2018 ANNUAL REPORT 1 2 4 2018 Highlights Chairman’s Review Managing Director’s Review 18 Dental Centre Locations 22 Corporate Governance 23 27 36 37 Directors’ Report Remuneration Report Auditor’s Independence Declaration Financial Statements 41 Notes to the Financial Statements 65 66 71 Directors’ Declaration Independent Auditor’s Report Shareholder Information IBC Corporate Directory “Our true purpose is to improve the oral health of ALL Australians to world’s best.” PACIFIC SMILES GROUP ANNUAL REPORT 2018 2018 Highlights PATIENT FEES – UP 12.0% $164.5m SAME CENTRE GROWTH – UP 130bps 5.1% ORDINARY DIVIDENDS – UP 3.4% 6.1cps DENTAL CENTRES - UP 14% ON PCP 80 UNDERLYING EBITDA – UP 2.9% $21.5m UNDERLYING NPAT – DOWN 9.7% $9.3m 1 PACIFIC SMILES GROUP ANNUAL REPORT 2018 The Board and I thank John for his impressive leadership which saw Pacific Smiles grow from three dental centres to 80 during his tenure. He and his management team have built a world- class dental centre network of which all stakeholders can be very proud. I take this opportunity to thank all of the dentists and employees who work across our two branded networks. They are the ones who deliver the care and service every day that makes Pacific Smiles such a compelling proposition for patients. Together, they demonstrate our True Purpose of improving the oral health of ALL Australians to world’s best, every day. Pacific Smiles will continue to grow and improve. With a large proportion of our dental centres less than three years old and achieving growth rates in excess of network average, we expect to see ongoing uplift over many years. Combined with the year after year step-up in Net Promoter Score, it is clear that we are building a business for the long term, centre by centre, as we continue to roll-out. A final dividend of 3.8 cents per share has been declared in relation to FY2018 and this will be paid in October 2018. This represents 100% of underlying Net Profit After Tax. I would like to thank our shareholders for their continued support. Robert Cameron AO Chairman Chairman’s Review During financial year 2018, Pacific Smiles Group expanded its network of dental centres to 80 locations throughout Queensland, New South Wales, the Australian Capital Territory and Victoria. In line with recent years, all new locations are within regional or sub regional shopping centres where foot traffic is strong and brand exposure is optimised. The centres are open seven days a week and offer appointments at times convenient to their patients. Patient care and customer service will always be the absolute priority of our people and I am pleased to report that our Net Promoter Score has improved again, averaging over 75 for the Group overall. This is incredibly high and a testament to the commitment of our front-line staff and dentists to deliver outstanding care. The continued growth of our branded network, impressive as it is, was just one part of the story, as management positioned the Company for long-term success. Key initiatives for the year included the acquisition of Everything Dentures and Sculpt Laboratory, the right-sizing of Pacific Smiles Dental in Parramatta and the completion of the nib Dental Care Centre network. Management focus was also upon professional training and development for dentists and on strategic investments into information and communication technologies. The strategic intent of each of these initiatives will be covered in the CEO Update, but suffice to say, they help to shape Pacific Smiles as a dental centre operator that is differentiated from the cottage industry and from scale competitors. Overall, the financial performance in FY2018 was not as strong as we expected at the start of the financial year and we experienced soft trading in May and June, resulting in a trading update in June. Patient volume growth was solid, but not strong enough to achieve the EBITDA guidance, given the relatively fixed cost base in the business. During the year, Non-Executive Director Grant Bourke resigned and a new Non-Executive Director Zita Peach joined the Board. I continue to be very impressed with the Board of Directors and thank them for their contributions in FY2018. A further change has been announced since the end of the financial year, advising of a transition of the Chief Executive Officer and Managing Director role from John Gibbs to Phil McKenzie in October 2018. Having led Pacific Smiles for almost 15 years, John is ready for his next challenge. 2 PACIFIC SMILES GROUP ANNUAL REPORT 2018 “Pacific Smiles’ absolute commitment to outstanding patient care and customer service is reflected by our high Net Promoter Scores.” 3 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Managing Director’s Review Overview Operations Overview and Highlights With continued roll-out of new dental centres, typically in busy suburban retail hubs, Pacific Smiles Group Limited (Pacific Smiles) now owns and operates 70 Pacific Smiles Dental Centres and 10 nib Dental Care Centres in Queensland, New South Wales, Victoria and the Australian Capital Territory. Dental practitioners engage Pacific Smiles in order to practice from one or more fully serviced facilities in exchange for a monthly service fee. The dentists devote their working days to clinical dentistry while Pacific Smiles provides them with everything else they require for a successful practice including administration, IT systems, human resources, marketing, equipment, consumables and facility management. Approximately 380 dentists have engaged Pacific Smiles in this way, enjoying the benefits of practicing at one or more of the 80 facilities owned and operated by Pacific Smiles. An absolute