Helping farmers get more from their land Annual Report 2019 N u f a r m L i m i t e d | A n n u a l R e p o r t 2 0 1 9 2019 Highlights Sales $3,758m Net profit after tax $38m reported Net profit after tax $89m underlying Customers 100+ countries Manufacturing & distribution 30+ countries Employees 3,000+ Contents Chairman’s Message Managing Director’s Message Board of Directors Key Management Personnel Operating and Financial Review Corporate Governance Directors’ Report Remuneration Report Lead Auditor’s Independence Declaration Consolidated Income Statement 2 3 4 6 7 24 25 29 53 54 Consolidated Statement of Comprehensive Income 55 Consolidated Balance Sheet Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder and Statutory Information Corporate Directory 56 57 58 60 129 130 136 IBC Helping farmers get more from their land For more than 100 years we’ve been finding more effective ways to fight disease, weeds and pests to increase the yields of growers’ crops. Keeping customers at the heart of our business has always been the key to our success. As our customers grow and the industry evolves, we’re finding new ways to grow with them to meet more of their needs across the crop life-cycle. We focus on what the farmers and growers need and partner with distributors so they get the right product at the right time. That’s why more and more people are depending on us to help them grow. Nufarm Limited Annual Report 2019 1 Chairman’s Message Dear Shareholder, In 2019 your company reported net profit after tax of $38 million, including individually significant items of $51 million. Underlying earnings before interest, tax, depreciation and amortisation increased to $420 million from $386 million in the prior year. Earnings growth was achieved this transaction will deliver compelling, despite significant external up-front value for shareholders and headwinds, reflecting the benefit refocus the company on regions of recent investments and the quality where we can generate higher and resilience of the business. margins and stronger cash flows. A full year contribution from the Shareholders will receive more European portfolios acquired last information and have an opportunity year and strong performances in to vote on the proposal later in the North America, Seed Technologies 2019 calendar year. and Asia combined to offset weaker earnings in Australia and flat earnings in Latin America. The contribution from the European portfolios was impacted by supply issues and while this was a disappointment, the acquisition has transformed our presence in this market and provides a strong base to support improved earnings in the short and medium term. The Nufarm culture continues to play an important role in delivering the company’s strategy and meeting community expectations. Board members have observed first-hand the commitment of employees from around the world to Nufarm’s values, stakeholders, and to achieving Nufarm’s goals. This extends from contributing to communities, protecting the The balance sheet was environment, and developing new strengthened with the support products to help farmers increase of shareholders for the equity yield, adapt to changing growing raising in the first half of the year. conditions and address growing This allowed us to reduce debt and societal concerns about the manage the impact of extreme sustainability of modern agriculture. weather conditions and supply disruptions while meeting the needs of our growing business. On behalf of the Board of Directors, I thank our management team and employees for their dedication Improving margins and generating and commitment. We also thank cash are key priorities for the outgoing director, Bruce coming year. The Board is confident Goodfellow, for his guidance over the management team has taken the his many decades of involvement necessary steps to ensure a timely with the company. recovery from the headwinds and issues that impacted performance in 2019 and 2020 will see improved performance. In closing, I also thank our shareholders. With your support we have built a valuable global distribution network, quality product On 30 September 2019 we portfolio and promising pipeline announced our intention to divest of new product development. the South American businesses to Your Board is confident the Sumitomo Chemical Company for significant reinvestment we have $1.188 billion and customary net made over recent years will deliver working capital adjustments on value to shareholders in the coming completion. The Board believes year and for years to come. Donald McGauchie AO Chairman 2 Nufarm Limited Annual Report 2019 Managing Director’s Message Greg Hunt Managing Director and Chief Executive Officer Dear Shareholder, 2019 was a trying year for our industry but even in this constrained environment we continued to see strong support from our customers. Managing external headwinds and strengthening our business to improve returns was a major focus in every region. In 2019 we faced continued drought Latin America benefited from both in large parts of Australia, flooding in favourable weather and strong major cropping regions in the United commodity demand and we States and supply conditions which continued our focus on meeting impacted product availability and customer needs while maintaining increased costs in Europe. Despite discipline on margins in an these difficult conditions, earnings increasingly competitive market. grew in all regions except Australia, with earnings in Latin America steady on the prior year. The Seed Technologies business achieved another year of earnings growth with higher seed treatment, In Europe we completed the sunflower and sorghum seed sales. integration of the portfolios acquired The acquisition of the nematicide, in 2018 and accelerated the transfer Trunemco, is expected to support of product registrations to improve growth in coming years and first product availability for the coming sales of Nuseed’s proprietary year. While tight supply conditions for technical materials sourced from China are expected to continue to omega-3 canola product, Aquaterra™, are on track for 2020, with a positive earnings pressure costs in 2020, demand for contribution expected from the the acquired products is strong. 2021 financial year. These portfolios are an important extension to our business and are expected to drive further earnings growth in the coming years. Improving working capital efficiency to generate cash was a focus in all regions and cash flow generation improved significantly In North America we maintained on the prior year. earnings momentum despite severe flooding in the United States and dry conditions in Canada which reduced demand and increased competition in an oversupplied market. Our new formulation facility in Greenville, Mississippi, is now ready for commissioning and will support growth into North America. Keeping our people safe, improving margins, and generating cash are the key priorities for the 2020 year. Over recent years we have invested in the transformation of our cost base and the growth of our business. We have broadened our product portfolio and strengthened our pipeline of new products, including In Australia we responded to a the development of the commercially second year of extreme drought significant omega-3 canola. with an unprecedented temporary Our investment has created a strong closure of manufacturing lines and platform for future growth and we by launching the next phase of our are excited by the opportunities transformation program to reduce before us. In closing I thank our costs. These actions set us up to dedicated and talented people improve margins and working across the world and our shareholders capital efficiency in 2020 while for their continued support. retaining upside exposure to a recovery in weather conditions. Nufarm Limited Annual Report 2019 3 Board of Directors Donald McGauchie AO Greg Hunt AB Brennan Gordon Davis Chairman Managing Director and Anne Brennan joined the Gordon Davis joined the Donald McGauchie AO Chief Executive Officer board on 10 February 2011. board on 31 May 2011. joined the board in 2003 Greg Hunt joined the She has a bachelor He has a bachelor of and was appointed Board and was appointed of commerce (hons) forest science (Hons), chairman on 13 July 2010. chief executive officer from University College master of agricultural in 2015. Galway and is a science and holds a He has wide commercial experience within the He has extensive Agricultural, food executive and processing, commodity agribusiness experience trading, finance and having held senior telecommunication executive positions and fellow of the Institute of master of business Chartered Accountants administration. in Australia and a fellow of the Australian Institute of Company Directors. Gordon is a director of Primary Health Care Limited and Midway sectors. He also has advisory roles. Greg was She was formerly the Limited and was extensive public policy formerly the managing executive finance director managing director of experience, having director of Elders Australia for the Coates Group AWB Limited between previously held several Limited, a position he held and chief financial officer 2006 and 2010. high-level advisory from 2001 to 2007, and for CSR. Prior to this, he held Prior to this Anne was a various senior executive partner in professional positions with Orica services firms Ernst & Young, Limited, including general Andersen and KPMG. manager of Orica Mining Anne is a director of Charter Hall Group and Argo Investments Limited. She is also a director of Rabobank Australia Limited and Rabobank New Zealand Limited. Anne is a former director of Myer Holdings Limited and Metcash Limited. Anne is a member of the audit and risk committee and human resources committee. Services (Australia, Asia) and general manager of Incitec Fertilizers. He has also served in a senior capacity on various industry associations. Gordon is chairman of the health, safety and environment committee and a member of the audit and risk committee and the human resources committee. positions to the was also a director of government including Tandor Ltd and Costa the Prime Minister’s Group Holdings. Supermarket to Asia He has worked with Council, the Foreign Affairs various private equity Council and the Trade firms focused on the Policy Advisory Council. agriculture sector and He is a former member of acted as corporate the board of the Reserve advisor to Australian and international organisations in agribusiness related matters. Bank of Australia. Donald is chairman of Australian Agricultural Company Limited and a director of Graincorp Ltd. In the past three years, Donald was a director of James Hardie Industries plc. Donald is chairman of the nomination and governance Committee and a member of the human resources committee. 4 Nufarm Limited Annual Report 2019 Frank Ford Peter Margin Marie McDonald Toshikazu Takasaki Frank Ford joined the Peter Margin joined the Marie McDonald joined Toshikazu Takasaki joined board on 10 October 2012. board on 3 October 2011. the board in 2017. the board in 2012. Frank has a master of taxation from the Peter has a bachelor of Marie has a bachelor Mr Takasaki represents the science (hons) from the of laws (honours) and interests of shareholder University of Melbourne University of NSW and a bachelor of science Sumitomo Chemical and a bachelor of holds a master of business (honours) and was a Company (SCC). business, accounting administration from senior partner at Ashurst from RMIT University Monash University. until 2014, specialising in Peter has many years of leadership experience in major Australian mergers and acquisitions, corporate governance and commercial law. He has a bachelor of business administration from the University of Tokyo and is a former executive of SCC holding and is a fellow of the Institute of Chartered Accountants. Frank is a former managing partner of Deloitte Victoria after a long and successful career as a professional advisor spanning some 35 years. During that period, Frank was also a member of the Deloitte global board, global governance committee and national management committee. Frank is a director of Tarrawarra Museum of Art. Frank is the chairman of the audit and risk committee and a member of the nomination and governance committee and international food She was widely senior management companies. His most recognised as one positions in businesses recent role was a chief of Australia’s leading relating to crop executive of Goodman corporate and protection, both within Fielder Ltd and before commercial lawyers. Japan and in the US. that Peter was chief executive and chief operating officer of National Foods Ltd. He has also held senior management roles in Simplot Australia Pty Ltd, Pacific Brands Limited (formerly known as Pacific Dunlop Limited), East Asiatic Company, HJ Heinz Company Australia Limited and is currently executive chair of Asahi Beverages ANZ. Peter is a director of ASX Listed Companies Bega Cheese Limited, PACT Group Holdings Limited and Costa Group Holdings Limited. In the past three years Peter was a director of PMP Limited and Huon Aquaculture Group Limited. Peter is chairman of the human resources committee and a member of the audit and risk committee. Marie is a director of CSL Limited, Nanosonics Limited and the Walter and Eliza Hall Institute of Medical Research. She was chair of the corporations committee of the Business Law Section of the Law Council of Australia from 2012 to 2013, having previously been the deputy chair, He is now a business consultant with a national qualification registered by the Japanese Ministry of Economy, Trade and Industry as a small and medium sized enterprise consultant. He brings broad industry and international experience to the board. Toshikazu is a member and was a member of of the health, safety and the Australian Takeovers environment committee. Panel from 2001 to 2010. Marie is a member of the audit and risk committee and the health, safety and environment committee. Nufarm Limited Annual Report 2019 5 Key Management Personnel Greg Hunt Paul Binfield Niels Pörksen Elbert Prado Brent Zacharias Managing Director Chief Financial Group Executive Group Executive Group Executive and Chief Executive Officer Portfolio Solutions Manufacturing and Nuseed Officer Paul joined Nufarm Niels joined Supply Chain Brent joined Nufarm Greg Hunt joined in November 2011. Nufarm in 2014 as Elbert, a chemical in 2006 after a the Board and was He has held senior director, business engineer, joined 14-year career with appointed chief strategic financial improvement in Nufarm in July 2013 Dow AgroSciences. executive officer roles at Coles Liquor Europe, and was after extensive in 2015. and Hotels, a appointed director, international He has extensive executive and agribusiness experience major division of commercial experience in Wesfarmers Ltd, and operations in 2015. senior operations at Mayne Group. In October 2016, Paul has extensive Niels joined the roles within the chemical industry. Brent has a degree in agricultural economics and held senior roles in Nufarm’s Canadian business prior to having held senior experience in global team in He has a strong transferring to executive positions publicly listed and Australia to focus on safety, Australia as Nuseed and advisory roles. private company represent the supply chain and general manager Greg was formerly finance functions, portfolio function, manufacturing in 2008. Now based in Canada, Brent holds global responsibility for Nuseed – Nufarm’s agricultural seed and traits division. the managing both in Australia and as part of the excellence. director of Elders the United Kingdom. Nufarm executive Elbert was global manufacturing and supply chain director for Rohm and Haas. team. Niels has significant experience in the crop protection industry and was an executive board member at Nordzucker and worked at BASF Chemicals in various senior management roles for over 17 years. Australia Limited, a position he held from 2001 to 2007, and was also a director of Tandor Ltd and Costa Group Holdings. He has worked with various private equity firms focused on the agriculture sector and acted as corporate advisor to Australian and international organisations in agribusiness related matters. 6 Nufarm Limited Annual Report 2019 Operating and Financial Review Our strategy and operating model Nufarm is a leading developer and manufacturer of crop protection solutions and seed technologies with more than 3,000 employees supporting customers in over 100 countries. Our business has two main reporting segments. Seed Technologies Crop Protection Seed technologies combines our seed treatment portfolio and the Nuseed business. Our seed treatment products provide protection and treatment for damage caused by insects, fungus and disease. Nuseed is focused on plant-based solutions that deliver value BEYOND YIELD™. Through Nuseed we develop and distribute high yielding sunflower, sorghum and canola seed to customers in more than 30 countries. We use our leading molecular capabilities, global genetics and industry collaboration to develop unique plant output traits with specific customer and consumer benefits such as our proprietary Omega-3 canola. We develop, manufacture and sell crop protection solutions including herbicides, insecticides and fungicides that help growers protect crops against weeds, pests and disease. We operate primarily in the off-patent market, providing customers with long- standing foundational products and unique formulations. Our business is focused on five core crops across key geographies. Our key crops are cereals; corn; soybean; pasture, turf and ornamentals; and trees, nuts, vines and vegetables (TNVV). Our core geographies are Europe, North America, Asia Pacific and Latin America. Our global footprint means we manufacture, source and deliver high quality products at competitive prices. We partner with leading industry and research organisations around the world to develop and offer new solutions to meet existing and emerging farmer needs across the life-cycle of our chosen crops. FY19 Gross Profit Asia 4% Seed Technology 8% ANZ 9% Europe 32% North America 22% Latam 25% FY19 Gross Profit Seed Technology 8% Other 13% Fungicide 10% Insecticide 14% Herbicide 55% Nufarm Limited Annual Report 2019 7 Operating and Financial Review (continued) Strategy We aim to build a cost-competitive business and improve the quality of earnings to create a strong platform to support continued, profitable growth. We allocate capital to our areas of existing strength and potential growth opportunities that will maximise returns. Our scale and global distribution footprint make us an attractive partner for major manufacturers and research organisations. our customers high-quality products at competitive prices and a growing range of new, differentiated products to meet more of their needs across the crop lifecycle. We believe our product and geographic diversity, along with our long-term customer relationships, help protect our business from adverse seasonal or commercial pressures in any one market while also providing Channel partnerships We have teams based in more than 30 countries supporting channel partners and growers in over 100 countries around the world. This platform also allows us to establish close relationships with our customer base, including independent distributors and dealers as well as end users of our products – contributing to a range of expansion opportunities our understanding of the evolving in major cropping markets around needs of growers and thereby helping us optimise our product development activities. By collaborating with these industry the world. participants, we are able to offer Operating Model Our business model puts the customer at the centre of our business and decision making and provides a foundation for future growth. 8 Nufarm Limited Annual Report 2019 Channel partnerships Customer experience Portfolio solutions Supply chain excellence People · Values · Culture · Process Supply chain excellence Portfolio solutions We have crop protection With strategically located formulation and manufacturing laboratories across the world, facilities in nine countries, and we have proven product seed-related research, development and registration development and marketing expertise in our key markets that operations in Australia, North enables us to develop innovative, America, Latin America and Europe. differentiated and value-added Our global manufacturing and distribution platform allows us to deliver products to our customers with short lead times, which is critical given the weather dependent nature of cropping and related crop protection product demand patterns. products and formulations relevant to the region’s growers and bring them to market quickly. This provides us with a strong pipeline of new product opportunities and supports the profitable growth of our business. We have a strategic alliance with our largest shareholder, Sumitomo Chemical Company, with whom we have a range of collaboration agreements covering product distribution, development and manufacturing. We also have commercial relationships with other major crop protection companies which we believe strengthen our business in a variety of areas, including research and development, procurement, manufacturing, distribution and sales. Nufarm Limited Annual Report 2019 9 Operating and Financial Review (continued) Sustainability Our mission to “grow a better over the four years reflects the Improving environmental controls tomorrow” reflects our ambition positive impact of the strategy and performance has been another for our customers, our people, with our safety metrics approaching key area of progress during the period communities and financial industry best practice. of strategy implementation. We have stakeholders. While some regions and operating With the world’s population sites achieved significant injury increasing in size and prosperity, prevention milestones in 2019, Nufarm plays an important role overall company performance in helping farmers deliver food against our principal safety security and improved nutrition to a metric, Serious Injury Frequency growing population. We recognise Rate, deteriorated in the first half the challenges they face in using of the year from our best ever limited natural resources in a performance recorded the sustainable way while responding prior year. to climate volatility and growing pressures on biodiversity. We acted quickly to identify and address the causes and satisfy We are committed to understanding ourselves there had not been a these challenges and advancing systemic weakening of controls. change within our own organisation Our efforts to refresh the focus on and throughout the value chain. safety across our global workforce We work in partnership with our through stop work initiatives customers, colleagues, suppliers, and safety leadership programs regulators, industry groups, and improved performance toward investors to assess, prioritise and the end of the year. While we have expanded the focus of our sustainability efforts beyond safety and health over the past years, making sure every one of our colleagues gets home safely every day will continue to be our number one priority. developed and implemented a global environmental standard that sets expectations around our key environmental risk areas of waste and emissions, soil and groundwater protection, and resource use and conservation. A gap analysis against the standard has been completed for all manufacturing operations and we have improved the principal elements of our environmental management systems. In 2019 we made good progress closing gaps against our standards and our environmental management systems have been further strengthened with an additional two manufacturing sites completing ISO14001 accreditation. This brings the number of manufacturing sites with ISO14001 accreditation to five and this year we have committed to achieving accreditation at all manufacturing sites by 2024. We further reduced our water use this year and have set ourselves an objective to improve waste water treatment at our sites. manage sustainability-related risks and opportunities. Our approach focuses on the following key areas: • Safety • Environment • People • Product stewardship and ethical sourcing • Governance Financial year 2019 is the final year of the sustainability strategy launched in 2015. When we launched the strategy our aspiration was to achieve a step change in sustainability maturity and impact, with the health and safety of our people being the priority of the strategy for the first two years. We have made significant progress in safety risk management since 2015 through investment in safety related plant improvements, safety standards, systems and processes and safety awareness programs. The improvement in performance 10 Nufarm Limited Annual Report 2019 Global SIFR and LTIFR – rolling 12 month averages 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 6 1 n a J 6 1 r a M 6 1 y a M 6 1 l u J 6 1 p e S 6 1 v o N 7 1 n a J 7 1 r a M 7 1 y a M 7 1 l u J 7 1 p e S 7 1 v o N 8 1 n a J 8 1 r a M 8 1 y a M 8 1 l u J 8 1 p e S 8 1 v o N 9 1 n a J 9 1 r a M 9 1 y a M 9 1 l u J Nufarm Global SIFR Nufarm Global LTIFR Serious Injury Frequency Rate (SIFR) is an indicator that includes the two principal serious injury metrics (Lost Time and Medical Treatment). Nufarm Limited Annual Report 2019 11 Our people and the Nufarm culture play a critical role in both delivering on the company’s strategy and meeting community expectations. Over the past four years we have embedded common values and behavioural expectations that unite our global workforce and have helped us create “One Nufarm”. We have formalised our position on matters such as modern slavery, equal opportunity and collective bargaining in our human rights policy and committed to lifting inclusion and diversity across our workforce. In 2019 we established inclusion and diversity councils to support the achievement of our target of increasing female participation in our workforce. Our product stewardship standards and processes support our customers to meet the growing societal concerns around the sustainability of modern agriculture. This will be an increasing focus for our product development and portfolio teams and will influence how we allocate funding to construct our portfolio of future products. A significant milestone in advancing the maturity of our sustainability approach was the preliminary materiality assessment completed last year. This has helped confirm the issues relevant to Nufarm stakeholders and is an important step as we continue to broaden the focus of our sustainability efforts beyond our internal organisation and into the value chain. The increased discipline, processes and structures the organisation has put in place to ensure we are measuring and managing our business in a way that allows us to be accountable for our performance are testament to the achievement of the aspirations of the strategy we launched in 2015. There is more work to do and in 2020 we will re-engage with external stakeholders to expand our materiality assessment to inform the next phase of our sustainability strategy. The strategy will build on the work we have done to advance change within our organisation and seek to influence change beyond our business, particularly through how we support our customers in achieving their own sustainability goals. Operating and Financial Review (continued) Group Results A full year contribution from the acquired European portfolios and strong performances in North America, Seed Technologies and Asia were the key drivers of earnings growth. Year ended 31 July Revenue Underlying gross profit Underlying EBITDA (1) (2) Underlying EBIT (1) Operating profit External headwinds constrained Underlying financing costs performance with the continuation Underlying net profit after tax (3) of drought conditions in large parts Net profit after tax of eastern Australia, extreme flooding in major cropping regions in the United States and supply Net operating cash flow Underlying basic earnings per share (cents) disruptions in Europe. Total dividend per share declared in respect of period (cents) 2019 $000 2018 $000 Change 3,757,590 3,307,847 1,034,667 420,293 248,585 197,815 116, 866 89,080 38,310 98,131 21.2 – 963,434 385,653 265,103 175,499 118,334 98,396 (15,588) (88,169) 13.6% 7.4% 9.0% (6.2%) 12.7% (1.2%) (9.5%) 345.8% 211.3% 28.2 (25.0%) 11.0 (11.0) Earnings Statutory net profit after tax of Underlying earnings before Financing costs (comprising net $38 million increased $54 million interest, tax, depreciation and interest and foreign exchange costs) on the prior year loss of $16 million amortisation (EBITDA) increased were in line with the prior year, with and included material items of nine per cent to $420 million with higher interest costs offset by lower $51 million (2018: $114 million). a full year contribution from the foreign exchange costs. Underlying Group revenues increased 14 per cent to $3.76 billion (2018: $3.31 billion) with growth in all regions except Australia/ New Zealand with large parts of the Australian east coast impacted by continued drought conditions. The increase in revenues was partially offset by the impact of increased competition in Latin America, cost pressures in Europe and pricing pressure in North America resulting in a decline in gross profit margins from 29.1 per cent in the prior year to 27.5 per cent. European portfolios acquired interest costs increased by 17 per in 2018 and strong earnings in cent to $107 million (2018: $92 million) North America, Seed Technologies in line with higher average debt and Asia offsetting a weaker levels throughout the year. Foreign performance in Australia/New exchange losses declined 64 per Zealand and flat earnings in cent to $10 million (2018: $27 million) Latin America. Underlying earnings before interest and tax (EBIT) declined six per cent primarily due to the inclusion of a full year of as Latin American hedging costs of approximately $15 million, which were in line with the prior year, were offset by gains from other foreign exchange exposures. depreciation and amortisation Underlying basic earnings per for the European portfolios share declined to 21.2 cents with acquired in 2018. earnings growth less than the increase in issued equity. 12 Nufarm Limited Annual Report 2019 Material items Year ended 31 July 2019 Material items by category Legal costs Idle plant capacity Asset rationalisation and restructuring Pre-tax $000 After-tax $000 (10,517) (21,386) (18,867) (10,517) (21,386) (18,867) Total material items (50,770) (50,770) Material items of $51 million were of the performance improvement comprised primarily of unrecovered program in Australia, integration overhead costs relating to the costs for the acquired European unprecedented temporary closure portfolios and legal costs for the of manufacturing lines in Australia action brought in the United States following continued drought conditions, business restructuring to enforce Nufarm’s rights in relation to the omega-3 canola costs relating to implementation patent estate. Dividend Directors suspended dividends for the 2019 year. This decision reflects the company’s immediate focus on reducing debt levels. Cash flow Year ended 31 July Cash generated from operations Net interest paid Taxes paid Dividends received 2019 $000 242,734 (102,608) (42,060) 65 2018 $000 58,583 (98,652) (48,112) 12 Change 184,151 (3,956) 6,052 53 Net operating cash flows 98, 131 (88,169) 186,300 Cash flows from investing activities (173,980) (965,574) 791,594 Cash flows from financing activities 269,994 1,112,430 (842,436) Net increase in cash and cash equivalents 194,145 58,687 135,458 Net operating cash flows Net investing cash flows reduced, with increased $186 million on the the prior year including the acquisition prior year primarily due to of product portfolios in Europe. higher earnings and a smaller increase in net working capital requirements compared to the prior year. The major financing activity during the year was an equity raising that raised net proceeds of $296 million. Nufarm Limited Annual Report 2019 13 Operating and Financial Review (continued) Balance Sheet Management Year ended 31 July Net debt ANWC/sales (%) Leverage (with pro forma adjustment in FY18) Interest coverage ratio (with pro forma adjustment in FY18) Gearing % ROFE 2019 $000 2018 $000 Change 1,247,129 1,374,070 46.8% 2.97 3.92 34.1% 7.1% 40.3% 3.00 4.99 41.1% 9.4% (9.2%) 6.5% (0.03) (1.07) (7.0%) (2.3%) Net debt was reduced by nine The leverage ratio of 2.97 times is The performance improvement per cent, with the equity raising in a small improvement on the prior program in Australia is forecast to the first half of the financial year year, reflecting lower net debt deliver increased earnings before reducing debt and strengthening and higher earnings. interest, tax, depreciation and the company’s financial position. Interest coverage reduced to Average net working capital to 3.92 times reflecting the increase sales increased to 46.8 per cent. in interest costs on higher average This was primarily due to higher debt levels during 2019. average inventories held in Australia and North America due to climatic factors impacting sales, 2020 outlook amortisation of between $10 million to $15 million in 2020. The business is well positioned to benefit further from improved weather conditions if they occur. Resolution of the supply issues that impacted product availability and higher average inventories On 30 September 2019 the in Europe in 2019 is expected to and receivables in Europe. company announced its intention contribute positively to earnings for Improving working capital efficiency across all regions remains a key focus for all levels of the organisation with a medium-term target to return to 2018 levels of average net working capital to sales, and in the longer term to return this ratio to the range of 35 to 37 per cent. Improving inventory levels in Australia, North America and Europe will be a key driver to meeting this goal. Inventory levels in Australia have been significantly reduced during 2019 and this will benefit 2020. Inventory levels in North America are expected to normalise as the region recovers from flooding that impacted industry sales in 2019. In Europe, Nufarm will have full control of the supply chain for the majority of the acquired portfolio in 2020 and this will drive improved inventory management. to divest the crop protection and 2020. The tight supply conditions for seed treatment assets in South some technical ingredients sourced America (including in Brazil, from China experienced in 2019 Argentina, Chile and Colombia) are expected to continue to impact for cash proceeds of $1,188 million negatively on the cost of goods and customary net working capital in this region during 2020. The net adjustments on completion. The proposal is subject to impact of these factors is expected to benefit earnings before interest review by an independent expert, and tax by approximately shareholder and competition approvals by relevant South American regulatory bodies. $15 million. There is no major planned plant maintenance shut down scheduled for the region Completion of the transaction is in the 2020 financial year. targeted during the first half of the 2020 calendar year. Nufarm will continue to operate these businesses until completion of the transaction. Nufarm expects continued growth in sales, cost saving Competitive market conditions are expected in North America due to the current high levels of inventory in sales channels and lower farm incomes. Continued support from existing customers is forecast to deliver sales growth and benefits and improvements in commissioning of the Greenville supply chain efficiencies to drive earnings growth in the remaining businesses in 2020. formulation facility in the first half of 2020 will support future growth into south-eastern states of the United States. 14 Nufarm Limited Annual Report 2019 The full earnings benefit of the Forecast net interest expense of includes a full year forecast of Greenville facility is expected to $105 million to $110 million in 2020 $8 million relating to the South be realised when manufacturing includes an estimated $30 million American businesses. throughput reaches planned of interest costs relating to the capacity in 2021. Earnings from Seed Technologies South American businesses that are proposed to be divested. Earnings before interest, tax, depreciation and amortisation for the first half of the 2020 financial will be reduced by the impact of the Forecast hedging and net foreign year are expected to be in line with divestment of the South American exchange costs of $20 million the prior year. This assumes a full seed treatment assets to Sumitomo includes an estimated full year half contribution from the South if this transaction proceeds. hedging cost of approximately American businesses and average Earnings from the remaining $12 million relating to the South seasonal conditions for the major assets are expected to grow American businesses that are selling periods in our key markets, with continued momentum from proposed to be divested. with the exception of Australia product launches supplemented by increased canola sales if weather conditions in Australia improve. First commercial sales of omega-3 canola are expected in 2020 with a positive earnings contribution forecast for 2021. The company’s effective tax rate is expected to be approximately 33 per cent in 2020. Capital expenditure is forecast to be approximately $150 million. Forecast depreciation and amortisation of $190 million where continued drought conditions are expected to impact the east coast for the summer cropping season. No material impacts from government policy changes or additional third party supply interruptions are assumed in this forecast. Operating segments results Sales and earnings increased in both the crop protection and seed technologies segments. Revenue Underlying EBITDA 2019 2018 Change 2019 2018 Change Year ended 31 July ($000s) Crop protection Australia and New Zealand Asia Europe North America Latin America 452,368 190,285 814,845 1,020,448 1,058,158 590,151 170,680 642,571 833,705 885,232 Total Crop Protection 3,536,104 3,122,339 Seed Technologies – global 221,486 185,508 – – Corporate Nufarm Group 3,757,590 3,307,847 13.6% 420,293 385,653 (23.3%) 11.5% 26.8% 22.4% 19.5% 13.3% 19.4% n/a 20,685 26,979 167,608 107,762 97,276 23,736 25,229 149,873 99,487 97,377 420,310 395,702 50,736 (50,753) 43,580 (53,629) (12.9%) 6.9% 11.8% 8.3% (0.1%) 6.2% 16.4% (5.4%) 9.0% Nufarm Limited Annual Report 2019 15 Operating and Financial Review (continued) Crop Protection Crop protection sales and earnings Dry winter conditions in the central company incurring overhead costs increased in all regions except and northern Europe impacted of $21 million that could not be Australia/New Zealand which was earnings in the first half of the year, allocated to manufacturing impacted by continued drought and biennual planned maintenance production and these were conditions in large parts of the east shutdowns also impacted earnings recorded as a material item in coast of Australia, and earnings by $5 million. were flat in Latin America. Further detail on the drivers of performance North America in each region is provided below. Herbicide sales increased eight per cent to $2.29 billion with growth in phenoxy herbicides offsetting a three per cent decline in glyphosate sales due to unfavourable weather conditions in Australia. Glyphosate sales represented approximately ten per cent of total company gross margin in 2019. Other herbicide revenues were up 21 per cent on the prior year with Dicamba, Extreme wet conditions in the US south and midwest delayed the season, reduced area planted and impacted crop protection and turf applications with dry conditions in Canada also impacting sales. High channel inventories in the US and Canada from impending tariffs and the reduction in seasonal applications resulted in aggressive industry pricing. A strong contribution from the turf the financial accounts. Inventory levels have been reduced by approximately $100 million and manufacturing has recommenced in the 2020 financial year. The next phase of the performance improvement program was launched during the year to deliver greater efficiencies, reduce earnings volatility and improve the company’s competitive position. The program is expected to deliver a sustained improvement in EBITDA performance with an improvement of $10 million to $15 million dollars Flumioxazin, Bromoxynil and and ornamental segment in the first forecast in 2020. Costs of $10 million Fluazifop the major contributors. half and market share gains in crop to implement the program have Insecticide sales were up 21 per cent to $462 million with growth driven primarily by a full year contribution protection products from existing and new customers in the second half offset the impact of external from the acquired European portfolios headwinds. and continued growth in Brazil. Fungicide sales grew by 30 per cent to $410 million. Growth was driven primarily by a full year contribution from the acquired European portfolios with tebuconazole and Working capital levels were elevated as a result of lower and later than expected sales following the extreme weather conditions. Australia/New Zealand prochloraz mixtures delivering Continued dry conditions for large strong growth despite constrained parts of the east coast of Australia supply limiting sales. following extreme drought last year been incurred to date and included as a material item in the 2019 results. Asia Drought conditions, low pest outbreaks and low commodity prices led to a decline in the overall market in Indonesia. Nufarm gained market share with the support of new product launches and increased sales of differentiated products to achieve a small increase in sales and earnings. Europe Sales and earnings grew in flat market conditions with a full year contribution of $75 million from the product portfolios acquired in 2018 the main driver of growth. This was below the forecast contribution as a result of supply issues increasing costs and and a late season for the west coast Sales and earnings momentum impacted demand and sales of continued in China with a full year crop protection products. Elevated contribution from the new joint levels of inventories in Australian sales channels due to a second year of drought conditions resulted in aggressive industry pricing that venture. Sales and earnings also increased with strong customer support in Japan, Malaysia and Sri Lanka and a new product kept margins at reduced levels launch in Vietnam. for a second year. In response to the low levels of impacting ability to meet customer demand and high inventory levels, demand. The acceleration of product registration transfers for the acquired product portfolios is expected to improve product availability in 2020. manufacturing lines in Australia were temporarily closed to enable an