Nick Scali
Annual Report 2022

Plain-text annual report

Annual Report 2022 Bliss 3 Seater Lounge with Chaise. Parc Round Coffee Table. Russell Rug. Ceres Round Dining Table. Bobbi Dining Chairs. Francesca Buffet. 2 Annual Report 2021 | Nick Scali Limited Contents Page Page Chairman and Managing Director’s Review Directors’ Report Auditor’s Independence Declaration Consolidated Statement of comprehensive income Consolidated Statement of financial position Consolidated Statement of changes in equity Consolidated Statement of cash flows Directors’ Declaration Independent Auditor’s Report Shareholder Information Corporate Information 5 6 17 20 21 22 23 47 48 52 54 Notes to the consolidated financial statements Note 1. Basis of preparation Note 2. Segment information Note 3. Revenue and other income Note 4. Expenses Note 5. Current and deferred tax Note 6. Earnings per share Note 7. Dividends Note 8. Reconciliation of profit after income tax to net cash from operating activities Note 9. Cash and cash equivalents Note 10. Receivables Note 11. Inventories Note 12. Other financial assets Note 13. Property, plant and equipment Note 14. Leases Note 15. Intangibles Note 16. Borrowings Note 17. Payables Note 18. Deferred revenue Note 19. Provisions Note 20. Issued capital Note 21. Reserves Note 22. Financing facilities Note 23. Financial instruments Note 24. Contingent liabilities Note 25. Commitments Note 26. Employees Note 27. Key management personnel Note 28. Related party transactions Note 29. Share-based payments Note 30. Parent entity information Note 31. Controlled entities Note 32. Business Combinations Note 33. Significant events after the reporting period Note 34. Remuneration of auditors Note 35. Summary of other significant accounting policies 24 25 25 25 26 27 27 28 28 29 29 29 30 31 32 33 33 34 34 35 35 36 36 39 39 39 39 39 40 40 41 43 45 45 45 3 Annual Report 2022 | Nick Scali Limited Historical Performance Revenue ($m) Net profit after tax ($m) 441.0 373.0 84.2 74.9 268.0 262.5 250.8 42.1 42.1 41.0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 Showrooms Dividends (cents per share) 108 70.0 65.0 58 57 61 51 47.5 45.0 40.0 2018 2019 2020 2021 2022 2018 2019 2020 2021 2022 4 Annual Report 2022 | Nick Scali LimitedChairman and Managing Director’s Review Overview Despite the turbulent retail environment of the past 12 months, we are pleased to report that Nick Scali Limited has had another successful year, delivering record sales revenue and maintaining underlying profitability at a similar level to the previous year. Further, the Company successfully completed its first major acquisition, purchasing Plush-Think Sofas Pty Ltd (“Plush”) for $103million in November 2021. Operating Performance During the year, sales revenue increased by 18.0% to $441million, with the Company benefiting from both the acquisition of Plush, and an environment where consumers continued to invest in items for the home. Sales revenue growth was restricted by lockdowns due to government mandated store closures in the first half of the year and lockdowns in sourcing countries toward the end of the financial year which impacted the Company’s ability to recognise revenue from delivered sales to customers. Gross margin decreased by 250 basis points to 61.0%, due to increased freight costs and the impact of the Plush acquisition, whilst the operating costs of the existing Nick Scali Furniture business remained tightly controlled in the face of inflationary headwinds. As a consequence of the reduction in gross margin and after allowing for the additional operating costs in the Plush business (including significant one-off acquisition and restructuring costs), the Company recorded a statutory net profit after tax of $75million. During the year, the Group increased its borrowings by $65million to fund the acquisition of Plush, whilst continuing to maintain its strong working capital position. The Group generated an operating cashflow before interest and tax of $163million, and by 30 June 2022, had repaid $10million of the new loan facility and returned $49million to shareholders in dividends during the year. Plush acquisition On 1 November 2021, the Company acquired Plush from Greenlit Brands Household Goods Pty Ltd for $103million, through a combination of existing cash reserves and new borrowings. Founded in 1999, Plush is a specialist Australian sofa retailer with a focus on high quality, hand-crafted “built to last” sofas, and a network of 46 showrooms across Australia. Positioned in the market as a mid-premium sofa retailer with a focus on the aspirational customer demographic, Plush provides the Group with the ability to create Australia’s leading sofa retailer with a dual brand strategy targeting a broad customer demographic. the enhanced market positioning and Given the highly complementary ‘made to order’ business models of Plush and Nick Scali Furniture, we expect the acquisition to generate material synergies and drive profit growth over the medium term. To date, the Company has reduced operating expenses within the Plush business by $18million per annum, through reductions in property, employment and marketing expenses. Impact of Covid The Covid pandemic continued to have a significant impact on the Company during the year, with government mandated store closures resulting in over half of the store network being closed for three months between August and November. Furthermore, the Company was significantly impacted by Covid- related lockdowns in sourcing countries, most notably in Vietnam and China, where government mandated restrictions resulted in supply delays and extended customer delivery lead-times. Store network During the year, one new Nick Scali Furniture store was opened in Hastings, New Zealand – the Company’s first regional store in New Zealand. This opening, along with Plush acquisition, resulted in the Company having a combined store network of 108 stores at the end of June 2022. We believe that there is potential for Plush to operate a long-term store network of between 90 and 100 stores, and that the Nick Scali store network can be expanded to encompass at least 85 stores. In the next financial year we expect to open six new stores across the combined store network. In addition to its significant lease portfolio, the Company currently has around 40,000m2 of owned property in Australia, and during the year the Company purchased a multi-purpose showroom and distribution facility in Townsville which replaced the existing Nick Scali Furniture showroom and provides the infrastructure for the growth of both brands in North Queensland. Alongside the store network, the Company has continued to grow its successful online business, and as customer awareness of this business increased during the periods of government mandated store closures, online sales now represent around 7% of total revenue. Outlook The Company’s future growth will primarily be driven by the continuation of the new store rollout, as the Company extends the store networks of both brands over the coming years. In the short-term, the current elevated outstanding order bank will drive material revenue growth in the first half of the new financial year. However, the business expects to face inflationary pressure on operating costs, as the global economic environment becomes less favourable over the next 12-24 months. Dividends On 22nd August 2022, the Directors declared a fully franked final dividend of 35.0 cents per share, bringing the total dividend for the year to 70.0 cents per share. This represents a payout ratio of 76%. The final dividend has a record date of 3rd October 2022 and will be paid on 24th October 2022. The Board recognises that the success of Nick Scali Limited is the result of the dedication of our many employees and associates across Australia and New Zealand, and this has been particularly so over the last two years. We would like to take this opportunity to thank them for their hard work and commitment to the Company. Furthermore, the Board also takes this opportunity to thank our customers and suppliers, and shareholders whose continuing support underpins the performance of the Company. 5 Annual Report 2022 | Nick Scali LimitedDirectors’ Report The directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the ‘Group’) consisting of Nick Scali Limited (referred to hereafter as the ‘Company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2022. Directors The names and details of the Company’s directors (referred to hereafter as the ‘Board’) in office at any time during the financial year or until the date of this report are as follows. Directors were in office for this entire year unless otherwise stated. John Ingram Carole Molyneux Stephen Goddard William Koeck Anthony Scali Principal activities The principal activities of the Group during the year were the sourcing and retailing of household furniture and related accessories. No significant change in the nature of these activities occurred during the year. Dividends Dividends paid during the year were as follows: Final franked dividend for 30 June 2021: 25.0 cents (2020: 22.5 cents) Interim franked dividend for 30 June 2022: 35.0 cents (2021: 40.0 cents) 2022 $’000 20,250 28,350 48,600 2021 $’000 18,225 32,400 50,625 In addition to the above dividend, since the end of the financial year directors have declared a fully franked final dividend of 35.0 cents per fully paid ordinary share to be paid on 24 October 2022 out of retained profits at 30 June 2022. Operating and financial review Nick Scali Limited is a furniture retailer operating in Australia and New Zealand. Acquisition of Plush-Think Sofas Pty Ltd On 1 November 2021 the Company acquired Plush-Think Sofas Pty Ltd (‘Plush’) from Greenlit Brands Household Goods Pty Ltd for a consideration of $102,522,000. The acquisition group was funded through a combination of new debt facilities and existing cash reserves. The Group expects the acquisition to enable it to reach a wider customer demographic, and deliver operating synergies across both existing and acquired businesses. Following the acquisition of Plush, the business operates under two brands, Nick Scali Furniture and Plush-Think Sofas. Group operating results Revenue Gross Margin % Net profit after tax (NPAT) Earnings per share (EPS)(cents) 2022 $’000 440,957 61.0 74,922 92.5 2021 $’000 373,040 63.5 84,241 104.0 % Change 18.2% -11.1% -11.1% During the year, and despite significant shipping delays in the second half of the year due to the lockdown in Shanghai, the Group saw sales revenue increase by 18.2% to $440,957,000, with Plush contributing $88,832,000 in sales revenue for period post-acquisition. The Group’s overall gross margin was down 250 basis points to 61.0%, due to both the dilutive effect of the acquisition of the lower margin Plush business and increases in the cost of international freight. Operating expenses within the Nick Scali Furniture business remained at similar levels to previous years, and the Group continued to leverage its fixed cost base to record strong levels of net profitability in the underlying Nick Scali Furniture business. However, due to one-off acquisition and restructuring costs incurred in relation to Plush totalling $7,355,000, and the lower operating leverage in the Plush business, total operating expenses were significantly higher than in the prior financial year, and net profit after tax was down 11.0% to $74,922,000. On an underlying basis, excluding one-offs, net profit after tax was down 4.9% to $80,154,000. 6 Annual Report 2022 | Nick Scali Limited Directors’ Report (continued) Reconciliation of underlying net profit after tax Profit before tax Income tax expense Net profit after tax Reported $’000 107,956 (33,034) 74,922 One-offs Acquisition Costs Restructuring Costs $’000 3,324 (915) 2,409 $’000 4,031 (1,209) 2,822 Underlying $’000 115,311 (35,158) 80,153 The Group maintained a strong working capital position throughout the year, and increased its borrowings to fund the acquisition of Plush through a new $65,000,000 loan facility. By 30 June 2022, $10,000,000 of the new loan facility had been repaid and the Group had net assets of $140,928,000 at the end of the financial year. Showroom network Australia New Zealand Nick Scali Furniture (No.) Plush (No.) Total (No.) 57 46 103 5 – 5 During the year, 46 new stores were acquired as part of the acquisition of Plush, and one new Nick Scali Furniture store was opened in Hastings, New Zealand – the Company’s first regional store in New Zealand. The Company remains focused on its target of at least 85 Nick Scali Furniture stores and between 90 and 100 Plush stores across Australia and New Zealand, and in the next financial year expects to open between four and six new stores across the combined store network. Covid-19 impact Throughout the year, the Group continued to be impacted by the issues arising from the Covid-19 pandemic and was required to close various stores under government mandated lockdowns at different times during the year. During the first half of the year, over 50% of the store network was closed for a period of three months, severely restricting trading in NSW, Victoria and New Zealand. Further, the Group was significantly impacted by lockdowns in sourcing locations, with the extended closures of manufacturing sites in Vietnam and port facilities in China negatively impacting the Group’s delivery lead times. Whilst the possibility of further lockdown remains, the Directors are optimistic that the impact of the Covid-19 pandemic will be much less pronounced in the next financial year. People The Group has a strong focus on attracting, engaging, developing, and retaining top talent to ensure it remains an employer of choice and maximises its potential to deliver growth. Investment in training and leadership development ensures employees are equipped to deliver in their varied roles, and best practice short- term and long-term incentives are in place to reward exceptional performance. To deliver maximum shareholder value, and to maintain investor and consumer confidence, the Group is committed to achieving high levels of integrity and ethical standards across all areas of the business. The Group has a Code of Conduct which sets out the requirement for honesty, care, fair dealing, and integrity in the conduct of all business activities. The Group promotes workplace diversity and has zero tolerance for discrimination and harassment, and ensures that Workplace Health and Safety is a priority for all employees, along with that of customers and suppliers. Climate change The Company has assessed that climate related risks do not currently have a significant impact on the business. Outlook At 30 June 2022, the Group had an outstanding order book of $185,284,000. Given this, and the incremental sales revenue from the Plush business, the Company expects sales revenue for the first half of the next financial year to be materially