of grant (or any varied limit if permitted under the Corporations Act 2001, ASX Listing Rules and ASIC instruments). Certain offers of options may be excluded from calculation as permitted under Class Order 14/1000, including excluded offers under section 708 of the Corporations Act 2001 and offers under a disclosure document. Each option entitles the participant to subscribe for one ordinary share in the Company. The specific terms relevant to the grant of options are set out in an offer from the Company to the Eligible Person which contains details of the application price (if any) (which must not be for more than nominal consideration), the expiry date, the exercise price, the vesting date, any applicable performance conditions and other specific terms relevant to those options. Unless otherwise specified in the offer of an option, if a “Change of Control Event” occurs before the vesting date of an option, that option immediately vests and ceases to be subject to any performance condition to which it was subject. A Change of Control Event means the occurrence of one or more of the following events: ● a person who has offered to acquire all shares in the Company acquires Control (as defined in section 50AA of the Corporations Act 2001) of the Company; any other event occurs which causes a change in Control of the Company; unless the Board determines otherwise, a takeover bid is recommended by the Board or a scheme of arrangement which would have a similar effect to a full takeover bid is announced by the Company; and any other event which the Board reasonably considers should be regarded as a Change of Control Event. ● ● ● 66 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 36. Share-based payments (continued) Options may only be transferred: ● ● to a legal personal representative on the death of the participant or to the participant’s trustee in bankruptcy on the bankruptcy of the participant; or pursuant to an off-market takeover bid, in various compulsory acquisition scenarios under Chapter 6A of the Corporations Act 2001, under a creditor’s scheme of arrangement under section 411 of the Corporations Act 2001 or if approved by the Board. An option does not confer any rights to participate in a new issue of shares by the Company. If the Company conducts a rights issue, the exercise price of options will be adjusted in accordance with the adjustment formula for pro rata issues set out in the Listing Rules. If the Company makes a bonus issue of securities to holders of shares, the rights of a holder in respect of an unexercised option will be modified such that the participant will receive, upon exercise of an option, one Share plus such additional securities which the participant would have received had the participant exercised the option immediately before the record date for that bonus issue and participated in the bonus issue as the holder of the share. If the Company’s issued capital is reorganised (including consolidation, subdivision, reduction, or return), then the number of options, the exercise price or both or any other terms will be reorganised in a manner determined by the Board which complies with the Listing Rules. Any shares issued under the ESOP rank equally in all respects with the Shares of the same class on issue, subject to the restrictions on the transfer of shares. Shares issued on exercise of options are not transferable for the period (if any) specified in the offer from the Company to the Eligible Person. An unvested option lapses upon the first to occur of the following: ● ● ● ● its expiry date; any applicable performance condition not being satisfied prior to the end of any prescribed performance period; a transfer or purported transfer of the option in breach of the rules; 30 days following the day the participant ceases to be employed or engaged by the Company or an associated body corporate by resigning voluntarily and not recommencing employment with the Company or an associated body corporate before the expiration of that 30 days; 30 days following the day the participant ceases to be employed or engaged by the Company or an associated body corporate by reason of his or her death, disability, bona fide redundancy, or any other reason with the approval of the Board and the participant has not recommenced employment with the Company or an associated body corporate before the expiration of those 30 days, however the Board has a discretion to deem all or any of the options to have vested; or termination of the participant’s employment or engagement with the Company or an associated body corporate on the basis the participant acted fraudulently, dishonestly, in breach of the participant’s obligations or otherwise for cause. ● ● A vested but unexercised option lapses upon the first to occur of the following: ● ● ● its expiry date; a transfer or purported transfer of the option in breach of the rules; or termination of the participant’s employment or engagement with the Company or an associated body corporate on the basis the participant acted fraudulently, dishonestly, in breach of the participant’s obligations or otherwise for cause. Subject to the ASX Listing Rules and the law, the Board may at any time by resolution amend or add to the rules of the ESOP. However, the consent of a participant is required for any change to the rules or option terms which prejudicially affects the rights of the participant in relation to the option (except for certain changes, including changes to benefit the administration of the Plan or to comply with laws, ASX Listing Rules or regulations). 