orderly reduction in excess inventory. This action resulted in the 16 Nufarm Limited Annual Report 2019 Latin America New varieties were successfully period. Initial data confirms earlier launched in all regions, helping to independent findings by NOFIMA drive both increased sales and that production metrics such as stronger margins. Europe was a growth, feed conversion, and stand-out performer, with new mortality are competitive with sunflower hybrids contributing fish oil. The data also suggests to a significant increase in sales enhanced fillet colour for fish that Increased soy plantings in Brazil and a return to more normal climatic conditions in Argentina drove volume and revenue growth across all key product groups. Strong early demand for the summer season drove sales late into the second half of 2019, which also resulted in an increase in working capital balances. Strong competition on foundational products reduced margins, this was offset by increased sales volumes and an improved product mix to deliver a steady EBITDA outcome for the period. Seed Technologies over the prior year. Substantial progress was achieved in relation to Nuseed’s proprietary omega-3 canola, which is being commercialised initially as a feed input for the aquaculture industry branded under the name ‘Aquaterra™’. During the period, a regulatory approval for cultivation was secured from the United States Department of Agriculture and regulatory filings were submitted Seed Technologies combines the in several other markets including seed treatment portfolio and the Europe. The regulatory submissions Nuseed business. Revenues increased 19 per cent to $221 million, with seed treatment relating to consumption (food and feed) approval in both the USA and in Canada are also progressing. revenues increasing 17 per cent to The first commercial crop of 35,000 $98 million and Nuseed revenues acres was planted in Montana increasing 20 per cent to and North Dakota in the US and $123 million. Growth in seed treatment revenues and earnings was driven by higher sales of Sumitomo products into Latin America and European sales is currently being harvested. This crop will be stored on-farm prior to delivery to mill for crush Proceedings were instigated and oil production in the first in the Eastern District of Virginia quarter of next calendar year. asserting infringement of valid grew with a full year contribution of Next generation varieties of seed treatment products acquired in omega-3 canola with improved the prior year. This more than offset agronomic performance, including a decline in Australian sales and higher yields, are currently in seed sales into North America remained production and will be available stable on the prior year. for commercial planting in the Nuseed secured market share gains across its three focus crops of sunflower, sorghum and canola. This was despite challenging seasonal conditions in Australia which negatively impacted canola US next year. The introduction of these new varieties will continue to improve oil production per planted acre, reduce grain transport costs and progressively lower the cost of goods. plantings and in the United States, Extensive fish feeding trials, which resulted in lower plantings involving more than one million of sunflower and sorghum. fish, were undertaken with several aquaculture firms during the were fed Aquaterra diets with increasing inclusion rates, which is an important feature for the final market. The trial results validate the performance and fit of Aquaterra in potential customers’ existing feed manufacturing and fish farm systems on a large scale. Positive initial commercial discussions have been undertaken with the key aquafeed and farm companies in Norway and Chile. Nuseed is targeting to have first commercial supply agreements in place before the end of the calendar year. The intellectual property estate which protects the proprietary omega-3 technology platform continued to strengthen, with new patents secured during the period. patents held by Nuseed and its collaborative partners, CSIRO and GRDC. The result of this court action does not impact Nuseed’s freedom to operate. The court action is scheduled to be heard in October 2019, with a decision anticipated before the end of the year. Nufarm Limited Annual Report 2019 17 Operating and Financial Review (continued) 2019 $000 2018 $000 420,293 385,653 (171,708) (120,550) 248,585 265,103 (50,770) 197,815 (89,604) 175,499 (2) Underlying EBITDA is used to reflect the underlying performance of Nufarm’s operations. Underlying EBITDA is reconciled to Operating IFRS and Non-IFRS financial information Nufarm results are reported under International Financial Reporting Standards (IFRS) including Underlying EBIT and Underlying EBITDA which are used to measure segment performance. This release also includes certain non-IFRS Profit below. Year ended 31 July Underlying EBITDA less depreciation and amortisation excluding material items Underlying EBIT measures including Underlying Material items impacting operating profit net profit after tax and Gross profit Operating profit margin. These measures are used internally by management to (3) Non-IFRS measures are defined as follows: assess the performance of our business, make decisions on the allocation of our resources and assess operational management. Non-IFRS measures have not been • Underlying gross profit – comprises gross profit less material items. • Underlying net profit after tax – comprises profit/(loss) for the period attributable to the equity holders of Nufarm Limited less material items. subject to audit or review. • Average gross margin – defined as average gross profit as a The following notes explain the terms used throughout this profit release: (1) Underlying EBIT is earnings before net finance costs, taxation and material items. percentage of revenue. • Average gross profit – defined as revenue less a standardized estimate of production costs excluding material items and non-product specific rebates and other pricing adjustments. • Net external interest expense – comprises interest income – external, interest expense – external/debt establishment transaction Underlying EBITDA is Underlying costs and lease amortization – finance charges as described in EBIT before depreciation and note 10 to the 31 July 2019 Nufarm Limited financial report. amortization of $420.293 million for the year ended 31 July 2019 and $385.653 million for the year ended 31 July 2018. We believe Underlying EBIT and Underlying EBITDA provide useful information, but should not be considered as an indication of, or an alternative to, Profit/(loss) for the period as an indicator of operating performance or as an alternative to cash flow as a measure of liquidity. • ROFE – defined as underlying EBIT divided by the average of opening and closing funds employed(total equity plus net debt). • Net debt – total debt less cash and cash equivalents. • Average net debt – net debt measured at each month end as an average. • Net working capital – current trade and other receivables, non-current trade receivables/trade finance receivables, and inventories less current trade and other payables. • Average net working capital – net working capital measured at each month end as an average. • Constant currency – comparison removing the impact from the fluctuation in exchange rates between all foreign denominated amounts and the Australian dollar. • Underlying free cash flow – net cash from operating activities excluding material items less net cash from investing activities excluding material items. 18 Nufarm Limited Annual Report 2019 Risk Management A summary of the material risks that could impact the achievement of Nufarm’s business objectives is included below. The Group’s processes for managing risk are set out in the Group’s Corporate Governance Statement which is available on our website: www.nufarm.com/investor-centre/corporate-governance/ Economic and Business Risks Climate and seasonality Commodity prices As an input supplier to global International commodity prices Further, a substantial portion of Nufarm’s revenues, costs, assets agriculture, demand for crop can impact the profitability of crop and liabilities are denominated in protection products is influenced protection companies. This relates currencies other than Australian by climatic conditions that help to fluctuations in the prices of determine the timing and extent commodities that are associated dollars. As a result, exchange rate movements affecting these of cropping activity as well as with chemical intermediates used in currencies may impact the financial weed, pest and disease pressures. the manufacture of crop protection performance and future prospects While certain conditions may products, and to international prices of the business of Nufarm. increase demand for crop for various crops (‘soft’ commodities) protection products, extreme that can affect demand for those climatic conditions, such as crops and growers’ decisions to prolonged drought, may reduce plant them. The crop protection demand for those products. products market can be volatile In addition, the timing of weather seasons in the geographies in which Nufarm operates is uncertain and varies from year to year. Consequently, there is a risk that unusually early or late seasons may have a negative impact on and pricing can change rapidly. This volatility, in combination with foreign exchange changes, could have a material impact on Nufarm’s ability to compete and may impact the financial performance and prospects of the business. Nufarm has implemented a range of financial risk management policies and procedures to assist with the management of foreign exchange exposure. The group treasury function manages financial risks in accordance with these policies. Where possible, currency and interest rate risk is managed through hedging strategies. Industry consolidation demand for Nufarm products in Nufarm has entered into numerous The industry in which Nufarm a particular year and therefore arrangements with suppliers conducts business has undergone its financial performance. and customers to assist in the a period of consolidation with Nufarm’s operations are global, providing geographic diversification to climatic and seasonality risks. Our product portfolio is diverse, supporting a wide range of agricultural applications. At an operating level, Nufarm’s business planning processes incorporate forecasting and supply planning based on typical weather conditions. These plans are reviewed on an ongoing basis as the seasons progress to align supply with changing demand. management of our supply chain a number of large mergers and costs to ensure we can compete acquisitions (including, for example, in changing and competitive markets. Nufarm’s business ChemChina’s acquisition of Syngenta, Dow’s merger with planning processes help inventory DuPont, FMC’s acquisition of certain management to reduce price risk assets from DuPont’s crop protection of stock on hand. Foreign exchange business, Bayer’s acquisition of Monsanto, UPL’s acquisition of Arysta and BASF’s acquisition of Global crop protection companies a portfolio of assets from Bayer). such as Nufarm purchase inputs Completion of these transactions and determine selling prices in a is expected to result in a change range of international currencies to the industry landscape and and are therefore exposed to fluctuations in exchange rates. competitive environment, producing larger market competitors with an increased market presence. Nufarm Limited Annual Report 2019 19 Operating and Financial Review (continued) 20 Nufarm Limited Annual Report 2019 Nufarm continues to actively monitor the market to identify specific risks and opportunities presented by industry consolidation. We have taken a disciplined approach to participation in opportunities presented, ensuring all decisions are strategically aligned and execution risks are understood and managed. Analysis of the industry post consolidation occurs on an ongoing basis as input to strategic marketing and operational decisions.Geopolitical risksNufarm is subject to a number of geopolitical risks in certain markets that Nufarm may or may not operate in, including political instability and policy changes. The introduction of Chinese and US tariffs have the potential to impact the price and volume of a number of agricultural products that are traded between the countries (for example, soybeans exported into China from the US) and also have the potential to impact the volume and price of certain chemical inputs imported by Nufarm.The UK’s exit from the European Union has the potential to impact the UK and Europe’s agricultural sector as new agricultural and crop chemical policies may be implemented. These changes, among others, could adversely affect Nufarm’s operations and earnings.Nufarm continues to monitor these developments closely and assess the potential impacts through our ongoing business planning processes for both demand and supply.Grower options and technologyGrowers evaluate a number of options when determining how best to address their crop protection needs. Products supplied by Nufarm might be assessed alongside products supplied by other crop protection companies and other forms of crop protection by alternative technologies such as biological controls and biotechnology. The introduction of genetically modified seeds has, in some instances, either reduced the need for crop protection products or resulted in a change in the crop protection products used.The Nufarm portfolio team conducts regular assessments of advancements in application technology and product development. This is a key input to the product development pipeline and participation in potential partnerships with third parties with access to alternative technologies. Debt financing risk any issues are identified early may have an adverse effect on the Nufarm has significant short term bilateral funding and supplier financing facilities to fund its working capital requirements. Continued access to these facilities is dependent upon compliance with relevant banking covenants and actively managed. A clearly operating, marketing and financial defined funding strategy is in performance of Nufarm. Although place which includes a diversified most of Nufarm’s products are post funding structure with a range patent, there are certain products of debt maturity profiles. or developing technologies IP rights and branded names protection. There is a risk that which may be entitled to patent and the successful renewal of these Nufarm regards its brand names, facilities as and when they fall trademarks, domain names, trade due. Nufarm’s ability to refinance secrets and similar intellectual its debt obligations, and the terms property as important to its success. on which any such refinancing Nufarm’s business has been can be obtained, is uncertain. developed with a strong emphasis If Nufarm is unable to refinance its on branding. Should any brand debt obligations, or to do so on names be damaged in any way reasonable terms, it may have or lose market appeal, Nufarm’s an adverse effect on the financial business could be adversely position and performance of Nufarm. Board and executive oversight is in place to monitor ongoing compliance with key impacted. While Nufarm will use all reasonable endeavours to protect its intellectual property rights, unauthorised use or banking covenants and to ensure disclosure of its intellectual property Nufarm might not be able to obtain or maintain such protection, or that Nufarm’s activities may infringe the patent or other rights of others. Policies and procedures are in place to assist with the identification and protection of patents and trademarks. The Nufarm product development process includes specific steps to identify potential patent or trademark risks. Where considered necessary, external expert advice is obtained. Nufarm Limited Annual Report 2019 21 Operating and Financial Review (continued) Operational Risks Third party supply Nufarm relies on supply of various active ingredients, intermediates and other inputs from a number of third party suppliers, including suppliers based in China. The reliability of supply and the cost of these inputs can be impacted by a range of factors including, but not limited to, manufacturing closures or temporary disruptions, compliance Relationships with channel partners and commercial counterparties Nufarm is exposed to competitor pressures in retaining and attracting customers. The loss of a key customer, the inability to renew contracts on similar terms or the inability of Nufarm to attract new customers may have a material impact on future profitability. Nufarm’s strategic alliances, partnerships and distribution agreements are reviewed on an ongoing basis and aligned to strategy. Customer marketing plans are managed regionally and aligned to specific customer needs. Our customer base is diversified to minimise the impact of the loss of any single customer. with more stringent environmental Nufarm also uses third parties to Quality controls and/or safety standards, and other sell and/or distribute its products. Nufarm manufactures and supplies changes in government policy or These third parties may choose a range of crop protection products regulation. Any resulting disruption to prioritise other products or may which must be manufactured, to supply or price impact may affect elect not to renew distribution formulated and packaged to Nufarm’s ability to meet its sales agreements when they expire. exact standards, with strict quality and/or margin forecasts. Should this occur, Nufarm may controls. The performance of those Supply and demand factors play a role in the profitability of crop protection sales. The introduction of new distributors. not be able to sell its products or products would be negatively may suffer delays in appointing impacted if those quality standards are not met and this could, in turn, have an adverse impact on the reputation and success of Nufarm. significant levels of new capacity Nufarm has important strategic relating to the supply of crop alliances and a range of business protection products can result in relationships with other major Quality guidelines and procedures are volatility in pricing and margins in companies in the sector, including defined across the manufacturing key products supplied by Nufarm. licensing arrangements and process, including external tolling Nufarm’s procurement and business planning processes include the ongoing assessment of supply availability as input to manufacturing and safety stock levels. Where possible, we have entered into specific supply arrangements to assist with distribution arrangements. activities. These processes are subject These arrangements provide to rigorous testing to ensure quality opportunities to maximise the standards are met. An ongoing value of Nufarm’s distribution review program is in place with platforms as well as increasing the aim of ensuring operations Nufarm’s customer base by adhere to the quality standards providing access to additional and identify continuous products or new markets. improvement opportunities. availability and pricing of key Nufarm’s collaborative active ingredients. Our manufacturing facilities are geographically aligned with distribution to minimise disruption to supply. relationships with other major crop protection companies may change or be terminated, which could have a material adverse impact on Nufarm’s financial performance. 22 Nufarm Limited Annual Report 2019 Loss of key personnel Nufarm and may impact or natural disasters could have There can be no assurance that Nufarm will be able to retain key Nufarm’s financial performance a significant impact on Nufarm’s and future prospects. ability to maintain operations personnel. The loss of key personnel Critical roles across the or the inability to recruit and retain or motivate high calibre staff could have a material adverse effect on Nufarm. Nufarm operates globally and has facilities in multiple jurisdictions. Management of a complex business that operates globally has a higher employee risk/complexity than a business which operates in one jurisdiction. The addition of new employees and the departure of existing employees, particularly in key positions, can be disruptive and could have an adverse effect on organisation have been identified and appropriate succession and and service customers. This could adversely impact Nufarm’s financial position and/or reputation. retention strategies developed. Nufarm has implemented disaster Guidelines for remuneration and recovery strategies over its key IT reward have been developed systems, applications and data to ensure Nufarm can attract centres, which are reviewed and and retain talent. tested on a regular basis. Cyber threats are assessed on an ongoing Information and cyber security basis to the best of our knowledge Nufarm’s operations are supported based on the continually evolving by several key IT systems and applications. Complete or partial nature of these threats. Security controls are updated to mitigate failure of the IT systems, applications these risks supported by a or data centre infrastructure due to unauthorised access, cyberattacks combination of external and internal vulnerability testing. Compliance, Regulatory and Legal Risks Regulatory and Legal On 3 June 2019 Nufarm provided a Nufarm monitors regulatory The crop protection industry is Glyphosate Update to the Australian developments across its key highly regulated with government Securities Exchange concerning the regions of operations closely and controls and standards imposed risk of glyphosate litigation relating participates in several industry on all aspects of the industry’s operations. Crop protection to Bayer (Monsanto) in the United bodies and task forces which States. Glyphosate continues to be provide input and analysis to products are subject to regulatory subject to intense legal and regulatory bodies on the use of our review and approval in all markets in which they are sold, with the requirements of regulatory community pressure globally and key products. The Nufarm portfolio sales around the world could be adversely impacted. There is also team considers the regulatory environment in the maintenance authorities varying from country a risk of future litigation for suppliers and ongoing development of to country. Europe in particular, of glyphosate-based products, our portfolio. is highly regulated and there is including Nufarm. Introduction of increasing political influence on the new legislation or changes to regulatory system. The influence of legislation in any of the countries in politics in the regulatory process which Nufarm operates could have also makes outcomes increasingly an adverse impact on the financial unpredictable. Regulatory policies or operational position of Nufarm, can have an impact on the resulting in increased compliance availability and usage of crop costs and/or increased risk of protection products and, in some regulatory action. Nufarm also maintains a dedicated internal legal team across its key regional operations which is supported externally as required. Specific reporting protocols and guidelines are in place to manage ongoing legal input and facilitate escalation to executive management when required. cases, can result in the restriction or removal of certain products from the market, which can have a material adverse effect on the financial performance of Nufarm. Nufarm Limited Annual Report 2019 23 Operating and Financial Review (continued) Corporate Governance 24 Nufarm Limited Annual Report 2019 Environmental Nufarm operates in a regulatory environment that establishes high standards in terms of environmental compliance. Any material failure by Nufarm to adequately control hazardous substances and manufacturing operations, including the discharge of waste material, or to meet its various statutory and regulatory environmental responsibilities, could result in significant liabilities as well as ongoing costs relating to operational inefficiencies which may arise.Group HSE has provided clear guidelines on the management of environmental risks, which includes ongoing assessment and review of regulatory requirements. Local management engage with local environmental authorities on key risks and compliance.Workplace Safety Operation of Nufarm’s manufacturing sites across the globe require major hazard facility licences. Operating within these environments can lead to personal injury, loss of life or damage to property. Regulatory bodies undertake regular audits of Nufarm’s sites to ensure that it is appropriate to renew the licences. These audits can result in suspension of operations, fines or penalties or remediation expenses.A robust and comprehensive Health Safety and Environment (HSE) program is in place which provides clear guidance on culture, behaviours, process and reporting. This program includes the ongoing assessment of HSE risks and practices.Nufarm’s governance framework and board processes have been reviewed to ensure they represent and protect the interests of all stakeholders. This includes detailed consideration of the third edition of the Corporate Governance Principles and Recommendations, (‘the ASX principles’) published by the Australian Securities Exchange Limited’s (ASX) Corporate Governance Council.The ASX Listing Rules require Nufarm to disclose the extent to which we have adopted the ASX principles. During this reporting period, Nufarm complied with all of the ASX principles (third edition).Nufarm’s 2019 corporate governance statement can be viewed in the corporate governance section of our website: http://www.nufarm.com/investor-centre/corporate-governance Directors’ Report The directors present their report together with the financial report of Nufarm Limited (‘the company’) and of the group, being the company and its subsidiaries and the group’s interests in associates and jointly controlled entities, for the financial year ended 31 July 2019 and the auditor’s report thereon. Directors The directors of the company at any time during or since the end of the financial year are: DG McGauchie AO (Chairman) GA Hunt (Managing Director) AB Brennan GR Davis FA Ford Dr WB Goodfellow (retired on 6 December 2018) ME McDonald PM Margin T Takasaki Unless otherwise indicated, all directors held their position as a director throughout the entire period and up to the date of this report. Details of the qualifications, experience and responsibilities and other directorships of the directors will be set out in the Company’s 2019 Annual Report. Company secretary Fiona Smith (BSc, LLB, GDipGov, FGIA) joined the company on 20 June 2019 and was appointed company secretary on 27 June 2019. She has experience in company secretarial roles arising from her time spent in such roles in listed companies. Rodney Heath (LLB) joined the company in 1980 and was appointed company secretary in 1989 up until 27 June 2019 when he retired from the role. Directors’ interests in shares and step‑up securities Relevant interests of the directors in the shares and step‑up securities issued by the company and related bodies corporate are, at the date of this report, as notified by the directors to the Australian Securities Exchange in accordance with S205G(1) of the Corporations Act 2001, as follows: AB Brennan GR Davis FA Ford GA Hunt DG McGauchie ME McDonald PM Margin T Takasaki Nufarm Ltd Ordinary shares Nufarm Finance (NZ) Ltd Step–up securities 14,156 71,609 51,400 494,663 76,761 22,327 3,480 – – – – – – – – – Nufarm Limited Annual Report 2019 25 Directors’ Report (continued) Directors’ meetings The number of directors’ meetings (including meetings of board committees) and number of meetings attended by each of the directors of the company during the financial year are: Committees Director Board Audit & Risk Committee Human Resources Nomination & Governance Health Safety & Environment Meetings Held1 Meetings Attended Meetings Held1 Meetings Attended Meetings Held1 Meetings Attended Meetings Held1 Meetings Attended Meetings Held1 Meetings Attended AB Brennan GR Davis FA Ford Dr WB Goodfellow2 GA Hunt ME McDonald DG McGauchie PM Margin T Takasaki 8 8 8 1 8 8 8 8 8 8 8 8 1 8 8 8 8 8 4 4 4 – – 4 – 4 – 4 4 4 – – 4 – 4 – 5 5 – – – – 5 5 – 5 5 – – – – 5 5 – – – 3 1 – – 3 – – – – 3 1 – – 3 – – – 3 – – – 3 – – 3 – 3 – – – 3 – – 3 1 Number of meetings held during the period the director held office. 2 Dr WB Goodfellow retired on 6 December 2018. Principal Activities and Changes Nufarm’s principal activities during the financial year were the manufacture and sale of crop protection products and its proprietary seed technologies business which are further described in the Information on the Company section of the Operating and Financial Review accompanying this Directors’ Report. Nufarm employs approximately 3,300 people at its various locations in Australasia, Africa, the Americas and Europe. The company is listed on the Australian Securities Exchange (symbol NUF). Its head office is located at Laverton in Melbourne. Results The net profit/(loss) attributable to members of the Group for the 12 months to 31 July 2019 is $38.3 million. The comparable figure for the 12 months to 31 July 2018 was $(15.6 million). Operating and Financial Review and Future Prospects The operating and financial review and future prospects are set out in the Operating and Financial Review accompanying this Directors’ Report. 26 Nufarm Limited Annual Report 2019 Dividends The following dividends have been paid, declared or recommended since the end of the preceding financial year. The Final dividend for 2017‑2018 of 6 cents paid 2 November 2018 $’000 19,662 Nufarm Step‑up Securities distributions The following Nufarm Step‑up Securities distributions have been paid since the end of the preceding financial year: Distribution for the period 15 April 2018 – 14 October 2018 at the rate of 6.08 per cent per annum paid 15 October 2018 Distribution for the period 15 October 2018 – 14 April 2019 at the rate of 6.00 per cent paid 15 April 2019 $’000 7,651 7,511 State of Affairs The state of the group’s affairs are set out in the Operating and Financial Review accompanying this Directors’ Report. Events subsequent to reporting date On 30 September 2019, the company has entered into a sale and purchase agreement (‘SPA’) with Sumitomo Chemical Company and related group companies (‘Sumitomo’), to divest its shares in certain entities, that together, comprise the majority of the Latin American crop protection business and the Latin American Seed treatment business for consideration of $1,188 million. The SPA remains subject to a number of conditions including regulatory and shareholder approval, and the review of an independent expert. There will be a contractual obligation to repay the redeemable preference securities of $97.5 million to Sumitomo should the transaction complete. Environmental performance Details of Nufarm’s performance in relation to environmental regulations are set out in the Operating and Financial Review accompanying this Directors’ Report. The group did not incur any prosecutions or fines in the financial period relating to environmental performance. The group publishes annually a sustainability report. This report can be viewed on the group’s website or a copy will be made available upon request to the company secretary. Non‑audit services During the year KPMG, the company’s auditor, has performed certain other services in addition to their statutory duties. Details of the audit fee and non‑audit services are set out in note 39 to the financial report. The board has considered the non‑audit services provided during the year by the auditor and, in accordance with written advice provided by resolution of the audit committee, is satisfied that the provision of those non‑audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the reason that all non‑audit services were subject to the corporate governance procedures adopted by the company and have been reviewed by the audit committee to ensure they do not impact the integrity and objectivity of the auditor. Nufarm Limited Annual Report 2019 27 Directors’ Report (continued) Indemnities and insurance for directors and officers The company has entered into insurance contracts, which indemnify directors and officers of the company, and its controlled entities against liabilities. In accordance with normal commercial practices, under the terms of the insurance contracts, the nature of the liabilities insured against and the amount of premiums paid are confidential. An indemnity agreement has been entered into between the company and each of the directors named earlier in this report. Under the agreement, the company has agreed to indemnify the directors against any claim or for any expenses or costs, which may arise as a result of the performance of their duties as directors to the extent allowed by law. There are no monetary limits to the extent of this indemnity. Lead auditor’s independence declaration The lead auditor’s independence declaration is set out in the Company’s 2019 Annual Report and forms part of the directors’ report for the financial year ended 31 July 2019. Rounding of amounts The company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and, in accordance with that Instrument, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated. This report has been made in accordance with a resolution of directors. DG McGauchie AO Director GA Hunt Director Melbourne 30 September 2019 28 Nufarm Limited Annual Report 2019 2019 Remuneration Report A letter from the chairman of the human resources committee (HRC) (unaudited) Dear shareholder, On behalf of the Board, I present our remuneration report for the year ended 31 July 2019. Our aim in preparing this report is to enable you, our shareholders and interested stakeholders, to understand the links between remuneration, company strategy and Nufarm’s performance, and the framework we have in place to provide effective governance over remuneration at Nufarm. The role of the Human Resources Committee has evolved over the past few years with a broader remit which better reflects the breadth an effective HRC plays as we focus our efforts across the entire employee life cycle at Nufarm. The Committee takes an active view of the following: • Remuneration – Board and executive remuneration strategy and structure with a focus on strengthening the link between Company and individual performance. • Performance – establishing, monitoring and assessing executive KPIs that encourage strong and ethical performance and drive business outcomes while adding shareholder value. • Talent and Succession – ensure succession plans are in place for executives and a ready pool of talent is considered internally and externally. • Inclusion & Diversity – ensure all executive and board appointments are underpinned by our inclusion and diversity framework. Ensure all employee processes such as recruitment, remuneration, retention, promotion, recognition and termination are within the framework. • Alignment with Strategy and Operating Model – ensure the people strategy supports our business objectives and drives sustainable value creation. Outcomes for FY19 Fiscal 2019 was a challenging year for our industry with the continuation of drought conditions in large parts of eastern Australia and extreme flooding in major cropping regions in the United States. Our European business also dealt with supply disruptions and cost pressures which resulted in lost sales and reduced margins. Generating cash and reducing debt is an important focus for the coming year. The Board is confident the management team has taken the necessary steps to ensure a timely recovery from the issues that impacted performance in 2019 and our strategy of focussing on our chosen geographic markets and crops, rather than spreading our efforts more broadly, is working. The company’s performance has been reflected in the FY19 short term incentive outcomes which did not pay out for the CEO and most of the executive KMPs. The short term incentive metrics are made up of 40% uNPAT, 40% ANWC and 20% non financial. The FY17 LTI plan was tested on 31 July 2019 with no equity vesting since neither the Relative Total Shareholder Return (RTSR) nor the average ROFE targets were met. Our STI and LTI outcomes reflect that our senior executives are only rewarded when they deliver sustainable returns over both the short and long term. The FY19 Fixed remuneration increases (conducted in August 2018) for executives were determined according to the nature and size of role and within Nufarm’s usual benchmarking approach. Any increases are reflective of market pricing for roles that were undertaken. Employee Engagement We recognise the importance of employee engagement and its impact on customer satisfaction and business results. Several initiatives have been conducted over the year to help strengthen this further: • A high performance mindset culture is being embedded across the company, in all we do and how we work. Systems and processes that touch the employee lifecycle have been modernised to improve the employee experience, leadership and overall performance; Nufarm Limited Annual Report 2019 29 Directors’ Report (continued) • A focus on inclusion and diversity throughout FY19 was evident through a global pay parity review exercise which confirmed our remuneration practices are equitable and consistent across genders. We conducted a series of unconscious bias awareness training workshops for leaders and will conduct more in FY20; • We implemented a contemporary talent and succession planning methodology that reduces manager bias in the assessment and selection of new hires and succession planning; • We adopted recruitment practices, metrics and objectives that aim to increase female representation at Nufarm; • We conducted inclusive leadership training for all people managers as they are promoted or join Nufarm; and • Board members visited several locations over the year in countries such as USA, France, UK and Brazil. They held one on one and group meetings with staff to engage more actively and better understand the issues our people face and how they are working to serve our customers with a specific focus on health, safety and environment. Arrangements for FY20 Following a year of low growth and mixed financial results, the executive KMPs have elected to forfeit an increase to their fixed annual remuneration for FY20 as a demonstration of their commitment to turning the company’s financial health around. The Human Resources Committee continues to have a strong focus on the relationship between business performance and remuneration and in turn, each year the board reviews the financial metrics and individual objectives to ensure they remain appropriate as a basis of reward given the objectives of the business strategy and the interests of shareholders A marketplace review of the current STI plan involving market intelligence and external stakeholder consultation was initiated in September 2018. This plan was last reviewed in 2016. The outcome was that from FY20 onwards: • financial and non‑financial components of the plan will be delinked, with the non‑financial component shifting to team (rather than individual) performance to reflect how the executive team actually function; and • an increased focus on cash flow and overheads measures have been included to drive better balance sheet, cash flow and expenses management. After a review of all remuneration elements (base, STI and LTI) through external benchmarking, it’s evident that our current arrangements are Australian centric whereas, most of our executives (and in fact our revenue) comes from outside Australia. Over the next year, the HRC will continue to review this finding to better understand how we shape our remuneration offering to attract and retain a global pool of executive talent. In line with the executive KMP stance, non‑executive directors elected not to increase their fees or the pool for FY20. Further detail is provided within the remuneration report. Peter Margin Chair – human resources committee 30 Nufarm Limited Annual Report 2019 The remuneration report is designed to provide shareholders with an understanding of Nufarm’s remuneration policies and the link between our remuneration strategy and performance. This report details Nufarm’s remuneration framework and outcomes for Key Management Personnel (KMP) for the year ended 31 July 2019 (FY19). The report has been prepared in accordance with section 300A of the Corporations Act 2001 (Corporations Act). Section What it covers 1. Remuneration snapshot 1.1 Key Management Personnel 1.2 Executive KMP remuneration outcomes 1.3 1.4 Actual total remuneration earned by executives in FY19 Summary of FY19 non executive director (NED) fees 1.5 Changes for FY19 1.6 Outlook for FY20 2. Setting Senior Executive remuneration 2.1 Remuneration governance 2.2 Remuneration strategy 2.3 Remuneration components • Lists the names and roles of the Executive KMP whose remuneration details are disclosed in this report. • Details the key remuneration outcomes in FY19. • Additional voluntary disclosure of cash and benefits actually earned by KMPs in FY19. • Details the NED fees changes in FY19. • Outlines the changes to remuneration arrangements in FY19. • Outlines the changes to remuneration in FY20. • Explains Nufarm’s remuneration policy, and how the board and Human Resources committee (HRC) make decisions, including the use of external consultants. • Explains Nufarm’s remuneration strategy for FY19 and how its evolving for FY20. • Shows how executive remuneration is structured to support business objectives and explains the executive remuneration mix. 3. Executive remuneration outcomes • Provides a breakdown of Nufarm’s performance 3.1 Financial performance 3.2 Short Term Incentive outcomes 3.3 Long Term Incentive outcomes 3.4 Senior executive contract details over the past five years. • Details the STI outcomes for FY19. • Details the LTI outcomes for the plan with a performance test at 31 July 2019. • Lists the key contract terms governing the employment of Executive KMP (including termination entitlements where relevant). 