above the previous year. However, given the current global economic environment, the business will face challenges in respect of potential rising freight costs and inflationary pressure on operating costs over the next 12-24 months. In the longer term, and following the successful acquisition of Plush, the Company’s growth is expected be driven by the continuation of the new store rollout program across both brands. Significant changes in the state of affairs Other than the acquisition of Plush-Think Sofas Pty Ltd on 1 November 2021 (and discussed above), there were no significant changes in the state of affairs of the Company during the year. Matters subsequent to the end of the financial year Other than the dividend declared on 22 August 2022 (and discussed above), no other matter or circumstance has arisen since 30 June 2022 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 Refer to the Operating and financial review on page 6. Environmental regulation The Company is not subject to any significant environmental regulation under Australian Commonwealth or State law. The Directors are not aware of any particular or significant environmental issues which have been raised in relation to the Group’s operations during the financial year. 7 Annual Report 2022 | Nick Scali Limited Directors’ Report (continued) John Ingram Information on directors Name: Title: Qualifications: AM, FCPA Experience and expertise: John was appointed to the Board as non-executive Chairman in Independent Non-Executive Chairman April 2004, and was formerly Managing Director of Crane Group Limited. Other current directorships: Non-executive Chairman of Peter Warren Automotive Holdings Limited (ASX: PWR). (last three years): Non-executive Former directorships Chairman of Shriro Holdings Limited (ASX: SHM). Special responsibilities: Member of the Audit and Risk Committee. Member of the Remuneration and Human Resources Committee. Interests in shares: 385,000. Carole Molyneux Independent Non-Executive Director Name: Title: Qualifications: BA (Hons) Experience and expertise: Carole was appointed to the Board in June 2014. Carole has extensive experience in retail and was the Chief Executive Officer of Suzanne Grae, (part of the Sussan Retail Group), for eighteen years until 2013. Other current directorships: Nil. Former directorships (last three years): Nil. Special responsibilities: Chairman of the Remuneration and Human Resources Committee. Member of the Audit and Risk Committee. Interests in shares: 20,000. Stephen Goddard Independent Non-Executive Director Name: Title: Qualifications: BSc (Hons), MSc Experience and expertise: Stephen was appointed to the Board in March 2018. Stephen William (Bill) Koeck Name: Title: Qualifications: LLB, LLM(Hons), Post Graduate Applied Independent Non-Executive Director Corporate Finance; admitted UK and Australia Experience and expertise: Bill was appointed to the Board in August 2020. Bill is an experienced legal adviser with over 40 years of experience in mergers and acquisitions, equity capital markets, private equity, restructuring and corporate governance. Bill is currently a member of the Federal Governments Takeovers Panel. Other current directorships: Non-Executive Chairman, Member of Audit Risk and Governance Committee and Chairman of Compensation and Nomination Committee for Coronado Global Resources Inc (ASX: CRN). Non-Executive Director of Poulos Bros.Group. Former directorships (last three years): Nil. Special responsibilities: Member of the Remuneration and Human Resources Committee. Member of the Audit and Risk Committee. Interests in shares: 16,300. Anthony Scali Managing Director Name: Title: Qualifications: BCom Experience and expertise: Anthony is Managing Director of Nick Scali Limited. Anthony joined the Company in 1982 after completing a Bachelor of Commerce degree at the University of New South Wales and has almost 40 years’ experience in furniture retailing. Other current directorships: Nil. Former directorships (last three years): Nil. Interests in shares: 11,039,474. ‘Other current directorships’ included above are current directorships for listed entities only and exclude directorships of all other types of entities, unless otherwise stated. is an experienced retailer having held a broad range of senior ‘Former directorships (last 3 years)’ included above are executive positions in the industry. These include Finance Director directorships held in the last three years for listed entities only and Operations Director for David Jones, founding Managing and exclude directorships of all other types of entities, unless Director of Officeworks, and various senior management roles otherwise stated. with Myer. Other current directorships: Non-Executive Chairman and Chairman of Remuneration and Nomination Committee of JB Hifi Limited (ASX: JBH). Non-Executive Director and Chairman of the Audit and Risk Committee of GWA Group Limited (ASX: GWA). Non-Executive Director and Chairman of the Audit and Risk Committee of Accent Group Limited (ASX: AX1). Former directorships (last three years): Nil. Special responsibilities: Chairman of the Audit and Risk Committee. Member of the Remuneration and Human Resources Committee. Interests in shares: 6,000. At the date of this report, no Directors held options over ordinary shares in the Company. Company Secretary The Company Secretary and Chief Financial Officer since February 2019 is Christopher Malley. He is a current member of the Institute of Chartered Accountants in England and Wales and began his career in Audit and Advisory with Deloitte in their consumer business practices in London and Sydney. Following ten years with Pepsico International, Christopher’s retail career began with MySale PLC before he joined Nick Scali as the General Manager Finance in November 2017. . 8 Annual Report 2022 | Nick Scali Limited Directors’ Report (continued) Special responsibilities of directors Audit and Risk Committee The members of the Audit and Risk Committee are as follows: • Stephen Goddard (Chairman) • William Koeck • John Ingram • Carole Molyneux Remuneration and Human Resources Committee The members of the Remuneration and Human Resources Committee are as follows: • Carole Molyneux (Chairman) • Stephen Goddard • John Ingram • William Koeck Meetings of directors The numbers of meetings of the Board and of each Board sub-committee held during the year ended 30 June 2022, and the numbers of meetings attended by each director or sub-committee member, were: John Ingram Stephen Goddard William Koeck Carole Molyneux Anthony Scali1 Directors’ Meetings Held Attended Remuneration and Human Resources Committee Attended Held Audit and Risk Committee Held Attended 10 10 10 10 10 10 10 10 10 10 2 2 2 2 – 2 2 2 2 – 4 4 4 4 – 4 4 4 3 – 1 Anthony Scali is not a member of the sub-committees, but was invited to attend the meetings of the sub-committees and his attendance was recorded in the minutes. Remuneration Report – Audited The remuneration report details the remuneration arrangements for the key management personnel of the Group, in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of the report, key management personnel are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the business. 1. Details of key management personnel For the year ended 30 June 2022 the key management personnel (KMPs) of the Group consisted of the following directors: John Ingram – Non-Executive Chairman Stephen Goddard – Non-Executive Director – Non-Executive Director William Koeck Carole Molyneux Anthony Scali – Non-Executive Director – Managing Director & Chief Executive Officer And the following executives: Christopher Malley – Chief Financial Officer & Company Secretary John Austin – Chief Operating Officer 2. Remuneration strategy The quality of Nick Scali Limited’s directors and executives is a major factor in the overall performance of the Group. To this end, the Company believes that an appropriately structured remuneration strategy underpins a performance-based culture which in turn drives shareholder returns. The Group’s remuneration strategy is therefore designed to attract and retain high quality and committed non- executive directors and employees. The executive remuneration and reward framework has two components: • fixed remuneration comprising of salary and superannuation • variable incentives comprising short-term incentives (STIs) in the form of a cash based reward and long-term incentives (LTIs) in the form of an equity reward. The variable incentives are designed to deliver value to executives for performance against a combination of Company profitability and achievement against strategic goals. Short-term incentives motivate employees to achieve outstanding performance and are based on current year predetermined key performance indicators (KPIs) such as profit after tax, and non-financial activities that achieve short to medium term objectives, while long-term incentives align employees with shareholder interests and are based on maintaining long-term shareholder value using performance measures such as EPS. 9 Annual Report 2022 | Nick Scali Limited Directors’ Report (continued) Remuneration Report – Audited (continued) 3. Remuneration and Human Resources Committee The Remuneration and Human Resources Committee currently consists of the non-executive Board members and is responsible for: • reviewing remuneration arrangements and succession planning of senior management, including the Managing Director and engaging external compensation consultants if necessary. • reviewing and approving any discretionary component of short and long-term incentives for the Managing Director and senior executives. • recommending to the Board any increase in the remuneration of existing senior employees of the Group for which Board approval is required. • recommending to the Board the remuneration of new senior executives appointed by the Group. • the setting of overall guidelines for Human Resources policy, within which Senior Management determines specific policies. • reviewing the performance of the Board and its sub-committees, with the advice of external parties if appropriate. The Committee has met twice in the last twelve months. In addition, matters for consideration by the Committee have been dealt with during various Board meetings, where all Remuneration and Human Resources Committee members were in attendance. 4. Remuneration structure In accordance with corporate governance best practices, the remuneration structures for non-executive directors and executives are separate. 4.1 Non-executive directors’ remuneration Non-executive directors are paid a fixed annual fee, which is periodically reviewed. Non-executive directors do not receive any variable renumeration and they are not entitled to participate in the Executive Performance Rights Plan. Non-executive chairman and directors’ fees in place at 30 June 2022 and 30 June 2021 were as follows: Base fee for Non-Executive Chairman Base fee for Non-Executive Director Additional fee for Audit and Risk Committee Chairman1 Additional fee for Audit and Risk Committee Member Additional fee for Remuneration and Human Resources Committee Chairman1 Additional fee for Remuneration and Human Resources Committee Member 2022 $ 200,000 100,000 20,000 5,000 10,000 3,000 2021 $ 200,000 100,000 17,000 5,000 7,000 3,000 1 The additional fees for the Audit and Risk Committee Chairman and the Remuneration and Human Resources Committee Chairman were increased during the year, with effect from 1 December 2021. The pool for non-executive directors’ fees is capped at $1,000,000 per year as approved by shareholders at the Company’s Annual General Meeting in October 2021. 4.2 Executive remuneration The Group provides appropriate rewards to attract and retain key personnel. Base salaries, STIs and LTIs are established by the Remuneration and Human Resources Committee for each executive having regard to the nature of each role, the experience of the individual employee and the performance of the individual and are then approved by the Board. External consultants are engaged as appropriate and market information is used to benchmark executive remuneration. 4.2.1 Service agreements Details of the ongoing service agreements between the Company and executives considered KMPs, are as follows: Name Title Commencement date Base salary including superannuation Termination benefit Anthony Scali Managing Director 24 May 2004 Christopher Malley Chief Financial Officer 6 February 2019 $750,000 $300,000 – 3 months base salary & Company Secretary John Austin Chief Operating Officer 1 July 2020 $350,000 3 months base salary 10 Annual Report 2022 | Nick Scali Limited Directors’ Report (continued) Remuneration Report – Audited (continued) 4.2.2 Targeted remuneration mix The targeted proportions of the total remuneration opportunity for the executives considered to be key management personnel (KMPs) for the 2022 financial year were: Fixed Remuneration Base Salary Variable Remuneration Short-term Incentive Long-term Incentive Managing Director Other KMPs 50% 50% 50% 25% – 25% 4.2.3 Fixed remuneration – Base Salary Fixed compensation is set to provide a base level of compensation which is appropriate to the position and responsibility and is competitive in the market. Fixed compensation is reviewed annually, with effect from 1 September each year, by the Remuneration and Human Resources Committee with reference to the performance of both the business and the individual, the individual’s skills and experience, comparative market compensation and where appropriate, external advice. The Group provides superannuation contributions in line with statutory obligations with benefits being contributed to the employee’s chosen superannuation fund. 4.2.4 Variable remuneration – Short-term incentive (STI) The Company operates annual short-term incentive programs that reward KMPs on the achievement of predetermined KPIs established each financial year, according to the accountabilities of their role and its impact on the Group’s performance. KPIs include profit targets and personal performance criteria which are set to incentivise superior performance. Using KPIs which include profit targets ensures that variable rewards are paid only when value is created for shareholders and Group profitability meets or exceeds a level approved by the Board. STIs are linked to KPIs on a sliding scale which is established at the beginning of each financial year. The STIs are paid in the form of cash bonuses and the Remuneration and Human Resources Committee is responsible for assessing whether the KPIs are met and the STIs are payable. The Managing Director may also recommend to the Board discretionary bonuses in exceptional circumstances to reward contributions from high performing employees. The following table shows the STI cash bonus target and the amount achieved for each KMP in the years ended 30 June 2022 and 30 June 2021: Year ended 30 June 