commitment to outstanding patient care and customer service at dental centres operated by Pacific Smiles is reflected in strong patient demand and in a high Group-average Patient Net Promoter Score of above 75. Convenient locations, extended opening hours and on line appointments enhance patient access and convenience and an outstanding in-centre experience underpins patient trust and loyalty. Solid progress was made during the year in building up our two branded networks through the eastern States of Australia. A total of 10 new centres were opened during the year, at Figtree and Shellharbour in the Illawarra, Balgowlah in Sydney, Gungahlin and Woden in the Australian Capital Territory, Leopold, Greensborough and Glen Waverley in Victoria and Buddina and Runaway Bay in Queensland. In all cases, the new centres were located within or adjacent to already established clusters of Pacific Smiles Dental and nib Dental Care Centres. The nib Dental Care Centre network was extended into Queensland and the Australian Capital Territory during the year, growing this network to 10 plus an additional co-branded Pacific Smiles Dental Centres/nib Dental Care Centre. In Queensland, an existing Pacific Smiles Dental Centre in the CBD was rebranded to a nib Dental Care Centre. In the Australian Capital Territory, a new nib Dental Care Centre was established in excess space adjacent to the existing Pacific Smiles Dental Centre in Woden. With the completion of this network, the vast majority of nib customers are within reasonable proximity of a nib Dental Care Centre. This is an important achievement, given the restriction of the no-gap check-ups to nib Dental Care Centres. Supporting a commitment to providing patients with as broad a range of dental services as possible, Everything Dentures was acquired in November 2017. Everything Dentures engages prosthetists (registered dental professionals who focus on custom dentures, mouth guards, splints and other oral appliances) and places them into their own branded denture clinics or into dental centres owned and operated by third parties. The strategic benefit for Pacific Smiles is linked to the preference by most dentists to refer out dentures to external prosthetists. The acquisition allows this important clinical work to be kept within Pacific Smiles, which is much more convenient for patients. Number of centres Patient fees $m 80 70 58 49 41 34 31 28 25 18 17 16 15 14 13 12 11 10 FY 165 147 134 121 96 95 86 70 60 18 17 16 15 14 13 12 11 10 FY 4 PACIFIC SMILES GROUP ANNUAL REPORT 2018 5 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Managing Director’s Review “During the year we provided 670,000 patient appointments and welcomed 120,000 new patients.” 6 PACIFIC SMILES GROUP ANNUAL REPORT 2018 A further strategic advantage is the vertical integration benefits delivered by Sculpt Dental Laboratory, which is part of Everything Dentures. Ownership of a dental laboratory allows for retention of revenues that would otherwise flow to third party laboratories, in relation to the laboratory work requested by the dentists and prosthetists who practice from Pacific Smiles Dental Centres. Sculpt Dental Laboratory also provides services to dentists outside of Pacific Smiles. As with the prior year, information technology featured strongly in terms of management priority and investment. A number of key projects were advanced during the year to leverage data and processes from the data warehouse and practitioner database, the two foundation projects. Reporting has been transformed and a number of processes automated; however, there is still a way to go here to bring all systems up to the scalable standards required. Another feature of the year was the strong investment in dentist development and training, including a boosted graduate program for recent graduate dentists, establishment of a network of mentor dentists across the centres plus a pilot for regional clinical mentor dentists with responsibility for clinical development in a cluster of dental centres. The significantly uplifted focus in this area is recognition of the critical importance of providing dentists with industry leading value-add skills development to help them to develop their clinical practice at Pacific Smiles Dental Centres and to provide a wider array of services to the patients. Group Financial Performance Ongoing challenges at Pacific Smiles Dental, Parramatta, prompted a reset at this centre, to right-size the staffing to the current and anticipated patient demand. With costs rebased and culture reset, this centre’s performance has materially improved. The two ex-DEP centres of Pacific Smiles Dental, Parramatta, and Pacific Smiles Dental, Town Hall are not yet performing at the level expected of centres of their size and maturity, but they are both improving and are no longer the problematic centres that they were. $ millions Revenue Gross profit EBITDA EBIT Net profit after tax Operating metrics Number of Dental Centres Commissioned Dental Chairs Patient Fees ($ millions) Same Centre Patient Fees growth Financial metrics Earnings per share (cents) EBITDA margin EBITDA to Patient Fees margin EBIT margin Adjustments to the Statutory Income Statement Statutory net profit after tax Severance and HR consultancy expense Major dental centre restructure Business acquisition costs Asset write-off Executive LTI plan expense/(write-back) Income tax effect of adjustments Underlying statutory net profit after tax Underlying 2018 Underlying 2017 104.5 96.5 21.5 13.7 9.3 80 308 164.5 5.1% 6.1 20.6% 13.1% 13.1% 91.5 85.9 20.9 14.9 10.3 70 276 147.0 3.8% 6.7 22.9% 14.2% 16.3% 2018 $ million 2017 $ million 6.6 0.2 2.4 0.1 0.4 