4. Non‑Executive Director remuneration • Provides details of the fee structure for board 5. Remuneration tables 5.1 Remuneration of directors and disclosed executives 5.2 Equity instruments held by disclosed executives 5.3 Shares held in Nufarm and committee roles. • Provides the remuneration disclosures required by the Corporations Act and in accordance with relevant Australian Accounting Standards. Nufarm Limited Annual Report 2019 31 Directors’ Report (continued) 1. Remuneration snapshot 1.1 Key Management Personnel This Remuneration Report is focused on the KMP of Nufarm, being those persons with authority and responsibility for planning, directing and controlling the activities of Nufarm. KMP includes the non‑executive directors and senior executives (referred to as executive KMPs throughout this report). Unless otherwise indicated, the KMP were classified as KMP for the entire financial year. Current non‑executive directors Donald McGauchie Chairman and independent, non‑executive director Anne Brennan Gordon Davis Frank Ford Independent, non‑executive director Independent, non‑executive director Independent, non‑executive director Bruce Goodfellow Independent, non‑executive director until 6 December 2018 Peter Margin Independent, non‑executive director Marie McDonald Independent, non‑executive director Toshikazu Takasaki Non‑executive director Current executive KMPs Greg Hunt Paul Binfield Elbert Prado Brent Zacharias Niels Poerksen Managing director and chief executive officer Chief financial officer Group executive supply chain operations Group executive Nuseed Group executive portfolio solutions 1.2 Executive KMP remuneration outcomes The overall structure and philosophy of Nufarm’s approach to remuneration remained consistent throughout FY19. The organisation’s remuneration philosophy is based on linking financial rewards directly to employee contributions and company performance. As Nufarm continues its transformation journey to deliver growth and build a better Nufarm, the remuneration framework and incentive plans continue to connect the evolving business strategy to leadership behaviours. Fixed annual remuneration (FAR) All executive KMPs received an increase of 2.5% to their FAR in FY19. GE Nuseed received a 3% increase. Mr Prado received a further 11.3% increase to his total package due to the benefits offered under US employment conditions as part of his relocation to North America. Short term incentive (STI) The entry hurdle measures required for payment of STI for executive KMPs were not met. With the exception of Brent Zacharias (Group Executive Nuseed) and Elbert Prado (Group Executive Supply Chain Operations) all KMPs including the chief executive officer did not receive any payment related to the FY19 plan. Consequently, the approval for grant of rights related to the FY19 STI payment will not apply for the CEO. Long term incentive (LTI) The FY17 LTI plan was tested on 31 July 2019. The average cumulative ROFE and the RTSR achievement were both below threshold. The plan did not meet the entry hurdle associated with the measures. The outcome was that all KMPs did not receive any equity related to the FY17 plan. 32 Nufarm Limited Annual Report 2019 1.3 Actual total remuneration earned by executives in FY19 (unaudited) The table below details actual pay and benefits for Executive KMPs who were employed as at 31 July 2019. This table aims to assist shareholders in understanding the cash and other benefits actually received by executive KMPs from the various components of their remuneration during FY19. As a general principle, Australian Accounting Standards require the value of share‑based payments to be calculated at the time of grant and accrued over the performance period and restriction period. The Corporations Act and Australian Accounting Standards also require that pay and benefits be disclosed for the period that a person is an executive KMPs. This may not reflect what executive KMPs actually received or became entitled to during FY19 (especially if they became KMP part way through the year). The figures in this table have not been prepared in accordance with Australian Accounting Standards. They provide additional voluntary disclosures to Table 5.1 (which provides a breakdown of executive KMPs remuneration in accordance with statutory requirements and Australian Accounting Standards). The treatment of the remuneration elements in this disclosure are as follows: • Fixed remuneration earned between 1 August 2018 and 31 July 2019. This includes superannuation. • STI payable as cash under the FY18 STI plan (which is paid in FY19 after audited results), as well as any restricted STI or LTI that has been earned as a result of performance in previous financial years but was subject to a restriction period that ended between 1 August 2018 and 31 July 2019. • Benefits received between 1 August 2018 and 31 July 2019. Nufarm Limited Annual Report 2019 33 Directors’ Report (continued) In AUD Fixed remuneration At risk remuneration (Realised) Salary and Fees $ Non‑monetary benefits $ Superannuation $ Total $ STI cash $ STI deferred shares vested LTI rights vested $ Other long term remuneration Total Total $ Directors’ Non‑executive Sub total non‑executive directors remuneration (realised) Executive Director GA Hunt Total Directors’ remuneration (realised) Group Executives PA Binfield E. Prado1 N Poerksen B Zacharias Sub total – total executive remuneration (realised) Total directors and executive remuneration (realised) 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 1,479,952 1,526,277 1,294,688 1,265,479 2,774,640 2,791,756 822,223 804,635 889,938 735,420 703,684 713,209 495,003 461,044 2,910,848 2,714,308 – – 295 2,944 295 2,944 295 295 88,266 23,504 33,735 27,661 53,417 46,261 175,713 97,721 127,619 137,985 25,000 25,000 152,619 162,985 25,000 25,000 14,829 – 25,522 25,449 92,729 50,601 158,080 101,050 1,607,571 1,664,262 1,319,983 1,293,423 2,927,554 2,957,685 847,518 829,930 993,033 758,924 762,941 766,319 641,149 557,906 3,244,641 2,913,079 5,685,488 5,506,064 176,008 100,665 310,699 264,035 6,172,195 5,870,764 111,509 – 7,337,566 6,400,743 $ – – 340,112 171,078 340,112 171,078 187,153 111,619 138,763 99,793 145,429 66,695 99,562 44,230 570,907 322,337 911,019 493,415 – – – – – – – – – – – 77,321 65,522 36,564 142,843 36,564 142,843 36,564 $ – – – – – – – – – – – – – – 111,509 111,509 1,607,571 1,664,262 1,660,095 1,464,501 3,267,666 3,128,763 1,034,671 941,549 1,320,626 858,717 908,370 833,014 806,233 638,700 4,069,900 3,271,980 – – – – – – – – – – – – – – – – – – 1 Mr E Prado fixed remuneration and other long term remuneration includes fees and long service leave amounts paid with respect to the relocation of Mr Prado from Australia to the United States of America during 2019. Note: Vested STI deferred shares and LTI rights are valued at the Nufarm share price prevailing upon the vesting or forfeiture date ($4.88 at 31 July 2019 and $7.15 at 31 July 2018). 34 Nufarm Limited Annual Report 2019 $ – – 295 2,944 295 2,944 295 295 88,266 23,504 33,735 27,661 53,417 46,261 175,713 97,721 1,479,952 1,526,277 1,294,688 1,265,479 2,774,640 2,791,756 822,223 804,635 889,938 735,420 703,684 713,209 495,003 461,044 2,910,848 2,714,308 127,619 137,985 25,000 25,000 152,619 162,985 25,000 25,000 14,829 – 25,522 25,449 92,729 50,601 158,080 101,050 1,607,571 1,664,262 1,319,983 1,293,423 2,927,554 2,957,685 847,518 829,930 993,033 758,924 762,941 766,319 641,149 557,906 3,244,641 2,913,079 Directors’ Non‑executive Sub total non‑executive directors remuneration (realised) Executive Director GA Hunt Total Directors’ remuneration (realised) Group Executives PA Binfield E. Prado1 N Poerksen B Zacharias Sub total – total executive remuneration (realised) 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 Total directors and executive remuneration (realised) 5,685,488 5,506,064 176,008 100,665 310,699 264,035 6,172,195 5,870,764 1 Mr E Prado fixed remuneration and other long term remuneration includes fees and long service leave amounts paid with respect to the relocation of Mr Prado from Australia to the United States of America during 2019. Note: Vested STI deferred shares and LTI rights are valued at the Nufarm share price prevailing upon the vesting or forfeiture date ($4.88 at 31 July 2019 and $7.15 at 31 July 2018). In AUD Fixed remuneration At risk remuneration (Realised) Total Salary Non‑monetary and Fees $ benefits Superannuation $ Total $ STI cash $ STI deferred shares vested $ LTI rights vested $ Other long term $ Total remuneration $ – – – – – – – – 77,321 – – – 65,522 36,564 142,843 36,564 142,843 36,564 – – 340,112 171,078 340,112 171,078 187,153 111,619 138,763 99,793 145,429 66,695 99,562 44,230 570,907 322,337 911,019 493,415 – – – – – – – – – – – – – – – – – – – – – – – – – – 111,509 – – – – – 111,509 – 111,509 – 1,607,571 1,664,262 1,660,095 1,464,501 3,267,666 3,128,763 1,034,671 941,549 1,320,626 858,717 908,370 833,014 806,233 638,700 4,069,900 3,271,980 7,337,566 6,400,743 Nufarm Limited Annual Report 2019 35 Directors’ Report (continued) 1.4 Summary of FY19 NED fees NED fees are fixed and do not have any variable components. The chairman receives a fee for chairing the Nufarm board and is not paid any other fees. Other NEDs receive a base fee and additional fees for each additional Committee chairmanship and membership. NED fees increased by 3.75% effective August 2018, after no increases since August 2016. No additional retirement benefits were paid. Fees paid to NEDs are subject to a maximum annual non‑executive director fee pool of $2 million approved by shareholders at the 2017 AGM and this was not increased at the 2018 AGM. 1.5 Changes for FY19 Elbert Prado – Mr Prado relocated to USA effective 1 June 2019. In line with this move, his package was altered to reflect the US employment conditions and market (with the inclusion of 401k, car allowance and health insurance). Additionally, he held the dual role of Regional General Manager – Latin America for FY19 while the role has been vacant. During FY19, he oversaw the Latin America regional strategy and execution of that strategy. His FY19 STI was also prorated to reflect his dual role as detailed later in this report. Brent Zacharias – It is evident that Nuseed’s growth agenda and strategy are substantially different from the crop protection business. Therefore, to factor in the above and the start up like environment in which Nuseed operates, Mr Zacharias’ package has been structured differently to other Group Executive roles. This difference will also be acknowledged in the STI plan with Mr Zacharias being placed on an STI plan with Nuseed specific metrics only from FY20 onwards. Effective FY19, Nuseed Long Term Incentive Plan was offered to Mr Zacharias in lieu of the Nufarm LTIP in the form of 9,500 phantom rights with a performance period of 3 years. The rights will only vest if certain performance conditions are met. The Nuseed Phantom LTIP was created to foster stronger alignment between company strategy and those selected roles which are considered pivotal to delivering Nuseed’s long term enterprise value. The model is based on a proxy of economic value (EV) which generates a phantom share price. EV = (average Nuseed EBITDA of FY19 and FY20) X 20x multiple – (change in net debt x 1.5x multiple). Change in net debt multiple = (average 12 month net debt of 2020 – average 12 month net debt of 2017) X 1.5x multiple. The adjustment for 1.5 times any increase/decrease in cash/debt is designed to encourage the business to use funds wisely, including net working capital (NWC) management in a growing business, capex and appropriate R&D investment. It will also appropriately encourage a balance of monetising non‑core assets, and assessing EPS accretive forward investments. The plan is cash settled with the following pay out. Performance level Below threshold Threshold Target Maximum Growth in EV over the Performance Period Cash payment per Vested Award (AU$)* 150% 150% 210% 350% (or above) $0 1.5 x allocation 2 x allocation 3.5 x allocation All other elements of the plan as it relates to items such as cessation of employment, divestment of business, change of control and clawback, lapse and forfeiture events will continue to be underpinned by the Nufarm LTIP terms and conditions as outlined in section 2.3c. 36 Nufarm Limited Annual Report 2019 1.6 Outlook for FY20 Fixed annual remuneration (FAR) Following a year of disappointing financial results driven largely by factors outside the control of management, the executive KMPs at Nufarm forfeited an increase to their FAR for FY20 as a demonstration of their commitment to turning the company’s financial health around. Short term incentive (STI) A complete review of the current STI plan involving market intelligence and internal stakeholder consultation was conducted in FY19. The outcome was that from FY20 onwards, financial and non‑financial components of the plan were delinked, with the non‑financial component shifting to team (rather than individual) performance. An increased focus on cash flow measures was also included. Long term incentive (LTI) A comprehensive review of the LTI plan was undertaken with no changes proposed for FY20. Non‑executive director fees and pool In line with the executive KMP stance, non‑executive directors elected not to increase their fees or the pool for FY20. 2. Setting senior executive remuneration 2.1 Remuneration governance The HRC is responsible for reviewing and making recommendations to the Nufarm board on remuneration policies and packages applicable to disclosed executives. The HRC is comprised of four independent non‑executive directors and is tasked with ensuring that remuneration policies and packages retain and motivate high calibre executives and have a clear relationship between company performance and executive remuneration. The HRC charter can be found at www.nufarm.com. Over the past few years, the HRC has progressively increased their remit to include a wider talent and succession agenda including a review of Nufarm’s diversity and inclusion practices. The HRC reviews Executive KMPs’ remuneration annually to ensure there is a balance between fixed and at risk pay, and it reflects both short and long term objectives aligned to Nufarm’s strategy. The board reviews the CEO’s remuneration based on market practice, performance against agreed measures and other relevant factors, while the CEO undertakes a similar exercise in relation to senior executives. The results of the CEO’s annual review of senior executives’ performance and remuneration are subject to board review and approval. The board measures financial performance under the STI and LTI plans using audited numbers. The relative total shareholder return (RTSR) is measured by an independent external advisor. Within the remuneration framework the board has discretion to ‘clawback’ LTI plan and STI (cash and equity): • where payment is contrary to the financial soundness of the company; • in circumstances where the financial performance of Nufarm over the relevant period (including the initial STI performance period) has been mis‑stated; and/or • for individual gross misconduct. Executive KMPs are not permitted to hedge any shares issued to them under the STI while those shares remain held in trust. The board considered all information in light of company performance, changes during the year to the scope and scale of executive roles, individual performance and the motivation and retention of key individuals, in making its’ remuneration decisions. Nufarm Limited Annual Report 2019 37 Directors’ Report (continued) 2.2 Remuneration Strategy Up to FY19, Nufarm’s remuneration strategy and reward frameworks have reflected the importance of improving the performance of the business and lifting returns on funds employed, as well as supporting a goal to attract, motivate and retain a high performing workforce. The core elements of Nufarm’s remuneration strategy and policy for the disclosed Executive KMPs up to FY19 have been: • An overall framework that supports attraction, motivation and retention of talent, shareholder value creation and reward differentiation. • An STI program that is biased to growth in profitability and a strong focus on balance sheet management. • An LTI plan that is based on the principle of aligning Executive KMPs’ interests and rewards with those of shareholders. Throughout FY19, we reviewed the various elements of our reward offering. Consequently from FY20 onwards, the remuneration strategy is further refined to incorporate the following: • A renewed focus on managing working capital and improving returns on funds employed which is fundamental to the way in which Nufarm operates and is therefore a key element of the way performance is measured and assessed at a group level. • An overall framework underpinned by the core principles of simplicity, flexibility, line of sight, retention, driving business objectives and creation of value. • An STI plan which rewards year on year growth, profitability, collaboration and stronger focus on balance sheet management through additional measures of cashflow and stock cover. • An LTI plan which creates long term value for the organisation and shareholders. 2.3 Remuneration components The executive remuneration structure is based on Fixed Annual Remuneration (FAR) with additional short term and long term incentives (described as a percentage of FAR) available to be earned subject to performance. Australian based executive KMPs are employed on this basis. Those located overseas in Canada and US, also receive benefits as per local employment conditions. The graph below outlines the target remuneration mix for executive KMPs. The variable components of STI (including potential restricted shares) and LTI are expressed at target. Disclosed Executives CFO CEO 49.4% 12.2% 12.2% 26.3% 38.5% Equity 45.5% 15.9% 15.9% 22.7% 38.6% Equity 40.0% 15.0% 15.0% 30.0% 45.0% Equity FAR Cash STI Deferred STI LTI 38 Nufarm Limited Annual Report 2019 a) Remuneration structure Attract, motivate and retain highly skilled employees FAR Fixed annual remuneration Reward achievement of financial and personal strategic objectives STI Short term incentive (at risk) Align to long term shareholder value creation LTI Long term incentive (at risk) Cash Equity • Base Salary plus superannuation. • Set based on market and internal relativities, performance and experience. • 50% of STI outcome paid in October after the financial year end. • STI outcome based on financial and individual performance. • 50% of the STI outcome is deferred as Restricted Shares for a period of 2 years. • Subject to clawback and forfeiture in circumstances outlined. • Indeterminate Rights subject to three year performance period with 50% subject to RTSR and 50% subject to ROFE. • Subject to clawback and forfeiture in circumstances outlined. Note: From FY20 onwards, the personal component of STI will change to team based performance. b) FY19 STI plan For FY19, all Executive KMPs participated in the same STI plan with the exception of: • Group executive Nuseed who participated in a separate plan tailored to ensure the role was measured against and rewarded for Nuseed deliverables. • Group executive supply chain operations who also participated in a plan aligned to his dual role of regional general manager – Latin America. All plan details are below, with the major differences between the plans outlined where applicable. Who participates in the STI? Plan participants include disclosed executives and senior managers globally. What is the plan’s aim? The Plan rewards a combination of financial and non‑financial performance measures that are aligned to the creation of shareholder value. Primary emphasis is placed on profitability and cash flow and the non‑financial measures focus our Executives and employees on executing the most critical objectives aligned to the annual business plan. When are awards made? Awards under the plan are made at the end of the financial year. Nufarm Limited Annual Report 2019 39 Directors’ Report (continued) What measures are used in the plan? The board sets measures at the start of each year focused on profitability and balance sheet management. Noted below are the measures used in 2019. All Executive KMP roles (except GE Nuseed and GE supply chain operations) 80% of the potential was based on Nufarm group underlying Net Profit after Tax (uNPAT) and Average Net Working Capital (ANWC)/Sales. Group executive Nuseed 20% of the potential was based on Nufarm group uNPAT and Nufarm group ANWC/Sales. 60% of the potential was based on Nuseed uPBT and Nuseed ANWC/Sales. Group executive supply chain operations (pro‑rata basis while acting as regional general manager – Latin America) 45% of the potential was based on Nufarm group uNPAT and Nufarm group ANWC/Sales. 35% of the potential was based on Latin America’s uPBT and Latin America NWC as at 31 July 2019. For all executives 20% of the potential was based on individual strategic and business improvement objectives aligned to the role and contribution of the executive. This structure reflects Nufarm’s strong focus on the use of capital and ensures alignment of reward to business outcomes and shareholder returns. When and how are the STI payments determined? Awards are assessed annually at the end of the financial year. Awards are based on the percentage achievement against the budget and strategic measures. Group uNPAT and Group ANWC/Sales – The threshold for these measures is the prior year’s achievement or 85% of target, whichever is higher. At threshold achievement, 25% of the STI associated with the measure pays out. Target achievement results in 100% payment with stretch achievement (120% for uNPAT and 110% for ANWC/Sales) paying out at 150%. Nuseed uPBT and Nuseed ANWC/Sales – The threshold for these measures is the achievement of 85% of target where 25% of the STI associated with the measure pays out. Target achievement results in 100% payment with stretch achievement (120% for uPBT and 110% for ANWC/Sales) paying out at 150%. Regional NWC as at 31 July 2019 – This was a one off measure set for the region to incentivise a focus on strong capital management and cash flow. The threshold of this measure is the achievement of target where 100% of the STI associated with the measure pays out. At stretch (125% of target), 150% of STI is paid. Straight line vesting between threshold and budget and between budget (target) and stretch. Strategic and business improvement objectives are assessed on a merit basis against stated objectives. Are payments in cash or shares? 50% of Executive KMPs’ STI is paid in cash at the time of performance testing and 50% deferred into indeterminate rights with a time based restriction. When do the shares vest? Is there a clawback provision in the plan? What happens if the Executive KMP leaves Nufarm? Vesting will occur on the second anniversary of the grant date of the deferred equity, subject to continued employment or otherwise if the participant has left employment for a qualifying reason. The rules of the plan provide for clawback of the entire STI (cash and equity which maybe vested or unvested) with board discretion where payment is contrary to the financial soundness of the company; in circumstances where the financial performance of Nufarm over the relevant period (including the initial STI performance period) has been misstated; and/or for individual gross misconduct. If an Executive KMP leaves before the vesting anniversary under ‘qualifying leaver’ provisions the equity will remain in the plan until the vesting date. If the executive leaves under other than ‘qualifying leaver’ circumstances the equity will be forfeited. ‘Qualifying leaver’ provisions include participants who cease employment due to retirement, death, ill health/disability, redundancy, or contract severance without cause by Nufarm. The rules of the plan provides the flexibility, in special circumstances (e.g. health or severe personal hardship), to accelerate the vesting. This would result in the shares being released from the trust to the executive. 40 Nufarm Limited Annual Report 2019 FY20 STI plan In 2019, Nufarm undertook a comprehensive review of the STI plans across the organisation. The proposed changes reflect market data, feedback from the senior leaders and alignment to Nufarm’s financial objectives over the next 12 months. Key changes include: • Delinking financial and non‑financial measures – The underlying principle to this approach is the ability to reward both financial and non‑financial outcomes. In an industry heavily impacted by weather conditions, employees have worked harder than ever to deliver on transformation projects which will yield long terms returns. Therefore, the focus on transformation must continue to be rewarded. If one of the financial gates is missed then the non‑financial component can still pay out. If all financial gates are missed, then, the non‑financial component is reduced by half to remain fiscally sound and affordable. • Changing non‑financial component from individual to team‑based performance – The STI plan aims to leverage the One Nufarm model of collaboration by rewarding behaviour that ultimately leads to collective success. The aim is to drive a growth mindset culture and a higher trust environment. For executive KMPs this means one single assessment for what they deliver as a collective team, driving the success of the business and leading the transformation of the organisation together. In line with this change, the non financial will also have a stretch to 150% in line with financial measures enabling the ability to reward exceptional performance. • Financial measures – Nufarm’ s focus over the next 12 months is to improve margins and strengthen the balance sheet with a focus on improving cash flow and working capital. Therefore, measures such as stock cover and sales and general administration expenses/gross profit are being introduced to align better with the immediate business imperatives. • Brent Zacharias – Mr Zacharias will move from an STI plan (currently 20% group Nufarm financials, 60% group Nuseed financials and 20% individual) to 80% group Nuseed financials and 20% team. c) FY19 LTI plan Why have an LTI plan? This plan aims to align executive interests and earnings with the long term Nufarm strategy and the interests of shareholders. Who participates in the LTI plan? The current participants in the plan are disclosed executives and other selected senior managers (together, the LTI plan participants). Are the awards cash or shares? The plan rules provide the flexibility to use a number of different instruments provided they comply with local regulations and sound practice. At the time of vesting the board will determine if the rights convert to ordinary shares or cash or other instruments which may be in use at the time. When are the awards made? Under the plan, LTI plan participants receive an annual award of rights as soon as practical after the announcement of results for the preceding year. How are the number of rights calculated? The number of rights to be granted is calculated by dividing the individual’s LTI grant opportunity for the performance year by the volume weighted average price of the company’s shares over the five trading days immediately following the prior year’s annual results announcement. When do the awards vest? The performance/vesting period for awards is 3 years. Awards will vest in two equal tranches as follows: • 50% of the LTI plan grant will vest subject to the achievement of RTSR performance hurdle measured against a selected comparator group of companies; and • The remaining 50% of the LTI plan grant will vest subject to the 3 year average of an absolute ROFE target. Why have ROFE and RTSR been chosen as the hurdles? ROFE is used to track progress towards the goal to return long‑term results back to acceptable levels for Nufarm. Strong RTSR performance ensures Nufarm is an attractive investment for shareholders. What is the comparator group for the assessment of relative TSR? Based on the results of research and modelling carried out by Ernst and Young, at the inception of the plan the board approved the adoption of the ‘S&P ASX 200 excluding those companies in the Financial, Materials and Energy groups’ as the RTSR comparator group. Nufarm Limited Annual Report 2019 41 Directors’ Report (continued) How is RTSR measured? What is the RTSR performance required for vesting? How is the ROFE target set? How is ROFE measured? What ROFE result is required for vesting? What was the result for the FY19 year? What happens if the awards do not vest? Is there a clawback provision in the plan? What happens if an Executive KMP leaves? RTSR will be measured over the performance period. For the purposes of this measurement, each company’s share price will be measured using the average price over 60 days up to (but excluding) the first day of the performance period, and the average closing price over 60 days up to and including the last day of the performance period. RTSR of Nufarm relative to the RTSR of comparator group companies Proportion of RTSR grant vesting Less than 50th percentile 50th percentile Between 51st percentile and 75th percentile 0% 50% Straight line vesting between 50% and 100% 75th percentile 100% vesting ROFE objectives are set by the board at the beginning of each year. There is both a ‘target’ and a ‘stretch’ hurdle. These numbers are based on the budget and align with the guidance given to the market. ‘Target’ represents a sustainable return to acceptable ROFE levels. Stretch recognises achievement well above budget. This ensures that full vesting of the LTI plan is truly reliant on outstanding performance. Return is calculated on the group’s earnings before interest and taxation and adjusted for any material items. Funds employed are represented by shareholder’s funds plus total interest bearing debt. For the purposes of measuring ROFE performance in the LTI plan, ROFE will be averaged over the life of the plan. Percentage of ROFE target achieved Less than Target Target Proportion of ROFE grant vesting 0% 50% Between Target and Stretch Straight line vesting between 50% and 100% Stretch 100% Nufarm’s RTSR was at the 13th percentile of the comparator group and average cumulative ROFE was below threshold. Consequently, the FY17 award, which matured in FY19 did not vest into shares as both performance hurdles were not met. To the extent that the RTSR and ROFE performance hurdles are not met at the end of the 3‑year performance period and full vesting is not achieved, performance will not be re‑tested and the award will lapse. There is no partial vesting of the LTI plan before the 3rd anniversary. The rules of the plan provide for clawback of both vested and unvested LTI plan rights where: payment is contrary to the financial soundness of the company; in circumstances where the financial performance of Nufarm over the relevant period has been misstated; and/or for individual gross misconduct. To be eligible under the LTI plan, the executive must be employed by Nufarm on the 1st anniversary of the allocation. If the executive leaves before this date, the allocation is forfeited. If the executive leaves under ‘qualifying leaver’ provisions, (refer STI section above for definition of ‘qualifying leaver’) after the 1st anniversary and before the 3rd anniversary of the plan the allocation will be pro‑rated and the pro‑rated allocation will remain ‘on foot’ in the plan subject to certain overriding discretions set out in the plan. FY20 LTI Plan No changes are proposed for the FY20 LTI plan. Looking forward, we will continue to engage with the proxy advisors and key investors to ensure we have the LTI plan that adequately reflects the long term aspirations of the company. 42 Nufarm Limited Annual Report 2019 3. Executive remuneration outcomes 3.1 Financial Performance Details of Nufarm’s performance, share price and dividends over the past five years are summarised in the table below: Performance measures FY19 FY18 FY17 FY16 FY15 Earnings Underlying EBIT* Underlying EBITDA ANWC/Sales*** Underlying NPAT** ROFE achieved Shareholder value Closing share price 31 July Enterprise value**** TSR $m $m % $m % $ $m % Dividends declared Cents 248.6 420.3 46.8 89.1 7.1 4.88 3,443.7 (31.0) 0.0 265.1 385.7 40.3 98.4 9.4 7.15 3,964.1 (13.9) 11.0 302.3 390 36.8 135.8 13.6 8.46 3,185.4 3.5 13.0 286.7 372 39.9 108.9 13.2 8.28 3,074.0 8.7 11.0 236.9 317 41.9 117.1 11.0 7.72 2,840.0 80.2 10.0 * and **: Underlying EBIT is earnings before net finance costs, taxation and material items. Underlying NPAT is Net Profit after Tax before material items. Underlying NPAT and Underlying EBIT are used internally by management to assess performance of the business and make decisions on the allocation of our resources. NPAT, rather than EBIT, is used to assess management’s STI to ensure rewarded business outcomes are aligned with shareholder returns. ***: ****: Average Net Working Capital/Sales is used throughout the business and highlights the management of working capital over the full year. Enterprise value is Nufarm ordinary shares on issue, multiplied by Nufarm’s share price, plus net debt and Other securities as at 31 July. 3.2 Short Term Incentive outcomes Based on an underlying NPAT result of $89.08m, an ANWC/Sales result at 46.8% and performance against individual strategic and business improvement objectives, disclosed executives (except GE Nuseed and GE supply chain operations) employed for the performance period FY19 did not receive any payment under the incentive in accordance with the rules of the plan. Individual objectives were driven by Nufarm’s strategy and the goals to deliver on sustainable innovation and business discipline across the business. These objectives were specific to the role of each executive and included organisation restructuring, management of risk, efficiency improvements, partnership development, portfolio enhancement, business process and systems improvements and the implementation of initiatives to support growth in higher value segments. There was no payment associated with the individual objectives since the entry hurdle for the FY19 plan was not met for the CEO, CFO and GE portfolio solutions. Nufarm Limited Annual Report 2019 43 Directors’ Report (continued) a) FY19 STI plan payment results Outcomes against targets for disclosed executives are shown below: Financial: Weighting and outcome* Group uNPAT Group ANWC Regional NWC 31 Jul 2019 Business Unit uPBT Business unit ANWC Personal Weighting & outcome 40% 40% 25% 40% 10% 40% 40% 20% 40% 10% 20% – – – – – – – 15% 30% 30% – – – – 20% 20% 20% 20% 20% Disclosed executive Greg Hunt Paul Binfield Elbert Prado Niels Poerksen Brent Zacharias Key: Below threshold Between threshold and target Above target *: Nufarm’s objective is to be as transparent as possible, without disclosing commercially sensitive information. Consequently, while STI measures, descriptions, weighting and performance in FY19 for executive KMPs have been provided above, the specific targets for measures such as uNPAT have not. The table below displays FY19 STI payments as a percentage of FAR and also as a percentage of target opportunity. Disclosed executive 2019 STI Potential At target $ At maximum $ 989,766 1,484,649 593,056 889,584 – – Total Award $ FY19 STI Award as a % of target potential FY19 STI as % of FAR Greg Hunt Paul Binfield Elbert Prado 384,800 577,199 154,642 Brent Zacharias 247,142 370,712 131,045 Niels Poerksen 376,903 565,355 – Senior executive average 518,333 777,500 57,137 0% 0% 40% 53% 0% 11% 0% 0% 21% 27% 0% 7% To be paid in cash in October 2019 $ Retained in shares vesting 2nd anniversary 31.7.20* $ – – 77,321 65,522 – – – 77,321 65,523 – 28,569 28,569 * The portion of FY19 STI payment retained in shares will vest on 31 July 2020, on the second anniversary from effective allocation date. ** As the CEO will not receive an STI payment for FY19, there will be no deferred equity granted and therefore, no requirement to raise a motion at the AGM for approval. 44 Nufarm Limited Annual Report 2019 b) Historical STI plan performance relative to Nufarm’s uNPAT results The following chart compares Nufarm’s historical STI plan performance results against underlying NPAT for the same period. Nufarm’s incentive plans measure performance against a range of financial and non‑financial metrics with varied weightings. Accordingly, the pay for performance relationship is based on the performance against these metrics as a whole and may not always align with underlying NPAT growth. Underlying NPAT growth vs STI outcomes 40.0% 32.0% 24.0% 16.0% 8.0% 0.0% -8.0% FY15 FY16 FY17 FY18 FY19 h t w o r G T A P N g n i y l r e d n U -16.0% -24.0% -32.0% -40.0% Underlying NPAT % Growth % STI max 140.0% 120.0% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% e m o c t u O n a l P I T S 3.3 Long Term Incentive outcomes The performance period for the FY17 LTI plan concluded on 31 July 2019. The results of Nufarm’s RTSR was calculated by an external provider. The board determined the ROFE outcome to ensure no windfall gains or losses and accordingly adjusted for the net impact of material items. The board approved the vesting outcomes in accordance with the LTI plan rules. a) FY17 LTI plan testing as at 31 July 2019 The vesting table for the FY17 LTI plan is detailed below, reflecting performance up to 31 July 2019 against the two performance measures of RTSR and ROFE. Performance Measure Target Outcome % of total plan vested RTSR ROFE Total 75th percentile 11.8% 13th percentile (below threshold) 84.7% of target (below threshold) 0% 0% Nil Nufarm Limited Annual Report 2019 45 Directors’ Report (continued) b) FY17 LTI award outcome The table below details the individual outcome for the FY17 LTI plan. Total number of rights available Total number of rights awarded Total Award as a % of potential Average grant date fair value of awarded rights Total grant date fair value of award $ 95,670 35,096 31,226 19,276 26,008 – – – – – 0.0% 0.0% 0.0% 0.0% 0.0% n/a n/a n/a n/a n/a – – – – – Total grant date fair value of lapsed awards $ 685,476 251,463 223,734 138,113 186,347 Disclosed executive Greg Hunt Paul Binfield Elbert Prado Brent Zacharias Niels Poerksen c) Historical LTI plan performance relative to Nufarm’s share price The following chart compares Nufarm’s LTI plan vesting results for the past four LTI plans (as a percentage of plan maximum) to the share price history during the same period. The FY16 and FY17 LTI plans did not meet hurdle and therefore are not depicted. Nufarm historical share price vs LTI outcome $ e c i r P e r a h S 12.00 10.00 8.00 6.00 4.00 2.00 0.00 100.0% 89.2% 31.3% 0.0% 0.0% 3 1 - g u A 3 1 - t c O 3 1 - c e D 4 1 - b e F 4 1 - r p A 4 1 - n u J 4 1 - g u A 4 1 - t c O 4 1 - c e D 5 1 - b e F 5 1 - r p A 5 1 - n u J 5 1 - g u A 5 1 - t c O 5 1 - c e D 6 1 - b e F 6 1 - r p A 6 1 - n u J 6 1 - g u A 6 1 - t c O 6 1 - c e D 7 1 - b e F 7 1 - r p A 7 1 - n u J 7 1 - g u A 7 1 - t c O 7 1 - c e D 8 1 - b e F 8 1 - r p A 8 1 - n u J 8 1 - g u A 8 1 - t c O 8 1 - c e D 9 1 - b e F 9 1 - r p A 9 1 - n u J 120% 100% 80% 60% 40% 20% 0% e m o c t u O n a l P I T L LTI Plan Share Price 3.4 Senior Executive contract details The company has employment contracts with the disclosed executive KMPs. These contracts formalise the terms and conditions of employment. The contracts are for an indefinite term. The contracts of the CEO and other disclosed executives have been structured to be compliant with the termination benefits cap under the Corporations Act. The company may terminate the contract of the CEO and managing director by giving 6 months’ notice, in which case the CEO would be entitled to a termination payment of 12 months FAR inclusive of any notice paid in lieu. The contract also provides for payment of applicable statutory entitlements. The CEO may terminate the contract by giving the company 6 months’ notice. The company may terminate the contract of other executives by 6 months’ notice in which case a termination payment equivalent to 12 months FAR will be paid including notice period paid in lieu. The company may terminate the employment contracts immediately for serious misconduct. 46 Nufarm Limited Annual Report 2019 4. Non‑Executive directors (NED) remuneration Nufarm’s operations are managed under the direction of the board. The board oversees the performance of Nufarm management in seeking to deliver superior business and operational performance and long‑term growth in shareholder value. The board recognises that providing strong leadership and strategic guidance to management is important to achieve our goals and objectives. Fees for non‑executive directors are set at a level to attract and retain Directors with the necessary skills and experience to allow the board to have a proper understanding of, and competence to deal with, current and emerging issues for Nufarm’s business. The board seeks to attract directors with different skills, experience, expertise and diversity. Additionally, when setting non‑executive director fees, the board takes into account factors such as external market data on fees and the size and complexity of Nufarm’s operations. The non‑executive directors’ fees are fixed, and non‑executive directors do not participate in any Nufarm incentive plan. The board’s policy with regard to NED remuneration is to position board remuneration at the market median with comparably sized listed entities. The board determines the fees payable to non‑executive directors within the aggregate amount approved from time to time by shareholders. At the company’s 2017 AGM, shareholders approved an aggregate of $2,000,000 per year (including superannuation costs). The total fees for FY19 remained within the approved cap. Board fees are generally reviewed every 18 months with the last increase of 3.75% effective August 2018. While the next review will be held in February 2020, the board have mirrored management sentiment to forfeit any increase for FY20. Chairman* General board Audit committee Chair Audit committee Member HSE Risk committee Chair HSE Risk committee Member HR committee Chair HR committee Member Nominations committee Chair Nominations committee Member Fees applicable from 1 August 2018 to 31 July 2019 ($) per annum 392,567 160,597 32,370 16,185 18,883 9,441 26,975 13,488 12,462 1,618 per meeting * The Chairman receives no fees as a member of any committee. Nufarm Limited Annual Report 2019 47 Directors’ Report (continued) 5. Remuneration tables 5.1 Remuneration of directors and disclosed executives Details follow of the nature and amount of each major element of remuneration in respect of the NED and disclosed Executive KMPs. Short Term Post‑ employment Share Based Payments Total1 In AUD Directors’ Non‑executive AB Brennan GR Davis Dr WB Goodfellow2 DG McGauchie P. Margin F. Ford T. Takasaki M. McDonald Sub total non‑ executive directors remuneration Executive Director GA Hunt Total Directors’ remuneration Group Executives PA Binfield E. Prado4 N Poerksen B Zacharias3 Sub total – total executive remuneration Total directors and executive remuneration Salary and Fees $ Cash Bonus (Vested) $ Non‑monetary Benefits $ 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 172,973 166,720 190,139 183,265 52,492 144,974 356,879 343,980 203,757 197,733 179,838 173,338 154,580 148,993 169,294 167,274 1,479,952 1,526,277 1,294,688 1,265,479 2,774,640 2,791,756 822,223 804,635 889,938 735,420 703,684 713,209 495,003 461,044 2,910,848 2,714,308 5,685,488 5,506,064 – – – – – – – – – – – – – – – – – – – – – – – – 77,321 – – – 65,522 36,564 142,843 36,564 142,843 36,564 – – – – – – – – – – – – – – – – – – 295 2,944 295 2,944 295 295 88,266 23,504 33,735 27,661 53,417 46,261 175,713 97,721 176,008 100,665 Total $ 172,973 166,720 190,139 183,265 52,492 144,974 356,879 343,980 203,757 197,733 179,838 173,338 154,580 148,993 169,294 167,274 1,479,952 1,526,277 1,294,983 1,268,423 2,774,935 2,794,700 822,518 804,930 1,055,525 758,924 737,419 740,870 613,942 543,869 3,229,404 2,848,593 6,004,339 5,643,293 1. Represents total remuneration paid in the financial year. 2. Dr WB Goodfellow ceased to be a Director on 6 December 2018. 