2022 Anthony Scali Christopher Malley John Austin Year ended 30 June 2021 Anthony Scali Christopher Malley John Austin Targeted STI Entitlement and KPIs Non Financial KPIs % Financial KPIs % Total $ STI Achieved and KPIs Financial KPIs % Non Financial KPIs % 80% 100% 100% 80% 100% 100% 20% 750,000 – – 150,000 150,000 20% 750,000 – – 150,000 150,000 80% 100% 100% 80% 100% 100% 20% – – 20% – – Total $ 750,000 150,000 150,000 750,000 150,000 150,000 4.2.5 Variable remuneration – Long-term incentive (LTI) Long-term incentives, in the form of the share rights offered under the Executive Performance Rights Plan (EPRP), are provided to employees to align remuneration with the creation of shareholder value over the long-term. The EPRP is only made available to executives and other employees who have been employed for more than 12 months who are able to influence the generation of shareholder value and who have a direct impact on the Group performance against relevant long-term performance targets. The Board has determined earnings per share (EPS) growth to be the most appropriate measure of long-term performance. Under the EPRP, employees are granted rights to ordinary shares that will vest after a period of three years subject to the achievement of specific levels of EPS growth. EPS is based on the Group’s underlying profit after tax and before non-recurring items, as determined by the Board. Under the EPRP the number of rights exercisable at the end of the vesting period is dependent on the level of EPS growth achieved by the Company, as follows: EPS growth (3 year CAGR) Less than 5% 5% 5% to 10% More than 10% Percentage of rights exercisable Nil 50% Pro rata between 50% and 100% 100% 11 Annual Report 2022 | Nick Scali Limited Directors’ Report (continued) Remuneration Report – Audited (continued) The number of rights granted is calculated by taking the relevant executive’s fixed annual remuneration and multiplying it by the relevant predetermined LTI entitlement percentage of fixed remuneration and then dividing this by the Group’s volume weighted average share price for the four-week period prior to the date of the release of the Group’s full year results. Rights to ordinary shares may also be granted in accordance with the EPRP as a retention award where the only performance condition is continued employment with the Group at the vesting date. During the year ended 30 June 2022, 60,000 such rights were awarded to John Austin. If the minimum level of EPS growth is not met or if the participant ceases to be employed by the Group, any unvested rights will immediately lapse unless otherwise determined by the Board. There is no exercise price for shares granted under the EPRP and the employees are able to exercise their rights up to two years following the vesting date, after which time the rights will lapse. In the event of a takeover offer for the Company, the rights may, at the discretion of the Board, vest in accordance with an assessment of performance with the performance period pro-rated to the date of the takeover offer. The LTI entitlement of executives considered KMPs is calculated as a percentage of fixed annual remuneration for the years ended 30 June 2022 and 30 June 2021 as follows: Year ended 30 June 2022 Years of Service Targeted LTI Entitlement LTI Awarded Anthony Scali Christopher Malley John Austin 41 4 2 0% 50% 50% 0% 50% 50% Year ended 30 June 2021 Years of Service Targeted LTI Entitlement LTI Awarded Anthony Scali Christopher Malley John Austin 40 3 1 0% 50% 50% 0% 50% 0% Employees who have been granted rights are prohibited from entering transactions to limit the economic risk of such rights whether through a derivative, hedge, or similar arrangement. In addition, employees are prohibited from entering margin lending arrangements in respect of shares in the Company where those shares are offered as security for the lending arrangement. 4.2.6 Terms of performance and retention rights granted The terms and conditions of each grant of rights to ordinary shares affecting the remuneration of employees in this financial year or future reporting years are as follows: Grant reference Grant date1 FY22/24 FY21/23 FY20/22 20 Sep 2021 14 Sep 2020 13 Sep 2019 Vesting and exercisable date Aug 20242 Aug 20232 22 Aug 2022 Expiry date Exercise price ($) Fair value per right at grant date ($) 30 Jun 2026 30 Jun 2025 30 Jun 2024 0.00 0.00 0.00 9.87 6.61 5.17 1 The grant date is the date at which the performance rights are communicated to the employees. The effective date of the grant, from which the performance hurdles are measured, is the first day of the financial year in which the grant is made. 2 The exact vesting and exercisable date for rights that have not yet vested is currently indeterminate, and depends on the date of meeting at which the Board can confirm the achievement of the long-term performance hurdles. This is typically four to eight weeks following the end of the financial year. 4.2.7 Performance rights holding The table below sets out the balance of performance rights held by executives considered KMPs. Balance 1 July 2021 – 45,708 – Balance 1 July 2020 – Granted – 12,669 12,669 Granted – 23,810 21,898 – – Vested and exercised Forfeited Balance 30 June 2022 – – – – – – – 58,376 12,669 Vested and exercised Forfeited Balance 30 June 2021 – – – – – – – 45,708 – Anthony Scali Christopher Malley John Austin Anthony Scali Christopher Malley John Austin 12 Annual Report 2022 | Nick Scali Limited Directors’ Report (continued) Remuneration Report – Audited (continued) 4.2.8 Retention rights holding The table below sets out the balance of retention rights held by executives considered KMPs. Balance at 1 July 2021 Granted Vested and exercised Forfeited Balance at 30 June 2022 Anthony Scali Christopher Malley John Austin – – – – – 60,000 – – – – – – – – 60,000 4.3 Group performance The table below sets out the financial performance of the Group over the past five years: Revenue ($m) Net profit after tax ($m) Earnings per share (Cents) Ordinary dividends per share (Cents) Share price at 30 June ($) 4.4 Remuneration outcomes 2018 2019 2020 2021 2022 CAGR (%) 250.8 268.0 262.5 41.0 50.6 40.0 6.73 42.1 52.0 45.0 6.26 42.1 51.9 47.5 6.48 373.0 84.2 104.0 65.0 11.72 441.0 74.9 92.5 60.0 8.26 15.0 16.3 16.3 10.7 5.3 4.4.1 Remuneration outcomes for non-executive directors The tables below set out the remuneration outcomes for the non-executive directors for the years ended 30 June 2022 and 30 June 2021 respectively: Year ended 30 June 2022 John Ingram William Koeck Carole Molyneux Stephen Goddard Year ended 30 June 2021 John Ingram William Koeck1 Carole Molyneux Stephen Goddard Short-term benefits Fees Post-employment benefits Superannuation 181,818 98,182 103,409 110,682 494,091 182,648 90,411 102,283 109,589 484,931 18,182 9,818 10,341 11,068 49,409 17,352 8,589 9,717 10,411 46,069 Total 200,000 108,000 113,750 121,750 543,500 200,000 99,000 112,000 120,000 531,000 1 William Koeck was appointed as a Non-executive Director on 1 August 2020 4.4.2 Remuneration outcomes for executive KMPs The tables below set out the remuneration outcomes for the executive KMPs for the years ended 30 June 2022 and 30 June 2021 respectively: Short-term benefits Base Salary $ Cash bonus (STI) $ Post-employment benefits Superannuation $ Long-term benefits Employee entitlements $ Share-based payments Shares rights (LTI) $ Total $ Year ended 30 June 2022 Anthony Scali Christopher Malley John Austin Year ended 30 June 2021 Anthony Scali1 Christopher Malley1 John Austin 726,437 276,423 305,548 750,000 150,000 150,000 1,308,408 1,050,000 803,723 308,723 288,723 750,000 150,000 150,000 1,401,169 1,050,000 23,567 23,567 23,567 70,700 21,277 21,277 21,277 63,831 11,243 – 1,511,247 – – 145,473 238,985 595,462 718,100 11,243 384,458 2,824,809 11,852 – – – 1,586,852 82,938 – 562,938 460,000 11,852 82,938 2,609,790 1 In response to the Covid-19 crisis, executives accepted a voluntary 30% reduction to remuneration for the period 1 April 2020 to 30 June 2020. This was repaid as an ex-gratia payment in September 2020. 13 Annual Report 2022 | Nick Scali Limited Directors’ Report (continued) Remuneration Report – Audited (continued) 4.5 Additional disclosures relating to key management personnel 4.5.1 Interest in the Shares of the Company The beneficial interest of each director in the contributed equity of the Company are as follows: John Ingram William Koeck Carole Molyneux Stephen Goddard Anthony Scali Balance at 1 July 2021 Received as part of remuneration Purchases Disposals Balance at 30 June 2022 Ordinary shares Ordinary shares Ordinary shares Ordinary shares Ordinary shares 360,000 5,900 15,500 6,000 11,039,474 11,426,874 – – – – – – 25,000 10,400 4,500 – – 39,900 – – – – – – 385,000 16,300 20,000 6,000 11,039,474 11,466,774 This concludes the remuneration report, which has been audited. Indemnity and insurance of officers The Company indemnifies all the directors and executive officers against certain liabilities incurred as such by a director or officer, while acting in their respective capacity, and enters contracts insuring the directors and officers against liabilities of this nature. The premiums paid under the terms of these contracts have not been determined on an individual director or officer basis, and the directors have not included details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors’ and officers’ liability insurance contracts, as such disclosure is prohibited under the terms of the contract. No other agreements to indemnify directors or officers have been entered into, nor have any payments in relation to indemnification been made, during or since the end of the financial year, by the Company. Indemnity and insurance of auditor To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young Australia (EY), as part of the terms of audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount) – except for any loss in respect of any matters which are finally determined to have resulted from EY’s negligent, wrongful, or wilful acts or omissions. No payment has been made to indemnify EY during or since the financial year. 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. Officers of the Company who are former partners of Ernst & Young There are no officers of the Company who are former partners of Ernst & Young. Corporate Governance Statement Nick Scali Limited’s Corporate Governance Statement discloses how the Company complies with the recommendations of the ASX Corporate Governance Council (4th Edition) and sets out the Group’s main corporate governance practices. This statement has been approved by the Board and is current as of 30 June 2022. The Corporate Governance Statement of Nick Scali Limited can be found on the Company’s website: www.nickscali.com.au/corporate-governance. Rounding of amounts The Company is of a kind referred to in Class Order 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 Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. 14 Annual Report 2022 | Nick Scali Limited Directors’ Report (continued) Non-audit services The Company may decide to employ the Company’s auditor, or its network firms, for non-audit services where their skills and expertise are considered relevant. During the year ended 30 June 2022, Ernst & Young Australia performed due diligence services on a acquisition and provided tax compliance services. Details of the amount paid to the auditor for non-audit services are set out below. Tax compliance services Due diligence 2022 $’000 46 143 189 The directors are satisfied that the provisions of non-audit services are compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of all non-audit services provided was approved by the Audit and Risk Committee, and the directors are satisfied that the services provided do not compromise the integrity and objectivity of the Company’s auditor for the following reasons: • none of the services required the auditor to review or audit the auditors own work • none of the services required the auditor to act in a management or decision-making capacity for the Company • none of the services required the auditor to act as an advocate for the Company • none of the services involved the auditor jointly sharing in the economic risks and rewards of the Company • a declaration required by section 307C of the Corporations Act 2001 confirming their independence has been received from Ernst & Young Australia Auditor’s independence declaration The Directors received the declaration from the auditor of Nick Scali Limited and is included on page 17 of the Financial Statements. Auditor Ernst & Young Australia 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 John Ingram Chairman 22 August 2022 Sydney Barrel Swivel Armchair. Anthony Scali Managing Director Annual Report 2022 | Nick Scali Limited 15 Luzzi Queen Bed Frame, 100% Natural Leather. Agoura Dresser. Larry Rug. 16 Annual Report 2022 | Nick Scali Limited Auditor’s Independence Declaration Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Auditor’s Independence Declaration to the Directors of Nick Scali Limited As lead auditor for the audit of the financial report of Nick Scali Limited for the financial year ended 30 June 2022, I declare to the best of my knowledge and belief, there have been: a. No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; b. No contraventions of any applicable code of professional conduct in relation to the audit; and c. No non-audit services provided that contravene any applicable code of professional conduct in relation to the audit. This declaration is in respect of Nick Scali Limited and the entities it controlled during the financial year. Ernst & Young Lisa Nijssen-Smith Partner 22 August 2022 Annual Report 2022 | Nick Scali Limited 17 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Autograph Right Corner Modular with Chaise and Woodshelf. Autograph Coffee Table Ottoman. Provence Console. Pemba Rug. 18 Annual Report 2022 | Nick Scali Limited Annual Report 2022 | Nick Scali Limited 19 Consolidated statement of comprehensive income For the year ended 30 June 2022 Revenue from contracts with customers Cost of goods sold Gross profit Other income Expenses Marketing expenses Employment expenses General and administration expenses Property expenses Distribution expenses Acquisition expenses Depreciation and amortisation Finance costs Profit before income tax expense Income tax expense Note 2022 $’000 2021 $’000 3 3 4 4 32 5 440,957 (171,980) 373,040 (136,285) 268,977 236,755 1,554 1,582 (21,828) (62,294) (13,032) (7,750) (3,522) (3,324) (41,555) (9,270) 107,956 (33,034) (16,217) (46,124) (10,417) (5,216) (1,322) – (30,870) (6,958) 121,213 (36,972) Profit after income tax expense for the year attributable to the owners of Nick Scali Limited 74,922 84,241 Other comprehensive income Items that may be reclassified subsequently to profit or loss Net change in the fair value of cash flow hedges taken to equity, net