0.1 (0.4) 9.3 10.0 0.4 – – – – (0.1) 10.3 Change 14.3% 12.3% 2.9% (9.5%) (9.7%) 14.3% 11.6% 12.0% (9.0%) 7 PACIFIC SMILES GROUP ANNUAL REPORT 2018 DENTISTS KEEPING IT IN THE FAMILY “ I have built my practice over 32 years at Pacific Smiles Greenhills and I am extremely proud to now have the pleasure of my daughter joining me to develop her career as a dentist.” Dr Anne Bailey 8 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Managing Director’s Review PACIFIC SMILES GROUP ANNUAL REPORT 2018 9 Statutory Results The Group achieved statutory net profit after tax of $6.6 million, a decrease of 34.8% from $10.0 million in 2017. The statutory results were impacted by the one-off restructuring and impairment costs for the Parramatta dental centre, one-off costs associated with dental chair write-offs and higher depreciation costs associated with the rollout strategy of new centres. These significant events make year on year performance comparisons more difficult. As such, the Operating and Financial Review discussions will focus on the underlying results for 2018 and the comparative period. Underlying and Statutory Results For the financial year the underlying EBITDA increased by 2.9% to $21.5 million compared with 2017. Higher depreciation costs associated with the rollout strategy of new centres, resulted in the underlying Net Profit After Tax decreasing by 9.7% to $9.3 million compared to $10.3 million for the prior year. Group revenue was $104.5 million, up by 14.3% over the previous financial year. This revenue consists mainly of the service fees charged to the dentists who practice from our centres. Pacific Smiles provides dentists with fully serviced and equipped facilities including support staff, materials, marketing and administrative services. This enables dentists to maximise time treating patients. Revenue growth is achieved through the combination of our existing dental centres and our new dental centres opened in recent years. Patient fees increased 12.0% over the previous year to $164.5 million due to same centre fee growth of 5.1%, plus the fullyear effect from new centres opened in 2017 and part-year impact of new centre openings in 2018. The Group’s underlying EBITDA to Patient fees margin declined in 2018 to 13.1%. Although Pacific Smiles achieved solid same centre growth in 2018, this was lower than expected due to softer trading and reduced labour efficiency in the more mature dental centres, as well as additional IT investments. In response to the ongoing underperformance of the centres acquired from Medibank Private, in November 2017 the Pacific Smiles Dental Centre at Parramatta was right-sized and is now staffed for seven dental chairs. Clinical treatments and services are being provided by dentists and prosthetists and visiting specialists, but no longer by hygienists. Patient volumes have remained steady and EBITDA and margins have improved. The centres acquired from Medibank Private are positive contributors, but at lower margins than is usual for large, mature centres and have therefore been dilutive to overall margin. The restructure of the Pacific Smiles Dental Centre at Parramatta was a key step in addressing this. The new Pacific Smiles’ Dental Centres are typically not profitable in the first year of operation. This means the accelerated dental centre rollout strategy also impacts Group profitability in the short term. The 2018 new openings have performed in line with expectations and, like the centres opened in prior years, will be strong contributors to long term growth and profit margins over time. Corporate costs increased in 2018 due to additional positions to broaden expertise and support the growth plans. Financial Position In line with Pacific Smiles’ long term growth strategy, total capital expenditure for 2018 was $13.8 million. This included $8.3 million for new dental centres and $1.6 million in upgrades for existing centres, equipment replacements, commissioning of nine additional surgeries in existing centres and additional IT infrastructure. EBITDA (underlying) $m DIVIDENDS (cps) 20.9 21.5 19.7 18.4 17% CAGR 13.3 15.1 10.2 8.0 6.8 5.0 4.4 FY 08 09 10 11 12 13 14 15 16 17 18 12.0 10.0 8.0 6.0 4.0 2.0 0.0 10 Interim Dividend Final Dividend Special Dividend 2013 2014 2015 2016 2017 2018 PACIFIC SMILES GROUP ANNUAL REPORT 2018Managing Director’sReview PACIFIC SMILES GROUP ANNUAL REPORT 2018 11 12 PACIFIC SMILES GROUP ANNUAL REPORT 2018 EMPLOYEES “ Pacific Smiles has provided me with amazing opportunities over the 14 years I have been with the Company. I started my career as a trainee dental assistant and now hold a senior management position, helping to shape the direction of the Company.” Jess Garside 13 PACIFIC SMILES GROUP ANNUAL REPORT 2018 “Outlook is for a continued roll-out of branded dental centres as we scale to our long term dental network potential of at least 250 centres.” 14 PACIFIC SMILES GROUP ANNUAL REPORT 2018Managing Director’sReview Borrowings increased to $12.0 million in the current year from $5.0 million in 2017, primarily to support the expansion of the dental centre network and upgrades of existing facilities, equipment and systems. Ordinary dividends of $9.1 million were paid to shareholders in 2018, compared with $8.7 million in the prior year. After considering the final dividend declared of 3.8 cents per share in relation to 2018, which will be paid in October 2018, the dividend payout increased to 100.2% of underlying Net Profit After Tax (2017 was 87.2% of underlying Net Profit After Tax). The Market The market for dental services in Australia is approximately $9 billion to $10 billion per annum and the market has grown steadily over the long term. Funding for dental services is predominantly from individuals, however private health insurance participation supports dental attendances and spending through co-payment arrangements. APRA’s latest dental service data reported that more than 41 million dental services were funded by health funds in the 12 months ending March 2018. The health funds pay more than $2.6 billion per annum in dental benefits. 