3. Included in Other long term remuneration for B Zacharias is the fair value expense for the financial year relating to the Nuseed LTI plan (refer section 1.5). 4. Mr E Prado fixed remuneration and other long term remuneration includes fees and long service leave amounts paid with respect to the relocation of Mr Prado from Australia to the United States of America during 2019. 48 Nufarm Limited Annual Report 2019 Super‑ Termination annuation Benefits Equity Settled Other Total performance Long Term Remuneration based Remuneration Percentage of Remuneration Value of Options as a Proportion of Total $ $ $ $ 17,297 16,672 19,014 18,326 5,249 19,630 35,688 34,398 – – 17,984 17,333 15,458 14,899 16,929 16,727 127,619 137,985 25,000 25,000 152,619 162,985 25,000 25,000 14,829 – 25,522 25,449 92,729 50,601 158,080 101,050 310,699 264,035 $ – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – $ – – – – – – – – – – – – – – – – – – 443,069 557,691 443,069 557,691 219,410 263,659 178,702 205,715 162,098 215,533 94,641 130,170 654,851 815,077 1,097,920 1,372,768 $ – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 111,509 108,504 220,013 220,013 190,270 183,392 209,153 201,591 57,741 164,604 392,567 378,378 203,757 197,733 197,822 190,671 170,038 163,892 186,223 184,001 1,607,571 1,664,262 1,763,052 1,851,114 3,370,623 3,515,376 1,066,928 1,093,589 1,360,565 964,639 925,039 981,852 909,816 724,640 4,262,348 3,764,720 7,632,971 7,280,096 25% 30% 21% 24% 19% 21% 18% 22% 30% 23% 14% 16% 11% 10% 5% 9% 9% 13% 1% 7% 5. Remuneration tables 5.1 Remuneration of directors and disclosed executives Details follow of the nature and amount of each major element of remuneration in respect of the NED and disclosed Executive KMPs. Directors’ Non‑executive In AUD AB Brennan GR Davis Dr WB Goodfellow2 DG McGauchie P. Margin F. Ford T. Takasaki M. McDonald Sub total non‑ executive directors remuneration Executive Director GA Hunt Total Directors’ remuneration Group Executives PA Binfield E. Prado4 N Poerksen B Zacharias3 Sub total – total executive remuneration Total directors and executive remuneration $ 172,973 166,720 190,139 183,265 52,492 144,974 356,879 343,980 203,757 197,733 179,838 173,338 154,580 148,993 169,294 167,274 1,479,952 1,526,277 1,294,688 1,265,479 2,774,640 2,791,756 822,223 804,635 889,938 735,420 703,684 713,209 495,003 461,044 2,910,848 2,714,308 5,685,488 5,506,064 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 2019 2018 $ – – – – – – – – – – – – – – – – – – – – – – – – – – – 77,321 65,522 36,564 142,843 36,564 142,843 36,564 $ – – – – – – – – – – – – – – – – – – 295 2,944 295 2,944 295 295 88,266 23,504 33,735 27,661 53,417 46,261 175,713 97,721 176,008 100,665 Total $ 172,973 166,720 190,139 183,265 52,492 144,974 356,879 343,980 203,757 197,733 179,838 173,338 154,580 148,993 169,294 167,274 1,479,952 1,526,277 1,294,983 1,268,423 2,774,935 2,794,700 822,518 804,930 1,055,525 758,924 737,419 740,870 613,942 543,869 3,229,404 2,848,593 6,004,339 5,643,293 1. Represents total remuneration paid in the financial year. 2. Dr WB Goodfellow ceased to be a Director on 6 December 2018. 3. Included in Other long term remuneration for B Zacharias is the fair value expense for the financial year relating to the Nuseed LTI plan (refer section 1.5). 4. Mr E Prado fixed remuneration and other long term remuneration includes fees and long service leave amounts paid with respect to the relocation of Mr Prado from Australia to the United States of America during 2019. Short Term Post‑ employment Share Based Payments Total1 Salary Cash Bonus Non‑monetary and Fees (Vested) Benefits Super‑ annuation $ Termination Benefits $ Equity Settled $ Other Long Term $ Total Remuneration $ Percentage of Remuneration performance based $ Value of Options as a Proportion of Total Remuneration $ 17,297 16,672 19,014 18,326 5,249 19,630 35,688 34,398 – – 17,984 17,333 15,458 14,899 16,929 16,727 127,619 137,985 25,000 25,000 152,619 162,985 25,000 25,000 14,829 – 25,522 25,449 92,729 50,601 158,080 101,050 310,699 264,035 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 443,069 557,691 443,069 557,691 219,410 263,659 178,702 205,715 162,098 215,533 94,641 130,170 654,851 815,077 1,097,920 1,372,768 – – – – – – – – – – – – – – – – – – – – – – – – 111,509 – – – 108,504 – 220,013 – 220,013 – 190,270 183,392 209,153 201,591 57,741 164,604 392,567 378,378 203,757 197,733 197,822 190,671 170,038 163,892 186,223 184,001 1,607,571 1,664,262 1,763,052 1,851,114 3,370,623 3,515,376 1,066,928 1,093,589 1,360,565 964,639 925,039 981,852 909,816 724,640 4,262,348 3,764,720 7,632,971 7,280,096 25% 30% 21% 24% 19% 21% 18% 22% 30% 23% 14% 16% 11% 10% 5% 9% 9% 13% 1% 7% Nufarm Limited Annual Report 2019 49 Directors’ Report (continued) 5.2 Equity instruments held by disclosed executives The following tables show the number of: • options/performance rights over ordinary shares in the company; • right to deferred shares granted under the STI scheme; and • shares in the company that were held during the financial year by disclosed executives of the group, including their close family members and entities related to them. All equity transactions with key management personnel other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the entity would have adopted if dealing at arm’s length. Options/rights over ordinary shares in Nufarm Balance at 1 August 2018 Granted as remun‑ eration(f) Forfeited or Lapsed(c) Net Change Other(e) Balance at 31 July 2019(d) Vested During 2019 Vested at 31 July 2019(a) Exercised Scheme Directors G Hunt LTI performance 211,082 162,933 – (95,670) STI deferred(b) 69,695 – (69,695) – Executives Current KMP P Binfield LTI performance 84,494 69,734 – (35,096) STI deferred(b) 38,351 – (38,351) – E Prado LTI performance 66,384 49,636 – (31,226) STI deferred(b) 28,435 B Zacharias LTI performance 41,400 – – (28,435) – – (19,276) STI deferred(b) 17,724 5,583 (20,402) – N Poerksen LTI performance 61,166 49,636 – (26,008) STI deferred(b) 29,801 – (29,801) – Total LTI performance 464,526 331,939 – (207,276) STI deferred(b) 184,006 5,583 (186,684) Non‑KMP Officers F Smith LTI performance – – – Former non‑KMP Officers – – – – – – – – – – – – – – – R Heath LTI performance 20,408 14,599 – (9,808) (25,199) 278,345 – – 69,695 119,132 – – 38,351 84,794 – – 28,435 22,124 – 2,905 20,402 84,794 – – 29,801 589,189 – 2,905 186,684 – – – – Value at Date of for‑ feiture(c) 466,870 – 171,268 – 152,383 – 94,067 – 126,919 – 1,011,507 – – – – – – – – – – – – – – – – 47,863 Total 668,940 352,121 (186,684) (217,084) (25,199) 592,094 186,684 – 1,059,370 (a) All options/rights that are vested are exercisable. (b) The grant date fair value of deferred shares granted as remuneration during the year ended 31 July 2019 was $6.07. 100% of STI deferred shares available to vest during the year ended 31 July 2019 vested as the necessary service condition was satisfied. 100% of non‑vested STI deferred shares are due to vest during the year ended 31 July 2020. Note those deferred shares granted as remuneration during the year ended 31 July 2019 relate to the year ended 31 July 2018 STI outcomes. Deferred shares granted as remuneration on the back of the current year STI outcomes will be determined and allocated in October 2019. (c) LTIP performance rights forfeited due to a failure to satisfy service or performance conditions during 2019 are disclosed in column “Forfeited or lapsed”. 100% of rights due to vest in 2019 were forfeited. The value of LTIP performance rights forfeited is expressed in the table above using the share price of the company at 31 July 2019 of $4.88. (d) 267,850 of total LTIP performance rights held by KMPs or non‑KMP Officers are due to vest in the period ending 31 July 2020, with the remaining unvested balance due to vest in the period ending 31 July 2021. (e) “Net change other” reflects changes to KMPs and non‑KMP Officers during the period. (f) The number of LTIP performance rights granted as remuneration during FY19 were determined by dividing the KMP’s total LTI grant opportunity by $6.07, being the fix‑day VWAP commencing 1 October 2018. 50 Nufarm Limited Annual Report 2019 5.3 Shares held in Nufarm Ltd Directors DG McGauchie G Hunt AB Brennan GR Davis FA Ford Dr WB Goodfellow1 PM Margin ME McDonald T Takasaki Executives Current KMP P Binfield E Prado B Zacharias N Poersken Balance at 1 August 2018 Granted as Remuneration On Exercise of Rights Net Change Other Balance at 31 July 2019 66,293 319,727 12,224 48,889 24,445 1,339,887 3,005 8,584 – 266,501 71,471 32,649 18,024 – – – – – – – – – – – – – – 69,695 – – – – – – – 10,468 105,241 1,932 22,720 26,955 (1,339,887) 475 13,743 38,351 28,435 23,307 29,801 27,323 (23,561) 5,965 35,996 76,761 494,663 14,156 71,609 51,400 – 3,480 22,327 – 332,175 76,345 61,921 83,821 Total 2,211,699 – 189,589 (1,112,630) 1,288,658 1. Dr WB Goodfellow ceased to be a Director on 6 December 2018. Shares issued as a result of the exercise of options There were nil (2018: 333,078) shares issued as a result of the exercise of options during the year. Unissued shares under option There are nil (2018: nil) unissued shares under option. The unissued shares under option have been provided to Nufarm employees as performance rights and the exercise price of such options is nil. Loans to key management personnel There were no loans to key management personnel at 31 July 2019 (2018: Nil). Nufarm Limited Annual Report 2019 51 Directors’ Report (continued) Other key management personnel transactions with the company or its controlled entities Apart from the details disclosed in this note, no director has entered into a material contract with the company or entities in the group since the end of the previous financial year and there were no material contracts involving director’s interest existing at year‑end. A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of these entities transacted with the company or its subsidiaries in the reporting period. The terms and conditions of the transactions with management persons and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non‑director related entities on an arms‑length basis. From time to time, key management personnel of the company or its controlled entities, or their related entities, may purchase goods from the group. These purchases are on the same terms and conditions as those entered into by other group employees or customers and are trivial or domestic in nature. This report has been made in accordance with a resolution of directors. DG McGauchie AO Director GA Hunt Director Melbourne 30 September 2019 52 Nufarm Limited Annual Report 2019 Lead Auditor’s Independence Declaration Under section 307C of the Corporations Act 2001 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Nufarm Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Nufarm Limited for the financial year ended 31 July 2019 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Gordon Sangster Partner Melbourne 30 September 2019 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. Nufarm Limited Annual Report 2019 53 Consolidated Income Statement For the year ended 31 July 2019 Continuing operations Revenue Cost of sales Gross profit Other income Sales, marketing and distribution expenses General and administrative expenses Research and development expenses Share of net profits/(losses) of equity accounted investees Operating profit Financial income Financial expenses excluding foreign exchange gains/(losses) Net foreign exchange gains/(losses) Net financial expenses Net financing costs Profit/(loss) before income tax Consolidated 2019 $000 2018* $000 Note 7 19 10 10 10 3,757,590 3,307,847 (2,744,309) (2,344,413) 1,013,281 963,434 10,461 7,256 (561,151) (480,650) (223,768) (275,573) (41,132) (39,046) 124 78 197,815 175,499 10,051 (117,293) (9,624) (126,917) (116,866) 10,978 (118,638) (27,946) (146,584) (135,606) 80,949 39,893 Income tax benefit/(expense) 11 (42,639) (55,900) Profit/(loss) for the period from continuing operations 38,310 (16,007) Attributable to: Equity holders of the company Non–controlling interests Profit/(loss) for the period Earnings per share Basic earnings/(loss) per share Diluted earnings/(loss) per share 38,310 (15,588) – (419) 38,310 (16,007) 30 30 7.4 7.4 (8.5) (8.5) * The group has initially applied AASB 15 and AASB 9 at 1 August 2018. Under the transition method chosen comparative information is not restated. The consolidated income statement is to be read in conjunction with the attached notes. 54 Nufarm Limited Annual Report 2019 Consolidated Statement of Comprehensive Income For the year ended 31 July 2019 Profit/(loss) for the period Other comprehensive income Items that may be reclassified subsequently to profit or loss: Note Consolidated 2019 $000 2018* $000 38,310 (16,007) Foreign exchange translation differences for foreign operations 69,086 (24,231) Foreign exchange translation differences for disposal groups Effective portion of changes in fair value of cash flow hedges Effective portion of changes in fair value of net investment hedges Items that will not be reclassified to profit or loss: Actuarial gains/(losses) on defined benefit plans Income tax on share based payment transactions – 54 (10,735) – 2,028 8,882 (7,356) – 4,980 (587) Other comprehensive profit/(loss) for the period, net of income tax 51,049 (8,928) Total comprehensive profit/(loss) for the period 89,359 (24,935) Attributable to: Equity holders of the company Non‑controlling interest 89,359 (24,516) – (419) Total comprehensive profit/(loss) for the period 89,359 (24,935) * The group has initially applied AASB 15 and AASB 9 at 1 August 2018. Under the transition method chosen comparative information is not restated. The amounts recognised directly in equity are disclosed net of tax. The consolidated statement of comprehensive income is to be read in conjunction with the attached notes. Nufarm Limited Annual Report 2019 55 Consolidated Balance Sheet As at 31 July 2019 Current assets Cash and cash equivalents Trade and other receivables Inventories Current tax assets Other investments Preference securities receivable Total current assets Non‑current assets Trade and other receivables Investments in equity accounted investees Other investments Deferred tax assets Property, plant and equipment Intangible assets Total non‑current assets TOTAL ASSETS Current liabilities Bank overdraft Trade and other payables Loans and borrowings Employee benefits Current tax payable Provisions Total current liabilities Non‑current liabilities Payables Loans and borrowings Deferred tax liabilities Employee benefits Total non‑current liabilities TOTAL LIABILITIES NET ASSETS Equity Share capital Reserves Retained earnings Equity attributable to equity holders of the Company Other securities Non‑controlling interest TOTAL EQUITY Consolidated 2019 $000 2018* $000 Note 15 16 17 18 20 13 16 19 20 18 22 23 15 24 25 26 18 28 24 25 18 26 505,687 1,378,751 1,228,241 36,320 – 97,500 301,700 1,199,617 1,179,696 31,609 – – 3,246,499 2,712,622 101,977 108,859 2,010 421 212,997 393,582 411 442 201,962 338,749 1,719,034 1,688,322 2,430,021 2,338,745 5,676,520 5,051,367 – 1,221,261 494,986 19,275 18,971 17,216 7,357 1,131,270 519,698 19,347 20,930 12,398 1,771,709 1,711,000 11,058 1,257,830 125,883 105,096 10,800 1,148,715 113,552 95,676 1,499,867 1,368,743 3,271,576 3,079,743 2,404,944 1,971,624 1,834,594 1,537,502 (249,508) 475,926 (309,126) 496,316 2,061,012 1,724,692 29 343,932 246,932 – – 2,404,944 1,971,624 * The group has initially applied AASB 15 and AASB 9 at 1 August 2018. Under the transition method chosen comparative information is not restated. The consolidated balance sheet is to be read in conjunction with the attached notes. 56 Nufarm Limited Annual Report 2019 Consolidated Statement of Cash Flows For the year ended 31 July 2019 Cash flows from operating activities Profit/(loss) for the period – before tax Adjustments for: Depreciation & amortisation Asset impairment Inventory write down Share of (profits)/losses of associates net of tax Net finance expense Other Movements in working capital items: (Increase)/decrease in receivables (Increase)/decrease in inventories Increase/(decrease) in payables Exchange rate change on foreign controlled entities working capital items Cash generated from operations Interest received Dividends received Interest paid Taxes paid Net operating cash flows Cash flows from investing activities Proceeds from sale of property, plant and equipment Payments for plant and equipment Purchase of businesses, net of cash acquired Purchase of equity investment Proceeds from sale of business and investments Payments for acquired intangibles and major product development expenditure Net investing cash flows Cash flows from financing activities Share issue proceeds (net of costs) Debt establishment transaction costs Proceeds from borrowings Repayment of borrowings Distribution to other securities holders Dividends paid Net financing cash flows Net increase/(decrease) in cash and cash equivalents Cash at the beginning of the year Exchange rate fluctuations on foreign cash balances Cash and cash equivalents at 31 July (a) Note 8 8 8 19 6 14 19 Consolidated 2019 $000 2018* $000 80,949 39,893 171,708 – 12,640 (124) 107,241 (648) (194,552) (61,184) 52,948 73,756 242,734 10,051 65 (112,659) (42,060) 98,131 120,550 70,559 15,310 (78) 107,660 (102) (183,045) (407,253) 316,514 (21,425) 58,583 10,978 12 (109,630) (48,112) (88,169) 2,098 (66,966) 6,084 (69,539) – (778,859) (1,440) – – – (107,672) (123,260) 6 (173,980) (965,574) 25 25 25 29 29 6 296,008 436,454 (2,288) (16,911) 1,350,589 2,201,871 (1,340,229) (1,458,764) (15,162) (18,924) (14,640) (35,580) 269,994 1,112,430 194,145 294,343 17,199 58,687 223,761 11,895 15 505,687 294,343 (a) Represented in 2019 by cash at bank of $505.687 million. * The group has initially applied AASB 15 and AASB 9 at 1 August 2018. Under the transition method chosen comparative information is not restated. The consolidated statement of cash flows is to be read in conjunction with the attached notes. Nufarm Limited Annual Report 2019 57 Consolidated Statement of Changes in Equity For the year ended 31 July 2019 Consolidated Balance at 1 August 2017 Profit/(loss) for the period Other comprehensive income Actuarial gains/(losses) on defined benefit plans Foreign exchange translation differences Gains/(losses) on cash flow hedges taken to equity Gains/(losses) on net investment hedges taken to equity Income tax on share based payment transactions Total comprehensive income/(loss) for the period Transactions with owners, recorded directly in equity Accrued employee share award entitlement Issuance of shares under employee share plans Dividends paid to shareholders Dividend Reinvestment Plan Distributions to Nufarm Step‑up Security holders Remeasurement of non‑controlling interest option Acquisition of remaining interest in non‑controlling interest Contributions of equity net of transaction costs Share capital $000 Translation reserve $000 1,090,197 (316,406) Capital profit reserve $000 33,627 Other reserve $000 (18,962) Retained earnings $000 563,140 Other Non‑controlling Total $000 1,351,596 securities $000 246,932 interest $000 4,395 Total equity $000 1,602,923 – – – – – – – – 7,473 – 2,962 – – – 436,870 – – (24,231) – – – (24,231) – – – – – – 1,249 – Balance at 31 July 2018 1,537,502 (339,388) 33,627 (3,365) 496,316 1,724,692 246,932 Balance at 1 August 2018 Adjustment on initial application of AASB 15 (net of tax) Adjustment on initial application of AASB 9 (net of tax) 1,537,502 (339,388) 33,627 (3,365) 1,724,692 246,932 – – – – *Adjusted balance at 1 August 2018 1,537,502 (339,388) 33,627 (3,365) 475,591 1,703,967 246,932 1,950,899 Profit/(loss) for the period Other comprehensive income Actuarial gains/(losses) on defined benefit plans Foreign exchange translation differences Gains/(losses) on cash flow hedges taken to equity Gains/(losses) on net investment hedges taken to equity Income tax on share based payment transactions Total comprehensive income/(loss) for the period Transactions with owners, recorded directly in equity Accrued employee share award entitlement Issuance of shares under employee share plans Dividends paid to shareholders Dividend Reinvestment Plan Distributions to Nufarm Step‑up Security holders Remeasurement of non‑controlling interest option Acquisition of remaining interest in non‑controlling interest Contributions of equity net of transaction costs – – – – – – – – 346 – 738 – – – 296,008 – – 69,086 – – – 69,086 – – – – – – – – Balance at 31 July 2019 1,834,594 (270,302) 33,627 (12,833) 475,926 2,061,012 343,932 2,404,944 *The group has initially applied AASB 15 and AASB 9 at 1 August 2018. Under the transition method chosen comparative information is not restated. The consolidated statement of changes in equity is to be read in conjunction with the attached notes. 58 Nufarm Limited Annual Report 2019 (15,588) (15,588) (419) (16,007) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 2,028 8,882 (587) 10,323 3,904 (7,889) – – – (379) 9,638 – – – – – – – – – – – – – 54 (10,735) 1,559 (346) 4,980 (10,608) (37,795) (10,763) (7,658) – – – – – – – – – – – – – – – – – – – (19,662) (10,957) 4,980 (24,231) 2,028 8,882 (587) (24,516) 3,904 (416) (37,795) 2,962 (10,763) (379) 3,229 436,870 (7,356) 69,086 54 (10,735) – 89,359 1,559 – (19,662) 738 (10,957) – – 496,316 (7,017) (13,708) (7,017) (13,708) 38,310 38,310 (7,356) (10,681) 30,954 296,008 97,000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 4,980 (24,231) 2,028 8,882 (587) (24,935) 3,904 (416) (38,542) 2,962 (10,763) (379) – 436,870 1,971,624 1,971,624 (7,017) (13,708) 38,310 (7,356) 69,086 54 (10,735) – 89,359 1,559 – (19,662) 738 (10,957) – – 393,008 (419) (747) (3,229) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Share capital $000 1,090,197 Translation reserve $000 (316,406) Capital profit reserve $000 33,627 Other reserve $000 (18,962) Retained earnings $000 563,140 Total $000 Other securities $000 Non‑controlling interest $000 Total equity $000 1,351,596 246,932 4,395 1,602,923 – – – – – – – – – – – – – – – – – – 2,028 8,882 (587) 10,323 3,904 (7,889) – – – (379) 9,638 – (15,588) (15,588) 4,980 – – – – (10,608) – – (37,795) – (10,763) – (7,658) – 4,980 (24,231) 2,028 8,882 (587) (24,516) 3,904 (416) (37,795) 2,962 (10,763) (379) 3,229 436,870 – – – – – – – – – – – – – – Balance at 31 July 2018 1,537,502 (339,388) 33,627 (3,365) 496,316 1,724,692 246,932 Balance at 1 August 2018 Adjustment on initial application of AASB 15 (net of tax) Adjustment on initial application of AASB 9 (net of tax) 1,537,502 (339,388) 33,627 (3,365) – – – – 496,316 (7,017) (13,708) 1,724,692 246,932 (7,017) (13,708) – – *Adjusted balance at 1 August 2018 1,537,502 (339,388) 33,627 (3,365) 475,591 1,703,967 246,932 Consolidated Balance at 1 August 2017 Profit/(loss) for the period Other comprehensive income Actuarial gains/(losses) on defined benefit plans Foreign exchange translation differences Gains/(losses) on cash flow hedges taken to equity Gains/(losses) on net investment hedges taken to equity Income tax on share based payment transactions Total comprehensive income/(loss) for the period Transactions with owners, recorded directly in equity Accrued employee share award entitlement Issuance of shares under employee share plans Dividends paid to shareholders Dividend Reinvestment Plan Distributions to Nufarm Step‑up Security holders Remeasurement of non‑controlling interest option Acquisition of remaining interest in non‑controlling interest Contributions of equity net of transaction costs Profit/(loss) for the period Other comprehensive income Actuarial gains/(losses) on defined benefit plans Foreign exchange translation differences Gains/(losses) on cash flow hedges taken to equity Gains/(losses) on net investment hedges taken to equity Income tax on share based payment transactions Total comprehensive income/(loss) for the period Transactions with owners, recorded directly in equity Accrued employee share award entitlement Issuance of shares under employee share plans Dividends paid to shareholders Dividend Reinvestment Plan Distributions to Nufarm Step‑up Security holders Remeasurement of non‑controlling interest option Acquisition of remaining interest in non‑controlling interest Contributions of equity net of transaction costs – – – – – – – – – – – – – – – – – – – – – – – – – – 7,473 2,962 436,870 346 738 296,008 (24,231) (24,231) 1,249 69,086 69,086 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 54 (10,735) – (10,681) 1,559 (346) – – – – – – (7,356) – – – – 30,954 – – (19,662) – (10,957) – – – (7,356) 69,086 54 (10,735) – 89,359 1,559 – (19,662) 738 (10,957) – – – – – – – – – – – – – – – 296,008 97,000 38,310 38,310 Balance at 31 July 2019 1,834,594 (270,302) 33,627 (12,833) 475,926 2,061,012 343,932 *The group has initially applied AASB 15 and AASB 9 at 1 August 2018. Under the transition method chosen comparative information is not restated. The consolidated statement of changes in equity is to be read in conjunction with the attached notes. (419) (16,007) – – – – – (419) – – (747) – – – (3,229) – – – – – – – – – – – – – – – – – – – – – – 4,980 (24,231) 2,028 8,882 (587) (24,935) 3,904 (416) (38,542) 2,962 (10,763) (379) – 436,870 1,971,624 1,971,624 (7,017) (13,708) 1,950,899 38,310 (7,356) 69,086 54 (10,735) – 89,359 1,559 – (19,662) 738 (10,957) – – 393,008 2,404,944 Nufarm Limited Annual Report 2019 59 Notes to the Consolidated Financial Statements 1. Reporting entity Nufarm Limited (the ‘company’) is a company limited by shares and domiciled in Australia that is listed on the Australian Securities Exchange. The address of the company’s registered office is 103‑105 Pipe Road, Laverton North, Victoria, 3026. The consolidated financial statements of the company as at and for the year ended 31 July 2019 comprise the company and its subsidiaries (together referred to as the ‘group’ and individually as ‘group entities’) and the group’s interest in associates and jointly controlled entities. The group is a for‑profit entity and is primarily involved in the manufacture and sale of crop protection products used by farmers to protect crops from damage caused by weeds, pests and disease, and seed treatment products. 2. Basis of preparation (a) Statement of compliance The consolidated financial statements are general purpose financial statements which have been prepared in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (IFRSs) adopted by the International Accounting Standards Board (IASB). This is the first set of the group’s annual financial statements in which AASB 15 Revenue from Contracts with Customers and AASB 9 Financial Instruments have been applied. Changes to significant accounting policies are described in note 3. The consolidated financial statements were authorised for issue by the Board of Directors on 30 September 2019. (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for derivative financial instruments which are measured at fair value, and defined benefit fund obligations that are measured as the present value of the defined benefit obligation at the reporting date less the fair value of the pension plan’s assets. The methods used to measure fair values are discussed further in note 4. (c) Functional and presentation currency These consolidated financial statements are presented in Australian dollars, which is the company’s functional currency. The company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and, in accordance with that Instrument, all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated. (d) Use of estimates and judgements The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant impact on the amount recognised in the financial statements are described below. (i) Business combinations Fair valuing assets and liabilities acquired in a business combination involves the group making assumptions about the timing of cash inflows and outflows, growth assumptions, discount rates and cost of debt. (ii) Impairment testing The group determines whether goodwill and intangibles with indefinite useful lives are impaired on an annual basis or at each reporting date if required, using a value in use (VIU) or a fair value less cost to dispose (FVLCD) methodology to estimate the recoverable amount of cash generating units. VIU is determined as the present value of the estimated future cash flows expected to arise from the continued use of the asset in its present form and its eventual disposal. 60 Nufarm Limited Annual Report 2019 2. Basis of preparation (continued) (d) Use of estimates and judgements (continued) (ii) Impairment testing (continued) VIU is determined by applying assumptions specific to the group’s continued use and cannot consider future development. The determination of recoverable value often requires the estimation and discounting of future cash flows which is based on information available at balance date such as expected revenues from products, the return on assets, future costs, growth rates, applicable discount rates and useful lives. FVLCD is an estimate of the amount that a market participant would pay for an asset or Cash Generating Unit (CGU), less the cost to dispose. Fair value is generally determined using independent market assumptions to calculate the present value of the estimated future cash flows expected to arise from the continued use of the asset, and its eventual sale where a market participant may take a consistent view. Cash flows are discounted using an appropriate discount rate to arrive at a net present value of the asset which is compared against the asset’s carrying value. These estimates are subject to risk and uncertainty that may be beyond the control of the group; hence there is a possibility that changes in circumstances will materially alter projections, which may impact the recoverable amount of assets at each reporting date. Other non‑current assets are also assessed for impairment indicators. Refer to note 23 for key assumptions made in determining the recoverable amounts of the CGU’s. (iii) Income taxes Uncertain tax matters: The group is subject to income taxes in Australia and overseas jurisdictions. There are many transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain. The group has exercised judgement in the application of tax legislation and its interaction with income tax accounting principles. Where the final tax outcome of these matters is different from the amounts initially recorded, such differences will impact the current and deferred tax provisions recognised on the balance sheet and the amount of other tax losses and temporary differences not yet recognised in the period in which the tax determination is made. Deferred tax: Deferred tax assets are recognised only to the extent that it is probable that future taxable profits will be available against which the assets can be utilised. Judgement is required by the group to determine the likely timing and the level of future taxable income. The group assesses the recoverability of recognised and unrecognised deferred taxes including losses in Australia and overseas using assumptions and projected cashflows. Deferred tax liabilities arising from temporary differences in investments, caused principally by retained earnings held in foreign tax jurisdictions, are recognised unless repatriation of retained earnings can be controlled and are not expected to occur in the foreseeable future. (iv) Defined benefit plans A liability in respect of defined benefit pension plans is recognised in the balance sheet, and is measured as the present value of the defined benefit obligation at the reporting date less the fair value of the pension plan’s assets. The present value of the defined benefit obligation is based on expected future payments which arise from membership of the fund at the reporting date, calculated annually by independent actuaries and requires the exercise of judgement in relation to assumptions for expected future salary levels, long term price inflation and bond rates, experience of employee departures and periods of service. Refer to note 26 for details of the key assumptions used in determining the accounting for these plans. Nufarm Limited Annual Report 2019 61 Notes to the Consolidated Financial Statements (continued) 2. Basis of preparation (continued) (d) Use of estimates and judgements (continued) (v) Working capital In the course of normal trading activities, the group uses judgement in establishing the carrying value of various elements of working capital, which is principally inventories and trade receivables. Judgement is required to estimate the provision for obsolete or slow moving inventories and bad and doubtful receivables. In estimating the provision for obsolete or slow moving inventories the group considers the net realisable value of inventory using estimated market price less cost to sell. In estimating the provision for bad and doubtful receivables the group measures the expected credit losses (ECLs) using key assumptions to determine a probability weighted basis including the geographical location’s specific circumstances. Actual expenses in future periods may be different from the provisions established and any such differences would impact future earnings of the group. (vi) Capitalised development costs Development expenditure is recognised as an intangible asset when the group judges and can demonstrate: (a) the technical feasibility of completing the intangible asset so that it will be available for use; (b) intention to complete; (c) ability to use the asset; and (d) how the asset will generate future economic benefits and the ability to measure reliably the expenditure during development. The criteria above are derived from independent valuations and predicated on estimates and judgments including future cash flows, revenue streams and value in use calculations. Estimates and assumptions may change as new information becomes available. If, after having commenced the development activity, a judgement is made that the intangible asset is impaired, the appropriate amount will be written off to the income statement. (vii) Intellectual property Intellectual property consists of product registrations, product access rights, trademarks, task force seats, product distribution rights and product licences acquired from third parties. The group assesses intellectual property to have a finite life or indefinite life. Changes to estimates related to the useful life of intellectual property are accounted for prospectively and may affect amortisation rates and intangible asset carrying values. (e) Reclassification Where applicable comparatives are adjusted to present them on the same basis as current period figures. 3. Significant accounting policies Except as described immediately below, the group’s accounting policies have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by group entities. Changes in significant accounting policies AASB 15 Revenue from Contracts with Customers AASB 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced AASB 118 Revenue and related interpretations. AASB 15 was effective for the group beginning on 1 August 2018. Under AASB 15, revenue is recognised when a customer obtains control of the goods or services. Determining the timing of the transfer of control requires judgement. Revenue with customers is allocated between performance obligations and recognised as each performance obligation is met. The group generates sales revenue primarily from the obligation to supply products to customers, and in some cases there is a secondary obligation for delivery and tolling services. 62 Nufarm Limited Annual Report 2019 3. Significant accounting policies (continued) Changes in significant accounting policies (continued) AASB 15 Revenue from Contracts with Customers (continued) Sales contracts include variable consideration such as rebates and sales incentives to customers. Variable consideration is only included in the transaction price if, and to the extent that, it is highly probable that its inclusion will not result in a significant revenue reversal in the future when the uncertainty has been resolved. The seed technologies segment receives royalty revenue from growers for certain varieties of seed. Revenue is recognised at the later of when the sales or usage occurs and the performance obligation is satisfied, which would be when the harvest occurs and the royalty is paid. Under the previous accounting policy, royalty revenue was estimated and accrued at the point the seed was sold. The adjustment to derecognise accrued revenue related to the royalties has resulted in a reduction to accrued receivables of $7.202 million (in trade and other receivables) and a corresponding entry to retained earnings ($7.017 million) and deferred tax asset ($0.185 million). AASB 15 did not have a significant impact on the group’s accounting policies with respect to other revenue streams (refer to note 3 (l)). The group has adopted AASB 15 using the cumulative transition approach where transitional adjustments are recognised in retained earnings at 1 August 2018, without adjustment of the 2018 comparatives. In addition, the disclosure requirements in AASB 15 have not generally been applied to comparative information. AASB 9 Financial Instruments AASB 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non‑financial items. It replaced AASB 139 Financial Instruments: Recognition and Measurement. AASB 9 was effective for the group beginning on 1 August 2018. i) Impairment of financial assets AASB 9 replaces the ‘incurred loss’ model in AASB 139 with a forward‑looking ‘expected credit loss’ (ECL) model. The group measures loss allowances at an amount equal to lifetime ECLs. The group applied judgement as to how changes in economic factors affect ECLs, and was determined on a probability‑weighted basis. Reasonable and supportable information was considered, that was relevant and available without undue cost or effort and included both qualitative and quantitative information based on historical experiences, and also forward looking information. The application of AASB 9’s impairment requirements is an additional loss allowance required of $17.401 million with a corresponding entry to retained earnings ($13.708 million) and deferred tax assets ($3.693 million). Refer to note 31. The group has used the exemption to not restate comparative information for prior periods with respect to classification and measurement (including impairment) changes and accordingly there is no restatement required for 2018. ii) Classification and measurement of financial assets and liabilities AASB 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVTPL). The classification of financial assets under AASB 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. AASB 9 eliminates the previous AASB 139 categories of held to maturity, loans and receivables and available for sale. AASB 9 largely retains the existing requirements in AASB 139 for the classification and measurement of financial liabilities. Nufarm Limited Annual Report 2019 63 Notes to the Consolidated Financial Statements (continued) 3. Significant accounting policies (continued) Changes in significant accounting policies (continued) AASB 9 Financial Instruments (continued) The adoption of AASB 9 has not had a significant effect on the group’s accounting policies related to financial liabilities and derivative financial instruments (for derivatives that are used as hedging instruments). For an explanation of how the group classifies and measures financial instruments and accounts for related gains and losses under AASB 9 see note 3 (c). New standards and interpretations not yet adopted A number of new standards and amendments to standards are effective for annual periods beginning on or after 1 August 2019. The group has not early adopted any amendments, standards or interpretations that have been issued but are not yet mandatory in preparing these consolidated financial statements. Of those standards that are not yet effective, AASB 16 Leases is expected to have a material impact on the group’s consolidated financial statements in the period of initial application. AASB 16 Leases The standard is effective for the group beginning on 1 August 2019. The group has assessed the estimated impact that initial application of AASB 16 will have on its consolidated financial statements, as described below. The actual impacts of adopting the standard on 1 August 2019 may change because – the new accounting policies are subject to change until the group presents its first consolidated financial statements that include the date of initial application. AASB 16 introduces a single, on‑balance lease sheet accounting model for lessees. As lessee, the group will recognise a right‑of‑use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are optional exemptions for short‑term leases and leases of low value. In addition, the nature of expenses related to those leases will change as AASB 16 replaces the straight‑line operating lease expense with a depreciation charge for right‑of‑use assets and interest expense on lease liabilities. EBITDA, as defined in note 5 operating segments, will increase as the operating lease cost is charged against EBITDA under AASB 117 Leases while under the new standard will be included in depreciation and interest which are excluded from EBITDA. Based on information currently available, the group estimates that as at 1 August 2019 it will recognise: • additional lease liabilities of between $140.0 million and $154.0 million • right of use assets of between $113.0 million and $127.0 million • deferred tax of approximately $5.0 million No significant impact is expected for the group’s finance leases. The group plans to apply AASB 16 initially on 1 August 2019 using the modified retrospective approach. Therefore the cumulative effect of adopting AASB 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 August 2019, with no restatement of comparative information. AASB Interpretation 23 Uncertainty over Income Tax Treatment The Interpretation provides a framework to consider, recognise and measure the impact of tax uncertainties. It specifically addresses how to determine the unit of account and provides recognition and measurement guidance to be applied such as: • how taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates are determined; and • consideration of changes in facts and circumstances. The Interpretation is effective for the group on 1 August 2019, with certain transition relief available. Since the group operates in a complex multinational tax environment, applying the Interpretation may affect its consolidated financial statements. 