of tax Exchange differences on translation of foreign operations Other comprehensive income for the year, net of tax Total comprehensive income for the year attributable to the owners of Nick Scali Limited 647 (201) 446 4,858 13 4,871 75,368 89,112 CENTS CENTS Basic earnings per share Diluted earnings per share 6 6 92.5 92.5 104.0 104.0 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes 20 Annual Report 2022 | Nick Scali Limited Consolidated statement of financial position As at 30 June 2022 Assets Current assets Cash and bank deposits Receivables Inventories Other financial assets Prepayments Total current assets Non-current assets Land and buildings Plant and equipment Right-of-use assets Deferred tax Intangibles Total non-current assets Total assets Liabilities Current liabilities Borrowings Payables Lease liabilities Deferred revenue Current tax liabilities Provisions Total current liabilities Non-current liabilities Borrowings Lease liabilities Deferred revenue Deferred tax Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity Note 2022 $’000 2021 $’000 9 10 11 12 13 13 14 5 15 16 17 14 18 19 16 14 18 5 19 20 21 74,620 3,550 70,525 3,091 3,040 106,892 1,694 46,733 1,565 2,382 154,826 159,266 97,385 15,140 215,362 4,257 129,425 461,569 83,413 15,215 170,904 5,334 2,691 277,557 616,395 436,823 20,100 34,979 36,200 85,074 7,665 6,260 15,500 22,075 27,309 51,895 15,588 3,593 190,278 135,960 71,562 201,736 1,767 8,130 1,994 285,189 18,162 166,009 1,272 – 1,394 186,837 475,467 322,797 140,928 114,026 3,364 1,538 136,026 140,928 3,364 958 109,704 114,026 The above consolidated statement of financial position should be read in conjunction with the accompanying notes 21 Annual Report 2022 | Nick Scali Limited Consolidated statement of changes in equity For the year ended 30 June 2022 Issued capital $’000 Equity benefits reserve $’000 Capital profits reserve $’000 Cash flow hedge reserve $’000 Foreign exchange reserve $’000 Retained profits $’000 Total equity $’000 Balance at 1 July 2020 3,364 (352) 78 (3,760) (4) 76,088 75,414 Profit after income tax expense for the year – Other comprehensive income for the year, net of tax Total comprehensive income for the year Employee share rights recognised under EPRP (Note 21) Dividends paid during the year (Note 7) – – – – – – – 125 – – – – – – – – – – 84,241 84,241 4,858 13 – 4,871 4,858 13 84,241 89,112 Balance at 30 June 2021 3,364 (227) 78 1,098 Balance at 1 July 2021 3,364 (227) 78 1,098 Profit after income tax expense for the year – Other comprehensive income for the year, net of tax Total comprehensive income for the year Employee share rights recognised under EPRP (Note 21) Dividends paid during the year (Note 7) – – – – – – – 134 – – – – – – – 647 647 – – – – 9 9 – – 125 (50,625) (50,625) 109,704 114,026 109,704 114,026 74,922 74,922 (201) – 446 (201) 74,922 75,368 – – – 134 (48,600) (48,600) Balance at 30 June 2022 3,364 (93) 78 1,745 (192) 136,026 140,928 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes 22 Annual Report 2022 | Nick Scali Limited Consolidated statement of cash flows For the year ended 30 June 2022 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Income tax payments Note 2022 $’000 2021 $’000 500,023 (336,821) 426,170 (258,777) 163,202 167,393 92 (40,955) 367 (27,332) Net cash from operating activities 8 122,339 140,428 Cash flows from investing activities Purchase of property, plant and equipment Purchase of intangible assets Proceeds from the sale of property, plant and equipment Acquisition of subsidiary, net of cash acquired (18,422) (557) – 32 (102,522) (15,325) (312) 22 – Net cash from investing activities (121,501) (15,615) Cash flows from financing activities Payment of dividends on ordinary shares Proceeds from borrowings Repayment of borrowings Investment in term deposits Repayment of lease liabilities Interest payments – lease liabilities Interest payments – borrowings Net cash used in financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year 7 14 14 (48,600) 72,500 (14,500) (40,000) (33,274) (8,124) (1,112) (50,625) – – – (23,594) (6,208) (531) (73,110) (80,958) (72,272) 106,892 43,855 63,037 Cash and cash equivalents at the end of the financial year 9 34,620 106,892 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes 23 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements For year ended 30 June 2022 Note 1. Basis of preparation Corporate information Nick Scali Limited (the Company or the parent) is a for profit company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Stock Exchange. 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. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). The financial statements have been prepared under the historical cost convention, except for derivative financial instruments, which have been prepared at fair value. The financial report was authorised for issue in accordance with a resolution of the directors on 22 August 2022. At the end of the reporting period the Group had a net current liability position of $35,452,000. Within the net current liability position, the Group has recorded deferred revenue of $85,074,000 that is expected to be recognised as revenue within the next 12 months, and accordingly the financial statements continue to be prepared on a going concern basis. Where necessary because of a change in the presentation of certain expenses during the current year, comparative amounts in the statement of comprehensive income have been reclassified for consistency with presentation in the current year. Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as of 30 June 2022. A subsidiary is an entity that is controlled by the Company. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and can affect those returns through its power over the entity. The financial statements of the subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. Intercompany transactions, balances, and unrealised gains on transactions between the Company and its subsidiaries are eliminated. Accounting policies of the subsidiaries are consistent with the policies adopted by the Company. Changes in accounting policies, accounting standards and interpretations The accounting policies adopted in the preparation of the annual financial statements are consistent with those followed in the preparation of the annual financial statements for the period 30 June 2021. In addition, the following accounting policies were adopted in the preparation of the interim financial statements that were not outlined in the annual report for the year ended 30 June 2021. Business combinations Acquisitions of subsidiaries and other business combinations are accounted for using the acquisition method with the cost of acquisition allocated to the fair value of the assets acquired and liabilities assumed at the acquisition date. Acquisition costs incurred are expensed during the financial year. 24 Business combination provisional accounting The Group has 12 months from the acquisition date to finalise the accounting for any business combination. Provisional accounting is applied by the Group for business combinations where the acquisition accounting is incomplete at the end of the reporting period. Significant accounting judgements, estimates and assumptions In the process of applying the Company’s accounting policies, management has made judgements, estimates and assumptions. All judgements, estimates and assumptions made are believed to be reasonable, based on the most current information available to management. Actual results may differ from these judgements, estimates and assumptions. Judgements, estimates and assumptions which have the most significant effect on the amounts recognised in the financial statements: Impairment of goodwill The Company determines whether goodwill is impaired on an annual basis. This requires an estimation of the recoverable amount of the cash-generating unit to which the goodwill is allocated. The assumptions used in this estimation of recoverable amount and the carrying amount of goodwill is discussed in the financial report. Lease term of contracts with renewable options The Company determines the lease term to be the non- cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain that the option will be exercised. In assessing the likelihood of a lease option being exercised, the Company considers the costs of termination, the extent of any leasehold improvements, the strategic importance of the lease location and the current market rent for the site. Estimation of useful lives of assets The estimation of the useful lives of assets has been based on historical experience as well as consideration of lease terms (for assets used in or affixed to leased premises) and replacement policies (for motor vehicles). In addition, the condition of the assets is assessed at least once per year and considered against the remaining useful life. Adjustments to useful lives are made when considered necessary. Net realisable value of inventory Inventories are valued at the lower of cost and net realisable value. Weighted average cost is used to value inventories. Costs incurred in bringing each product to its present location and condition including freight, cartage and import duties are included in the cost of finished goods. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. Judgment is applied in assessing the net realisable value. Valuation of brands acquired Brand names acquired in a business combination are valued at fair value using the relief from royalty method. This method requires the Company to estimate future cashflows arising from the brand, applicable royalty rates and appropriate discount rates. Annual Report 2022 | Nick Scali LimitedNotes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 2. Segment information The Company has identified the Managing Director and the Board of Directors as the chief operating decision makers. The Company has one reportable segment being the retailing of furniture in Australia and New Zealand. Note 3. Revenue and other income Revenue Revenue from contracts with customers Other income Net gain on disposal of property, plant and equipment Net gain on disposal of right-of-use asset and remeasurement of lease liability Rental income Interest income Sundry income 2022 $’000 2021 $’000 440,957 373,040 – 29 916 92 517 14 – 783 367 418 1,554 1,582 Recognition and measurement – Revenue Revenue from contracts with customers 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. Contracts with customers provide for both the sale of goods and the provision of accidental damage warranties, and the timing of the recognition of revenue of these separate components is as follows: Sale of goods When recognising revenue in relation to the sale of goods to customers, the key performance obligation of the Group is the delivery of the goods to the customer, and revenue is recognised at the time of delivery of the goods to the customer. Accidental damage warranties When recognising revenue in relation to accidental damage warranties, the key performance obligation of the Group extends over the term of the warranty, and consequently revenue is recognised over the term of warranty, weighted according to the expected occurrence of the performance obligations. Note 4. Expenses Profit before income tax includes the following specific expenses: Included within employee expenses Salaries, wages and fees Government wage subsidies received as a consequence of Covid-19 Voluntary repayment of government wage subsidies Superannuation contributions Share-based payments Included within property expenses Short-term and low value lease payments Rent concessions received as a consequence of Covid-19 2022 $’000 2021 $’000 41,533 (67) – 4,374 625 1,588 (847) 33,805 (3,565) 2,471 3,265 210 697 (624) 25 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 5. Current and deferred tax Income tax expense Current income tax charge Adjustments in respect of current income tax of previous years Relating to origination and reversal of temporary differences Income tax expense Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense Income tax at the statutory tax rate of 30% Adjustments in respect of current income tax of previous years Adjustment for difference in overseas tax rates Adjustment for share rights exercised Adjustment for voluntary repayment of government wage subsidies Adjustment for acquisition costs Other items Income tax expense Deferred tax recognised comprises temporary differences attributable to: Right-of-use assets Lease liabilities Brands Deferred capital gains Property, plant and equipment Employee entitlements Cashflow hedge (Note 23) Other Reflected in the statement of financial position as follows: Deferred tax assets Deferred tax liabilities Deferred tax liabilities, net 2022 $’000 2021 $’000 33,138 (201) 97 33,034 37,527 (94) (461) 36,972 107,956 121,213 32,387 36,369 (201) (103) (106) – 991 66 (94) (23) (105) 741 – 84 33,034 36,972 (64,116) 70,899 (11,400) (1,612) (77) 2,034 (927) 1,326 (3,873) 4,257 (8,130) (3,873) (50,812) 57,480 – (1,612) (1,550) 1,153 (469) 1,144 5,334 5,334 – 5,334 Recognition and measurement – Income tax Current tax assets and liabilities for the current and prior years are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the reporting date. Recognition and measurement – Deferred tax Deferred income tax is provided on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax, assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Income taxes relating to items recognised directly in equity are recognised in equity and not in profit or loss. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. 