67 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 36. Share-based payments (continued) Employee Gifted Shares During the year, Terry and Susanne Smith (co-founders of Exclusive Tyre Distributors Australia Pty Ltd) and Chris and Christine Hummer (co-founders of Dynamic Wheel Co Pty Ltd), transferred a total of 319,666 of their personally owned National Tyre & Wheel Limited (NTD) shares to a number of employees of the Group. The gifts were made as a gesture of thanks and appreciation for the employees’ efforts and support for the business, prior to NTD’s listing on the ASX in December 2017. The transfers occurred following the release of the shares from voluntary escrow during the year and were valued at 45 cents per share at that time. Set out below are summaries of options granted under the plans: 2019 Grant date Expiry date Exercise price Balance at start of year Granted Option split Exercised Balance at end of year1 07/12/2018 30/09/2023 $1.1724 - 1,630,000 - - 1,630,000 1 All options outstanding at 30 June 2019 have lapsed as at the date of this report as the performance conditions have not been met. 2018 Grant date Expiry date 01/07/2012 01/04/2014 01/07/2016 01/07/2016 01/07/2016 30/06/2017 01/07/2017 01/07/2017 01/07/2022 01/07/2022 01/07/2022 01/07/2022 01/07/2022 01/07/2022 01/07/2022 01/07/2022 Exercise price Balance at start of year Granted Option split Exercised3 Balance at end of year $0.0000 $0.0000 $0.50222 $0.50222 $0.0000 $0.0000 $0.0000 $0.50222 1,487,945 77,305 220,000 2,150,000 1,324,339 1,000,000 - - - - - - - - 1,006,470 200,000 23,298 1,210 3,445 33,665 20,737 15,658 15,760 3,132 (1,511,243) (78,515) (223,445) (2,183,665) (1,345,076) (1,015,658) (1,022,230) (203,132) 6,259,589 1,206,470 116,905 (7,582,964) - - - - - - - - - 2 3 The Exercise price was adjusted during the financial year as a result of the share consolidation and share split that occurred prior to the IPO. All options were exercised just prior to the Group listing on the ASX. The weighted average share price on the exercise date is therefore considered to be $1.00. The weighted average remaining contractual life of options outstanding at the end of the financial year was nil years (2018: nil years). Valuation model inputs For the options granted during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Expiry date Share price Exercise at grant date price Expected volatility Dividend Risk-free Fair value yield interest rate at grant date 07/12/2018 30/09/2023 $0.4900 $1.1724 65.00% 8.70% 2.00% $0.081 68 For personal use only Notes to the financial statements National Tyre & Wheel Limited and its controlled entities 30 June 2019 Notes to the financial statements 30 June 2019 Note 36. Share-based payments (continued) Expenses recognised from share-based payment transactions The expense recognised in relation to the share-based payment transactions was recognised within employee benefit expense within the statement of profit or loss as follows: Options issued under the NTAW Employee Share Option Plan Options issued under the NTAW Senior Executive Option plan Employee gifted shares Total expense recognised from share-based payment transactions in employee benefits expense Note 37. Events after the reporting period Consolidated 2019 $'000 2018 $'000 - - 132 - 2,657 - 132 2,657 Apart from the dividend declared as disclosed in note 22 and the lapsing of 1.63 million options as noted in the Remuneration Report and note 36, no other matter or circumstance has arisen since 30 June 2019 that has significantly affected, or may significantly affect the Group's operations, the results of those operations, or the Group's state of affairs in future financial years. 69 For personal use only Directors’ Declaration National Tyre & Wheel Limited and its controlled entities 30 June 2019 Directors' declaration 30 June 2019 In the directors' opinion: ● ● ● ● ● the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 2 to the financial statements; the attached financial statements and notes give a true and fair view of the Group's financial position as at 30 June 2019 and of its performance for the financial year ended on that date; there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and at the date of this declaration, there are reasonable grounds to believe that the members of the Extended Closed Group will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in note 33 to the financial statements. The directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the directors ___________________________ Murray Boyte Chairman 23 August 2019 Brisbane 70 For personal use only Independent Auditor’s Report Independent Auditor’s Report To the Shareholders of National Tyre & Wheel Limited To the Shareholders of National Tyre & Wheel Limited Report on the Audit of the Financial Report Report on the Audit of the Financial Report Opinion Opinion We have audited the financial report of National Tyre & Wheel Limited and controlled entities (“the We have audited the financial report of National Tyre & Wheel Limited and controlled entities (“the Group”), Group”), which comprises the consolidated statement of financial position as at 30 June 2019, the which comprises the consolidated statement of financial position as at 30 June 2018, the consolidated statement consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of to the financial statements, including a summary of significant accounting policies, and the directors’ cash flows for the year then ended, and notes to the financial statements, including a summary of significant declaration. accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, Act 2001, including: including: (a) giving a true and fair view of the Group’s financial position as at 30 June 2019 and of its financial performance for the year then ended; and giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its financial complying with Australian Accounting Standards and the Corporations Regulations 2001. performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. (a) (b) (b) Basis for Opinion Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those independence requirements of the Corporations Act 2001 and the ethical requirements of the standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional our report. We are independent of the Group in accordance with the auditor independence requirements of the Accountants “the Code” that are relevant to our audit of the financial report in Australia. We have also Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards fulfilled our other ethical responsibilities in accordance with the Code. Board’s APES 110 Code of Ethics for Professional Accountants “the Code” that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Group, would