64 Nufarm Limited Annual Report 2019 3. Significant accounting policies (continued) (a) Basis of consolidation (i) Business combinations Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the group. The group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. In assessing control, the group takes into consideration potential voting rights that currently are exercisable. The group measures goodwill at the acquisition date as: • the fair value of the consideration transferred; plus • the recognised amount of any non‑controlling interests in the acquiree; plus if the business combination is achieved in stages, the fair value of the existing equity interest in the acquiree; less • the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss. The consideration transferred does not include amounts related to the settlement of pre‑existing relationships. Such amounts are generally recognised in profit or loss. Costs related to the acquisition, other than those associated with the issue of debt or equity securities, that the group incurs in connection with a business combination are expensed as incurred. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. (ii) Non‑controlling interests (NCI) NCI are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date. When a written put option is established with non‑controlling shareholders in an existing subsidiary, then the group will recognise a liability for the present value of the exercise price of the option. When the NCI still has present access to the returns associated with the underlying ownership interest, NCI continues to be recognised and accordingly the liability is considered a transaction with owners and recognised via a reserve. Any changes in the carrying value of the put liability over time is recognised directly in reserves. (iii) Subsidiaries Subsidiaries are entities controlled by the group. The group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. When the group loses control over a subsidiary it derecognises the assets and liabilities of the subsidiary and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit and loss. Any interest retained is measured at fair value when control is lost. Changes in the group’s interest in a subsidiary that do not result in a loss of control are accounted for as an equity transaction. The accounting policies of subsidiaries have been changed where necessary to align them with the policies adopted by the group. Losses applicable to the NCI in a subsidiary are allocated to the NCI even if doing so causes the NCI to have a deficit balance. (iv) Investments in equity accounted investees The group’s interests in equity‑accounted investees comprise interests in associates and joint ventures. Nufarm Limited Annual Report 2019 65 Notes to the Consolidated Financial Statements (continued) 3. Significant accounting policies (continued) (a) Basis of consolidation (continued) (iv) Investments in equity accounted investees (continued) Associates are those entities in which the group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the group has joint control, whereby the group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities. Investments in associates and joint ventures are accounted for using the equity method and are initially recognised at cost, which includes transaction costs. The group’s investment includes goodwill identified on acquisition, net of any accumulated impairment losses. Subsequent to initial recognition, the consolidated financial statements include the group’s share of the income and expenses and equity movements of the investees after adjustments to align the accounting policies of the investees with those of the group, until the date on which significant influence or joint control ceases. On loss of significant influence the investment is no longer equity accounted and is revalued to fair value. (v) Transactions eliminated on consolidation Intra‑group balances and transactions, and any unrealised income and expenses arising from intra‑group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. (b) Foreign currency (i) Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of group entities at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. Non‑monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss. Non‑monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign currency gains and losses are included in net financing costs. (ii) Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to Australian dollars at exchange rates at the reporting date. The income and expenses of foreign operations are translated to Australian dollars at exchange rates at the dates of the transactions. Foreign currency differences are recognised in other comprehensive income and accumulated in translation reserve except to the extent that the translation difference is allocated to NCI. When a foreign operation is disposed of, in part or in full, the relevant amount in the translation reserve is transferred to profit or loss as part of the profit or loss on disposal. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely in the foreseeable future, foreign exchange gains and losses arising from such a monetary item are considered to form part of a net investment in a foreign operation and are recognised in other comprehensive income, and are presented within equity in the translation reserve. (c) Financial instruments A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity. (i) Non‑derivative financial assets Financial assets are classified, at initial recognition, as subsequently measured at amortised cost, fair value through other comprehensive income (FVOCI), and fair value through profit or loss (FVTPL). 66 Nufarm Limited Annual Report 2019 3. Significant accounting policies (continued) (c) Financial instruments (continued) (i) Non‑derivative financial assets (continued) The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the group’s business model for managing them. With the exception of trade receivables, the group initially measures a financial asset at its fair value plus transaction costs on trade date at which the group becomes a party to the contractual provisions of the instrument. Trade receivables that do not contain a significant financing component are measured at the transaction price determined under AASB 15. Refer to note 3 (l). The group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risk and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the group has the legal right to offset the amounts and intends to settle on a net basis or to realise the asset and settle the liability simultaneously. Subsequent measurement For purposes of subsequent measurement, financial assets are classified in four categories: • Amortised cost • Fair value through OCI with recycling of cumulative gains and losses (debt instruments) • Fair value through OCI with no recycling of cumulative gains and losses upon derecognition (equity instruments) • Fair value through profit or loss Financial assets at amortised cost This category is the most relevant to the group. Financial assets are measured at amortised cost if both of the following conditions are met and is not designated as FVTPL: • The financial asset is held within a business model with the objective to hold financial assets in order to collect contractual cash flows; and • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets at amortised cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognised in profit or loss when the asset is derecognised, modified or impaired. The group’s financial assets at amortised cost includes trade receivables. Financial assets at fair value through OCI (FVOCI) – debt instruments The Group measures debt instruments at fair value through OCI if both of the following conditions are met and is not designated as FVTPL: • The financial asset is held within a business model with the objective of both holding to collect contractual cash flows and selling; and • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Interest income, foreign exchange revaluation and impairment losses or reversals are recognised in the statement of profit or loss and computed in the same manner as for financial assets measured at amortised cost. The remaining fair value changes are recognised in OCI. Upon derecognition, the cumulative fair value change recognised in OCI is recycled to profit or loss. The group does not currently have any financial assets classified as FVOCI. Nufarm Limited Annual Report 2019 67 Notes to the Consolidated Financial Statements (continued) 3. Significant accounting policies (continued) (c) Financial instruments (continued) (i) Non‑derivative financial assets (continued) Financial assets at fair value through OCI (FVOCI) – equity instruments Upon initial recognition, the group can elect to classify irrevocably its equity investments as equity instruments designated at fair value through OCI when they meet the definition of equity under AASB 132 Financial Instruments: Presentation and are not held for trading. The classification is determined on an instrument‑by‑instrument basis. Gains and losses on these financial assets are never recycled to profit or loss. Dividends are recognised as other income in the statement of profit or loss when the right of payment has been established, except when the group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, gains are recorded in OCI. The Group has elected to classify irrevocably its non‑listed equity investments under this category. Financial assets at fair value through profit or loss (FVTPL) A financial asset is classified as at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the group manages such investments and makes purchase and sale decisions based on their fair value in accordance with the group’s documented risk management or investment strategy. Financial assets with cash flows that are not ‘solely payments of principal and interest’ (SPPI) are classified and measured at fair value through profit or loss, irrespective of the business model. In assessing whether the contractual cash flows are SPPI, the group considers the contractual terms of the instrument by considering events, terms and prepayment/extension features that could change the timing or amount of contractual cash flows such that it would not meet this condition. Upon initial recognition attributable transaction costs are recognised in profit and loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss. Financial assets designated at fair value through profit or loss comprise equity securities. (ii) Non‑derivative financial liabilities At initial recognition, financial liabilities are classified at FVTPL, loans and borrowings, or payables, as appropriate. All financial liabilities are recognised initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs. The group initially recognises debt securities and subordinated liabilities on the date they are originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date at which the group becomes a party to the contractual provisions of the instrument. The group derecognises a financial liability when its contractual obligations are discharged or cancelled or expired. Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only when, the group has the legal right to offset the amounts and intends to settle on a net basis or to realise the asset and settle the liability simultaneously. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest rate method. This includes trade payables that represent liabilities for goods and services provided to the group prior to the end of the year which are unpaid. The group has the following non‑derivative financial liabilities: loans and borrowings, bank overdrafts and trade and other payables. 68 Nufarm Limited Annual Report 2019 3. Significant accounting policies (continued) (c) Financial instruments (continued) (iii) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any related income tax benefit. Dividends on ordinary shares are recognised as a liability in the period in which they are declared. (iv) Other securities Sumitomo preference securities The Sumitomo Preference Securities (SPS) are classified as non‑controlling equity instruments as no voting rights have been attached to the SPS. After 24 months the SPS may be exchanged for Nufarm ordinary shares. After‑tax distributions thereon are recognised as distributions within equity. Further details can be found in note 29. Nufarm step‑up securities The Nufarm Step‑up Securities (NSS) are classified as non‑controlling equity instruments as they are issued by a subsidiary. After‑tax distributions thereon are recognised as distributions within equity. Further details can be found in note 29. (v) Derivative financial instruments, including hedge accounting 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 the end of each reporting period. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The full fair value of a hedging derivative is classified as a non‑current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. The group designates certain derivatives as either: • hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedges) • hedges of a particular risk associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions (cash flow hedges); or • hedges of a net investment in a foreign operation (net investment hedges). The group documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. Before 1 August 2018, the documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the Group will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated. Beginning 1 August 2018, the documentation includes identification of the hedging instrument, the hedged item, the nature of the risk being hedged and how the Group will assess whether the hedging relationship meets the hedge effectiveness requirements (including the analysis of sources of hedge ineffectiveness and how the hedge ratio is determined). A hedging relationship qualifies for hedge accounting if it meets all of the following effectiveness requirements: • There is an economic relationship’ between the hedged item and the hedging instrument. • The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship. • The hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item. Nufarm Limited Annual Report 2019 69 Notes to the Consolidated Financial Statements (continued) 3. Significant accounting policies (continued) (c) Financial instruments (continued) (v) Derivative financial instruments, including hedge accounting (continued) Hedges that meet all the qualifying criteria for hedge accounting are accounted for, as described below: Fair value hedge Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in profit or loss, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. The gain or loss relating to the effective portion of interest rate swaps hedging fixed rate borrowings is recognised in profit or loss within finance costs, together with changes in the fair value of the hedged fixed rate borrowings attributable to interest rate risk. The gain or loss relating to the ineffective portion is recognised in profit or loss within other income or other expenses. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised to profit or loss over the period to maturity using a recalculated effective interest rate. Cash flow hedge The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss within other income or other expense. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss (for instance when the forecast sale that is hedged takes place). The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in profit or loss within ‘finance costs’. The gain or loss relating to the effective portion of forward foreign exchange contracts hedging export sales is recognised in profit or loss within ‘sales’. However, when the forecast transaction that is hedged results in the recognition of a non‑financial asset (for example, inventory or fixed assets) the gains and losses previously deferred in equity are reclassified from equity and included in the initial measurement of the cost of the asset. The deferred amounts are ultimately recognised in profit or loss as cost of goods sold in the case of inventory, or as depreciation or impairment in the case of fixed assets. When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to profit or loss. Net investment hedge Hedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income and accumulated in reserves in equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss within other income or other expenses. Gains and losses accumulated in equity are reclassified to profit or loss when the foreign operation is partially disposed of or sold. Derivatives that do not qualify for hedge accounting Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any derivative instrument that does not qualify for hedge accounting are recognised immediately in profit or loss. (d) Property, plant and equipment (i) Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. 70 Nufarm Limited Annual Report 2019 3. Significant accounting policies (continued) (d) Property, plant and equipment (continued) (i) Recognition and measurement (continued) Cost includes expenditure that is directly attributable to the acquisition of the asset. The cost of self‑constructed assets includes the cost of materials and direct labour, any other costs directly attributable to bringing the asset to a working condition for its intended use, and the costs of dismantling and removing the items and restoring the site on which they are located, and capitalised borrowing costs. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items (major components) of property, plant and equipment. Gains and losses on disposal of an item of property, plant and equipment are determined by comparing the proceeds from disposal with the carrying amount of property, plant and equipment and are recognised net in profit or loss. (ii) Subsequent costs The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the group and its cost can be measured reliably. The carrying amount of the replaced part is derecognised. The costs of day‑to‑day servicing of property, plant and equipment are recognised in profit or loss as incurred. (iii) Depreciation Depreciation is calculated over the depreciable amount, which is the cost of an asset, less its residual value. Depreciation is recognised in profit or loss on a straight‑line basis over the estimated useful lives of each part of an item of property, plant and equipment, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Leased assets are depreciated over the shorter of the lease term and their useful lives, unless it is reasonably certain that the group will obtain ownership by the end of the lease term. Land is not depreciated. The estimated useful lives for the current and comparative periods are as follows: • buildings 15‑50 years • leasehold improvements 5 years • plant and equipment 10‑15 years • motor vehicles • computer equipment 5 years 3 years Depreciation methods, useful lives and residual values are reassessed at each reporting date. (e) Intangible assets (i) Goodwill Goodwill that arises upon the acquisition of business combinations is included in intangible assets. Subsequent to initial recognition, goodwill is measured at cost less accumulated impairment losses. In respect of equity accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and an impairment loss on such an investment is not allocated to any asset, including goodwill, that forms part of the carrying amount of the equity accounted investee. (ii) Research and development Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is recognised in profit or loss when incurred. Nufarm Limited Annual Report 2019 71 Notes to the Consolidated Financial Statements (continued) 3. Significant accounting policies (continued) (e) Intangible assets (continued) (ii) Research and development (continued) Development activities involve a plan or design for the production of new or substantially improved products and processes. Development expenditure is capitalised only if development costs can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the group has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of materials, direct labour and overhead costs that are directly attributable to preparing the asset for its intended use and capitalised borrowing costs. Development expenditure that does not meet the above criteria is recognised in profit or loss as incurred. Capitalised development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses. (iii) Intellectual property Intellectual property consists of product registrations, product access rights, trademarks, task force seats, product distribution rights and product licences acquired from third parties. Intellectual property is assessed as to whether it has a finite or indefinite life. Finite life intellectual property is amortised over its useful life but not longer than 30 years. Intellectual property intangibles acquired by the group are measured at cost less accumulated amortisation and impairment losses. Expenditure on internally generated goodwill and brands is expensed when incurred. (iv) Other intangible assets Other intangible assets that are acquired by the group, which have finite useful lives, are measured at cost less accumulated amortisation and accumulated impairment losses. (v) Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure is recognised in profit or loss when incurred. (vi) Amortisation Amortisation is calculated over the cost of the asset, less its residual value. With the exception of goodwill, intangibles with a finite life are amortised on a straight‑line basis in profit and loss over the estimated useful lives of the intangible assets from the date that they are available for use, since this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. The estimated useful life for intangible assets with a finite life, for the current and comparative periods, are as follows: • capitalised development costs 5 to 30 years • intellectual property – finite life over the useful life and not more than 30 years • computer software 3 to 7 years Amortisation methods, useful lives and residual values are reassessed at each reporting date. (f) Leases Operating leases are not capitalised and payments made are recognised in profit or loss on a straight‑line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Assets held under lease, which result in the group receiving substantially all the risks and rewards of ownership are capitalised as property, plant and equipment at the lower of the fair value of the asset or the estimated present value of the minimum lease payments, with a corresponding lease liability included within loans and borrowings. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the lease adjustment is confirmed. 72 Nufarm Limited Annual Report 2019 3. Significant accounting policies (continued) (g) Inventories Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first‑in first‑out principle and includes expenditure incurred in acquiring the inventories, production or conversion costs and other costs incurred in bringing them to their existing location and condition. In the case of manufactured inventories and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. (h) Impairment (i) Non‑derivative financial assets The group recognises an allowance for expected credit losses (ECLs) for all financial assets at amortised cost and debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms. For trade receivables, the group applies a simplified approach in calculating ECLs. Therefore, the group does not track changes in credit risk, but instead recognises a loss allowance based on lifetime ECLs at each reporting date. The group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward‑looking factors specific to the debtors and the economic environment. The group considers a financial asset to be in default when contractual payments are 90 days past due. However, in certain cases, the group may also consider a financial asset to be in default when internal or external information indicates that the group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows. Objective evidence of impairment includes default or delinquency by a debtor, indications that a debtor will enter bankruptcy, and, in the case of an investment in an equity security, a significant or prolonged decline in its fair value. Loss Allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets. For debt securities at FVOCI, the loss allowance is charged to profit or loss and is recorded in OCI. (ii) Non‑financial assets The carrying amounts of the group’s non‑financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated at each reporting date. The recoverable amount of an asset or cash‑generating unit is the greater of its value in use and its fair value less costs of disposal. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre‑tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash‑generating unit”). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash‑generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash‑generating unit exceeds its estimated recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash‑generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of other assets in the unit on a pro‑rata basis. Nufarm Limited Annual Report 2019 73 Notes to the Consolidated Financial Statements (continued) 3. Significant accounting policies (continued) (h) Impairment (continued) (ii) Non‑financial assets (continued) An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Goodwill that forms part of the carrying amount of an investment in an associate or joint venture is not recognised separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate or joint venture is tested for impairment as a single asset when there is objective evidence that the investment in an associate or joint venture may be impaired. Refer to use of estimates and judgements note 2 and intangibles note 23 for further information. (i) Assets held for sale Assets, or disposal groups comprising assets and liabilities, that are expected to be recovered primarily through sale rather than continuing use are classified as held for sale. Immediately before classification as held for sale, the assets, or components of a disposal group, are remeasured in accordance with the group’s accounting policies. Thereafter generally the assets, or disposal group, are measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets and employee benefit assets, which continue to be measured in accordance with the group’s accounting policies. Impairment losses on initial classification as held for sale and subsequent gains or losses on remeasurement are recognised in profit or loss. Gains are not recognised in excess of any cumulative impairment loss. Intangible assets and property, plant and equipment once classified as held for sale or distribution are not amortised or depreciated. In addition, equity accounting of equity accounted investees ceases once classified as held for sale or distribution. (j) Employee benefits (i) Defined contribution plans A defined contribution plan is a post‑employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised as an employee benefit expense in profit or loss in the periods during which services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. (ii) Defined benefit plans The group’s net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any assets. The calculation of defined benefit obligation is performed annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the group, the recognised asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value economic benefits, consideration is given to any applicable minimum funding requirements. 74 Nufarm Limited Annual Report 2019 3. Significant accounting policies (continued) (j) Employee benefits (continued) (ii) Defined benefit plans (continued) Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan asset (excluding interest) and the effect of the asset ceiling (if any, excluding interest), are recognised immediately in other comprehensive income (OCI). The group determines the net interest expense (income) on the net defined benefit liability (asset) for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then‑net defined benefit liability (asset), taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Net interest expense and other expenses related to defined benefit plans are recognised in profit and loss. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The group recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs. (iii) Other long‑term employee benefits The group’s net obligation in respect of long‑term employee benefits, other than defined benefit plans, is the amount of future benefit that employees have earned in return for their service in the current and prior periods plus related on‑costs; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The discount rate is the yield at the reporting date on corporate bonds that have maturity dates approximating the terms of the group’s obligations. The calculation is performed using the projected unit credit method. Any actuarial gains or losses are recognised in profit or loss in the period in which they arise. (iv) Termination benefits Termination benefits are recognised as an expense when the group is demonstrably committed, without a realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognised as an expense if the group has made an offer encouraging voluntary redundancy, it is probable that the offer will be accepted and the number of acceptances can be estimated reliably. If benefits are payable more than twelve months after the reporting period, then they are discounted to their present value. (v) Short‑term benefits Short‑term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid under short‑term cash bonus or profit‑sharing plans if the group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. (vi) Share‑based payment transactions The group has a global share plan for employees whereby matching and loyalty shares are granted to employees. The fair value of matching and loyalty shares granted is recognised as an expense in the profit or loss over the respective service period, with a corresponding increase in equity, rather than as the matching and loyalty shares to note 27 for details of the global share plan. The group has a short term incentive plan (STI) available to key executives, senior managers and other managers globally. A pre‑determined percentage of the STI is paid in cash with the remainder deferred into shares which have either a one or two year vesting period. The cash portion is recognised immediately as an expense at the time of performance testing. The expense relating to deferred shares is expensed over the vesting period. Refer to note 27 for further details on this plan. The group has a long term incentive plan (LTIP) which is available to key executives and certain selected senior managers. Performance rights have been granted to acquire ordinary shares in the company subject to the achievement of global performance hurdles. The expense in relation to the LTIP is recognised over the vesting period of 3 years. Refer to note 27 for further details on this plan. Nufarm Limited Annual Report 2019 75 Notes to the Consolidated Financial Statements (continued) 3. Significant accounting policies (continued) (k) Provisions A provision is recognised if, as a result of a past event, the group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre‑tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a finance cost. A provision for restructuring is recognised when the group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses are not provided for. (l) Revenue from contracts with customers The group has initially applied AASB 15 from 1 August 2018. The effect of initial application is described in Note 3. Revenue from contracts with customers is recognised when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services. The Group has generally concluded that it is the principal in its revenue arrangements, because it typically controls the goods or services before transferring them to the customer. The disclosures of significant accounting judgements, estimates and assumptions relating to revenue from contracts with customers are provided in Note 3. (i) Goods sold Prior to 1 August 2018 Revenue from the sale of goods is measured at the fair value of the consideration received or receivable, net of returns, trade discounts and volume rebates. Revenue is recognised when persuasive evidence of an arrangement exists, usually in the form of an executed sales agreement, that the significant risks and rewards of ownership have been transferred to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods and the amount of revenue can be measured reliably. If it is probable that discounts will be granted and the amount can be measured reliably, then the discount is recognised as a reduction of revenue as the sales are recognised. After 1 August 2018 Revenue from sale of goods is recognised at the point in time when control of the asset is transferred to the customer, generally on delivery of the goods. The Group considers whether there are other promises in the contract that are separate performance obligations to which a portion of the transaction price needs to be allocated. In determining the transaction price for the sale of goods, the group considers the effects of variable consideration, the existence of significant financing components, non‑cash consideration, and consideration payable to the customer (if any). ii) Variable consideration If the consideration in a contract includes a variable amount, the group estimates the amount of consideration to which it will be entitled in exchange for transferring the goods to the customer. The variable consideration is estimated at contract inception and constrained until it is highly probable that a significant revenue reversal in the amount of cumulative revenue recognised will not occur when the associated uncertainty with the variable consideration is subsequently resolved. Some contracts for the sale of certain products provide customers with a right of return and volume rebates. The rights of return and volume rebates give rise to variable consideration. Rights of return Certain contracts provide a customer with a right to return the goods within a specified period. The group uses the expected value method, including applying any constraints, to determine variable consideration to which the group will be entitled. For goods that are expected to be returned, instead of revenue, the group recognises a refund liability. A right of return asset (and corresponding adjustment to cost of sales) is also recognised for the right to recover products from a customer. 76 Nufarm Limited Annual Report 2019 3. Significant accounting policies (continued) (l) Revenue from contracts with customers (continued) ii) Variable consideration (continued) Rebates and sales incentives The group provides rebates and sales incentives to certain customers once thresholds specified in the contract are met or exceeded. Rebates are offset against amounts payable by the customer. To estimate the variable consideration for the expected future rebates, the group applies the requirements on constraining estimates of variable consideration and recognises a refund liability for the expected future rebates. iii) End point royalties The group receives royalty revenue from growers for certain varieties of seed. Before 1 August 2018, royalty revenue was estimated and accrued at the point the seed was sold. After 1 August 2018, sales or usage based royalties are recognised as revenue at the later of when the sales or usage occurs and the performance obligation is satisfied, which would be when the harvest occurs and the royalty is paid. iv) Significant financing components The group may receive short‑term advances from its customers. Using the practical expedient in AASB 15, the Group does not adjust the promised amount of consideration for the effects of a significant financing component as it is expected, at contract inception, that the period between the transfer of the good and when the customer pays for that good will be one year or less. (m) Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Bank overdrafts that are repayable on demand and form an integral part of the group’s cash management are included as a component of cash and cash equivalents for the purposes of the statement of cash flows. (n) Finance income and finance costs The group’s finance income and finance costs include the following: interest income, interest expense, dividends on preference shares issued classified as financial liabilities, financial assets, the net gain or loss on financial assets at fair value through profit or loss, the foreign currency gain or loss on financial assets and financial liabilities, the gain on the remeasurement to fair value of any pre‑existing interest in an acquiree in a business combination, the fair value loss on contingent consideration classified as a financial liability, impairment losses recognised on financial assets (other than trade receivables), the net gain or loss on hedging instruments that are recognised in profit or loss, and the reclassification of net gains previously recognised in other comprehensive income. Interest income or expense is recognised using the effective interest method. Finance costs are expensed as incurred except where they relate to the financing of construction or development of qualifying assets. (o) Income tax Income tax expense comprises current and deferred tax. Current and deferred taxes are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Nufarm Limited Annual Report 2019 77 Notes to the Consolidated Financial Statements (continued) 3. Significant accounting policies (continued) (o) Income tax (continued) Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss, and differences relating to investments in subsidiaries and jointly controlled entities to the extent that they will probably not reverse in the foreseeable future. In addition, deferred tax is not recognised for taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. A deferred tax asset is recognised for unused tax losses, tax credits and deductible temporary differences, to the extent that it is probable that future taxable profits will be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of cash dividends are recognised at the same time as the liability to pay the related dividend is recognised. The group does not distribute non‑cash assets as dividends to its shareholders. (i) Tax consolidation The company and its wholly‑owned Australian resident entities are part of a tax‑consolidated group. As a consequence, all members of the tax‑consolidated group are taxed as a single entity. The head entity within the tax‑consolidated group is Nufarm Limited. Current tax expense/benefit, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax‑consolidated group are recognised in the separate financial statements of the members of the tax‑consolidated group using the ‘separate taxpayer within group’ approach by reference to the carrying amounts of assets and liabilities in the separate financial statements of each entity and the tax values applying under tax consolidation. Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries are assumed by the head entity in the tax‑consolidated group and are recognised by the company as amounts payable/(receivable) to/(from) other entities in the tax‑consolidated group in conjunction with any tax funding arrangement (refer below). Any difference between these amounts is recognised by the company as an equity contribution amounts or distribution. The company recognises deferred tax assets arising from unused tax losses of the tax‑consolidated group to the extent that it is probable that future taxable profits of the tax‑consolidated group will be available against which the asset can be utilised. Any subsequent period adjustments to deferred tax assets arising from unused tax losses as a result of revised assessments of the probability of recoverability is recognised by the head entity only. (ii) Nature of tax funding arrangements and tax sharing agreements The head entity, in conjunction with other members of the tax‑consolidated group, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax‑consolidated group in respect of tax amounts. The tax funding arrangements require payments to/from the head entity equal to the current tax liability/ (asset) assumed by the head entity and any tax‑loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an inter‑entity receivable/(payable) equal in amount to the tax liability/(asset) assumed. The inter‑entity receivables/(payables) are at call. 78 Nufarm Limited Annual Report 2019 3. Significant accounting policies (continued) (o) Income tax (continued) (ii) Nature of tax funding arrangements and tax sharing agreements (continued) Contributions to fund the current tax liabilities are payable as per the tax funding arrangement and reflect the timing of the head entity’s obligation to make payments for tax liabilities to the relevant tax authorities. The head entity, in conjunction with other members of the tax‑consolidated group, has also entered a tax sharing agreement. The tax sharing agreement provides for the determination of the allocation of the income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the consolidated financial statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. (p) Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST or equivalent), except where the GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the tax authority is included as a current asset or liability in the balance sheet. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the relevant tax authorities are classified as operating cash flows. (q) Earnings per share The group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all potential dilutive ordinary shares, which comprise convertible notes and share options granted to employees. (r) Segment reporting Determination and presentation of operating segments An operating segment is a component of the group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the group’s other components. All operating segments’ results are reviewed regularly by the group’s Chief Executive Officer (CEO) to make decisions about resources to be allocated to the segment and to assess its performance. Segment results that are reported to the CEO include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly loans and borrowings and related expenses, corporate assets and head office expenses, and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment and intangible assets other than goodwill. Nufarm Limited Annual Report 2019 79 Notes to the Consolidated Financial Statements (continued) 4. Determination of fair values Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. (i) Property, plant and equipment The fair value of property, plant and equipment recognised as a result of a business combination is based on market values. The market value of property is the estimated amount for which a property could be exchanged on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, and willingly. The market value of items of plant, equipment, fixtures and fittings is based on the market approach and cost approaches quoted market prices for similar items when available and replacement cost when appropriate. (ii) Intangibles assets The fair value of patents and trademarks acquired in a business combination is based on the discounted estimated royalty payments that have been avoided as a result of the patent or trademark being owned. The fair value of other intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets. (iii) Inventories The fair value of inventories acquired in a business combination is determined based on its estimated selling price in the ordinary course of business less the estimated costs of completion and sale, and a reasonable profit margin based on effort required to complete and sell the inventories. (iv) Trade and other receivables The fair value of trade and other receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. This fair value is determined for disclosure purposes. (v) Derivatives The fair value of forward exchange contracts is based on their listed market price, if available. If a listed market price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a risk‑free interest rate (based on Government bonds). The fair value of interest rate swaps is based on broker quotes. Those quotes are tested for reasonableness by future cash flows based on the terms and maturity of each contract and using market interest rates for a similar instrument at the measurement date. (vi) Non‑derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases, the market rate of interest is determined by reference to similar lease agreements. (vii) Share‑based payment transactions The fair value of the performance rights issued under the Nufarm Long Term Incentive Plan have been measured using Monte Carlo Simulation and the Binomial Tree. The fair value of the deferred shares granted to participants under the Nufarm Short Term Incentive will be measured using the volume weighted average price for the five day period subsequent to year end results announcement. Measurement inputs include the share price on the measurement date, the exercise price of the instrument, expected volatility, expected term of the instruments, dividends, and the risk‑free rate (based on Government bonds). 80 Nufarm Limited Annual Report 2019 5. Operating segments Segment information is presented in respect of the group’s key operating segments. The operating segments are based on the group’s management and internal reporting structure. Operating segments The group operates predominantly along two business lines, being crop protection and seed technologies. The crop protection business deals in the manufacture and sale of crop protection products used by farmers to protect crops from damage caused by weeds, pests and disease. It is managed by major geographic segments, being Australia and New Zealand, Asia, Europe, North America and South America. The North America region includes Canada and USA. The Latin America region (previously known as South America) includes Brazil, Argentina, Chile, Uruguay, Paraguay, Bolivia, Colombia, the Andean countries, Mexico and the Central American countries. The seed technologies business deals in the sale of seeds and seed treatment products. The seed technologies business is managed on a worldwide basis. Information regarding the results of each operating segment is included below. Performance is measured based on underlying EBIT, as defined on following page, as included in the internal management reports that are reviewed by the group’s CEO. Underlying EBIT is used to measure performance as management believes that such information is the most relevant in evaluating the results of each segment. Segment revenue is based on the geographic location of customers. Segment results include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. The non‑operating corporate segment comprises mainly corporate expenses, interest‑bearing loans, borrowings and corporate assets. Nufarm Limited Annual Report 2019 81 Notes to the Consolidated Financial Statements (continued) 5. Operating segments (continued) Crop Protection Seed Technologies Non‑ Operating Corporate Group Australia and New Zealand $000 Asia $000 Europe $000 North America $000 Latin America $000 Total $000 Global $000 $000 Total $000 452,368 190,285 814,845 1,020,448 1,058,158 3,536,104 221,486 – 3,757,590 2019 Operating Segments Revenue Total segment revenue Results Underlying EBITDA(a) 20,685 26,979 167,608 107,762 97,276 420,310 50,736 (50,753) 420,293 Depreciation & amortisation excluding material items (12,537) (3,251) (107,720) (25,004) (6,897) (155,409) (14,153) (2,146) (171,708) Underlying EBIT(a) 8,148 23,728 59,888 82,758 90,379 264,901 36,583 (52,899) 248,585 Material items included in operating profit (refer note 6) Material items included in net financing costs (refer note 6) Total material items (refer note 6) Net financing costs (excluding material items) Profit/(loss) before tax Assets (50,770) – (50,770) (116,866) 80,949 Segment assets 455,942 105,280 1,873,952 912,105 997,737 4,345,016 488,719 840,775 5,674,510 Equity accounted investments – 1,559 – – – 1,559 451 – 2,010 Total assets 455,942 106,839 1,873,952 912,105 997,737 4,346,575 489,170 840,775 5,676,520 Liabilities Segment liabilities 124,353 330,084 346,254 240,715 284,393 1,325,799 52,842 1,892,935 3,271,576 Total liabilities 124,353 330,084 346,254 240,715 284,393 1,325,799 52,842 1,892,935 3,271,576 Other segment information Capital expenditure 18,601 1,582 60,499 57,134 7,729 145,545 44,864 – 190,409 (a) Underlying EBIT is earnings before net finance costs, taxation and material items. Underlying EBITDA is Underlying EBIT, before depreciation, amortisation and impairments. 82 Nufarm Limited Annual Report 2019 5. Operating segments (continued) Crop Protection Seed Technologies Non‑ Operating Corporate Group Australia and New Zealand $000 Asia $000 Europe $000 North America $000 Latin America $000 Total $000 Global $000 $000 Total $000 590,151 170,680 642,571 833,705 885,232 3,122,339 185,508 – 3,307,847 2018 Operating Segments Revenue Total segment revenue Results Underlying EBITDA(a) 23,736 25,229 149,873 99,487 97,377 395,702 43,580 (53,629) 385,653 Depreciation & amortisation excluding material items Underlying EBIT(a) (14,500) (3,049) (63,423) (22,036) (6,604) (109,612) (9,269) (1,669) (120,550) 9,236 22,180 86,450 77,451 90,773 286,090 34,311 (55,298) 265,103 Material items included in operating profit (refer note 6) Material items included in net financing costs (refer note 6) Total material items (refer note 6) Net financing costs (excluding material items) Profit/(loss) before tax Assets (89,604) (17,272) (106,876) (118,334) 39,893 Segment assets 703,337 106,143 1,757,588 666,249 866,038 4,099,355 427,712 523,889 5,050,956 Equity accounted investments – – – – – – 411 – 411 Total assets 703,337 106,143 1,757,588 666,249 866,038 4,099,355 428,123 523,889 5,051,367 Liabilities Segment liabilities 239,835 281,043 304,458 203,173 209,598 1,238,107 34,745 1,806,891 3,079,743 Total liabilities 239,835 281,043 304,458 203,173 209,598 1,238,107 34,745 1,806,891 3,079,743 Other segment information Capital expenditure 55,906 1,296 814,587 12,574 13,128 897,491 43,662 – 941,153 (a) Underlying EBIT is earnings before net finance costs, taxation and material items. Underlying EBITDA is Underlying EBIT, before depreciation, amortisation and impairments. Nufarm Limited Annual Report 2019 83 Notes to the Consolidated Financial Statements (continued) 5. Operating segments (continued) Geographical information – revenue by location of customer Brazil United States of America Australia Rest of world(b) Total 2019 $000 960,923 903,387 407,103 Revenue 2018 $000 799,094 722,452 559,540 1,486,177 1,226,761 3,757,590 3,307,847 (b) Other than Australia, United States of America and Brazil, sales to other countries are individually less than 10% of the group’s total revenues. Geographical information – non‑current assets by location of asset Germany United States of America United Kingdom Brazil Australia Rest of world(c) Unallocated(d) Total Non‑current assets 2019 $000 721,971 413,362 298,133 280,589 277,243 226,239 212,484 2018 $000 739,688 353,767 301,914 275,002 256,585 209,496 202,293 2,430,021 2,338,745 (c) Other than Germany, Australia, United States of America, Brazil and United Kingdom, non‑current assets held in other countries are individually less than 10% of the group’s total non‑current assets. (d) Unallocated non‑current assets predominately include deferred tax assets. 6. Individually material income and expense items Individually material items are those items where their nature, including the expected frequency of the events giving rise to them, and/or amount is considered material to the financial statements. Such items included within the group’s profit for the year are detailed below. Consolidated Consolidated 2019 $000 2019 $000 2018 $000 2018 $000 Pre‑tax After‑tax Pre‑tax After‑tax (10,517) (21,386) (18,867) – – – – (10,517) (21,386) (18,867) – – – – – – 1,491 (70,559) (24,124) (13,684) – (50,770) (50,770) (106,876) – – 1,201 (91,504) (22,228) (13,684) 12,231 (113,984) Material items by category: Legal costs Idle plant capacity Asset rationalisation and restructuring ANZ impairment and tax asset write‑down Business acquisition costs – other Business acquisition costs – refinance 2019 notes Change in corporate tax rates Total 84 Nufarm Limited Annual Report 2019 6. Individually material income and expense items (continued) 2019 Material Items Legal costs During the year ended 31 July 2019, the group has incurred legal costs associated with the enforcement of Omega‑3 canola trademark and patent matters. Idle plant capacity Drought conditions in Australia have continued through 2019 impacting the ANZ business and has resulted in a reduction to production activity and temporary closure of all formulation lines at the Laverton manufacturing plant giving rise to idle capacity charges. Asset rationalisation and restructuring A performance and improvement program has commenced in the ANZ and European businesses across all functions. This includes organisational restructuring and the assessment and closure of certain under‑utilised facilities. 2018 Material Items Asset rationalisation and restructuring During the year ended 31 July 2018, the group undertook rationalisation and restructuring activities including the sale of a former manufacturing site located in NZ and the reorganisation of certain back office activities. ANZ Impairment and tax asset write‑down Prolonged and severe drought conditions across Australia reduced current expectations of future earnings whereby a non‑cash impairment of intangibles (refer note 22), property, plant and equipment (refer note 21), and tax assets amounting to $91.504 million was incurred in the year ended 31 July 2018. Business acquisition costs During the year the group acquired two separate European businesses consisting of product portfolios based in Europe (refer to note 14 for further details). One‑off transaction costs incurred to effect the acquisitions include, but are not limited to, advisor fees, integration costs, hedging costs, and other financing expenses. Business acquisition costs – refinance of 2019 notes In response to the 2018 business acquisitions, the group undertook an early refinance of the 2019 senior secured notes to strengthen its capital structure. As a result, break fees and the early recognition of interest costs in relation to interest rate swaps were incurred. The cash impact of the refinance of the 2019 Notes was a cash outflow of $0.300 million due to favourable cashflow outcomes on cash flow hedges offsetting break fees and interest costs on interest rate swaps. Change in corporate tax rates Changes in corporate tax rates across the USA, France and Argentina led to the re‑measurement of the group’s deferred tax position resulting in net income tax credits of $12.231 million. Nufarm Limited Annual Report 2019 85 Notes to the Consolidated Financial Statements (continued) 6. Individually material income and expense items (continued) Material items are classified by function as follows: Selling, marketing and distribution expense General & admin‑ istrative expense Net financing costs Year ended 31 July 2019 ($’000s) Cost of sales Legal costs Idle plant capacity Asset rationalisation and restructuring Total material items Total material items included in operating profit – (21,386) – (21,386) (21,386) Year ended 31 July 2018 ($’000s) Cost of sales Asset rationalisation and restructuring ANZ impairment and tax asset write‑down Business acquisition costs Business acquisition costs – refinance 2019 notes Total material items Total material items included in operating profit – – – – – – Material items impacting cash flows is as follows: – – (2,517) (2,517) (2,517) Selling, marketing and distribution expense (509) – – – (509) (509) Net operating cash flows Net operating cash (inflows)/outflows arising on material items Net cash from operating activities excluding material items Net investing cash flows Individually material (inflows)/outflows from sale of property, plant and equipment Individually material (inflows)/outflows form the sale/purchase of businesses and investments Net cash from investing activities excluding material items 7. Other income Dividend income Rental income Sundry income Total other income 86 Nufarm Limited Annual Report 2019 (10,517) – (16,350) (26,867) (26,867) General & admin‑ istrative expense 2,000 (70,559) (20,536) – – – – – Net financing costs – – (3,588) Total pre‑tax (10,517) (21,386) (18,867) (50,770) (50,770) Total pre‑tax 1,491 (70,559) (24,124) – (13,684) (13,684) (89,095) (17,272) (106,876) (89,095) – (89,604) Consolidated 2019 $000 98,131 40,318 138,449 2018 $000 (88,169) 31,462 (56,707) (173,980) (965,574) – – (5,351) 778,859 (173,980) (192,066) Consolidated 2019 $000 47 287 10,127 10,461 2018 $000 – 271 6,985 7,256 8. Other expenses The following expenses were included in the period result: Depreciation and amortisation Impairment loss Inventory write down Minimum lease payments recognised as an operating lease expense 9. Personnel expenses Wages and salaries Other associated personnel expenses Contributions to defined contribution superannuation funds (Expense)/gain related to defined benefit superannuation funds Short‑term employee benefits Other long‑term employee benefits Restructuring Personnel expenses Consolidated 2019 $000 (171,708) – (12,640) (6,987) 2018 $000 (120,550) (70,559) (15,310) (4,671) Consolidated 2019 $000 2018 $000 (301,848) (303,004) (52,131) (22,689) (4,505) (9,616) (3,368) (8,234) (50,057) (24,045) (2,113) (10,582) (3,004) (2,681) (402,391) (395,486) The Restructuring expense relates to the group’s asset rationalisation and organisational restructure program. These costs are included in material items in note 6. 10. Finance income and expense Other financial income Financial income Interest expense – external Interest expense – debt establishment transaction costs Lease amortisation – finance charges Net foreign exchange gains/(losses) Financial expenses Net financing costs Consolidated 2019 $000 10,051 10,051 2018 $000 10,978 10,978 (110,608) (109,933) (4,634) (2,051) (9,624) (126,917) (116,866) (6,719) (1,986) (27,946) (146,584) (135,606) Nufarm Limited Annual Report 2019 87 Notes to the Consolidated Financial Statements (continued) 11. Income tax expense Recognised in the income statement Current tax expense Current period Tax free income and non‑recognition of tax assets on material items Adjustments for prior periods Current tax expense Deferred tax expense Origination and reversal of temporary differences and tax losses Effect of changes in tax rates – material items Effect of changes in tax rates (Recognition)/derecognition of tax assets ANZ tax asset write‑down – material items Deferred tax expense/(benefit) Total income tax expense/(benefit) in income statement Attributable to: Continuing operations Total income tax expense/(benefit) in income statement Numerical reconciliation between tax expense and pre‑tax net profit Profit/(Loss) before tax Income tax using the Australian corporate tax rate of 30% Increase/(decrease) in income tax expense due to: Non‑deductible expenses Other taxable income Effect of changes in tax rates‑material items Effect of changes in tax rates Initial (recognition)/derecognition of tax assets ANZ tax asset write‑down‑material items Tax free income and non‑recognition of tax assets on material items Effect of tax rate in foreign jurisdictions Tax exempt income Tax incentives not recognised in the income statement Under/(over) provided in prior years Income tax expense/(benefit) Income tax recognised directly in equity Nufarm step‑up securities distribution Income tax recognised directly in equity Income tax recognised in other comprehensive income Relating to actuarial gains/(losses) on defined benefit plans Relating to equity based compensation Income tax recognised in other comprehensive income 88 Nufarm Limited Annual Report 2019 Consolidated 2019 $000 2018 $000 32,528 15,262 (3,399) 44,391 (11,905) – 83 10,070 – (1,752) 42,639 15,191 30,583 (538) 45,236 (3,326) (12,231) – 5,276 20,945 10,664 55,900 42,639 42,639 55,900 55,900 80,949 24,285 9,096 3,497 – 83 10,070 – 15,262 (6,167) (3,441) (6,647) 46,038 (3,399) 42,639 39,893 11,968 7,085 2,428 (12,231) – 5,276 20,945 30,583 (4,109) (242) (5,265) 56,438 (538) 55,900 (4,205) (4,205) (3,877) (3,877) (1,615) – (1,615) 917 587 1,504 12. Discontinued operations There were no discontinued operations in the current or prior period. 13. Preference securities receivable Preference securities receivable Total preference securities receivable Consolidated 2019 $000 97,500 97,500 2018 $000 – – On 31 July 2019, the group undertook the placement of $97.5 million of preference securities to existing shareholder and strategic business partner, Sumitomo Chemical Company Limited (Sumitomo), through a wholly owned subsidiary (Nufarm Investment Pty Ltd). The settlement of the cashflow in relation to the placement of the preference securities occurred on 2 August 2019. 14. Acquisition of businesses and acquisition of non‑controlling interests Business acquisitions – 2019 There were no acquisitions in the current period. Business acquisitions – 2018 Century and FMC acquisition On 24 October 2017, the group announced that it had entered into an agreement with Adama Agricultural Solutions Ltd (“Adama”) and Syngenta Crop Protection AG and related group companies (“Syngenta”) to purchase a European business comprising of a portfolio of crop protection products registered in European markets (“Century Acquisition”). Subsequently, the group announced an issuance of 59,551,672 ordinary shares which generated $436.870 million of additional share capital (net of costs). The cash consideration paid was US$490 million, plus inventory of $21.843 million. On 8 November 2017, the group announced that it had entered into an agreement with FMC Corporation (“FMC”) to purchase a European business comprising of a portfolio of herbicide products registered in European markets (“FMC Acquisition”). The cash consideration paid was US$85 million, plus inventory of $2.871 million. On 1 February 2018 the FMC Acquisition was closed with the successful transfer of registration data and cash consideration in accordance with the transaction agreements. Related derivative contracts were utilised or closed as part of the acquisition completion. On 16 March 2018, European regulatory approval was obtained in relation to the Century Acquisition. On 16 March 2018 the Century Acquisition was effectively closed with the successful transfer of registration data and cash consideration in accordance with the transaction agreements. Derivative contracts related to the Century Acquisition were utilised or closed as part of the acquisition completion, this included the derivative not designated for hedge accounting, which resulted in a realised loss for the group of $1.807 million in net financing costs. One‑off transaction costs incurred to effect the acquisitions include, but are not limited to, advisor fees, integration costs, hedging costs, and other financing expenses. These one‑off costs totalled $22.228 million net of tax (refer to note 6) for the year ended 31 July 2018. The acquisition of the these businesses increases the group’s product portfolio offering within the European region. The business expects to extract revenue synergies from the acquisitions via opening up the existing business to new customers and cross selling opportunities. Nufarm Limited Annual Report 2019 89 Notes to the Consolidated Financial Statements (continued) 14. Acquisition of businesses and acquisition of non‑controlling interests (continued) Business acquisitions – 2018 (continued) Identifiable assets acquired and liabilities assumed The following table summarises the assets acquired and liabilities assumed at the date of acquisition. Acquiree’s net assets at acquisition date Inventory Intangible assets Net identifiable assets and liabilities Goodwill on acquisition Consideration to be transferred FMC Acquisition fair value on acquisition $000 Century Acquisition fair value on acquisition $000 Total fair value on acquisitions $000 2,871 84,763 87,634 26,308 113,942 21,843 530,487 552,330 105,283 657,613 24,714 615,250 639,964 131,591 771,555 Total goodwill of $131.591 million from business acquisitions is attributable mainly to the synergies expected to be achieved from integrating the respective businesses into the group’s existing business. During the year ended 31 July 2018, the acquired businesses above generated additional revenues of $68.943 million and operating profits of approximately $10.969 million. Revenue and profit from the acquired businesses that would have been earned if the acquisitions had occurred at the commencement of the financial year has not been provided on the basis that the calculation of that information is impracticable. This is because the businesses were fully integrated into the vendor’s operations and separate comparable financial information relating to the acquired businesses as stand‑alone operations is not available. Acquisition of non‑controlling interest 2019 There was no acquisition of non‑controlling interest in current period. Acquisition of non‑controlling interest 2018 On 29 December 2017 the group acquired an additional 49% of the equity interest in Atlantica Sementes SA (“Atlantica”), a business based in Brazil specialising in the sale and distribution of seed related products, via the exercising of a written put option. As a result, the group’s equity interest in Atlantica increased from 51% to 100%. The group recognised a liability for the present value of the exercise price of the put option up to the date of acquisition and exercise of the put option. The carrying amount of Atlantica’s net assets in the group’s consolidated financial statements on the date of acquisition was $6.590 million. Given the transaction is deemed as a common control transaction the impact has been recognised in equity resulting in a transfer of non‑controlling interests to retained earnings. 90 Nufarm Limited Annual Report 2019 15. Cash and cash equivalents Bank balances Call deposits Bank overdraft Total cash and cash equivalents 16. Trade and other receivables Current Trade receivables Provision for impairment losses Derivative financial instruments Prepayments Other receivables Current receivables Non‑current Derivative financial instruments Trade receivables Trade finance receivables Other receivables Non‑current receivables Consolidated 2019 $000 2018 $000 424,274 255,535 81,413 505,687 – 46,165 301,700 (7,357) 505,687 294,343 Consolidated 2019 $000 2018 $000 1,297,372 1,130,846 (49,531) (36,546) 1,247,841 1,094,300 3,829 42,163 84,918 5,339 23,882 76,096 1,378,751 1,199,617 – 73,024 22,583 6,370 101,977 – 76,452 26,824 5,583 108,859 Total trade and other receivables 1,480,728 1,308,476 17. Inventories Raw materials Work in progress Finished goods Provision for obsolescence of finished goods Total inventories Consolidated 2019 $000 414,005 10,442 816,105 1,240,552 (12,311) 2018 $000 313,103 18,438 862,360 1,193,901 (14,205) 1,228,241 1,179,696 Nufarm Limited Annual Report 2019 91 Notes to the Consolidated Financial Statements (continued) 18. Tax assets and liabilities Current tax assets and liabilities The current tax asset for the group of $36.320 million (2018: $31.609 million) represents the amount of income taxes recoverable in respect of prior periods and that which arose from the payment of tax in excess of the amounts due to the relevant tax authority. The current tax liability for the group of $18.971 million (2018: $20.930 million) represents the amount of income taxes payable in respect of current and prior financial periods. Deferred tax assets and liabilities Recognised deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Consolidated Property, plant and equipment Intangible assets Employee benefits Provisions Other items Tax value of losses carried forward Tax assets/(liabilities) Set off of tax Assets Liabilities Net 2019 $000 13,648 9,158 21,099 24,770 12,450 2018 $000 16,945 8,928 19,556 20,993 16,231 2019 $000 (8,295) 2018 $000 (8,311) 2019 $000 5,353 2018 $000 8,634 (101,267) (86,770) (92,108) (77,842) – (1,059) (15,262) – (1,024) (17,447) 21,099 23,710 (2,812) 19,556 19,969 (1,216) 131,872 119,309 – – 131,872 119,309 212,997 201,962 (125,883) (113,552) 87,114 88,410 – – – – – – Net tax assets/(liabilities) 212,997 201,962 (125,883) (113,552) 87,114 88,410 Movement in temporary differences during the year Balance 2018 $000 Recognised in income $000 Recognised in equity $000 Currency adjustment $000 Other movement $000 Balance 2019 $000 8,634 (77,842) 19,556 19,969 (1,216) 119,309 88,410 (2,883) (9,208) 2,998 2,798 (58) 8,105 1,752 – – (1,615) – – – (397) (5,057) 160 942 (1,537) 4,457 (1,615) (1,432) – – – – – – – 5,353 (92,108) 21,099 23,710 (2,812) 131,872 87,114 Balance 2017 $000 Recognised in income $000 Recognised in equity $000 Currency adjustment $000 Other movement $000 Balance 2018 $000 (9,132) (92,613) 20,125 19,540 8,540 18,262 18,573 (657) 1,032 (10,379) 156,144 (37,495) – – (917) – (587) – (496) (3,802) 1,005 (603) 1,210 660 102,604 (10,664) (1,504) (2,026) – – – – – – – 8,634 (77,842) 19,556 19,969 (1,216) 119,309 88,410 Consolidated 2019 Property, plant and equipment Intangibles assets Employee benefits Provisions Other items Tax value of losses carried forward Consolidated 2018 Property, plant and equipment Intangibles assets Employee benefits Provisions Other items Tax value of losses carried forward 92 Nufarm Limited Annual Report 2019 18. Tax assets and liabilities (continued) Deferred tax assets and liabilities (continued) The carrying value of deferred tax assets relating to tax losses and tax credits is largely dependent on the generation of sufficient future taxable income. The carrying value of this asset will continue to be assessed at each reporting date. Unrecognised deferred tax liability At 31 July 2019, a deferred tax liability of $32.762 million (2018: $26.368 million) relating to investments in subsidiaries has not been recognised because the company controls the repatriation of retained earnings and it is satisfied that it will not be incurred in the foreseeable future. This amount represents the theoretical withholding tax payable if all overseas retained earnings were paid as dividends. Unrecognised deferred tax assets At 31 July 2019, there are unrecognised deferred tax assets in respect of tax losses and timing differences of $113.864 million (2018: $90.197 million). 19. Investments accounted for using the equity method The group accounts for investments in associates and joint ventures using the equity method. The group had the following individually immaterial associates and joint ventures during the year: Ownership and voting interest Carrying amount Share of profit/(loss) Nature of relationship Country Balance date of associate 2019 2018 Seedtech Pty Ltd Associate(1) Australia 31 December 25.00% 25.00% 2019 $000 451 Leshan Nong Fu Trading Co., Ltd Joint Venture(2) China 31 December 35.00% – 1,559 2,010 2018 $000 2019 $000 2018 $000 411 – 411 40 84 124 78 – 78 (1) Seedtech is a company that offers services to the seed industry such as cleaning, packaging, distribution and storage of seeds. (2) Leshan Nong Fu Trading is a joint venture in which the group has joint control and a 35 percent ownership interest. The joint venture is focused on sales and marketing of formulation crop protection products in the Chinese domestic market. It is structured as a separate vehicle. In accordance with the agreement under which Leshan Nong Fu Trading was established, the investors in the joint venture have agreed to make capital contributions in proportion to their ownership interests to make up any losses, if required, or at the latest within 5 years after incorporation, up to a maximum amount of RMB 100 million. This commitment has not been recognised in this consolidated financial report. 20. Other investments Current investments Balance at the beginning of the year Additions Net change in fair value gains/(losses) transferred to equity Disposal Balance at the end of the year Non‑current investments Other investments Total non‑current investments Consolidated 2019 $000 2018 $000 – – – – – 421 421 – – – – – 442 442 Nufarm Limited Annual Report 2019 93 Notes to the Consolidated Financial Statements (continued) 21. Other non‑current assets There were no other non‑current assets in the current or prior period. 22. Property, plant and equipment Consolidated 2019 Cost Land and buildings $000 Plant and machinery $000 Leased plant and machinery $000 Capital work in progress $000 Balance at 1 August 2018 206,234 Additions Additions through business combinations Disposals and write‑offs Other transfers Foreign exchange adjustment 1,740 – (1,668) 2,794 7,152 581,790 45,458 – (11,116) 12,399 14,700 12,684 461 – (132) 288 148 Balance at 31 July 2019 216,252 643,231 13,449 Accumulated depreciation and impairment losses Balance at 1 August 2018 (114,067) (402,077) Depreciation charge for the year (5,673) (31,863) Additions through business combinations Disposals and write‑offs Other transfers Foreign exchange adjustment – 573 (14) (3,848) – 10,748 471 (9,486) (2,757) (442) – 101 (45) (46) Balance at 31 July 2019 (123,029) (432,207) (3,189) 56,942 36,624 – (170) (15,893) 1,572 79,075 – – – – – – – Total $000 857,650 84,283 – (13,086) (412) 23,572 952,007 (518,901) (37,978) – 11,422 412 (13,380) (558,425) Net property, plant and equipment at 31 July 2019 93,223 211,024 10,260 79,075 393,582 94 Nufarm Limited Annual Report 2019 Land and buildings $000 Plant and machinery $000 Leased plant and machinery $000 Capital work in progress $000 Total $000 22. Property, plant and equipment (continued) Consolidated 2018 Cost Balance at 1 August 2017 Additions Additions through business combinations Impairment loss Disposals and write‑offs Other transfers Foreign exchange adjustment 200,126 872 – – (2,265) 3,008 4,493 518,170 31,659 – – (7,340) 19,462 19,839 Balance at 31 July 2018 206,234 581,790 Accumulated depreciation and impairment losses Balance at 1 August 2017 Depreciation charge for the year Additions through business combinations Impairment loss Disposals and write‑offs Other transfers (89,539) (6,690) – (15,513) 1,014 (1) (331,158) (31,049) – (33,729) 7,180 149 Foreign exchange adjustment (3,338) (13,470) 11,746 512 – – (81) – 507 12,684 (2,306) (453) – – 59 – (57) 43,481 36,496 773,523 69,539 – – (3) (23,985) 953 56,942 – – – – – – – – – – (9,689) (1,515) 25,792 857,650 (423,003) (38,192) – (49,242) 8,253 148 (16,865) (518,901) Balance at 31 July 2018 (114,067) (402,077) (2,757) Net property, plant and equipment at 31 July 2018 92,167 179,713 9,927 56,942 338,749 Assets pledged as security for finance leases amount to $10.260 million (2018: $9.927 million). Nufarm Limited Annual Report 2019 95 Notes to the Consolidated Financial Statements (continued) 23. Intangible assets Consolidated 2019 Cost Intellectual Property Goodwill $000 indefinite life $000 finite life $000 Capitalised development costs $000 Computer software $000 Total $000 Balance at 1 August 2018 456,322 1,680 1,162,306 Additions Additions through business combinations Disposals and write‑offs Other transfers Foreign exchange adjustment – – – (1,756) 21,223 – – – – 38 701 – – (1,558) 47,128 388,744 86,075 153,537 2,162,589 19,350 106,126 – (214) 1,559 5,935 – (1,987) (3) – (2,201) (1,758) 4,636 78,960 Balance at 31 July 2019 475,789 1,718 1,208,577 482,099 175,533 2,343,716 Accumulated amortisation and impairment losses Balance at 1 August 2018 (104,940) (1,680) (189,126) (121,859) (56,662) (474,267) Amortisation charge for the year Additions through business combinations Impairment loss Disposals and write‑offs Other transfers Foreign exchange adjustment – – – – 1,757 (6,092) – – – – – (85,065) (30,759) (17,906) (133,730) – – 17 546 – – 41 (499) (1,928) – – 1,926 (46) – – 1,984 1,758 (1,943) (20,427) (38) (10,426) Balance at 31 July 2019 (109,275) (1,718) (284,054) (155,004) (74,631) (624,682) Intangibles carrying amount at 31 July 2019 366,514 – 924,523 327,095 100,902 1,719,034 96 Nufarm Limited Annual Report 2019 23. Intangible assets (continued) Consolidated 2018 Cost Intellectual Property Goodwill $000 indefinite life $000 finite life $000 Capitalised development costs $000 Computer software $000 Total $000 Balance at 1 August 2017 322,497 1,576 526,026 Additions Additions through business combinations Disposals and write‑offs Other transfers Foreign exchange adjustment – 131,591 (237) – 2,471 – – – – 4,136 308,619 69,394 102,655 1,261,373 51,243 124,773 615,250 – – 746,841 (91) (2,518) (6,886) 3,179 104 19,503 14,438 (5,197) 2,132 2,704 (12,411) 2,793 39,220 Balance at 31 July 2018 456,322 1,680 1,162,306 388,744 153,537 2,162,589 Accumulated amortisation and impairment losses Balance at 1 August 2017 (105,477) (1,576) (134,326) (89,822) (38,786) (369,987) Amortisation charge for the year Additions through business combinations Impairment loss Disposals and write‑offs Other transfers Foreign exchange adjustment – – (3,109) – – – – – – – (44,371) (27,058) (10,928) (82,357) – (5,612) 76 644 – (5,500) 6,541 (644) (5,376) – (7,096) 1,244 – (1,096) – (21,317) 7,861 – (8,467) 3,646 (104) (5,537) Balance at 31 July 2018 (104,940) (1,680) (189,126) (121,859) (56,662) (474,267) Intangibles carrying amount at 31 July 2018 351,382 – 973,180 266,885 96,875 1,688,322 For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash‑generating unit”/“CGU”). The group has determined that operating unit by country or region (i.e. Europe) is the appropriate method for determining the cash‑generating units (CGU) of the business. This level of CGU aligns with the cash flows of the business and the management structure of the group. The goodwill and intellectual property with an indefinite life are CGU specific, as the acquisitions generating goodwill and the product registrations that are the major indefinite life intangibles are country or region specific in nature. There is no allocation of goodwill between CGUs. The major CGUs and their intangible assets are as follows: North America $220 million (2018: $208 million), Brazil $157 million (2018: $150 million), Seed Technologies $343 million (2018: $305 million), Europe $953 million (2018: $979 million) and Australia and New Zealand (ANZ) $22 million (2018: $25 million). The balance of intangibles is spread across multiple CGUs, with no individual CGU intangible balance being material relative to the total intangibles balance at balance date. Impairment testing for cash‑generating units containing goodwill For the impairment testing of these assets, the carrying amount of the asset is compared to its recoverable amount at a CGU level. Two valuation methods are used by the group. Nufarm Limited Annual Report 2019 97 Notes to the Consolidated Financial Statements (continued) 23. Intangible assets (continued) Valuation method – Value in use The group uses the value‑in‑use (VIU) method to estimate the recoverable amount. In assessing VIU, the estimated future cash flows are derived from the three year plan for each cash‑generating unit with a growth factor applied to extrapolate a cash flow beyond year three. A perpetuity factor is then applied to the normalised cash flow beyond year five in order to include a terminal value in the VIU calculation. The terminal growth rate assumed for each CGU is generally a long term inflation estimate. The cash flow is then discounted to a present value using a discount rate which is the company’s weighted average cost of capital, adjusted for country risk and asset‑specific risk associated with each CGU. Valuation method – Fair value less cost of disposal Fair value less cost of disposal (FVLCD) is an estimate of the amount that a market participant would pay for an asset or a CGU, less the cost of disposal. The fair value is determined using discounted cash flows. This fair value is benchmarked against the sum of the parts method, comparable market transactions, and company trading multiples. The cash flows are derived from Board approved management expectations of future outcomes taking into account past experience, adjusted for anticipated revenue growth. Cash flows are discounted using an appropriate post‑tax market discount rate to arrive at a net present value of the asset which is compared against the asset’s carrying value. The fair value measurement was categorised as a Level 3 fair value based on inputs in the valuation technique used (see note 31). Valuation assumptions The valuation method, range of terminal growth rates and nominal post‑tax discount rates applied for impairment testing purposes is as follows: 2019 Material crop protection CGU’s (North America, Brazil and Europe) ANZ CGU Seed Technology CGU 2018 Material crop protection CGU’s (North America, Brazil and Europe) ANZ CGU(1) Seed Technology CGU Valuation method Terminal growth rate Discount rate Total goodwill $000 VIU 2.0% to 4.0% 7.8% to 11.6% 278,897 FVLCD VIU 2.0% 3.0% 11.0% to 12.5% – 11.4% 71,563 Valuation method Terminal growth rate Discount rate Total goodwill $000 VIU 1.9% to 4.1% 8.0% to 13.1% 268,051 FVLCD VIU 2.5% 3.1% 9.9% 12.4% – 68,431 (1) As at 31 July 2017, the total goodwill and indefinite life assets for the ANZ CGU was equal to $3.109 million. The carrying amount of goodwill and indefinite life assets for the ANZ CGU was reduced to nil at 31 July 2018 as a result of impairment. The terminal growth rate assumed is generally a long term inflation estimate. The discount rate assumed is the company’s weighted average cost of capital, adjusted for country risk and asset‑specific risk. The margin and volume assumptions generally reflect past experience for existing and enhanced portfolio products, while new products utilise external sources of information reflecting current market pricing in expected end use markets. With the exception of the ANZ CGU (see below), management has determined that, given the excess of recoverable value over asset carrying value (headroom), there are no reasonably possible changes in assumptions which could occur to cause the carrying amount of the CGU’s to exceed their recoverable amount. 98 Nufarm Limited Annual Report 2019 23. Intangible assets (continued) ANZ cash generating unit Following the impairment loss recognised in the ANZ CGU during the year ended 31 July 2018, the recoverable amount was equal to the carrying amount. At 31 July 2019, management has determined that the recoverable amount remains equal to the carrying amount. If there was an adverse movement in a key assumption (noted above) or ANZ cash flows, in the absence of other factors, this may lead to further impairment. At 31 July 2018 the group became aware of impairment indicators for the ANZ CGU and commenced using the FVLCD methodology for the CGU. The carrying amount of the ANZ CGU was determined to be higher than its recoverable amount and an impairment loss of $70.559 million was recognised during the year ended 31 July 2018. The impairment loss was allocated against goodwill, intangibles assets, and property, plant and equipment, and is included in ‘general and administrative expenses’ (refer note 6). 24. Trade and other payables Current payables – unsecured Trade creditors and accruals – unsecured Deferred revenue Derivative financial instruments Payables – acquisitions Current payables Non‑current payables – unsecured Creditors and accruals Derivative financial instruments Non‑current payables 25. Interest‑bearing loans and borrowings Current liabilities Bank loans – secured Bank loans – unsecured Deferred debt establishment costs Other loans – unsecured Finance lease liabilities – secured Loans and borrowings – current Non‑current liabilities Bank loans – secured Bank loans – unsecured Brazil unsecured notes Senior unsecured notes Deferred debt establishment costs Other loans – unsecured Finance lease liabilities – secured Loans and borrowings – non‑current Net cash and cash equivalents Net debt 2019 $000 2018 $000 1,108,267 1,087,802 111,812 1,182 – 40,280 3,024 164 1,221,261 1,131,270 11,058 – 11,058 10,800 – 10,800 Consolidated 2019 $000 2018 $000 385,948 110,868 (3,683) 1,342 511 390,905 130,817 (3,683) 1,303 356 494,986 519,698 420,969 404,842 63,786 77,122 689,605 (9,374) 3,381 12,341 30,878 71,610 638,613 (11,721) 2,256 12,237 1,257,830 1,148,715 (505,687) (294,343) 1,247,129 1,374,070 Nufarm Limited Annual Report 2019 99 Notes to the Consolidated Financial Statements (continued) 25. Interest‑bearing loans and borrowings (continued) Financing facilities Refer to the section entitled “Liquidity Risk” in note 31 for detail regarding the group’s financing facilities. 2019 Bank loan facilities and senior unsecured notes Other facilities Total financing facilities 2018 Bank loan facilities and senior unsecured notes Other facilities Total financing facilities Reconciliation of liabilities arising from financing activities Accessible $000 Utilised $000 2,519,407 1,748,298 4,723 4,723 2,524,130 1,753,021 2,185,377 1,667,665 3,559 3,559 2,188,936 1,671,224 Balance at 31 July 2018 Cash changes Proceeds from borrowings (net of costs) Repayment of borrowings Debt establishment transaction costs Total cash flows Non‑cash changes Foreign exchange movements Transfer Amortisation of debt establishment transaction costs Total non‑cash changes Balance at 31 July 2019 Loans and borrowings – current $000 Loans and borrowings – non‑current $000 Debt related derivatives (included in assets/ liabilities)(1) $000 Total debt related financial instruments $000 519,698 1,148,715 (3,553) 1,664,860 578,098 (529,736) (2,288) 46,074 76,280 (13,239) 750,693 (810,493) (59,800) 17,215 13,239 4,634 35,088 21,798 1,350,589 (1,340,229) (2,288) 8,072 21,798 (22,703) 70,792 – 4,634 75,426 63,041 (22,703) 494,986 1,257,830 (4,458) 1,748,358 (1) Total derivatives balance at 31 July 2019 is a net asset of $2.647 million (31 July 2018: $2.315 million net asset). The difference in carrying value to the table above relates to interest rate swap contracts, cross‑currency interest rate swap contracts, and forward exchange contracts which are excluded from the balances above. Financing arrangements Repayment of borrowings (excluding finance leases) Period ending 31 July, 2019 Period ending 31 July, 2020 Period ending 31 July, 2021 Period ending 31 July, 2022 or later Consolidated 2019 $000 2018 $000 – 523,025 498,158 185,847 1,069,016 30,648 1,117,551 – 100 Nufarm Limited Annual Report 2019 25. Interest‑bearing loans and borrowings (continued) Finance lease liabilities Finance leases are entered into to fund the acquisition of plant and equipment. Lease commitments for capitalised finance leases are payable as follows: Not later than one year Later than one year but not later than two years Later than two years but not later than five years Later than five years Less future finance charges Finance lease liabilities Finance lease liabilities are secured over the relevant leased plant. Average interest rates Nufarm step‑up securities Syndicated bank facility Group securitisation program facility Other bank loans Finance lease liabilities – secured Brazil unsecured notes Senior unsecured notes Consolidated 2018 $000 1,640 1,664 5,551 85,629 94,484 (81,890) 12,594 Consolidated 2018 % 6.08 1.84 2.89 5.70 13.33 9.69 5.75 2019 $000 1,628 1,906 5,756 84,348 93,638 (80,786) 12,852 2019 % 5.67 2.03 2.94 4.43 13.73 9.20 5.75 Average interest rates are calculated using the weighted average of the interest rates for the drawn balances under each facility as at 31 July 2019. 