26 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 6. Earnings per share Profit after income tax attributable to the owners of Nick Scali Limited 2022 $’000 2021 $’000 74,922 82,241 Number Number Weighted average number of ordinary shares used in calculating basic earnings per share 81,000,000 81,000,000 Weighted average number of ordinary shares used in calculating diluted earnings per share 81,000,000 81,000,000 Basic earnings per share Diluted earnings per share Recognition and measurement – Earnings per share Basic earnings per share Cents 92.5 92.5 Cents 104.0 104.0 Basic earnings per share (EPS) is calculated as net profit attributable to members, adjusted to exclude costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted earnings per share Diluted EPS adjusts the basic EPS to take account of the after-tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and other costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration. Note 7. Dividends Dividends Dividends paid during the financial year were as follows: Final fully franked dividend for 30 June 2021: 25.0 cents (2020: 22.5 cents) Interim fully franked dividend for 30 June 2022: 35.0 cents (2021: 40.0 cents) 2022 $’000 2021 $’000 20,250 28,350 48,600 18,225 32,400 50,625 In addition to the above dividend, since the end of the financial year directors have declared a final fully franked dividend of 35.0 cents per fully paid ordinary share to be paid on 24 October 2022 out of retained profits at 30 June 2022. Franking credits Franking credits are available to the Company as follows: Franking credits available at the reporting date based on a tax rate of 30% 62,475 36,011 Franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date based on a tax rate of 30% Franking credits available for subsequent financial years based on a tax rate of 30% 3,688 66,163 15,457 51,468 Franking credits available for future reporting periods based on a tax rate of 30% 54,013 42,789 Tax rate at which paid dividends have been franked Tax rate at which dividends declared and unpaid will be franked 2022 % 30.0 30.0 2021 % 30.0 30.0 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: • franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date • franking debits that will arise from the payment of dividends recognised as a liability at the reporting date • franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date 27 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 8. Reconciliation of profit after income tax to net cash from operating activities Profit after income tax expense for the year 74,922 84,241 2022 $’000 2021 $’000 Investing and financing items included in profit after income tax expense: Net loss on disposal of property, plant and equipment Interest expense Net gain on disposal of right use asset Non-cash items included in profit after income tax expense: Depreciation and amortisation expense Share-based payments expense Cash items not included in profit after income tax expense: Purchase of shares under EPRP Change in operating assets and liabilities: Trade and other receivables Inventories Deferred tax Prepayments Other financial assets Net fair value change on derivatives Trade and other payables Deferred revenue Provision for income tax Other provisions Net foreign currency differences Net cash from operating activities Note 9. Cash and bank deposits Cash at bank and on hand Short-term deposits Cash and cash equivalents Term deposits 282 9,249 (29) 41,555 625 145 6,739 – 30,870 210 (352) (105) (1,426) (14,034) 592 (162) (1,671) 647 6,766 13,596 (7,923) (230) (68) 877 (10,460) 1,707 (291) (6,936) 4,858 5,813 12,304 10,001 315 140 122,339 140,428 2022 $’000 34,620 – 34,620 40,000 74,620 2021 $’000 50,045 56,847 106,892 – 106,892 Recognition and measurement – Cash and bank deposits Cash and cash equivalents comprise cash at bank and on hand and short-term deposits with an original maturity of three months or less. Deposits are made for varying periods, depending on the immediate cash requirements of the Group. Deposits with an original maturity of more than three months are recognised as term deposits. For the purposes of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above. 28 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 10. Receivables Trade debtors Other debtors 2022 $’000 1,823 1,727 3,550 2021 $’000 189 1,505 1,694 During the year ended 30 June 2022, $40,000 (2021: $2,000) was recognised as an expense for expected credit losses. Recognition and measurement – Trade and other receivables Trade and other debtors are initially recognised at fair value, less any allowance for expected credit losses. Trade debtors are generally due for settlement within 30 days. Other debtors include receivables from suppliers and GST paid in advance. These are non-interest bearing and are due for settlement between 30 and 90 days. Note 11. Inventories Finished goods – at net realisable value Stock in transit – at cost 2022 $’000 47,997 22,528 70,525 2021 $’000 34,987 11,746 46,733 During the year ended 30 June 2022, $292,000 (2021: $620,000) was recognised as reduction in cost of goods sold for inventories carried at net realisable value. Recognition and measurement – Inventories Inventories are valued at the lower of cost and net realisable value. Weighted average cost is used to value inventories. Costs incurred in bringing each product to its present location and condition includes purchase price plus freight, cartage and import duties. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. Note 12. Other financial assets Derivative hedge receivable Foreign exchange forward contracts 2022 $’000 3,091 3,091 2021 $’000 1,565 1,565 Foreign exchange forward contracts are held as hedging instruments against forecast purchases in USD. The notional amount of foreign exchange forward contracts held on 30 June 2022 totalled $USD32,060,000 which covers between 50% and 100% of highly probable purchases for the six months to 31 December 2022 (30 June 2021: $USD39,760,000). The average rate of foreign exchange forward contracts held on 30 June 2022 was $USD0.74 (30 June 2021: $USD0.77). Recognition and measurement – Other financial assets Derivative hedge receivable The Group uses derivative financial instruments, such as forward currency contracts, interest rate swaps and forward commodity contracts, to hedge its foreign currency risks, interest rate risks and commodity price risks, respectively. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative. Where derivative financial instruments are deemed to be effective hedges against foreign currency, interest rate, or commodity price risks, the net gain or loss on the fair value of the instrument is recognised as other comprehensive. Where derivative financial instruments are deemed to be ineffective hedges, the net gain or loss on the fair value of the instrument is recognised in profit or loss. 29 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 13. Property, plant and equipment Land & buildings $’000 Leasehold improvements $’000 Fixtures & fittings $’000 Motor vehicles $’000 Office equipment $’000 Total $’000 Year ended 30 June 2022 At cost 104,824 Less, accumulated depreciation (7,439) 22,318 (13,282) 2,292 (1,907) Year ended 30 June 2021 At cost Less, accumulated depreciation 97,385 9,036 385 90,164 (6,751) 83,413 21,215 (11,243) 9,972 950 (755) 195 921 (584) 337 747 (419) 328 14,692 (9,310) 145,047 (32,522) 5,382 112,525 12,794 (8,074) 125,870 (27,242) 4,720 98,628 Reconciliations Reconciliation of the carrying amounts of property, plant and equipment at the beginning and end of the financial year: Land & buildings $’000 Leasehold improvements $’000 Fixtures & fittings $’000 Motor vehicles $’000 Office equipment $’000 Balance at 1 July 2020 Additions Disposals Foreign currency translation Depreciation expense Balance at 30 June 2021 Acquisitions (Note 32) Additions Disposals Foreign currency translation Depreciation expense Balance at 30 June 2022 74,488 10,080 – – (1,155) 83,413 – 15,398 (164) – (1,262) 97,385 9,362 2,896 – (8) (2,278) 9,972 2,245 1,267 (118) (64) (4,266) 9,036 227 4 – – (36) 195 286 6 – (1) (101) 385 303 126 (6) – (95) 328 36 85 – (1) (111) 337 Total $’000 89,622 13,788 (6) (9) 5,242 682 – (1) (1,203) (4,767) 4,720 328 1,666 – (11) (1,320) 98,628 2,894 18,422 (282) (77) (7,060) 5,382 112,525 Land and buildings totalling $67.5m (2021: $83.4m) are used to secure bank loans relating to their purchase. Recognition and measurement – Property, plant and equipment All classes of property, plant and equipment are measured at cost, less accumulated depreciation and any impairment in value. Depreciation is provided on a straight-line basis based on management’s estimate of both the residual value and the useful economic life of the asset. The depreciation methods, residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Management’s current estimates of useful economic lives are as follows: Buildings: 20 to 40 years Leasehold improvements: 5 to 15 years (leasehold improvements are depreciated at the shorter of the useful life or the term of the lease) Furniture and fitting: 3 to 15 years Motor vehicles: Office equipment 6 years (including IT equipment): 3 to 12 years An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the Company. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which it belongs. If any such indication exists and where the carrying values exceed the estimated recoverable amount, the assets or cash-generating units are written down to their recoverable amount. 30 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 14. Leases Lease liabilities Current lease liabilities Non-current lease liabilities Reconciliation of lease liabilities Opening lease liabilities Lease modifications agreed during the year Additional leases entered during the year Acquisitions (Note 32) Interest accrued Lease repayments Disposal Foreign currency translation Right-of-use assets Right-of-use assets – at cost Less, accumulated depreciation Reconciliation of right-of-use assets Opening right-of-use asset Lease modifications agreed during the year Additional right-of-use assets relating to leases entered during the year Acquisitions (Note 32) Acquired make good provision Disposal of right-of-use assets relating to leases terminated during the year Additional make good asset during the year Depreciation Foreign currency translation 2022 $’000 2021 $’000 36,200 201,736 27,309 166,009 237,936 193,318 193,318 6,742 11,484 62,172 8,124 (41,398) (1,959) (547) 181,203 8,934 26,509 – 6,207 (29,472) – (63) 237,936 193,318 344,184 (128,822) 270,663 (99,759) 215,362 170,904 170,904 6,742 11,484 62,172 251 (1,929) 18 (33,816) (464) 161,734 8,934 26,509 – – (160) – (26,057) (56) 215,362 170,904 Recognition and measurement – Leases Lease liabilities The Group enters non-cancellable leases for retail showrooms and warehouse facilities in Australia and New Zealand. Leases are entered into for varying terms and rent reviews are based on CPI increases or fixed increases. A lease liability is recognised at the commencement date of a lease at the present value of the lease payments to be made over the term of the lease. Lease liabilities include known future payments for which the Group is contractually obliged under the terms of its non-cancellable leases. Estimated future payments in respect of make-good clauses within non-cancellable leases are accounted for as provisions (Note 19). A number of the leases contain options to renew in favour of the Group. These options are negotiated by management to provide flexibility in managing the leased-asset portfolio and align with the Group’s business needs. Management exercises judgement in determining whether these extension options are reasonably certain to be exercised. The present value of the lease payments to be made under options considered reasonably certain to be exercised have been included in the lease liability balance at 30 June 2022. The undiscounted potential future payments under options that are not considered reasonably certain to be exercised is $131,321,000 which includes those that have an exercise date within the next five years of $51,750,000. Right-of-use assets Right-of-use assets are measured at cost at commencement of the lease and depreciated on a straight-line basis over the effective life of the asset. The right-of-use assets have an effective life of between three and fourteen years dependent on the term of the lease and the likelihood of the Company exercising any lease extension options in its favour. 31 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 15. Intangibles Year ended 30 June 2022 At cost Less, accumulated amortisation Year ended 30 June 2021 At cost Less, accumulated amortisation Goodwill $’000 90,589 – 90,589 2,378 – 2,378 Brands $’000 Website costs $’000 38,000 – 38,000 – – – 2,367 (1,531) 836 1,165 (852) 313 Reconciliations Reconciliation of the carrying amounts of intangibles at the beginning and end of the financial year: Balance at 1 July 2020 Additions Amortisation expense Balance at 30 June 2021 Additions Acquisitions (Note 32) Amortisation expense Balance at 30 June 2022 Goodwill $’000 2,378 – – 2,378 – 88,211 – 90,589 Brands $’000 Website costs $’000 – – – – – 38,000 – 38,000 47 312 (46) 313 557 645 (679) 836 Total $’000 130,956 (1,531) 129,425 3,543 (852) 2,691 Total $’000 2,425 312 (46) 2,691 557 126,856 (679) 129,425 No impairment losses have been recognised in the year ended 30 June 2022 (2021: $Nil) Recognition and measurement – Intangibles Goodwill and brands Goodwill on acquisition is initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities, and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Brand names acquired in a business combination are initially measured at fair value using the relief from royalty method. Following initial recognition, brands are measured at cost less any accumulated impairment losses. Goodwill and brands are reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that their carrying value may be impaired. Impairment is determined by assessing the recoverable amount of the cash generating unit (“CGU”), or group of CGUs, to which the asset relates. The Group has determined that its CGUs are the individual showrooms, being the smallest grouping of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The Group has determined that the relevant group of CGUs to which all of the Group’s goodwill and brands relate is the aggregation of all CGUs within the Nick Scali Group, as it is not considered practicable to allocate these assets to smaller CGUs on a reasonable and consistent basis. It was previously determined that the relevant group of CGUs to which the Group’s goodwill related was the aggregation of all CGUs in South Australia, as the goodwill had arisen on the acquisition of the store network in South Australia. During the year, this asset was reallocated to the aggregated group of all CGUs within the Nick Scali Group, as this more accurately reflects the way in which management monitor the activities of the business The recoverable amount of the aggregation of all CGUs within the Nick Scali Group is based on their value in use, determined by discounting the future cash flows expected to be generated by their continued use. The key assumptions, to which this determination is most sensitive, relate to the following: Sales revenue: Revenue for the next five years has been estimated with reference to the Group’s budget for the year ending 30 June 2023 and five-year forward-looking plans, adjusted for recent performance trends. Consideration was given to expected retail trading conditions when estimating future revenue. Gross margin: Gross margins have been estimated with reference to the Group’s budget for the year ending 30 June 2023, adjusted where appropriate for expected future changes in the Group’s international supply chain. 