be in the same terms if given to the directors as at the time We confirm that the independence declaration required by the Corporations Act 2001, which has been given to of this auditor’s report. the directors of the Group, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in Key Audit Matters our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide Key audit matters are those matters that, in our professional judgement, were of most significance in our audit a separate opinion on these matters. of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 71 71 71 For personal use only Key audit matter How our audit addressed the matter Impairment of goodwill and separately identifiable intangible assets Refer to Note 14: Intangibles As part of business combinations completed during prior years, the Group recognised goodwill and other intangible assets valued at $8,878,000 and $11,435,000, respectively. These intangible assets relate to the acquisition of various subsidiaries of National Tyre & Wheel Ltd, with these subsidiaries being the basis of management’s determination of Cash- Generating Units (“CGU”) in the Group. The carrying amount of Goodwill and the intangible assets is supported by value-in-use calculations prepared by management which are based on budgeted future cash flows and key estimates such as growth rate and discount rate. This is a key area of audit focus as the value of the intangible assets is material and the evaluation of the recoverable amount of these assets requires significant judgement in determining the key estimates supporting the expected future cash flows of the CGUs and the utilisation of the relevant assets. Our audit procedures included:  Assessing management’s determination of the Group’s CGUs based on our understanding of the nature of the Group’s business and the identifiable groups of cash generating assets;  Comparing the cash flow forecasts used in the value-in-use calculations to Board approved budgets for the 2020 financial year and the Group’s historic actual performance;  Assessing the significant judgements and key estimates used for the impairment assessment, in particular, those judgements relating to the discount rate and cash flow forecasts;  Checking the mathematical accuracy of the impairment testing model and agreed relevant data to the latest budgets;  Performing sensitivity analysis by varying significant judgements and key estimates, including the discount rate and growth rate inputs, for the CGUs to which goodwill relates; and  Assessing the adequacy of the Group’s disclosures in respect of impairment testing of goodwill and indefinite useful life intangible assets. Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2019, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Group are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.  Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of Pitcher Partners is an association of independent firms. An Independent Queensland Partnership ABN 84 797 724 539. Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Pitcher Partners is an association of independent firms. An Independent Queensland Partnership ABN 84 797 724 539. Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. 72 73 For personal use only Key audit matter How our audit addressed the matter Impairment of goodwill and separately identifiable intangible assets Refer to Note 14: Intangibles As part of business combinations completed Our audit procedures included: during prior years, the Group recognised goodwill and other intangible assets valued at $8,878,000 and $11,435,000, respectively.  Assessing management’s determination of the Group’s CGUs based on our understanding of the nature of the Group’s business and the identifiable groups of cash These intangible assets relate to the acquisition generating assets; of various subsidiaries of National Tyre & Wheel  Comparing the cash flow forecasts used in Ltd, with these subsidiaries being the basis of the value-in-use calculations to Board key estimates such as growth rate and discount  Checking the mathematical accuracy of the management’s determination of Cash- Generating Units (“CGU”) in the Group. The carrying amount of Goodwill and the intangible assets is supported by value-in-use calculations prepared by management which are based on budgeted future cash flows and rate. This is a key area of audit focus as the value of the intangible assets is material and the evaluation of the recoverable amount of these assets requires significant judgement in determining the key estimates supporting the expected future cash flows of the CGUs and the utilisation of the relevant assets. approved budgets for the 2020 financial year and the Group’s historic actual performance;  Assessing the significant judgements and key estimates used for the impairment assessment, in particular, those judgements relating to the discount rate and cash flow forecasts; impairment testing model and agreed relevant data to the latest budgets;  Performing sensitivity analysis by varying significant judgements and key estimates, including the discount rate and growth rate inputs, for the CGUs to which goodwill relates; and  Assessing the adequacy of the Group’s disclosures in respect of impairment testing of goodwill and indefinite useful life intangible assets. Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2019, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Group are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.  Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of Pitcher Partners is an association of independent firms. An Independent Queensland Partnership ABN 84 797 724 539. Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Pitcher Partners is an association of independent firms. An Independent Queensland Partnership ABN 84 797 724 539. Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. 