26. Employee benefits Current Liability for short‑term employee benefits Liability for current portion of other long‑term employee benefits Current employee benefits Non‑current Defined benefit fund obligations Present value of unfunded obligations Present value of funded obligations Fair value of fund assets – funded Recognised liability for defined benefit fund obligations Liability for non‑current portion of other long‑term employee benefits Non‑current employee benefits Total employee benefits Consolidated 2018 $000 17,377 1,970 19,347 7,505 173,171 (100,115) 80,561 15,115 95,676 115,023 2019 $000 16,684 2,591 19,275 9,337 188,948 (109,567) 88,718 16,378 105,096 124,371 During the year ended 31 July 2019 the group made contributions to defined benefit pension funds in the United Kingdom, France and Indonesia that provide defined benefit amounts for employees upon retirement. Nufarm Limited Annual Report 2019 101 Notes to the Consolidated Financial Statements (continued) 26. Employee benefits (continued) Changes in the present value of the defined benefit obligation are as follows: Opening defined benefit obligation 180,676 174,583 Consolidated 2019 $000 2018 $000 Service cost Interest cost Actuarial losses/(gains) Past service cost Losses/(gains) on curtailment Plan amendments Contributions Benefits paid Exchange adjustment 695 5,100 15,191 – – 1,523 – (6,287) 1,387 607 4,908 (3,604) (908) 59 – – (6,579) 11,610 Closing defined benefit obligation 198,285 180,676 Changes in the fair value of fund assets are as follows: Opening fair value of fund assets Interest income Actuarial gains/(losses) – return on plan assets excluding interest income Surplus taken to retained earnings Assets distributed on settlement Contributions by employer Distributions Exchange adjustment Closing fair value of fund assets 100,115 2,813 6,346 – – 5,286 (5,730) 737 109,567 90,485 2,553 2,293 – – 4,933 (6,376) 6,227 100,115 The actual return on plan assets is the sum of the expected return and the actuarial gain/(loss). Expense/(gain) recognised in profit or loss Current service costs Interest on obligation Interest income Losses/(gains) on curtailment Plan amendments Past service cost/(gain) Expense recognised in profit or loss The expense is recognised in the following line items in the income statement: Cost of sales Sales, marketing and distribution expenses General and administrative expenses Research and development expenses Expense recognised in profit or loss 102 Nufarm Limited Annual Report 2019 Consolidated 2018 $000 607 4,908 (2,553) 59 – (908) 2,113 1,287 546 231 49 2,113 2019 $000 695 5,100 (2,813) – 1,523 – 4,505 1,769 1,972 180 584 4,505 26. Employee benefits (continued) Actuarial gains/(losses) recognised in other comprehensive income (net of tax) Cumulative amount at 1 August Recognised during the period Cumulative amount at 31 July The major categories of fund assets as a percentage of total fund assets are as follows: Equities Bonds Property Cash Principal actuarial assumptions at the reporting date (expressed as weighted averages): Discount rate at 31 July Future salary increases Future pension increases Consolidated 2019 $000 2018 $000 (69,067) (7,356) (76,423) (74,047) 4,980 (69,067) Consolidated 2019 % 71.8 25.2 1.6 1.4 2.2 0.2 2.6 2018 % % 62.2 31.7 1.3 4.8 2.8 0.3 2.8 The group expects to pay $5.177 million in contributions to defined benefit plans in 2020. (2018: $5.116 million). 27. Share‑based payments Nufarm Executive Share Plan (2000) The Nufarm Executive Share Plan (2000) offered shares to executives. From 1 August 2011, it was decided that there will be no further awards under this share plan and that it would be replaced by the Nufarm Short Term Incentive plan (refer below). Any unvested equities held in the executive share plan will remain and be subject to the vesting conditions under the rules of the plan. The executives may select an alternative mix of shares (at no cost) and options at a cost determined under the Black Scholes’ methodology. These benefits are only granted when a predetermined return on capital employed is achieved over the relevant period. The shares and options are subject to forfeiture and dealing restrictions. The executive cannot deal in the shares or options for a period of between three and ten years without board approval. An independent trustee holds the shares and options on behalf of the executives. At 31 July 2019 there were 13 participants (2018: 14 participants) in the scheme and 72,181 shares (2018: 77,916) were allocated and held by the trustee on behalf of the participants. The cost of issuing shares is expensed in the year of issue. Nufarm Short Term Incentive Plan (STI) The STI is available to key executives, senior managers and other managers globally. The first awards under the plan were issued in October 2012. The STI is measured on the following metrics, relevant to an individual: • budget measures of profit before tax or net profit after tax and net working capital; and • strategic and business improvement objectives A pre‑determined percentage of the STI is paid in cash at the time of performance testing and the balance is deferred into shares in the company for nil consideration. The number of shares granted is based on the volume weighted average price (VWAP) of Nufarm Limited shares in the 5 days subsequent to the results announcement. Vesting will occur after a two year period. Nufarm Limited Annual Report 2019 103 Notes to the Consolidated Financial Statements (continued) 27. Share‑based payments (continued) Nufarm Executive Long Term Incentive Plan (LTIP) On 1 August 2011, the LTIP commenced and is available to key executives and certain selected senior managers. Awards are granted to individuals in the form of performance rights, which comprise rights to acquire ordinary shares in the company for nil consideration, subject to the achievement of global performance hurdles. Under the plan, individuals will receive an annual award of performance rights as soon as practical after the announcement of results in the preceding year. The performance and vesting period for the awards will be three years. Awards vest in two equal tranches as follows: • 50 per cent of the LTIP grant will vest subject to the achievement of a relative total shareholder return (TSR) performance hurdle measured against a selected comparator group of companies; and • the remaining 50 per cent will vest subject to meeting an absolute return on funds employed (ROFE) target. Global Share Plan (2001) The Global Share Plan commenced in 2001, and is available to all permanent employees. Participants contribute a proportion of their salary to purchase shares. The company will contribute an amount equal to 10% of the number of ordinary shares acquired with a participant’s contribution in the form of additional ordinary shares. Amounts over 10% of the participant’s salary can be contributed but will not be matched. For each year the shares are held, up to a maximum of five years, the company contributes a further 10% of the value of the shares acquired with the participant’s contribution. An independent trustee holds the shares on behalf of the participants. At 31 July 2019 there were 519 participants (2018: 512 participants) in the scheme and 1,833,858 shares (2018: 1,624,341) were allocated and held by the trustee on behalf of the participants. The power of appointment and removal of the trustees for the share purchase schemes is vested in the company. Employee expenses Total expense arising from share‑based payment transactions Measurement of fair values 2019 $000 1,559 2018 $000 3,904 The fair value of performance rights granted through the LTIP and deferred shares granted through the STIP were measured as follows: Plan Weighted average fair value at grant date Share price at grant date Grant date Earliest vesting date Exercise price Expected life Volatility Risk free interest rate Dividend yield Nufarm STI 2019 Deferred shares Nufarm LTI 2019 Performance rights Nufarm STI 2018 Deferred shares Nufarm LTI 2018 Performance rights Nov 2017 $6.07 $6.07 $4.94 $7.25 $8.37 $8.37 $6.60 $8.99 1 Oct 2018 1 Aug 2018 28 Sep 2017 1 Nov 2017 31 Jul 2020 31 Jul 2021 31 Jul 2019 31 Jul 2020 – – – – 1 year 3.0 years 1 year 2.8 years n/a n/a n/a 28% 2.1% 2.0% n/a n/a n/a 28% 2.0% 1.7% The fair values of awards granted were estimated using a Monte‑Carlo simulation methodology and a Binomial Tree methodology. 104 Nufarm Limited Annual Report 2019 27. Share‑based payments (continued) Reconciliation of outstanding share awards Outstanding at 1 August Forfeited during the year Exercised during the year Expired during the year Granted during the year Outstanding at 31 July Exercisable at 31 July Nufarm LTI number of performance rights 2019 Nufarm STI number of deferred shares 2019 Nufarm LTI number of performance rights 2018 Nufarm STI number of deferred shares 2018 672,683 (302,091) – – 600,048 970,640 – 529,572 (11,751) (517,821) – 19,294 19,294 – 887,364 (276,863) (333,078) – 395,260 672,683 – 269,506 (14,272) (268,840) – 543,178 529,572 – The performance rights outstanding at 31 July 2019 have a $nil exercise price (2018: $nil) and a weighted average contractual life of 3 years (2018: 3 years). All performance rights granted to date have a $nil exercise price. 28. Provisions Current Restructuring Other Current provisions Consolidated Movement in provisions Balance at 1 August 2018 Provisions made during the year Provisions reversed during the year Provisions used during the year Exchange adjustment Balance at 31 July 2019 2019 $000 15,857 1,359 17,216 Restructuring $000 Other provisions $000 11,161 14,690 (1,256) (8,814) 76 15,857 1,237 125 – – (3) 1,359 Consolidated 2018 $000 11,161 1,237 12,398 Total $000 12,398 14,815 (1,256) (8,814) 73 17,216 The provision for restructuring is mainly relating to the asset rationalisation and restructuring being undertaken by the group. 29. Capital and reserves Share capital Balance at 1 August Issue of shares Balance at 31 July Parent Company Number of ordinary shares 2019 Number of ordinary shares 2018 327,704,975 266,928,840 51,934,359 60,776,135 379,639,334 327,704,975 The company does not have authorised capital or par value in respect of its issued shares. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the company. Nufarm Limited Annual Report 2019 105 Notes to the Consolidated Financial Statements (continued) 29. Capital and reserves (continued) Share capital (continued) On 26 September 2018, the company announced it was undertaking a pro‑rata entitlement offer to raise $303.000 million of share capital to repay existing debt facilities. On 8 October 2018, 40,272,313 shares at $5.8500 were issued under the institutional offer and on 25 October 2018, 11,475,463 shares at $5.8500 were issued under the retail offer. On 2 November 2018, 126,056 shares at $5.8565 were issued under the dividend reinvestment program. On 8 January 2019, 60,527 shares at $5.7269 were issued under the global share plan. In October 2017, the directors of the group agreed to issue 59,551,672 new shares to fund the acquisition of two European businesses (note 14) pursuant to the terms of an underwritten accelerated renounceable entitlement offer. Following the announcement in October 2017, on 6 November 2017, 44,777,979 shares at $7.5000 were issued under the institutional entitlement offer and on 24 November 2017, 14,773,693 shares at $7.5000 were issued under the retail entitlement offer. On 6 October 2017, 756,172 shares at $8.3667 were issued under the Nufarm short term incentive plan and Nufarm executive long term incentive plan. On 10 November 2017, 228,101 shares at $8.9479 were issued under the dividend reinvestment program. On 11 December 2017, 69,695 shares at $8.3667 were issued under the Nufarm short term incentive plan. On 5 January 2018, 64,104 shares at $8.7800 were issued under the global share plan. On 4 May 2018, 106,391 shares at $8.6513 were issued under the dividend reinvestment program. Other securities Sumitomo preference securities On 31 July 2019, the group undertook the placement of $97.5 million of preference securities to existing shareholder and strategic business partner, Sumitomo Chemical Company Limited (Sumitomo), through a wholly owned subsidiary (Nufarm Investment Pty Ltd), known as the Sumitomo Preference Securities (SPS). The SPS may be exchanged for Nufarm ordinary shares at Sumitomo’s election any time after 24 months, from the date of issue of the SPS, at an exchange price of $5.8500 per Nufarm ordinary share. As at 31 July 2019 $0.5 million of costs were incurred in relation to the placement. Nufarm Investments Pty Ltd maintains the ability to purchase the SPS from Sumitomo at any quarter following the issue of the SPS for the full principal amount outstanding at that time plus the amount of any unpaid distributions. Distributions on the SPS are at the discretion of the directors and are fixed rate, unfranked, cumulative and subordinated. In the event that Nufarm Investment Pty Ltd does not pay the distribution on the SPS, Nufarm may not declare a dividend payment in respect of its ordinary shares or declare a distribution on the Nufarm step‑up securities until all undeclared SPS distributions are declared and paid. The SPS distributions are declared and paid to Sumitomo quarterly at a fixed rate of 6% per annum for the first 12 months and at a fixed rate of 10% per annum thereafter. The first distribution is expected to be declared and paid on 31 October 2019. Nufarm step‑up securities In the year ended 31 July 2007 Nufarm Finance (NZ) Limited, a wholly owned subsidiary of Nufarm Limited, issued a new hybrid security called Nufarm Step‑up Securities (NSS). The NSS are perpetual step up securities and on 24 November 2006, 2,510,000 NSS were allotted at an issue price of $100 per security raising $251 million. The NSS are listed on the ASX under the code ‘NFNG’ and on the NZDX under the code ‘NFFHA’. The after‑tax costs associated with the issue of the NSS, totalling $4.1 million, were deducted from the proceeds. Distributions on the NSS are at the discretion of the directors and are floating rate, unfranked, non‑cumulative and subordinated. However, distributions of profits and capital by Nufarm Limited are curtailed if distributions to NSS holders are not made, until such time that Nufarm Finance (NZ) Limited makes up the arrears. The first distribution date for the NSS was 16 April 2007 and on a six‑monthly basis after this date. The floating rate is the average mid‑rate for bills with a term of six months plus a margin of 3.9% (2018: 3.9%). On 23 September 2011, Nufarm announced that it would ‘step‑up’ the NSS. This resulted in the interest margin attached to the NSS being stepped up by 2.0 per cent, with the new interest margin being set at 3.9 per cent as at 24 November 2011. No other terms were adjusted and there are no further step‑up dates. Nufarm retains the right to redeem or exchange the NSS on future distribution dates. 106 Nufarm Limited Annual Report 2019 29. Capital and reserves (continued) Translation reserve The translation reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations where their functional currency is different from the presentation currency of the reporting entity. Capital profit reserve This reserve is used to accumulate realised capital profits. Other reserve This reserve represents the accrued employee entitlements to share awards that have been charged to the income statement and have not yet been exercised. Until December 2017, this reserve held the debit balance related to a written put option of a 49% interest held by the non‑controlling shareholders of Altantica Sementes Ltda (Atlantica). As the non‑controlling shareholders had the present access to the economic benefits with their underlying ownership interest, their non controlling interest was recognised. In December 2017, the written put option was exercised, and the debit reserve was utilised to complete the transaction. This reserve also holds the balances related to hedging. Dividends No interim dividend was declared for Jan 2019 (2018: 5 cents per share, totalling $16,379,929). No final dividend was declared for Jul 2019 (2018: six cents per share, totalling $19,662,299). Distributions Distributions recognised in the current year by Nufarm Finance (NZ) Ltd on the Nufarm Step‑up Securities* are: 2019 Distribution Distribution 2018 Distribution Distribution Distribution rate Total amount $000 Payment date Consolidated 6.00% 6.08% 5.80% 5.87% 7,511 7,651 15,162 15 Apr 2019 15 Oct 2018 7,259 16 Apr 2018 7,381 16 Oct 2017 14,640 * Refer to discussion titled “Nufarm Step‑up Securities” above. The distribution on the Nufarm Step‑up Securities reported on the equity movement schedule has been reduced by the tax benefit on the gross distribution, giving an after‑tax amount of $10.957 million (2018:$10.763 million). Franking credit/(debit) balance The amount of franking credits available for the subsequent financial year are: Franking account balance as at the end of the year at 30% (2018: 30%) Franking credits/(debits) that will arise from the payment of income tax payable/(refund) as at the end of the year Credit/(debit) balance at 31 July 2019 $000 2018 $000 – – – – – – The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. In accordance with the tax consolidation legislation, the company as the head entity in the tax‑ consolidated group has also assumed the benefit/(obligation of $nil (2018: $nil)) franking credits/(debits). Nufarm Limited Annual Report 2019 107 Notes to the Consolidated Financial Statements (continued) 30. Earnings per share Net profit/(loss) for the year Net profit/(loss) attributable to non‑controlling interest Net profit/(loss) attributable to equity holders of the parent Nufarm Step‑up Securities distribution Earnings/(loss) used in the calculations of basic and diluted earnings per share Consolidated 2019 $000 38,310 – 38,310 (10,957) 27,353 2018 $000 (16,007) 419 (15,588) (10,763) (26,351) Earnings/(loss) from continuing operations 27,353 (26,351) Subtract/(add back) items of material income/(expense) (refer note 6) (50,770) (113,984) Earnings/(loss) excluding items of material income/(expense) used in the calculation of earnings per share excluding material items 78,123 87,633 For the purposes of determining basic and diluted earnings per share, the after‑tax distributions on NSS are deducted from net profit. Weighted average number of ordinary shares used in calculation of basic earnings per share Weighted average number of ordinary shares used in calculation of diluted earnings per share Number of shares 2019 2018 369,231,803 310,650,760 370,502,520 311,631,734 There have been no conversions to, calls of, or subscriptions for ordinary shares or issues of ordinary shares since the reporting date and before the completion of this financial report. Earnings per share for continuing and discontinued operations Basic earnings per share From continuing operations Diluted earnings per share From continuing operations Earnings per share (excluding items of material income/expense – see note 6) Basic earnings per share Diluted earnings per share Cents per share 2019 2018 7.4 7.4 21.2 21.1 (8.5) (8.5) 28.2 28.1 108 Nufarm Limited Annual Report 2019 31. Financial risk management and financial instruments The group has exposure to the following financial risks: • credit risk; • liquidity risk; and • market risk. This note presents information about the group’s exposure to each of the above risks, the objectives, policies and processes for measuring and managing risk, and the management of capital. The Board of Directors has responsibility to identify, assess, monitor and manage the material risks facing the group and to ensure that adequate identification, reporting and risk minimisation mechanisms are established and working effectively. To support and maintain this objective, the audit committee has established detailed policies on risk oversight and management by approving a global risk management charter that specifies the responsibilities of the general manager global risk management (which includes responsibility for the internal audit function). This charter also provides comprehensive global authority to conduct internal audits, risk reviews and system‑based analyses of the internal controls in major business systems operating within all significant company entities worldwide. The general manager global risk management reports to the chairman of the audit and risk committee and functionally to the chief financial officer. He provides a written report of his activities at each meeting of the audit and risk committee. In doing so he has direct and ongoing access to the chairman and members of the audit and risk committee. Credit risk Credit risk is the risk of financial loss to the group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the group’s receivables from customers and other financial assets. Exposure to credit risk The group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the group’s customer base, including the default risk of the industry and country in which the customers operate, has less of an influence on credit risk. The group has credit policies in place and the exposure to credit risk is monitored on an ongoing basis. Credit evaluations are performed on all customers before the group’s standard payment and delivery terms and conditions are offered. Purchase limits are established for each customer, which represents the maximum open amount without requiring further management approval. The group’s maximum exposure to credit risk at the reporting date was: Carrying amount Trade and other receivables Preference securities receivable Cash and cash equivalent assets Derivative contracts: Assets Consolidated 2019 $000 2018 $000 1,476,899 1,303,137 97,500 505,687 – 301,700 3,829 5,339 2,083,915 1,610,176 Nufarm Limited Annual Report 2019 109 Notes to the Consolidated Financial Statements (continued) 31. Financial risk management and financial instruments (continued) Credit risk (continued) The group’s maximum exposure to credit risk for trade and other receivables at the reporting date by geographic region was: Carrying amount Australia/New Zealand Asia Europe North America South America Consolidated 2019 $000 83,261 57,121 497,484 246,476 592,557 2018 $000 210,914 30,557 430,792 125,685 505,189 Trade and other receivables 1,476,899 1,303,137 The group’s top five customers account for $152.812 million of the trade receivables carrying amount at 31 July 2019 (2018: $186.729 million). These top five customers represent 11 per cent (2018: 15 per cent) of the total receivables. Impairment losses The ageing of the group’s customer trade receivables at the reporting date was: Receivables ageing Current Past due – 0 to 90 days Past due – 90 to 180 days Past due – 180 to 360 days Past due – more than one year Provision for impairment Trade receivables Consolidated 2019 $000 1,146,435 119,606 31,846 15,610 56,899 2018 $000 1,017,819 109,279 10,987 9,884 59,329 1,370,396 1,207,298 (49,531) (36,546) 1,320,865 1,170,752 Some receivables are secured by collateral from customers such as guarantees and charges on assets. In some countries credit insurance is undertaken to reduce credit risk. The past due receivables not impaired are considered recoverable. In the crop protection industry, it is normal practice to vary the terms of sales depending on the climatic conditions experienced in each country. The movement in the allowance for impairment in respect of trade receivables during the year was as follows. Comparative amounts for 2018 represent the allowance account for impairment losses under AASB 139. 110 Nufarm Limited Annual Report 2019 31. Financial risk management and financial instruments (continued) Credit risk (continued) Balance at 1 August under AASB 139 Adjustment on initial application of AASB 9 Balance at 1 August under AASB 9 Provisions made during the year Provisions used during the year Provisions acquired through business combinations Exchange adjustment Balance at 31 July Consolidated 2018 $000 26,439 – 13,915 (1,772) – (2,036) 36,546 2019 $000 36,546 16,414 52,960 6,830 (13,044) – 2,785 49,531 Expected credit loss assessment for individual customers The group uses an allowance matrix to measure the ECLs of trade receivables from individual customers, which comprise of a large number of customers with small balances. Loss rates are calculated using a ‘roll rate’ method based on the probability of a receivable progressing through successive stages of delinquency to write off. Roll rates are calculated separately for exposures in different segments and countries. Liquidity risk Liquidity risk is the risk that the group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The group’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, without incurring unacceptable losses or risking damage to the group’s reputation. Sales and operating profit are seasonal and are weighted towards the first half of the calendar year in Australia/ New Zealand, North America and Europe, reflecting the planting and growing cycle in these regions while in Latin America the sales and operating profit is weighted towards the second half of the calendar year. This seasonal operating activity results in seasonal working capital requirements. Principally, the group sources liquidity from cash generated from operations, and where required, external bank facilities. Working capital fluctuations due to seasonality of the business are supported by the short‑term funding available from the group’s trade receivable securitisation facility. Debt facilities As at 31 July 2019, the key group facilities include a group trade receivables securitisation facility, a US$475 million senior unsecured notes offering due in April 2026 (31 July 2018: US$475 million), and a senior secured bank facility of $665 million (31 July 2018: $645 million). On 26 April 2018 the group completed the refinancing of the US$325m senior unsecured notes due in October 2019. The 2019 notes were redeemed from investors in May 2018 through the issuance of US$475m senior unsecured notes due in April 2026 with a fixed coupon component of 5.75% (“2026 notes”). The 2026 notes were issued under a dual tranche structure by Nufarm Australia Ltd (US$266 million) and Nufarm Americas Inc (US$209 million). On 27 July 2018 the group closed an unsecured and non‑convertible BRL 200 million debenture. Issued by Nufarm Industria Quimica e Farma (Nufarm Brazil), the floating rate debenture matures in July 2021 and is governed by two group covenants that are measured and reported at 31 July each year. The proceeds have been used to repay existing bank debt and extend Brazil’s weighted average debt maturity profile. On 8 February 2019 the group upsized its senior secured bank facility (SFA) to $665 million (31 July 2018: $645 million) and renegotiated the tenor with lenders. As a result of these negotiations, $50 million is due in August 2019, $125 million is due in January 2021 and $490 million is due in January 2022 (31 July 2018: $645 million is due in January 2021). The SFA includes covenants of a type normally associated with facilities of this kind, and the group was in compliance with these covenants. The facility is drawn to $459.904 million at 31 July 2019 (31 July 2018: $404.843 million). Nufarm Limited Annual Report 2019 111 Notes to the Consolidated Financial Statements (continued) 31. Financial risk management and financial instruments (continued) Liquidity risk (continued) Debt facilities (continued) On 23 August 2011, Nufarm executed a group trade receivables securitisation facility. The facility provides funding that aligns with the working capital cycle of the company. The facility limit varies on a monthly basis to reflect the cyclical nature of the trade receivables being used to secure funding under the program. The monthly facility limit is set at $500 million for three months of the financial year, $400 million for one month of the financial year, $350 million for four months of the financial year, $300 million for two months of the financial year and $250 million for two months of the financial year (31 July 2018: facility limit is set to $375 million for five months of the financial year, $300 million for three months of the financial year, $275 million for one month of the financial year and $175 million for three months of the financial year). The majority of debt facilities that reside outside the notes, SFA and the group trade receivables securitisation facility are regional working capital facilities, primarily located in Latin America and Europe, which at 31 July 2019 totalled $814.802 million (2018: $601.765 million). At 31 July 2019, the group had access to debt of $2,519 million (2018: $2,185 million) under the notes, SFA, group trade receivables securitisation facility and with other lenders. A parent guarantee is provided to support working capital facilities in Europe, South America and the notes. Trade finance The liquidity of the group is influenced by the terms suppliers extend in respect of purchases of goods and services. The determination of terms provided by suppliers is influenced by a variety of factors including supplier’s liquidity. Suppliers may engage financial institutions to facilitate the receipt of payments for goods and services from the group, which are often referred to as supplier financing arrangements. The group is aware that trade payables of $293.810 million at 31 July 2019 (2018: $327.123 million) are to be settled via such arrangements in future periods. In the event suppliers or financial institutions cease such arrangements the liquidity of the group’s suppliers may be affected. If suppliers subsequently seek to reduce terms on group’s purchases of goods and services in the future, the group’s liquidity will be affected. Details of the group’s trade and other payables are disclosed in note 24. To support the liquidity of the group and reduce the credit risk relating to specific customers, trade receivables held by the group are sold to third parties. The sales (or factoring) of receivables to third parties is primarily done on a non‑recourse basis, and the group incurs a financing expense at the time of the sale. The group derecognises trade receivables where the terms of the sale allows for derecognition. At 31 July 2019 the group estimates $91.387 million (2018: $74.644 million) of derecognised trade receivables were being held by third parties. For clarity, the group trade receivables securitisation facility, noted above, has terms which does not allow the group to derecognise these trade receivables. 112 Nufarm Limited Annual Report 2019 31. Financial risk management and financial instruments (continued) The following are the contractual maturities of the group’s financial liabilities: Consolidated 2019 Non‑derivative financial liabilities Bank overdrafts Trade and other payables Bank loans – secured Bank loans – unsecured Brazil unsecured notes Senior unsecured notes Other loans – unsecured Finance lease liabilities – secured Derivative financial liabilities Derivatives used for hedging: Outflow Inflow Other derivative contracts: Outflow Inflow Derivative financial assets Derivatives used for hedging: Outflow Inflow Other derivative contracts: Outflow Inflow Consolidated 2018 Non‑derivative financial liabilities Bank overdrafts Trade and other payables Bank loans – secured Bank loans – unsecured Brazil unsecured notes Senior unsecured notes Other loans – unsecured Finance lease liabilities – secured Derivative financial liabilities Derivatives used for hedging: Outflow Inflow Other derivative contracts: Outflow Inflow Derivative financial assets Derivatives used for hedging: Outflow Inflow Other derivative contracts: Outflow Inflow Carrying amount $000 Contractual cash flows $000 Less than 1 year $000 1‑2 years $000 More than 2 years $000 – 1,231,137 806,917 174,654 77,122 689,605 4,723 12,852 – 1,231,137 836,090 189,310 91,234 967,170 4,723 93,638 – 1,220,079 405,081 120,397 7,095 39,652 1,342 1,628 – 19 7,185 10,094 84,139 39,652 3,381 1,906 – 11,039 423,824 58,819 – 887,866 – 90,104 – – 1,182 – – – – – – – 460,120 (456,546) 460,120 (456,546) – – – – – – – – – – – – – – – – – (3,829) 2,994,363 649,811 (657,546) 3,409,141 649,811 (657,546) 1,791,113 Carrying amount $000 Contractual cash flows $000 Less than 1 year $000 – – 146,376 1‑2 years $000 – – 1,471,652 More than 2 years $000 7,357 1,139,046 795,747 161,695 71,610 638,613 3,559 12,593 7,357 1,139,046 825,915 174,911 92,351 933,088 3,559 94,484 7,357 1,128,246 410,035 142,212 6,939 37,434 1,303 1,640 – 14 7,433 29,933 6,939 36,720 2,256 1,664 – 10,786 408,447 2,766 78,473 858,934 – 91,180 – – – – – – 3,024 – 523,446 (517,878) 523,446 (517,878) – – – – – – – – – – – – – – – – – – – (5,339) 2,827,905 843,835 (852,737) 3,267,377 843,835 (852,737) 1,731,832 – – 84,959 – – 1,450,586 Nufarm Limited Annual Report 2019 113 Notes to the Consolidated Financial Statements (continued) 31. Financial risk management and financial instruments (continued) Liquidity risk (continued) Interest on borrowings is denominated in currencies that match the cash flows generated by the underlying operations of the group. This provides an economic hedge and no derivatives are used to manage the exposure. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. Currency risk The group uses financial instruments to manage specifically identified foreign currency risk on sales, purchases and borrowings that are denominated in a currency other than the functional currency of the individual group entity. The currencies giving rise to this risk include the US Dollar, the Euro, the British Pound, the Australian Dollar, the New Zealand Dollar and the Brazilian Real. Financial instruments used by the group to manage currency risks include derivative instruments such as foreign exchange contracts, cross currency interest rate swaps and options, and non‑derivative instruments such as foreign currency debt instruments. The group designates select financial instruments for hedge accounting where it is deemed appropriate to do so. On 26 April 2018 the group completed the refinancing of the US$325m senior unsecured notes due in October 2019. The 2019 notes were redeemed through the issuance of US$475m senior unsecured notes due in April 2026 as a dual tranche issuance by Nufarm Australia Ltd and Nufarm Americas Inc. Currency risk related to the notes is managed using foreign exchange contracts. The group uses financial instruments to manage foreign currency translation risk arising from the group’s net investments in foreign currency subsidiary entities. These financial instruments are designated as net investment hedges for hedge accounting purposes. No ineffectiveness was recognised from net investment hedges during the reporting periods. For accounting purposes, the group has not designated any other derivative financial instruments in hedge relationships and all movements in fair value are recognised in profit or loss during the period. The net fair value of derivative financial instruments in the group, not designated as being in a hedge relationship, used as economic hedges of forecast transactions at 31 July 2019 was a $2.647 million asset (2018: $2.315 million liability) comprising assets of $3.829 million (2018: $5.339 million) and liabilities of $1.182 million (2018: $3.024 million). Exposure to currency risk The group’s exposure to major foreign currency risks at balance date are as follows. The exposures are calculated based on locally reported net foreign currency exposures, and are presented net of open derivative financial instruments. The analysis is performed on the same basis as the previous financial year. Net financial assets/(liabilities) – by currency of denomination AUD $000 – 2,467 (1,358) (268) – 841 USD $000 12,235 – 6,658 7,905 (22,964) 3,834 Euro $000 9,006 (187) – 7,754 – 16,573 GBP $000 (419) (23) 4,727 – – 4,285 Consolidated 2019 Functional currency of group operation Australian dollars US dollars Euro British pound Brazilian real 114 Nufarm Limited Annual Report 2019 31. Financial risk management and financial instruments (continued) Market risk (continued) Consolidated 2018 Functional currency of group operation Australian dollars US dollars Euro British pound Brazilian real Sensitivity analysis Net financial assets/(liabilities) – by currency of denomination AUD $000 – 2,447 97 (268) – 2,276 USD $000 Euro $000 37,906 21,682 – 25,836 10,533 (7,056) 67,219 (3) – (6,569) – 15,110 GBP $000 (1,392) – 4,625 – – 3,233 Based on the aforementioned group’s net financial assets/(liabilities) at 31 July 2019, a 1 percent strengthening or weakening of the following currencies at 31 July 2019 would have increased/(decreased) profit or loss by the amounts shown below. This analysis assumes all other variables, including interest rates, remain constant. The analysis is performed on the same basis for 31 July 2018. Currency movement 1% change in the Australian dollar exchange rate 1% change in the US dollar exchange rate 1% change in the Euro exchange rate 1% change in the GBP exchange rate 1% change in the BRL exchange rate Strengthening Weakening Strengthening Weakening Profit or (loss) after tax 2019 $000 Profit or (loss) after tax 2019 $000 Profit or (loss) after tax 2018 $000 Profit or (loss) after tax 2018 $000 (138) 172 46 (78) 161 140 (170) (45) 77 (159) (388) 503 (108) (3) 49 391 (498) 107 3 (49) The group’s financial asset and liability profile may not remain constant, and therefore these sensitivities should be used with care. The following significant exchange rates applied during the year: AUD US Dollar Euro GBP BRL Interest rate risk Average rate Reporting date 2019 0.715 0.627 0.553 2.761 2018 0.774 0.648 0.574 2.583 2019 0.689 0.619 0.564 2.593 2018 0.744 0.635 0.567 2.793 The group’s exposure to the risk of changes in market interest rates primarily relates to the group’s debt obligations that have floating interest rates. This risk is mitigated by maintaining a level of fixed and floating rate borrowings, as well as the the ability to use derivative financial instruments when deemed appropriate to do so. The majority of the group’s debt is raised under central borrowing programs. The A$665 million syndicated bank facility and the group trade receivables securitisation facility are considered floating rate facilities. The group completed the refinancing of the existing US$325m senior unsecured notes due in October 2019 during April 2018. The former notes were refinanced through the issuance of US$475m senior unsecured notes due in April 2026 with a fixed coupon component. Nufarm Limited Annual Report 2019 115 Notes to the Consolidated Financial Statements (continued) 31. Financial risk management and financial instruments (continued) Market risk (continued) Interest rate risk (continued) Interest rate risk on Nufarm step‑up securities The distribution rate is the average mid‑rate for bank bills with a term of six months plus a margin of 3.90% (2018: 3.90%). Profile At the reporting date the interest rate profile of the group’s interest‑bearing financial instruments were: Carrying amount Variable rate instruments Financial assets Financial liabilities Fixed rate instruments Financial assets Financial liabilities Consolidated 2019 $000 2018 $000 81,413 (1,065,803) (984,390) 46,165 (969,870) (923,705) – (700,070) (700,070) – (642,337) (642,337) Sensitivity analysis for variable rate instruments A change of 100 basis points in interest rates at the reporting date would have increased/(decreased) profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular foreign currency rates, remain constant. The sensitivity is calculated on the debt at 31 July 2019. Due to the seasonality of the crop protection business, debt levels can vary during the year. The analysis is performed on the same basis for 31 July 2018. 2019 Variable rate instruments Total sensitivity 2018 Variable rate instruments Total sensitivity Fair values Profit or loss 100bp increase $000 100bp decrease $000 (9,844) (9,844) (9,237) (9,237) 9,844 9,844 9,237 9,237 All financial assets and financial liabilities, other than derivatives, are initially recognised at the fair value of consideration paid or received, net of transaction costs as appropriate, and subsequently carried at fair value or amortised cost, as indicated in the tables below. Derivatives are initially recognised at fair value on the date the contract is entered into and are subsequently remeasured at their fair value. The financial assets and liabilities are presented by class in the tables below at their carrying values, which generally approximate to the fair values. In the case of the centrally managed fixed rate debt not swapped to floating rate totalling $700.070 million (2018: $642.337 million), the fair value at 31 July 2019 is $663.238 million (2018: $618.389 million). 