32 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 15. Intangibles continued Terminal growth rate: Growth beyond the next five years has been estimated with reference to the expected long-term average growth rate for Australia and New Zealand. The terminal growth rate was determined to be 2.0% (2021: 2.0%). Discount rate: The discount rate is based on the specific circumstances of the Group and its CGUs and was derived from its weighted average cost of capital. Consideration was given to the cost of both debt and equity, and the Group’s weighted average cost of capital was determined to be 10.4% (2021: 8.0%). At 30 June 2022, the recoverable amount of the CGU exceeded its carrying amount, and there are considered to be no reasonably possible changes to any of the key assumptions that would cause the recoverable amount of the CGU to be less than its carrying values, and consequently, no impairment has been recognised. Website costs The direct costs of developing the Group’s websites are measured at cost, less accumulated amortisation and any impairment in value. The Group determines that the website will generate probable future economic benefits and recognises both internal expenditure and external expenditure on website content as an intangible. The website costs are determined to have a finite life of between 3 and 5 years and amortisation is provided on a straight-line basis over the useful life. Note 16. Borrowings Current bank loans Non-current bank loans Reconciliation of borrowings Opening borrowings Additional bank loans drawn during the year Repayment of bank loans during the year Repayment of bank loans during the year 2022 $’000 20,100 71,562 91,662 33,662 72,500 (14,500) 91,662 2021 $’000 15,500 18,162 33,662 33,662 – – 33,662 The effective interest rates of the current and non-current bank loans are included at Note 23. The maturities of the non-current loans are between 12 months and 52 months. Recognition and measurement – Interest-bearing loans and borrowings All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Fees paid on the establishment of loan facilities that are yield related are included as part of the carrying amount of the loans and borrowings. Borrowing costs are recognised as an expense when incurred, unless they are directly attributable to the acquisition, construction, or production of a qualifying asset whereby they are capitalised. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Note 17. Payables Trade creditors Other creditors and accruals Trade creditors 2022 $’000 17,516 17,463 34,979 2021 $’000 11,542 10,533 22,075 Trade creditors are non-interest-bearing financial instruments and are normally settled within 30 days. Other creditors Other creditors are non-interest-bearing financial instruments and are normally settled on 30-day to 60-day terms. Recognition and measurement – Payables Trade and other payables are carried at amortised cost and due to their short-term nature they are not discounted. They represent liabilities for goods and services provided to the Company prior to the end of the financial year that are unpaid and arise when the Company becomes obliged to make future payments in respect of goods and services received. 33 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 18. Deferred revenue Customer deposits Current accidental damage warranties Current deferred revenue Non-current accidental damage warranties Non-current deferred revenue 2022 $’000 84,740 334 85,074 1,767 1,767 2021 $’000 51,418 477 51,895 1,272 1,272 86,841 53,167 Recognition and measurement – Deferred revenue Customer deposits Customer deposits represent amounts received from customers for orders not yet completed. Deposits received from customers are recognised as revenue at the point of delivery of the goods to the customer. Orders are typically completed within three months and deposits are therefore considered short-term in nature and are not discounted. Accidental damage warranties Accidental damage warranties are purchased by customers in conjunction with the purchase of goods and are initially measured based on an allocation of the purchase price between the fair value of the goods and the warranty. Amounts deferred are recognised as revenue over the term of the warranty. Accidental damage warranties classified as current will be recognised as revenue within 12 months of the reporting date. Note 19. Provisions Current employee entitlements Current lease make good Current provisions Non-current employee entitlements Non-current lease make good Non-current provisions 2022 $’000 6,088 172 6,260 698 1,296 1,994 8,254 2021 $’000 3,462 131 3,593 387 1,007 1,394 4,987 Recognition and measurement – Provisions Employee entitlements Liabilities for annual leave and long service leave expected to be settled within 12 months of the reporting date are measured as the amounts to be paid when the liabilities are settled and are discounted to net present value. Liabilities for annual leave and long service leave not expected to be settled within 12 months of the reporting date are measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to the 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 corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Lease make good A provision has been made for the present value of anticipated costs of future restoration of leased properties. The provision includes future cost estimates associated with restoring the premises to its condition at the time the Company initially leased the premises, subject to fair wear and tear. 34 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) 2022 Shares 2021 Shares 2022 $’000 2021 $’000 Note 20. Issued capital Authorised and fully paid ordinary shares 81,000,000 81,000,000 3,364 3,364 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. All ordinary shares carry one vote per share without restriction. There are no other classes of equity securities. Recognition and measurement – Issued share capital Ordinary share capital is recognised at the fair value of the consideration received by the Company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received, net of tax. Note 21. Reserves Capital profits reserve Cash flow hedge reserve Foreign exchange reserve Equity benefits reserve Movements in reserves Equity benefits reserve $’000 Capital profits reserve $’000 Balance at 1 July 2020 Amounts recognised for cash flow hedges Income tax on items taken directly to or transferred from equity Purchase of shares under EPRP Share based payments expense Foreign currency translation differences Balance at 30 June 2021 Amounts recognised for cash flow hedges Income tax on items taken directly to or transferred from equity Purchase of shares under EPRP Share-based payments Foreign currency translation differences Balance at 30 June 2022 (352) – 21 (105) 209 – (227) – (139) (352) 625 – (93) 2022 $’000 78 1,745 (192) (93) 1,538 2021 $’000 78 1,098 9 (227) 958 Total $’000 Cash flow hedge reserve $’000 (3,760) 6,937 (2,079) – – – 78 – – – – – 78 1,098 – – – – – 647 – – – – Foreign exchange reserve $’000 (4) (4,038) – – – – 13 9 – – – – (201) 6,937 2,058 (105) 209 13 958 647 (139) (352) 625 (201) 78 1,745 (192) 1,538 Equity benefits reserve This reserve is used to record the value of share-based payments provided to employees as part of their remuneration. Refer to Note 29 for further details of these plans. Capital profits reserve This reserve is comprised wholly of the surplus on the disposal of assets that were acquired prior to the introduction of Capital Gains Tax provisions. Cash flow hedge reserve This reserve is used to recognise the effective portion of the gain or loss on cash flow hedge instruments that are determined to be effective hedges. Foreign exchange reserve This reserve is used to recognise differences arising where assets and liabilities denominated in foreign currencies are translated at the functional currency exchange rate prevailing at the reporting date. 35 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 22. Financing facilities Unrestricted access was available to the following credit facilities at the reporting date: Total facilities Bank loans expiring within 12 months Bank loans expiring in greater than 12 months Interchangeable facilities, including letters of credit and bank guarantees Bank guarantee facilities Facilities used at reporting date Bank loans expiring within 12 months Bank loans expiring in greater than 12 months Interchangeable facilities, including letters of credit and bank guarantees Bank guarantee facilities Facilities unused at reporting date Bank loans expiring within 12 months Bank loans expiring in greater than 12 months Interchangeable facilities, including letters of credit and bank guarantees Bank guarantee facilities 2022 $’000 2021 $’000 20,100 71,562 1,000 500 93,162 20,100 71,562 – 380 92,042 – – 1,000 120 1,120 15,500 18,162 3,015 – 36,677 15,500 18,162 1,312 – 34,974 – – 1,703 – 1,703 Note 23. Financial instruments Financial risk management objectives The Company has exposure to foreign exchange risk, interest rate risk, credit risk and liquidity risk. The Company’s financial risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Company’s activities. The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Board of Directors has established an Audit and Risk Committee, which is responsible for developing and monitoring the Company’s risk management policies. The Committee provides regular reports to the Board of Directors on its activities. The Company’s principal financial instruments comprise bank loans, and cash and short-term deposits. The main purpose of these financial Instruments is to raise finance for and fund the Company’s operations. The Company has various other financial instruments such as trade debtors and trade creditors, which arise directly from its operations. It is, and has been throughout the year, the Company’s policy that no trading in financial instruments is undertaken. Market risk Market risk is the risk that changes in market prices such as foreign exchange rates and interest rates will affect the Company’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control exposure within acceptable parameters while maximising return. Foreign currency risk All the Company’s sales are denominated in either Australian dollars or New Zealand dollars, whilst the majority of inventory purchases are denominated in currencies other than Australian dollars, primarily US dollars. Where appropriate the Company uses forward currency contracts and options to manage its currency exposures; and where the qualifying criteria are met, these are designated as hedging instruments for the purposes of hedge accounting. As of 30 June 2022, the Company had trade payables of $6,835,000 (2021: $3,318,000) denominated in US dollars and stock in transit of $22,529,000 (2021: $11,746,000) denominated in US dollars, all of which are covered by designated cash flow hedges. As a result, the sensitivity to a reasonably possible change in the US dollar exchange rate is minimal. The cash flows relating to cash flow hedge positions held at year end are expected to occur in July 2022 through to December 2022, and the profit and loss is expected to be affected through cost of sales as the hedged items (inventory) are sold to customers. All forecast transactions subject to hedge accounting have occurred or are highly likely to occur. 36 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 23. Financial instruments (continued) During the year, the Company designated foreign currency forward contracts as hedges of highly probable purchases of inventory in US dollars. The forecast purchases of inventory for which designated foreign currency forward contracts were in place at 30 June 2022 are expected to occur during July 2022 through to December 2022. The terms of the foreign currency forward contracts have been negotiated to match the terms of the forecasted transactions. Both parties of the contract have fully cash collateralised the foreign currency forward contracts, and therefore, effectively eliminated any credit risk associated with the contracts (both the counterparty’s and the Company’s own credit risk). Consequently, the hedges were assessed to be highly effective. As of 30 June 2022, an unrealised gain of $647,000 (30 June 2021: an unrealised gain of $4,858,000) is recorded in other comprehensive income. Interest rate risk Financial instruments utilised that are subject to interest, and therefore interest rate risk, are cash and commercial bills. Management continually monitor the exposure to interest rate risk, and the following table sets out the carrying amount by maturity of the financial instruments exposed to interest rate risk at reporting date. All financial instruments exposed to interest rate risk are exposed to a variable interest rate. The fair value of the cash, deposits and bank loans shown below are based on the face value of those financial instruments. Weighted average interest rate % Assets less than three months – Cash Assets between three months and 12 months – Deposits Liabilities less than one year – Bank loans Liabilities between one and five years – Bank loans 0.20 3.65 2.04 1.26 2022 2021 Weighted average interest rate % 0.20 – 1.54 1.49 Balance $’000 34,816 40,000 (20,100) (71,562) (16,846) Balance $’000 106,892 – (15,500) (18,162) 73,230 A reasonably possible decrease (or increase) in the interest rate of 50 basis points would result in a decrease (or increase) of profit of $84,000 (2021: $45,000 on 50 basis points movement). Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a financial loss to the Company. In most cases, the Company requires full and final payment either prior to, or upon delivery of the goods to the customer. In limited cases where credit is provided, the Company trades on credit terms with recognised, creditworthy third parties. Customers who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis with the result that the Company’s exposure to bad debts is not significant. There are no significant concentrations of credit risk within the Company. With respect to credit risk arising from financial assets of the Company, which comprise of cash and cash equivalents and receivables, the Company’s maximum exposure to credit risk, excluding the value of any collateral or other security, at reporting date to recognised financial assets is in the carrying amount, net of any provisions for doubtful debts, as disclosed in the statement of financial position and notes to the financial statements. Cash and cash equivalents are only invested with corporations which are approved by the Board. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions. The Company 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. The following tables detail the Company’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 interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. 