72 73 For personal use only our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Other Information  Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in The directors are responsible for the other information. The other information comprises the information a manner that achieves fair presentation. included in the Group’s annual report for the year ended 30 June 2018, but does not include the financial report  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or and our auditor’s report thereon. business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely Our opinion on the financial report does not cover the other information and accordingly we do not express any responsible for our audit opinion. form of assurance conclusion thereon. We communicate with the directors regarding, among other matters, the planned scope and timing of In connection with our audit of the financial report, our responsibility is to read the other information and, in the audit and significant audit findings, including any significant deficiencies in internal control that we doing so, consider whether the other information is materially inconsistent with the financial report or our identify during our audit. knowledge obtained in the audit or otherwise appears to be materially misstated. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other If, based on the work we have performed, we conclude that there is a material misstatement of this other matters that may reasonably be thought to bear on our independence, and where applicable, related information, we are required to report that fact. We have nothing to report in this regard. safeguards. Responsibilities of the Directors for the Financial Report From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit The directors of the Group are responsible for the preparation of the financial report that gives a true and fair matters. We describe these matters in our auditor’s report unless law or regulation precludes public view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal disclosure about the matter or when, in extremely rare circumstances, we determine that a matter control as the directors determine is necessary to enable the preparation of the financial report that gives a true should not be communicated in our report because the adverse consequences of doing so would and fair view and is free from material misstatement, whether due to fraud or error. reasonably be expected to outweigh the public interest benefits of such communication. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue Report on the Remuneration Report as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic Opinion on the Remuneration Report alternative but to do so. We have audited the Remuneration Report included in pages 2 to 20 of the directors’ report for the year ended 30 June 2019. In our opinion, the Remuneration Report of National Tyre & Wheel Limited, for the year ended 30 June 2019, complies with section 300A of the Corporations Act 2001. Auditor’s Responsibilities for the Audit of the Financial Report Responsibilities Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. The directors of the Group 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 Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements Auditing Standards. can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement PITCHER PARTNERS and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. Warwick Face Partner Brisbane, Queensland 23 August 2019  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.  Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a Pitcher Partners is an association of independent firms. An Independent Queensland Partnership ABN 84 797 724 539. Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. 74 74 For personal use only our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. Other Information  Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in The directors are responsible for the other information. The other information comprises the information a manner that achieves fair presentation. included in the Group’s annual report for the year ended 30 June 2018, but does not include the financial report  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or and our auditor’s report thereon. business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely Our opinion on the financial report does not cover the other information and accordingly we do not express any responsible for our audit opinion. form of assurance conclusion thereon. We communicate with the directors regarding, among other matters, the planned scope and timing of In connection with our audit of the financial report, our responsibility is to read the other information and, in the audit and significant audit findings, including any significant deficiencies in internal control that we doing so, consider whether the other information is materially inconsistent with the financial report or our identify during our audit. knowledge obtained in the audit or otherwise appears to be materially misstated. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other If, based on the work we have performed, we conclude that there is a material misstatement of this other matters that may reasonably be thought to bear on our independence, and where applicable, related information, we are required to report that fact. We have nothing to report in this regard. safeguards. Responsibilities of the Directors for the Financial Report From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit The directors of the Group are responsible for the preparation of the financial report that gives a true and fair matters. We describe these matters in our auditor’s report unless law or regulation precludes public view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal disclosure about the matter or when, in extremely rare circumstances, we determine that a matter control as the directors determine is necessary to enable the preparation of the financial report that gives a true should not be communicated in our report because the adverse consequences of doing so would and fair view and is free from material misstatement, whether due to fraud or error. reasonably be expected to outweigh the public interest benefits of such communication. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue Report on the Remuneration Report as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic Opinion on the Remuneration Report alternative but to do so. We have audited the Remuneration Report included in pages 2 to 20 of the directors’ report for the year ended 30 June 2019. In our opinion, the Remuneration Report of National Tyre & Wheel Limited, for the year ended 30 June 2019, complies with section 300A of the Corporations Act 2001. Auditor’s Responsibilities for the Audit of the Financial Report Responsibilities Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. The directors of the Group 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 Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements Auditing Standards. can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement PITCHER PARTNERS and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, Warwick Face Partner Brisbane, Queensland intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that 23 August 2019 are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.  Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a Shareholder information National Tyre & Wheel Limited and its controlled entities 30 June 2019 Shareholder information 30 June 2019 The shareholder information set out below was applicable as at 20 August 2019. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel Equity security holders Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: Number of holders of ordinary shares 35 329 281 461 55 1,161 56 ST Corso Pty Ltd HSBC Custody Nominees (Australia) Limited National Nominees Limited J P Morgan Nominees Australia Pty Limited Roshan Charles Chelvaratnam BNP Paribas Nominees Pty Ltd (IB AU Noms Retailclient DRP) Mr John Peter Ludemann S.N. Tyre Wholesalers Pty Ltd BNP Paribas Noms Pty Ltd (DRP) Seymour Group Pty Ltd BNP Paribas Nominees Pty Ltd (IOOF INSMT Mgmt Ltd DRP) Mrs Christine Lorraine Hummer Mrs Christine Lorraine Hummer Mr Christopher John Hmmer Mr Christopher John Hummer Mr Craig Graeme Chapman (NAMPAC Discretionary A/Cc) CS Third Nominees Pty Limited (HSBC Cust Nom AU Ltd 13 A/C) Trevor John Wren Mr John William Weeks Mr Bradley Joseph Smith Unquoted equity securities There are no unquoted equity securities at the date of this report. Ordinary shares % of total shares issued Number held 26,750,297 12,351,757 7,505,244 7,473,924 3,929,250 3,036,056 2,589,928 2,487,440 2,193,000 2,000,000 1,200,000 1,048,929 1,048,928 1,048,928 1,011,337 750,000 660,300 655,737 553,279 387,484 26.00 12.00 7.29 7.26 3.82 2.95 2.52 2.42 2.13 1.94 1.17 1.02 1.02 1.02 0.98 0.73 0.64 0.64 0.54 0.38 78,681,818 76.47 Pitcher Partners is an association of independent firms. An Independent Queensland Partnership ABN 84 797 724 539. Liability limited by a scheme approved under Professional Standards Legislation. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. 74 74 75 For personal use only Shareholder information National Tyre & Wheel Limited and its controlled entities 30 June 2019 Shareholder information 30 June 2019 Substantial holders Substantial holders in the Company are set out below: Ordinary shares % of total shares issued Number held ST Corso Pty Ltd atf the Smith Trading Trust, Terence Smith & Susanne Smith (together Smith Group) Pendal Group Limited (Pendal Fund Services Limited) Forager Funds Management Pty Ltd 31,949,729 5,545,551 5,295,000 31.05 5.39 5.15 Voting rights The voting rights attached to ordinary shares are set out below: Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no other classes of equity securities on issue at the date of this report. Securities subject to voluntary escrow Class Ordinary shares Ordinary shares Ordinary shares Expiry date Earlier of five business days after the Company releases to the ASX its final results for the year ended 30 June 2019 and 7 November 2019 31 May 2020 31 May 2021 Number of shares 4,257,274 218,579 218,579 4,694,432 76 For personal use only Corporate directory National Tyre & Wheel Limited and its controlled entities 30 June 2019 Corporate directory 30 June 2019 Directors Murray Boyte - Chairman John Peter Ludemann - Chief Executive Officer and Managing Director Terence Smith William Cook Robert Kent Company secretaries Jason Lamb Laura Fanning Registered office and principal place of business Share register Auditor Solicitors Bankers 30 Gow Street Moorooka QLD 4105 Telephone: (07) 3212 0950 Facsimile: (07) 3212 0951 Computershare Investor Services Pty Limited Level 4 60 Carrington Street Sydney NSW 2000 Telephone: 1300 787 272 Pitcher Partners Level 38 345 Queen Street Brisbane QLD 4000 Dentons 77 Castlereagh Street Sydney NSW 2000 Commonwealth Bank of Australia Ground Floor Tower 1 201 Sussex Street Sydney NSW 2000 Stock exchange listing National Tyre & Wheel Limited shares are listed on the Australian Securities Exchange (ASX code: NTD) Website www.ntaw.com.au Business objectives National Tyre & Wheel Limited has used cash and cash equivalents held at the time of listing, in a way consistent with its stated business objectives. Corporate Governance Statement The Company’s directors and management are committed to conducting the Group’s business in an ethical manner and in accordance with the highest standards of corporate governance. The Company has adopted and substantially complies with the ASX Corporate Governance Principles and Recommendations (3rd Edition) (‘Recommendations’) to the extent appropriate to the size and nature of the Group’s operations. The Company has prepared a Corporate Governance Statement which sets out the corporate governance practices that were in operation since listing, identifies any Recommendations that have not been followed, and provides reasons for not following such Recommendations. The Company’s Corporate Governance Statement and policies, which is approved at the same time as the Annual Report, can be found on its website: http://www.ntaw.com.au/Corporate-Governance/Corporate-Governance- Statement.pdf 77 For personal use only This page is intentionally left blank For personal use onlyThis page is intentionally left blank For personal use onlyFor personal use only

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