116 Nufarm Limited Annual Report 2019 31. Financial risk management and financial instruments (continued) Consolidated 2019 Note Carried at fair value through profit or loss $000 Derivatives used for hedging $000 Financial assets/ liabilities at amortised cost $000 Total $000 Cash and cash equivalents Trade and other receivables excluding derivatives Forward exchange contracts: Assets Liabilities Interest Rate Swaps: Assets Liabilities Trade and other payables excluding derivatives Bank overdraft Secured bank loans Unsecured bank loans Brazil unsecured notes Senior unsecured notes Other loans Finance leases 15 16 16 24 16 24 24 15 25 25 25 25 25 25 – – 3,493 (1,182) 336 – – – – – – – – – 2,647 – – – – – – – – – – – – – – – 505,687 505,687 1,476,899 1,476,899 – – – – 3,493 (1,182) 336 – (1,231,137) (1,231,137) – (806,917) (174,654) (77,122) – (806,917) (174,654) (77,122) (689,605) (689,605) (4,723) (12,852) (4,723) (12,852) (1,014,424) (1,011,777) Consolidated 2018 Note Carried at fair value through profit or loss $000 Derivatives used for hedging $000 Financial assets/ liabilities at amortised cost $000 Total $000 Cash and cash equivalents Trade and other receivables excluding derivatives Forward exchange contracts: Assets Liabilities Interest Rate Swaps: Assets Liabilities Trade and other payables excluding derivatives Bank overdraft Secured bank loans Unsecured bank loans Brazil unsecured notes Senior unsecured notes Other loans Finance leases 15 16 16 24 16 24 24 15 25 25 25 25 25 25 – – 2,500 (3,024) 2,839 – – – – – – – – – 2,315 – – – – – – – – – – – – – – – 301,700 301,700 1,303,137 1,303,137 – – – – 2,500 (3,024) 2,839 – (1,139,046) (1,139,046) (7,357) (7,357) (795,747) (795,747) (161,695) (71,610) (161,695) (71,610) (638,613) (638,613) (3,559) (12,593) (3,559) (12,593) (1,225,383) (1,223,068) Nufarm Limited Annual Report 2019 117 Notes to the Consolidated Financial Statements (continued) 31. Financial risk management and financial instruments (continued) Fair values (continued) Fair value hierarchy The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities; • Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Consolidated 2019 Derivative financial assets Derivative financial liabilities Consolidated 2018 Derivative financial assets Derivative financial liabilities Level 1 $000 – – – – Level 1 $000 – – – – Level 2 $000 3,829 3,829 (1,182) (1,182) Level 2 $000 5,339 5,339 (3,024) (3,024) Level 3 $000 – – – – Level 3 $000 – – – – Total $000 3,829 3,829 (1,182) (1,182) Total $000 5,339 5,339 (3,024) (3,024) There have been no transfers between levels in either 2019 or 2018. Valuation techniques used to derive fair values The fair value of financial instruments that are not traded in an active market (for example, over–the–counter derivatives) is determined using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. Specific valuation techniques used to value financial instruments include: • The use of quoted market prices or dealer quotes for similar instruments. • The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves. • The fair value of forward foreign exchange contracts is determined using forward exchange rates at the balance sheet date. • Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial instruments. 118 Nufarm Limited Annual Report 2019 31. Financial risk management and financial instruments (continued) Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors monitors the group’s return on funds employed (ROFE). Return is calculated on the group’s earnings before interest and tax and adjusted for any material items. Funds employed is defined as shareholder’s funds plus total interest bearing debt. The Board of Directors determines the level of dividends to ordinary shareholders and reviews the group’s total shareholder return with similar groups. The Board believes ROFE is an appropriate performance condition as it ensures management is focused on the efficient use of capital and the measure remains effective regardless of the mix of equity and debt, which may change from time to time. ROFE objectives are set by the Board at the beginning of each year. There is a target and a stretch hurdle. These numbers will based on the budget and growth strategy. The ROFE return for the year ended 31 July 2019 was 7.1 per cent (2018: 9.4 per cent). There were no changes in the group’s approach to capital management during the year. 32. Operating leases Non‑cancellable operating lease rentals are payable as follows: Not later than one year Later than one year but not later than two years Later than two years but not later than five years Later than five years Consolidated 2019 $000 27,218 22,269 33,875 158,129 241,491 2018 $000 13,036 10,583 19,000 139,440 182,059 Operating leases are generally entered to access the use of shorter term assets such as motor vehicles, mobile plant and office equipment. Rentals are fixed for the duration of these leases. There is a small number of leases for office properties. These rentals have regular reviews based on market rentals at the time of review. 33. Capital commitments The group had contractual obligations to purchase plant and equipment for $22.064 million at 31 July 2019 (2018: $5.394 million). The group has agreed to make capital contributions in proportion to its interest in the Leshan Nong Fu Trading Co., Ltd joint venture to make up any losses if required or at the latest within five years after incorporation, up to a maximum of RMB 100 million. Also refer to note 19. Nufarm Limited Annual Report 2019 119 Notes to the Consolidated Financial Statements (continued) 34. Contingencies The directors are of the opinion that provisions are not required in respect of the following matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. Environmental guarantee given to the purchaser of land and buildings at Genneviliers for EUR 8.5 million. Insurance bond for EUR 2.789 million established to make certain capital expenditures at Gaillon plant in France. Consolidated 2019 $000 2018 $000 13,732 13,386 4,506 4,393 Brazilian taxation proceedings 20,546 31,554 Brazilian taxation proceedings – hedge costs deductibility 8,537 8,874 Brazilian taxation proceedings – goodwill deductibility 29,615 29,739 Other bank guarantees Contingent liabilities 221 219 77,157 88,165 Obligations may arise in the future due to currently unknown lawsuits and claims including those pertaining to product liability, safety and health, environmental and tax matters which may be instituted or asserted against the group. While the amounts claimed may be substantial, the ultimate liability cannot now be determined because of the considerable uncertainties that existed at balance date. Nonetheless, it is possible that results of Nufarm’s operations or liquidity in a particular period could be materially affected by such claims. Brazilian taxation proceedings As at 31 July 2019, the total contingent liability relating to future potential tax liabilities (excluding the goodwill and hedge cases) in Brazil is $20.546 million (2018: $31.554 million). The group considers that it is not probable that a liability will arise in respect of these cases and it continues to defend the cases. Brazilian taxation proceedings – goodwill deductibility The Brazilian tax authorities are challenging the validity of goodwill deductions, in respect of certain years, arising from Nufarm’s acquisition of Agripec (now known as Nufarm Brazil). There are six levels of Brazilian courts (3 levels of administrative court and 3 levels of judicial court), and Brazilian tax disputes can take 10‑15 years to be settled. This dispute has been ongoing since 2013, during which period the following events have occurred: • 2014 unfavourable decision at first level of administrative court • 2017 favourable decision at second level of administrative court • 2018 unfavourable decision at third level of administrative court The contingent liability has been estimated based on assessments received. Nufarm considers that it is not probable that a liability will arise in respect of these assessments. It is possible that further assessments could be received in future periods. 120 Nufarm Limited Annual Report 2019 34. Contingencies (continued) Brazilian taxation proceedings – hedge costs deductibility The Brazilian tax authorities are challenging the deductibility of hedge costs incurred in 2008. Nufarm received unfavourable decisions at the first and second levels of administrative court, but considers that it is not probable that a liability will arise in respect of this matter. The contingent liability has been estimated based on an assessment received. In the event any of the contingent Brazilian tax obligations crystallise, it will result in a tax asset write‑off and the tax liability will be settled using a combination of remaining recognised and unrecognised tax assets (refer note 18) and/or cash. Contingent asset The group holds a contingent asset in respect of potential pre‑acquisition tax credits of its Brazilian business acquired in 2007. Whilst the credits are deemed to be valid, the Brazilian courts are currently deliberating the value of the credits and therefore the full amount of this contingent asset is yet to be established. Such credits can be used to offset future federal tax payable. 35. Group entities Parent entity Nufarm Limited – ultimate controlling entity Subsidiaries Access Genetics Pty Ltd Agcare Biotech Pty Ltd Agchem Receivables Corporation Agryl Holdings Limited Agtrol International SE DE CV Ag‑seed Research Pty Ltd Ag‑turf SA DE CV AH Marks (New Zealand) Limited AH Marks Australia Pty Ltd AH Marks Holdings Limited AH Marks Pensions Scottish Limited Partnership Artfern Pty Ltd Atlantica Sementes SA Australis Services Pty Ltd Bestbeech Pty Ltd Chemicca Limited CNG Holdings BV Crop Care Australasia Pty Ltd Crop Care Holdings Limited Croplands Equipment Limited Croplands Equipment Pty Ltd Danestoke Pty Ltd Edgehill Investments Pty Ltd Fchem (Aust) Limited Fernz Canada Limited Fidene Limited Notes Place of incorporation Percentage of shares held 2019 2018 (a) (a) (a) (a) Australia Australia USA Australia Mexico Australia Mexico New Zealand (a) Australia United Kingdom United Kingdom (a) (a) (a) (a) (a) (a) (a) (a) (a) Australia Brazil Australia Australia Australia Netherlands Australia New Zealand New Zealand Australia Australia Australia Australia Canada New Zealand 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Nufarm Limited Annual Report 2019 121 Notes to the Consolidated Financial Statements (continued) 35. Group entities (continued) First Classic Pty Ltd Frost Technology Corporation Greenfarm Hellas Trade of Chemical Products SA Growell Limited Grupo Corporativo Nufarm SA Laboratoire European de Biotechnologie s.a.s Le Moulin des Ecluses s.a Lefroy Seeds Pty Ltd Manaus Holdings Sdn Bhd Marman (Nufarm) Inc Marman de Guatemala Sociedad Anomima Marman de Mexico Sociedad Anomima De Capital Variable Marman Holdings LLC Masmart Pty Ltd Mastra Corporation Pty Ltd Mastra Corporation Sdn Bhd Mastra Corporation USA Pty Ltd Mastra Holdings Sdn Bhd Mastra Industries Sdn Bhd Medisup Securities Limited NF Agriculture Inc Nufarm Africa SARL AU Nufarm Agriculture (Pty) Ltd Nufarm Agriculture Inc Nufarm Agriculture Zimbabwe (Pvt) Ltd Nufarm Americas Holding Company Nufarm Americas Inc Nufarm Asia Sdn Bhd Nufarm Australia Limited Nufarm Bulgaria Nufarm BV Nufarm Canada Receivables Partnership Nufarm Chemical (Shanghai) Co Ltd Nufarm Chile Limitada Nufarm Colombia S.A. Nufarm Crop Products UK Limited Nufarm Cropcare Private Limited Nufarm Costa Rica Inc. SA Nufarm de Guatemala SA Nufarm de Mexico Sa de CV Nufarm de Panama SA Nufarm de Venezuela SA Nufarm del Ecuador SA Nufarm Deutschland GmbH Nufarm do Brazil Ltda 122 Nufarm Limited Annual Report 2019 Notes Place of incorporation (a) Australia USA Greece United Kingdom Guatemala France France (a) Australia Malaysia USA Guatemala Mexico USA Australia Australia Malaysia Australia Malaysia Malaysia (a) (a) (a) (a) Australia (a) USA Morocco South Africa Canada Zimbabwe USA USA Malaysia Australia Bulgaria Netherlands Canada China Chile Colombia United Kingdom India Costa Rica Guatemala Mexico Panama Venezuela Ecuador Germany Brazil Percentage of shares held 2019 2018 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Nufarm Espana SA Nufarm Europe GmbH Nufarm Finance BV Nufarm Finance Inc Nufarm Finance Pty Ltd Nufarm Finance (NZ) Limited Nufarm GmbH Nufarm GmbH & Co KG Nufarm Grupo Mexico S DE RL DE CV Nufarm Holdings (NZ) Limited Nufarm Holdings BV Nufarm Holdings s.a.s Nufarm Hong Kong Investments Ltd Nufarm Hungaria Kft Nufarm Inc Nufarm Industria Quimica e Farmaceutica SA Nufarm Insurance Pte Ltd Nufarm Investments Cooperatie WA Nufarm Investments Pty Ltd Nufarm Italia srl Nufarm KK Nufarm Korea Ltd Nufarm Labuan Pte Ltd Nufarm Limited Nufarm Malaysia Sdn Bhd Nufarm Materials Limited Nufarm Middle East Operations Nufarm NZ Limited Nufarm Paraguay SA Nufarm Pensions General Partner Ltd Nufarm Pensions Scottish Limited Partnership Nufarm Peru SAC Nufarm Platte Pty Ltd Nufarm Polska SP.Z O.O Nufarm Portugal LDA Nufarm Romania SRL Nufarm s.a.s Nufarm SA Nufarm Services (Singapore) Pte Ltd Nufarm Services Sdn Bhd Nufarm Suisse Sarl Nufarm Technologies (M) Sdn Bhd Nufarm Technologies USA Nufarm Technologies USA Pty Ltd Nufarm Treasury Pty Ltd Nufarm Turkey Import & Trade of Chemical Products LLP Notes Place of incorporation Spain Germany Netherlands USA Australia New Zealand Austria Austria Mexico New Zealand Netherlands France Hong Kong Hungary USA Brazil Singapore Netherlands Australia Italy Japan Korea Malaysia United Kingdom Malaysia (a) Australia Egypt New Zealand Paraguay United Kingdom United Kingdom Peru (a) Australia Poland Portugal Romania France Argentina Singapore Malaysia Switzerland Malaysia New Zealand (a) (a) Australia Australia Turkey Nufarm UK Limited United Kingdom Percentage of shares held 2019 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 2018 100 100 – – – 100 100 100 100 100 100 100 100 100 100 100 100 100 – 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 Nufarm Limited Annual Report 2019 123 Notes to the Consolidated Financial Statements (continued) 35. Group entities (continued) Notes Place of incorporation Percentage of shares held 2019 2018 Nufarm Ukraine LLC Nufarm Uruguay SA Nufarm USA Inc Nugrain Pty Ltd Nuseed Americas Inc Nuseed Canada Inc Nuseed Europe Holding Company Ltd Nuseed Europe Ltd Ukraine Uruguay USA (a) Australia USA Canada United Kingdom United Kingdom Nuseed Global Holdings Pty Ltd (a) Australia Nuseed Global Innovation Nuseed Holding Company Nuseed International Holdings Pty Ltd Nuseed Mexico SA De CV Nuseed Omega Holdings Pty Ltd Nuseed Pty Ltd Nuseed Russia LLC Nuseed SA Nuseed Serbia d.o.o. Nuseed South America Sementes Ltda Nuseed Ukraine LLC Nuseed Uruguay Nutrihealth Grains Pty Ltd Nutrihealth Pty Ltd Opti‑Crop Systems Pty Ltd Pharma Pacific Pty Ltd PT Agrow PT Crop Care PT Nufamindo Agro Mukmur PT Nufarm Indonesia Richardson Seeds Ltd Seeds 2000 Argentina SRL Selchem Pty Ltd Societe Des Ecluses la Garenne s.a.s (a) (a) (a) (a) (a) (a) United Kingdom USA Australia Mexico Australia Australia Russia Argentina Serbia Brazil Ukraine Uruguay Australia Australia Australia Australia Indonesia Indonesia Indonesia Indonesia USA Argentina (a) Australia France 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 75 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 75 100 100 100 100 100 100 100 100 100 (a) These entities have entered into a deed of cross guarantee dated 21 June 2006, varied by an Assumption Deed dated 13 February 2013, 29 May 2013 and 26 July 2019 with Nufarm Limited which provides that all parties to the deed will guarantee to each creditor payment in full of any debt of each company participating in the deed on winding‑up of that company. As a result of a class order issued by the Australian Securities and Investment Commission, these companies are relieved from the requirement to prepare financial statements. 124 Nufarm Limited Annual Report 2019 36. Parent entity disclosures Result of the parent entity Profit/(loss) for the period Other comprehensive income Total comprehensive profit/(loss) for the period Financial position of the parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Share capital Reserves Accumulated losses Retained Earnings(a) Total equity 2019 $000 (20,135) 518 (19,617) Company 2018 $000 84,758 468 85,226 1,799,327 1,529,926 2,135,552 1,880,129 168,384 167,701 171,985 171,301 1,834,594 1,537,502 38,342 (51,671) 146,586 1,967,851 36,611 (31,536) 166,251 1,219,014 (a) Retained earnings comprises the transfer of net profit for the year and are characterised as profits available for distribution as dividends in future years. Dividends amounting to $19.662 million (2018: $37.795 million) were distributed from the retained earnings during the year. Parent entity contingencies The parent entity is one of the guarantors of the senior secured bank facility (SFA) and would be obliged, along with the other guarantors, to make payment on the SFA in the unlikely event of a default by one of the borrowers. The parent entity also provides guarantees to support several of the regional working capital facilities located in Latin America and Europe, and the senior unsecured notes. Parent entity capital commitments for acquisition of property, plant and equipment There are no capital commitments for the parent entity in 2019 or 2018. 37. Deed of cross guarantee Under ASIC Corporations (Wholly owned Companies) Instrument 2016/785, the Australian wholly‑owned subsidiaries referred to in note 35 are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports and director’s reports. It is a condition of the class order that the company and each of the subsidiaries enter into a deed of cross guarantee. The parent entity and all the Australian controlled entities have entered into a deed of cross guarantee dated 21 June 2006 which provides that all parties to the deed will guarantee to each creditor payment in full of any debt of each company participating in the deed on winding‑up of that company. A consolidated income statement and consolidated balance sheet, comprising the company and controlled entities which are a party to the deed, after eliminating all transactions between parties to the deed of cross guarantee, at 31 July 2019 is set out on the following page. Nufarm Limited Annual Report 2019 125 Notes to the Consolidated Financial Statements (continued) 37. Deed of cross guarantee (continued) Summarised income statement and retained profits Profit/(loss) before income tax expense Income tax expense Consolidated 2019 $000 (64,623) 831 2018 $000 (111,228) (15,580) Net profit attributable to members of the closed group (63,792) (126,808) Retained profits at the beginning of the period Adjustment on initial application of AASB 15 (net of tax) Adjustment on initial application of AASB 9 (net of tax) Dividends paid Retained profits at the end of the period Balance sheet Current assets Cash and cash equivalents Trade and other receivables Inventories Current tax assets Other Investments Total current assets Non‑current assets Trade and other receivables Investments in equity accounted investees Other investments Deferred tax assets Property, plant and equipment Intangible assets Total non‑current assets TOTAL ASSETS Current liabilities Trade and other payables Loans and borrowings Employee benefits Current tax payable Provision Total current liabilities Non‑current liabilities Payables Loans and borrowings Deferred tax liabilities Employee benefits Total non‑current liabilities TOTAL LIABILITIES NET ASSETS Equity Share capital Reserves Retained earnings TOTAL EQUITY 126 Nufarm Limited Annual Report 2019 (60,076) (6,379) (2,402) (19,662) (152,311) 104,527 – – (37,795) (60,076) 47,387 1,083,750 244,299 8,242 – 58,242 1,054,010 362,117 5,272 – 1,383,678 1,479,641 – 451 – 411 1,548,458 1,520,249 44,454 114,441 163,919 1,871,723 43,359 108,367 149,575 1,821,961 3,255,401 3,301,602 658,832 36,065 7,505 1,172 9,360 982,143 (3,182) 7,689 1,861 6,542 712,934 995,053 – – 674,372 662,266 13,173 10,212 697,757 1,410,691 1,844,710 12,066 9,489 683,821 1,678,874 1,622,728 1,901,084 1,603,992 95,937 (152,311) 78,812 (60,076) 1,844,710 1,622,728 38. Related parties (a) Transactions with related parties in the wholly‑owned group The parent entity entered into the following transactions during the year with subsidiaries of the group: • loans were advanced and repayments received on short term intercompany accounts; and • management fees were received from several wholly‑owned controlled entities. These transactions were undertaken on commercial terms and conditions. (b) Transactions with associated parties Sumitomo Chemical Company Ltd sales to purchases from trade receivable trade payable preference securities receivable Consolidated 2019 $000 57,262 175,605 34,319 62,382 97,500 2018 $000 44,176 177,841 27,574 68,926 – These transactions were undertaken on commercial terms and conditions. (c) Key management personnel compensation The key management personnel compensation included in personnel expenses (see note 9) are as follows: Short term employee benefits Post employment benefits Equity compensation benefits Termination benefits Other long term benefits Consolidated 2019 $ 2018 $ 6,004,339 5,643,293 310,699 264,035 1,097,920 1,372,768 – 220,013 – – 7,632,971 7,280,096 Individual directors and executives compensation disclosures Information regarding individual directors and executives compensation is provided in the remuneration report section of the director’s report. d) Other key management personnel transactions with the company or its controlled entities Apart from the details disclosed in this note, no director has entered into a material contract with the company or entities in the group since the end of the previous financial year and there were no material contracts involving director’s interest existing at year‑end. A number of key management persons, or their related parties, hold positions in other entities that result in them having control or significant influence over the financial or operating policies of those entities. A number of these entities transacted with the company or its subsidiaries in the reporting period. The terms and conditions of the transactions with management persons and their related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non‑director related entities on an arms‑length basis. From time to time, key management personnel of the company or its controlled entities, or their related entities, may purchase goods from the group. These purchases are on the same terms and conditions as those entered into by other group employees or customers and are trivial or domestic in nature. e) Loans to key management personnel and their related parties There were no loans to key management personnel at 31 July 2019 (2018: nil). Nufarm Limited Annual Report 2019 127 Notes to the Consolidated Financial Statements (continued) 39. Auditors’ remuneration Audit services KPMG Australia Consolidated 2019 $ 2018 $ Audit and review of group financial report 571,000 564,000 Overseas KPMG firms Audit and review of group and local financial reports Other auditors Audit and review of financial reports Audit services remuneration Other services KPMG Australia Other assurance services Other advisory services Overseas KPMG firms Other assurance services Other advisory services Other firms Other assurance services Other advisory services Other services remuneration 2,045,211 1,608,548 2,616,211 2,172,548 379,586 177,834 2,995,797 2,350,382 105,709 75,656 591,650 834,477 1,221 98,866 278,533 180,869 – 389,981 671,433 – 99,030 1,984,559 40. Subsequent events On 30 September 2019, the company has entered into a sale and purchase agreement (‘SPA’) with Sumitomo Chemical Company and related group companies (‘Sumitomo’), to divest its shares in certain entities, that together, comprise the majority of the Latin American crop protection business and the Latin American seed treatment business for consideration of $1,188 million. The SPA remains subject to a number of conditions including regulatory and shareholder approval, and the review of an independent expert. There will be a contractual obligation to repay the redeemable preference securities of $97.5 million to Sumitomo should the transaction complete. Other Other than the matters outlined above, or elsewhere in the financial information, no matters or circumstances have arisen since the end of the financial year, that have or may significantly affect the operations, results or state of affairs of the group in subsequent accounting periods. 128 Nufarm Limited Annual Report 2019 Directors’ Declaration 1. In the opinion of the directors of Nufarm Limited (the company): (a) the consolidated financial statements and notes are in accordance with the Corporations Act 2001 including: (i) giving a true and fair view of the group’s financial position as at 31 July 2019 and of its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. 2. There are reasonable grounds to believe that the company and the group entities identified in note 35 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the deed of cross guarantee between the company and those group entities pursuant to ASIC Corporations (Wholly owned Companies) Instrument 2016/785. 3. The directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the chief executive officer and chief financial officer for the financial year ended 31 July 2019. 4. The directors draw attention to note 2 to the consolidated financial statements, which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the directors: Dated at Melbourne this 30th day of September 2019 DG McGauchie AO Director GA Hunt Director Nufarm Limited Annual Report 2019 129 Independent Auditor’s Report Independent Auditor’s Report To the shareholders of Nufarm Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of The Financial Report comprises the: Nufarm Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: giving a true and fair view of the Group’s financial position as at 31 July 2019 and of its financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Consolidated balance sheet as at 31 July 2019 Consolidated income statement, consolidated statement income, consolidated statement of changes in equity, and consolidated statement of cash flows for the year then ended comprehensive of Notes including a summary of significant accounting policies Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year end and from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 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 Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Profession Standards Legislation. 130 Nufarm Limited Annual Report 2019 Key Audit Matters The Key Audit Matters we identified are: Recoverability assets, including property, plant and equipment and intangible assets non-current of Recoverability of deferred tax assets recognised in relation to prior period losses Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Recoverability of non-current assets, including property, plant and equipment ($393.6m) and intangible assets ($1,719.0m) Refer to the following notes to the financial report: Note 2 (d) (ii) Basis of preparation – Use of estimates and judgements – impairment testing, Note 3 (h) Significant accounting policies – Impairment, and Note 23 Intangible assets. The key audit matter How the matter was addressed in our audit Recoverability of non-current assets including property, plant and equipment, and intangible assets is a key audit matter due to the following: inherent complexity in determination of the Group’s cash generating units (‘CGU’s); the diverse nature of regional agricultural markets in which the Group operates. This includes different economic, regulatory and climatic conditions of a large number of geographies. The Group prepares individual discounted cash flow models incorporating these variations for each CGU. This volume and variety of data necessitates additional audit effort, and we involve KPMG audit teams located in significant jurisdictions who have knowledge of the local conditions. each geographic and product market segment experiences the following, which are subject to inherent uncertainty leading to a range of possible forecast outcomes: - - - fluctuating demand depending on economic and climatic conditions; regulatory and significant oversight, which can lead to approval and cessation of new and existing products; and activity technology advancements by the Group and competitors, which can lead to Our procedures included: testing the key controls over the cash flow models, including Board review and approval of key assumptions and business unit budgets which form the basis of the cash flow forecasts using our understanding of the nature of the Group’s business, we analysed: - - the internal reporting of the Group to assess how results are monitored and reported; and the implications to CGU identification in accordance with accounting standards. assessing the Group’s discounted cash flow models and key assumptions by: - - - comparing cash flows to historical trends and performance, by CGU, to inform our forecasts current evaluation incorporated into the models; of comparing the relevant cash flow forecasts to the Board approved budgets and FY20- FY21 business plans; involving our valuation specialists to assess the discount rates against comparable market information and the economic assumptions relating to cost of debt and cost of equity; and - using our industry knowledge, information Nufarm Limited Annual Report 2019 131 Independent Auditor’s Report (continued) shifts in market demand for products. Given the unique, non-homogenous, nature of these factors, specific auditor attention is applied to each element, increasing the audit effort. We focus on the authority and knowledge of the sources of judgements to the models, evidence of bias, and consistency of application of judgements. The above factors increase the complexity in auditing the intangible asset useful lives and the forward-looking assumptions contained in the Group’s discounted cash flow models for each CGU. Additional key assumptions we focused on included short term and terminal value growth rates and discount rates. These same conditions impact our audit effort applied for the value associated with new products in development phases. Products in early stages of development, compared to those closer to product launch, are prone to wider ranging forecasting outcomes and highly judgemental assumptions. The Group engaged an external valuation expert to assist them. We focused on the authority and knowledge of the sources of judgements to the valuation, common market practices, and consistency of judgements. published by regulatory and other bodies, and through inquiries with the Group, to assess the assumptions. These included intangible asset useful lives and the impact of technology, market and regulatory changes on those assumptions. We looked for evidence of sensitivity and bias within and across models, and consistency of application, investigating significant differences. the evaluating the Group’s sensitivity analysis in respect of the key assumptions in the models, including identification of areas of estimation uncertainty and reasonably possible changes in key assumptions. We assessed the related disclosures against accounting standard requirements; comparing carrying values of CGUs to available market data, such as implied earnings multiples of comparable entities; assessing the Group’s valuation of the ANZ Crop Protection CGU and products in development phase by additionally: - - assessing the competency, scope of work and objectivity of experts engaged by the Group; and involving our valuation specialists to assess the valuation methodology against industry practice and the requirements of the accounting standards. Recoverability of deferred tax assets recognised in relation to prior period tax losses ($131.9m) Refer to the following notes to the financial report: Note 2 (d) (iii) Basis of preparation - Use of estimates and judgements - income tax, Note 3(o) Significant accounting policies – Income tax, Note 11 Income tax expense and Note 18 Tax assets and liabilities. The key audit matter How the matter was addressed in our audit Recoverability of deferred tax assets in relation to prior period tax losses is a key audit matter due to the: complexity in auditing the forward-looking assumptions applied to the Group’s tax loss utilisation models for each tax jurisdiction given forward-looking assumptions involved. Further details on the significant the Our procedures included: testing key controls over the taxable profit forecasts underpinning the tax loss utilisation models, including Board review and approval of key assumptions and business unit budgets which form the basis of these forecasts. 132 Nufarm Limited Annual Report 2019 of non-current significant forward-looking assumptions and implications for the audit are contained in the recoverability assets, including property, plant and equipment and intangible assets key audit matter. Additional the is auditor attention reconciliation of forecast cash flows to taxable profits. focused on age of the tax losses, and the relevance of recent taxable profits to forecasts. large number of jurisdictions and our need to consider their varying and complex rules on tax loss utilisation. comparing the key assumptions and business unit budgets for consistency with those tested by us, as set out in the recoverability of non- current assets, including property plant and equipment and intangible assets key audit matter, and taxable profit concepts. assessing the Group’s tax loss utilisation models and key assumptions, by significant jurisdiction, by: - - - - - comparing taxable profit to historical trends and performance to inform our evaluation of the current taxable profit forecasts; comparing the taxable profit forecasts to the Board approved budgets; evaluating the Group’s aged utilisation sensitivity analysis in respect of the key assumptions, including the identification of areas of estimation uncertainty to focus our further procedures; understanding the timing of future taxable profits and considering the consistency of the timeframes of expected recovery to our knowledge of the business and its plans; and involving our tax specialists and teams from the relevant jurisdictions to assess the tax loss utilisation expiry dates and annual for consistency with local practice, regulatory parameters and legislation. allowances utilisation Nufarm Limited Annual Report 2019 133 Independent Auditor’s Report (continued) Other Information Other Information is financial and non-financial information in Nufarm Limited’s annual reporting which is provided in addition to the Financial Report and the Auditor's Report. The Directors are responsible for the Other Information. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we 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. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of Directors for the Financial Report The Directors are responsible for: preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001; implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error; and assessing the Group’s ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they 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 objective is: 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 Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar1.pdf. This description forms part of our Auditor’s Report. 134 Nufarm Limited Annual Report 2019 Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Nufarm Limited for the year ended 31 July 2019, complies with Section 300A of the Corporations Act 2001. KPMG Gordon Sangster Partner Melbourne 30 September 2019 preparation The Directors of the Company are responsible for the the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. presentation and of Our responsibilities We have audited the Remuneration Report included in the Directors’ report for the year ended 31 July 2019. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Nufarm Limited Annual Report 2019 135 Shareholder and Statutory Information Details of shareholders, shareholdings and top 20 shareholders Listed securities Fully paid ordinary shares Twenty largest shareholders Number of holders Number of securities Percentage held by top 20 16,948 379,639,334 82.12 HSBC Custody Nominees (Australia) Limited Sumitomo Chemical Company Limited J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited National Nominees Limited BNP Paribas Noms Pty LtdBNP Paribas Nominees Pty Ltd Amalgamated Dairies Limited CS Third Nominees Pty Limited JBWere (NZ) Nominees Limited <56950 A/C> Medich Capital Pty Ltd Argo Investments Limited CPU Share Plans Pty Ltd Moturua Properties LTD Citicorp Nominees Pty Limited HSBC Custody Nominees (Australia) Limited ‑ A/C 2 CPU Share Plans Pty Ltd BNP Paribas Noms (NZ) LTD The Khyber Pass Investment Company Limited Netwealth Investments Limited Distribution of shareholders Size of holding 1 ‑ 1,000 1,001 ‑ 5,000 5,001 ‑ 10,000 10,001 ‑ 100,000 100,001 Over Ordinary shares as at 30.09.19 Percentage of issued capital as at 30.09.19 77,082,433 60,271,136 57,236,292 41,013,362 24,164,628 15,940,873 8,977,073 6,934,328 4,077,415 3,150,538 2,600,000 2,246,407 1,781,677 1,352,595 1,128,883 1,054,248 1,038,724 690,028 587,635 442,581 20.30 15.88 15.08 10.80 6.37 4.20 2.36 1.83 1.07 0.83 0.68 0.59 0.47 0.36 0.30 0.28 0.27 0.18 0.15 0.12 Number of holders as at 30.09.19 Ordinary shares held as at 30.09.19 6,569 7,477 1,795 1,041 66 3,086,678 18,853,601 13,318,166 22,948,556 321,432,333 Of these, 913 shareholders held less than a marketable parcel of shares worth $500 (89 shares). In accordance with the ASX Listing Rules, the last sale price of the company’s shares on the ASX on 30 September 2019 was used to determine the number of shares in a marketable parcel. 136 Nufarm Limited Annual Report 2019 Stock exchanges on which securities are listed Ordinary shares: Australian Securities Exchange Limited. Substantial shareholders In accordance with section 671B of the Corporations Act, as at 30 September 2019, the substantial shareholders set out below have notified the company of their respective relevant interest in voting shares in the company shown adjacent to their respective names as follows: Name Sumitomo Chemical Company Limited Nufarm Limited1 Firetrail Investments Pty Ltd Ellerston Capital Limited United Super Pty Ltd Macquarie Group Limited Allan Gray Australia Pty Ltd Sumitomo Mitsui Trust Holdings Inc Voting rights Date of Notice 11 Oct 2018 11 Oct 2018 6 Nov 2018 23 Apr 2019 18 Jun 2019 24 Jul 2019 8 Aug 2019 9 Aug 2019 Number of shares 60,271,136 60,271,136 25,400,315 52,734,476 19,236,201 28,045,844 24,352,699 34,978,736 Interest 15.88% 15.88% 6.69% 13.89% 5.07% 7.38% 6.41% 9.21% On a show of hands every shareholder present in person or represented by a proxy or representative shall have one vote and on a poll every shareholder who is present in person or represented by a proxy or representative shall have one vote for every fully paid share held by the shareholder. Shareholder information Annual general meeting The annual general meeting of Nufarm Limited will be held on Thursday 5 December 2019 at 10.00am in Bayside Rooms 5 & 6, Level 2, RACV Club, 501 Bourke Street Melbourne, Victoria. Full details are contained in the notice of meeting and explanatory memorandum sent to all shareholders. Voting rights Shareholders are encouraged to attend the annual general meeting. However, when this is not possible, they are encouraged to use the form of proxy by which they can express their views. Proxy voting can be completed online via www.investorvote.com.au or via post by completing the proxy form and sending it back in the return envelope. Every shareholder, proxy or shareholder’s representative has one vote on a show of hands. In the case of a poll, each share held by every shareholder, proxy or representative is entitled to: (a) one vote for each fully paid share; and (b) voting rights in proportion to the paid up amount of the issue price for partly paid shares. 1 Nufarm Limited has a relevant interest in the shares held by Sumitomo Chemical Company Limited. The relevant interest arises under a Shareholder Deed dated 22 January 2010 between Nufarm and Sumitomo which contains certain obligations to the voting and disposal of shares in Nufarm by Sumitomo. Nufarm Limited Annual Report 2019 137 Shareholder and Statutory Information (continued) Stock exchange listing Nufarm shares are listing under the symbol NUF on the ASX. The securities of the company are traded on the ASX under CHESS (Clearing House Electronic Sub‑register System), which allows settlement of transactions without having to reply on paper documentation. Shareholders seeking more information about CHESS should contact their stockbroker or the ASX. Shareholder details The Nufarm Limited Share Register is managed by Computershare Investor Services Pty Limited. You can gain access to your shareholding information in the following ways. Online via investor centre Details of individual shareholdings can be checked by visiting our share registry’s website at www.investorcentre.com. Existing users can simply log in. New users will need to create a log in. You will need to enter your security reference number (SRN) or holder identification number (HIN), your postcode or country of residence, enter Nufarm as the company name and then follow the prompts to complete registration. By telephone via InvestorPhone: InvestorPhone provides telephone access 24 hours a day, seven days a week. Step 1 Call the Nufarm shareholder information line on 1300 652 479 (within Australia) or +61 3 9415 4360 (outside Australia). Step 2 Follow the prompts to gain secure, immediate access to your: • holding details • registration details • payment information Shareholder communications The default for receiving the annual report is now via the Company’s website – www.nufarm.com Shareholder enquiries Contact: Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street, Abbotsford Victoria 3067 GPO Box 2975 Melbourne Victoria 3001 Telephone: 1300 652 479 (within Australia) +61 3 9415 4360 (outside Australia) Website: www.investorcentre.com For enquiries relating to the operations of the company, please contact the Nufarm Corporate Affairs Office on: Telephone: Email: +61 3 9282 1088 corporate.information@nufarm.com 138 Nufarm Limited Annual Report 2019 Written correspondence should be directed to: Corporate Affairs Office Nufarm Limited PO Box 103 Laverton Victoria 3028 Australia Key dates 1 November 2019 Annual report sent to shareholders 5 December 2019 Annual general meeting 31 July 2020 End of financial year Nufarm Limited Annual Report 2019 139 This page has been left intentionally blank. 140 Nufarm Limited Annual Report 2019 Step-up securities registrar New Zealand Computershare Registry Services Limited Private Bag 92119 Auckland NZ 1142 Telephone: +64 9 488 8700 Registered office 103-105 Pipe Road Laverton North Victoria 3026 Australia Telephone: +61 3 9282 1000 Facsimile: +61 3 9282 1001 NZ branch office 6 Manu Street Otahuhu Auckland New Zealand Telephone: +64 9 270 4157 Facsimile: +64 9 267 8444 Website www.nufarm.com Nufarm Limited ACN 091 323 312 Corporate Directory Directors DG McGauchie AO – Chairman GA Hunt – Managing Director AB Brennan GR Davis FA Ford ME McDonald PM Margin T Takasaki Company Secretary F Smith Auditors KPMG Tower Two Collins Square 727 Collins Street Melbourne Victoria 3008 Australia Trustee for Nufarm step-up securities The Trust Company (Australia) Limited Level 15, 20 Bond Street Sydney NSW 2000 Australia Share registrar Australia Computershare Investor Services Pty Ltd GPO Box 2975 Melbourne Victoria 3001 Australia Telephone: 1300 652 479 Outside Australia: +61 3 9415 4360 www.colliercreative.com.au #NUF0001 N u f a r m L i m i t e d | A n n u a l R e p o r t 2 0 1 9 103–105 Pipe Road Laverton North Victoria 3026 Australia Telephone: +61 3 9282 1000 Facsimile: +61 3 9282 1001 nufarm.com