37 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 23. Financial instruments (continued) Less than 3 months $’000 3 to 12 months $’000 1 to 5 years $’000 Over 5 years $’000 Remaining maturities $’000 Year ended 30 June 2022 Interest bearing Bank loans Lease liabilities Non–interest bearing Trade creditors Other creditors Current tax liabilities Year ended 30 June 2021 Interest bearing Bank loans Lease liabilities Non-interest bearing Trade creditors Other creditors Current tax liabilities 20,143 11,374 – 31,973 74,913 95,076 – 8,974 95,056 147,397 17,516 17,465 7,665 74,163 – – – – – – – – – 17,516 17,465 7,665 31,973 169,989 8,974 285,099 – 8,509 15,613 24,928 18,609 94,094 – 16,583 34,222 144,114 11,542 10,533 15,588 46,172 – – – – – – – – – 11,542 10,533 15,588 40,541 112,703 16,583 215,999 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. Fair value hierarchy All financial instruments for which fair value is recognised or disclosed are categorised with the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole: Level 1: Quoted market prices in an active market (that are unadjusted) for identical assets or liabilities Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable At the reporting date the fair value of derivative financial instruments represented a derivative hedge receivable of $3,091,000 (2021: receivable of $1,565,000). All foreign currency forward contracts were measured at fair value using the Level 2 method. Unless otherwise stated, the carrying amounts of financial instruments reflect their fair value. Recognition and measurement – Financial instruments 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. Recognition of the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and the nature of the item being hedged. As appropriate, the Company designates derivatives as either hedges of the fair value of recognised assets or liabilities of firm commitments (fair value hedges) or hedges of highly probable forecast transactions (cash flow hedges). 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 year 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. 38 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 24. Contingent liabilities In the ordinary course of business, the Group are subject to various legal actions and inquiries or investigations from regulators and government bodies. Consideration has been given to all such matters at 30 June 2022, and no contingent liabilities were identified at that date (30 June 2021: Nil). Note 25. Commitments Land and buildings Leasehold improvements Plant and equipment Intangibles – Website costs Note 26. Employees The total number of employees at the reporting date was as follows: Number of full-time and part-time employees at balance date Note 27. Key management personnel The aggregate compensation made to directors and other key management personnel of the Company is set out below: Short-term employee benefits Long-term employee benefits Post-employment benefits Share-based payments 2022 $’000 6,729 43 1,391 440 8,603 2022 No. 2021 $’000 4,453 253 41 244 4,991 2021 No. 776 541 2022 $ 2021 $ 2,852,499 2,936,100 11,852 120,265 384,458 11,852 109,900 82,938 3,369,074 3,140,790 Note 28. Related party transactions Related party transactions between the Company and the directors and personally related entities were made during the year in the ordinary course of business on normal commercial terms and conditions. The nature of these dealings was primarily the reimbursement of personal expenses incurred on Company paid credit cards and the purchase of products for their own use. Receivables from and payables to related parties There were no trade receivables from or trade payables to related parties on 30 June 2022 (2021: Nil). Loans to or from related parties There were no loans to or from related parties on 30 June 2022 (2021: Nil). 39 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 29. Share-based payments The Company has an Executive Performance Rights Plan (EPRP) which is provided for executives and other employees. In accordance with the provisions of the plan, executives and employees are awarded rights to ordinary shares that will vest after a period of three years subject to the achievement of specific performance hurdles in relation to earnings per share (EPS) growth. There is no exercise price for the shares and the employees can exercise the right for up to two years following vesting, after which time the rights lapse. In the year ended 30 June 2022 rights to ordinary shares were issued which include performance hurdles requiring compound annual EPS growth of between 5% and 10%. Under the grant, 50% of the rights are exercisable on the achievement of 5% EPS growth, 100% on the achievement of 10% EPS growth, and for the achievement of between 5% and 10% EPS growth the number of rights exercisable is calculated on a pro-rata basis. The following table reconciles the outstanding employee share rights under the EPRP at the beginning and end of the financial year: Outstanding share rights at the start of the year Share rights granted Share rights vested and exercised Share rights forfeited 2022 146,459 108,914 (28,382) – 2021 114,827 56,569 (12,469) (12,469) Outstanding share rights at the end of the year 226,991 146,459 The expense recognised in relation to employee share rights during the year was $624,600 (2021: $209,450). Recognition and measurement – Share-based payments Share-based payments are measured at the fair value of the rights at grant date and are expensed on a straight-line basis over the vesting period, with a corresponding increase in equity, based on the Company’s estimate of the number of shares that will eventually vest, considering the likelihood of employee turnover and the likelihood of non-market performance conditions being met. The fair value of rights at grant date is valued under risk neutral conditions. Under these conditions the value of the right is equivalent to the share price reduced by the present value of dividends payable on the shares until vesting. The present value of the dividends is deducted from the share price because the right holder is not entitled to dividends until the rights are exercised. The valuation assumes that the rights are exercised as they vest. The key assumptions used for determining fair value at grant date are as follows: Share price at grant date ($) Dividend yield (%) Franking rate (%) Implied pre-tax effective dividend yield (%) Note 30. Parent entity information Set out below is the supplementary information about the parent entity. Statement of financial position Current assets Non current assets Total assets Current liabilities Non current liabilities Total liabilities Net assets 40 2022 12.36 9.0 30.0 12.9 2022 $’000 2021 8.75 6.5 30.0 9.3 2021 $’000 234,965 258,789 154,199 257,504 493,754 411,703 150,509 211,277 361,786 112,801 185,869 298,670 131,968 113,033 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 30. Parent entity information (continued) Equity Issued capital Capital profits reserve Cash flow hedge reserve Equity benefits reserve Retained profits Total equity Statement of comprehensive income Profit after income tax expense Other comprehensive Income Total comprehensive income for the year 2022 $’000 3,364 78 1,721 (93) 2021 $’000 3,364 78 1,098 (227) 126,898 108,720 131,968 113,033 66,778 446 67,224 83,481 4,858 88,339 Recognition and measurement – Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Nick Scali Limited (‘Company’ or ‘parent entity’) as of 30 June 2022 and the results of all subsidiaries for the year then ended. Nick Scali Limited and its subsidiaries together are referred to in these financial statements as the Group. Subsidiaries are all those entities over which the Company has control. The Company controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and can 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. Note 31. Controlled entities Subsidiaries The consolidated financial statements incorporate the assets, liabilities, and results of the following subsidiaries in accordance with the accounting policy described in this financial report Name of entity Country of incorporation Class of shares Nick Scali (New Zealand) Limited New Zealand Nick Scali Employee Share Scheme Pty Limited Australia Plush-Think Sofas Pty Limited Australia Ordinary Ordinary Ordinary 2022 % 100.0 100.0 100.0 2021 % 100.0 100.0 – Closed Group Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785, Nick Scali Limited, Plush-Think Sofas Pty Limited and Nick Scali Employee Share Scheme Pty Ltd (the “Closed Group”) entered into a deed of cross guarantee on 30 June 2022. The effect of the deed is that Nick Scali Limited has guaranteed to pay any deficiency in the event of winding up of any controlled entity or if they do not meet their obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. The controlled entities within the Closed Group have also given a similar guarantee in the event that Nick Scali Limited is wound up or if it does not meet its obligations under the terms of overdrafts, loans, leases or other liabilities subject to the guarantee. 41 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 31. Controlled entities (continued) The consolidated statement of profit or loss, consolidated statement of comprehensive income, summary of movements in consolidated retained earnings and consolidated statement of financial position of the entities that are members of the Closed Group are as follows: Closed Group 2022 $’000 426,730 (172,775) 5,265 (107,185) (38,078) (8,623) 105,334 (32,331) 73,003 647 647 73,650 108,870 73,003 (48,600) 133,273 70,369 6,255 66,382 3,091 2,982 149,079 97,385 12,502 198,065 129,425 437,377 586,456 Statement of profit or loss Revenue from contracts with customers Cost of goods sold Other income Operating expenses Depreciation and amortisation Finance costs Profit before income tax expenses Income tax expense Profit for the year Other comprehensive income Net change in the fair value of cash flow hedges taken to equity, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year, net of tax Summary of movements in consolidated retained earnings Retained earnings at the beginning of the year Profit for the year Dividends paid during the year Retained earnings at the end of the year Statement of financial position Assets Current assets Cash and cash equivalents Receivables Inventories Other financial assets Prepayments Total current assets Non-current assets Land and buildings Plant and equipment Right-of-use assets Intangibles Total non-current assets Total assets 42 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 31. Controlled entities continued Liabilities Current liabilities Borrowings Payables Lease liabilities Deferred revenue Current tax liabilities Provisions Total current liabilities Non-current liabilities Borrowings Lease liabilities Deferred revenue Deferred tax Provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity Closed Group 2022 $’000 20,100 34,107 33,028 81,685 7,228 6,151 182,299 71,562 186,385 1,767 4,189 1,886 265,789 448,088 138,368 3,364 1,731 133,273 138,368 Note 32. Business combinations Acquisition of Plush-Think Sofas Pty Limited Overview and strategic rationale On 1 November 2021 the Company acquired 100% of the issued share capital of Plush-Think Sofas Pty Ltd for $102,522,000. The Group expects the acquisition to enable it to expand its store network and leverage its existing distribution facilities. The cashflow on acquisition was as follows: Net cash acquired with the subsidiary Cash paid Purchase consideration transferred Identifiable assets and liabilities acquired $’000 7,784 (110,306) (102,522) The Group measured the value of the identifiable assets and liabilities at the date of acquisition at fair value. The acquired lease liabilities were measured using the present value of the remaining lease payments, whilst the acquired right-of-use assets were measured at an amount equal to the acquired lease liabilities. 43 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 32. Business combinations (continued) The fair values of the identifiable assets and liabilities of Plush-Think Sofas Pty Ltd at the date of acquisition were as follows: Assets Identifiable current assets Cash and cash equivalents Receivables Inventories Prepayments Total identifiable current assets Identifiable non-current assets Plant and equipment Right-of-use assets Intangibles Total identifiable non-current assets Total identifiable assets Liabilities Identifiable current liabilities Payables Lease liabilities Deferred revenue Other financial liabilities Provisions Total identifiable current liabilities Identifiable non-current liabilities Lease liabilities Deferred tax Provisions Total identifiable non-current liabilities Total identifiable liabilities Identifiable net assets Cash paid Identifiable net assets Goodwill arising on acquisition Value at Acquisition $’000 7,784 486 9,758 498 18,526 2,894 62,422 38,645 103,961 122,487 5,884 7,750 20,078 145 3,133 36,990 54,423 8,615 364 63,402 100,392 22,095 110,306 (22,095) 88,211 The goodwill recognised has been attributed to the expected synergies from combining the assets and activities of Plush with those of the other companies in the Group. There were no contingent liabilities identified within Plush-Think Sofas Pty Ltd at the date of acquisition. Transaction costs Transaction costs of $3,324,000 have been expensed and are included as acquisition expenses in the consolidated statement of comprehensive income. These costs were paid before 30 June 2022 and are part of operating cash flows in the consolidated statement of cash flows. Reported impact of acquisition Plush-Think Sofas Pty Ltd has contributed $88,832,000 of revenue for the period from 1 November 2021 to 30 June 2022. If the acquisition had taken place on 1 July 2021, revenue for the Group would have increased by $50,350,000 to $491,017,000. Due to the extensive effects of central group services provided by Greenlit Brands Holdings Limited to Plush-Think Sofas Pty Ltd prior to the acquisition, and the integration of the business in to the Group subsequent to the acquisition, it is impracticable to determine either the impact the acquisition has had on profit after tax for the period from 1 November 2021 to 30 June 2022, or the impact that the acquisition would have had on net profit after tax had the acquisition occurred on 1 July 2021. 44 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 33. Significant events after the reporting period Other than the dividend declared on 22 August 2022 (see Note 7), no other matter or circumstance has arisen since 30 June 2022 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. Note 34. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by Ernst & Young, the auditor of the Company, and its network firms: Audit services Auditing the statutory financial report of the Company and its controlled entities and auditing the statutory financial reports of any controlled entities 363,000 195,315 2022 $ 2021 $ Other services Due diligence services Tax compliance 142,621 46,095 551,716 145,000 30,936 371,251 Note 35. Summary of other significant accounting policies 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 normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting year; 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 year. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting year; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting year. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. Other taxes Revenues, expenses, and assets are recognised net of the amount of Goods and Services Tax (‘GST’) except: • when the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and • receivables and payables, which are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Foreign currency translation The financial statements are presented in Australian dollars, which is Nick Scali Limited’s functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions or at the hedged rate if qualifying financial instruments have been used to reduce exposure. Monetary assets and liabilities denominated in foreign currencies are retranslated at the financial year-end exchange rates and recognised in profit or loss. All exchange differences are recognised in the statement of comprehensive income, except when deferred in equity as qualifying cash flow hedges. 45 Annual Report 2022 | Nick Scali Limited Notes to the consolidated financial statements for year ended 30 June 2022 (continued) Note 35. Summary of other significant accounting policies (continued) 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. Government grants Government grants are recognised where there is reasonable assurance that the grant will be received and all attached conditions will be complied with. When the grant relates to an expense item, it is recognised as a reduction of the expense to which it relates. Rent concessions The practical expedient to AASB16 Covid-19 Related Rent Concessions has been adopted. This allows for an election to not account for changes in lease payments as a lease modification where a change in lease payments to the revised consideration are substantially the same or less than the consideration for the lease preceding the change, the reductions only affect payments which fall due before 30 June 2022 and there has been no substantive change in terms and conditions. Where the practical expedient has been applied, rent concessions are accounted for as a reduction in property costs. Derecognition of financial assets and financial liabilities Financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when either: • • the rights to receive cash flows from the asset have expired; or the Company retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; or • the Company has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset but has transferred control of the asset. When the Company has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Company’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration received that the Company could be required to repay. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged, cancelled, or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) because of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Company expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a borrowing cost. Dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the Company. Rounding of amounts The Company is of a kind referred to in Class Order 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 Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. 46 Annual Report 2022 | Nick Scali LimitedDirectors’ Declaration 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 the International Financial Reporting Standards as issued by the International Accounting Standards Board as described in Note 1 to the financial statements; • the attached financial statements and notes five a true and fair view of the Company’s financial position as at 30 June 2022 and of its performance for the financial year ended on that date; and • there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. • as at the date of this declaration, there are reasonable grounds to believe that the members of the Closed Group identified in Note 31 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. 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 Anthony Scali Managing Director John Ingram Chairman 22 August 2022 Sydney Parc TV Entertainment Unit. Parc Console. Links Rug. Annual Report 2022 | Nick Scali Limited 47 Independent Auditor’s Report to the Members of Nick Scali Limited Ernst & Young 200 George Street Sydney NSW 2000 Australia GPO Box 2646 Sydney NSW 2001 Tel: +61 2 9248 5555 Fax: +61 2 9248 5959 ey.com/au Independent auditor’s report to the members of Nick Scali Limited Report on the audit of the financial report Opinion We have audited the financial report of Nick Scali Limited (the Company) and its subsidiaries (collectively the Group), which comprises the consolidated statement of financial position as at 30 June 2022, the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: a. Giving a true and fair view of the consolidated financial position of the Group as at 30 June 2022 and of its consolidated financial performance for the year ended on that date; and b. Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. 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 judgment, were of most significance in our audit of the financial report of the current year. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the financial report section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the financial report. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying financial report. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 48 Annual Report 2022 | Nick Scali Limited Independent Auditor’s Report to the Members of Nick Scali Limited (continued) Inventory Valuation Why significant How our audit addressed the key audit matter As at 30 June 2022, the Group held $70.5 million in inventories representing 11% of total assets. All inventory within the Group is managed using consistent processes. Our audit procedures assessed the valuation of inventories and the related financial report disclosures. These procedures included the following: As detailed in Note 11 of the financial report, inventories are valued at the lower of cost and net realisable value. There is judgement involved in determining the cost of inventories and in assessing net realisable value. Assessed the application of inventory costing - methodologies, specifically in relation to freight and customs duties, and whether this was consistent with Australian Accounting Standards. The cost of inventories includes elements relating to the costs of freight and customs duties. Judgements were involved in the process of allocating these costs to inventories. Assessed the effectiveness of relevant controls in - relation to the inventory costing process and assessed the accuracy of the Group’s inventory valuation model, on a sample basis. There is judgement in estimating the value of inventory which may be sold below cost and determining the net realisable value of this inventory. Such judgements include expectations for future sales and inventory clearance plans. Assessed the basis by which the Group ensures - inventory was recorded at the lower of cost and net realisable value, including the rationale for recording specific adjustments to value inventory below cost. In doing so, we examined sales margins achieved, the process for identifying specific slow moving inventories, historical inventory turnover and expected future sales. Acquisition of Plush-Think Sofas Why significant How our audit addressed the key audit matter On 1 November 2021, the Group completed the acquisition of Plush-Think Sofas Pty Ltd (“Plush”) for consideration of $102.5m. The Group completed the acquisition accounting arising from the Plush acquisition and recognised goodwill of $88.2m and an intangible relating to the Plush brand of $38.0m. This goodwill, along with goodwill from a previous acquisition, has been allocated at the segment level being the lowest level at which goodwill is being monitored by management. Accounting for this acquisition was a complex and judgemental exercise, requiring the Group to determine the fair value of acquired assets and liabilities. Disclosures in relation to the acquisition can be found in Note 32 of the financial report. Our audit procedures included the following: We considered the terms of the agreement entered - into the acquire Plush and assessed whether the accounting treatment was in accordance with Australian Accounting Standards. - Assessed the valuation assumptions used in the determination of the fair value of the acquired assets and liabilities and the amount recognised as goodwill. Involved valuation specialists in assessing the fair - value of the brand acquired. Assessed the Group’s identified CGU and Goodwill - allocation with consideration of the Group’s reporting segments, operations and strategy. Assessed the adequacy of the financial report - disclosures contained in Note 32. Information other than the financial report and auditor’s report thereon The directors are responsible for the other information. The other information comprises the information included in the Company’s 2022 annual report other than the financial report and our auditor’s report thereon. We obtained the directors’ report that is to be included in the annual report, prior to the date of this auditor’s report, and we expect to obtain the remaining sections of the annual report after the date of this auditor’s report. Our opinion on the financial report does not cover the other information and we do not and will not express any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation Annual Report 2022 | Nick Scali Limited 49 Independent Auditor’s Report to the Members of Nick Scali Limited (continued) In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgment 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 our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 50 Annual Report 2022 | Nick Scali LimitedIndependent Auditor’s Report to the Members of Nick Scali Limited (continued) ► Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. ► Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated to the directors, we determine those matters that were of most significance in the audit of the financial report of the current year and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the audit of the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in the directors’ report for the year ended 30 June 2022. In our opinion, the Remuneration Report of Nick Scali Limited for the year ended 30 June 2022, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Ernst & Young Lisa Nijssen-Smith Partner Sydney 22 August 2022 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 51 Annual Report 2022 | Nick Scali LimitedShareholder Information Additional information required by the Australian Securities Exchange and not shown elsewhere in this report is as follows. The information is current as at 15 July 2022. Distribution of equitable securities Analysis of number of equitable security holders by size of holding: Shareholders Category 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total Number of holders of ordinary shares 2,864 2,117 467 354 27 5,829 Equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: Number held % of total shares issued Ordinary shares 15,722,394 12,986,465 11,039,474 9,071,910 4,710,769 2,794,201 2,300,000 1,325,039 1,200,000 557,331 411,944 322,272 221,588 211,500 180,500 172,451 163,500 159,707 154,222 116,403 19.41 16.03 13.63 11.20 5.82 3.45 2.84 1.64 1.48 0.69 0.51 0.40 0.27 0.26 0.22 0.21 0.20 0.20 0.19 0.14 63,821,750 78.79 Number held % of total shares issued Ordinary shares 11,039,474 7,024,241 4,081,577 22,145,292 13.63 8.67 5.04 27.34 HSBC Custody Nominees (Australia) Limited Citicorp Nominees Pty Limited Scali Consolidated Pty Limited J P Morgan Nominees Australia Pty Limited National Nominees Limited BNP Paribas Nominees Pty Ltd Grahger Retail Securities Pty Ltd BNP Paribas Nominees Pty Ltd Molvest Pty Ltd Citicorp Nominees Pty Limited Netwealth Investments Limited BNP Paribas Nominees Pty Ltd BNP Paribas Nominees Pty Ltd 28421 Pty Ltd Anacacia Pty Limited NCH Pty Ltd McNiven & Co Pty Ltd UBS Nominees Pty Limited BNP Paribas Nominees (NZ) Ltd Mr William Francis Cannon Substantial holders Substantial holders in the Company are set out below: Scali Consolidated Pty Limited Magellan Financial Group Limited Perpetual Limited Voting rights Ordinary shares All ordinary shares carry one vote per share without restriction. There are no other classes of equity securities. 52 Annual Report 2022 | Nick Scali Limited Slab Dining Table. Slab Bench. Slab Buffet. Zeya Rug. Annual Report 2022 | Nick Scali Limited 53 Corporate Information Nick Scali Limited ABN 82 000 403 896 Registered Office Level 7, Triniti 2 39 Delhi Road North Ryde NSW 2113 Telephone: 02 9748 4000 Website: www.nickscali.com.au Company Secretary Christopher Malley Auditors Ernst & Young 200 George Street Sydney NSW 2000 Solicitors Ashurst Level 11, 5 Martin Place Sydney NSW 2000 Share Registry Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Telephone: 02 8280 7100 Stock Exchange Nick Scali Limited shares are listed on the Australian Securities Exchange ASX code: NCK Annual General Meeting The Annual General Meeting will be held at 100 Walker Street, North Sydney at 11H00 on Thursday 24th November 2022 5454 Annual Report 2022 | Nick Scali Limited Store Locations New South Wales Alexandria Auburn Bankstown Belrose Bennetts Green Campbelltown Campbelltown Clearance Caringbah Castle Hill Casula Erina Clearance Kotara Marsden Park Moore Park Penrith Prospect Australian Capital Territory Fyshwick Fyshwick Clearance Queensland Aspley Bundall Cairns Fortitude Valley Jindalee Macgregor Mackay Maroochydore Morayfield North Lakes Robina Prospect Clearance Skygate (Brisbane Airport) Rutherford Tuggerah Warrawong West Gosford Toowoomba Townsville Virginia Clearance Victoria Chirnside Craigieburn Essendon Dandenong Clearance Frankston Geelong Maribyrnong Moorabbin Nunawading Nunawading Clearance Preston Richmond South Wharf Springvale Taylors Lakes Tasmania Hobart South Australia Gepps Cross Glynde Keswick Marion Western Australia Cannington Jandakot Joondalup Midland O’Connor Osborne Park Osborne Park Clearance New Zealand Hamilton Hastings Mt Wellington St Lukes Wairau Park New South Wales Albury Alexandria Artarmon Auburn Belrose Caringbah Castle Hill Crossroads Newcastle Prospect Rutherford Warrawong West Gosford Australian Capital Territory Fyshwick Queensland Aspley Bundall Fortitude Valley Jindalee Logan Maroochydore North Lakes Toowoomba Townsville Victoria Ballarat Dandenong Frankston Geelong Highpoint Knox Moorabbin Nunawading South Australia Gepps Cross Marion Mile End Western Australia Joondalup Midland Myaree Preston/Northland Osborne Park Richmond Shepparton Springvale Taylors Lakes Annual Report 2022 | Nick Scali Limited 55 

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