90% of dental health services provided to low and middle income earners are subsidised by health funds and 60% of dental treatments/ services in hospitals (typically extractions and restorations) are paid for by health funds. The proportions of total expenditure on dental services by health funds and by government are trending in opposite directions. Health funds have increased their proportion from 14.0% in 2009-10 to 18.1% in 2015-16, according to the Australian Institute of Health and Welfare, while the proportion by the Australian Government has decreased from 16.3% in 2009-10 to 15.9% in 2015-16. Expenditure by State and Local Governments has decreased from 8.2% in 2009- 10 to 7.7% in 2015-16. The Child Dental Benefit Schedule and some partnership arrangements with the States and Territories continue to be the main funding programs of the Commonwealth government, whereas the various States and Territories operate systems to overflow patients from public clinics to the private sector. The industry continues to be highly fragmented with the majority of providers operating from small-scale single locations, although corporate activity in the sector is increasing. There are more branded networks, including some owned and operated by private health insurance organisations, who market to their own members to encourage them to attend. The other major feature of the market is the continued growth in the number of registered dentists. The increase in recent years has been due to the combined impact of overseas trained dentists and local graduates. The number of registered dentists was 16,684 in March 2018, up by 2.9% from a year earlier. Business Strategy The overarching business strategy is to continue the roll-out of quality dental centres in convenient locations such as popular shopping centres, which patients can easily access to attend to their dental care needs. The roll-out strategy facilitates consistency of operations and market positioning. A cluster-by- cluster approach in the suburban markets of the eastern State and Territory capital cities, allows for efficiency of marketing and management and greater brand presence to help drive market share gain. With our True Purpose to improve the oral health of ALL Australians to world’s best, the strategy is not only about also extending our reach through the roll-out of new centres, but also the growth of all centres in the network through expansion of service offering and increase in market share through effective and innovative marketing and delivery of an outstanding patient experience. Fundamental to the achievement of true purpose is the continued uplift in clinical skills and range across the network, dentist training and development is an integral part of the strategy going forward. Outlook As in previous years, the outlook is for a continued roll-out of branded dental centres in new and adjacent geographic clusters throughout the eastern States and Territories of Australia, as we scale to our long term dental network; potential of at least 250 centres. There will be ongoing refinement of site selection, centre presentation, patient marketing and staff and dentist development and training, plus continued strategic technology investments to build a more scalable enterprise with better access to data to enhance marketing and operations and to boost overall performance. Patient and dentist experience will be very much our focus, as we bolster our service quality to both these customer groups and strive for continuous improvement in their experiences. As we continue to scale and as recent years of new centre cohorts mature, we will generate increased revenues and improved profitability. Corporate and operational efficiency gains will accrue from the increased scale and through strategic investments in technology and process improvements, over time. Pacific Smiles will pursue its true purpose of improving the oral health of ALL Australians to world’s best, without compromising the professional and ethical standards that have defined the organisation from the start. 15 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Risk Management Pacific Smiles is subject to various risk factors, both business-specific and of a general nature. Pacific Smiles has not identified any specific, material exposure to its economic, social or environmental sustainability over the long term. Pacific Smiles has established policies and structures for oversight and management of material business risks. Further information regarding how Pacific Smiles recognises and manages risks can be sourced from our Corporate Governance Statement and related governance policies on our website. The following risk areas and mitigating factors have been identified by Pacific Smiles: Risk Area Mitigating Factors General economic conditions – Downturns in general economic conditions could adversely impact demand for dental services, given the discretionary nature of some of those services. Dentists at Pacific Smiles Dental Centres provide a range of treatments to patients in a number of different geographic zones throughout the eastern states of Australia. Reduction in private health insurance coverage – Changes to the nature or extent of private health insurance coverage could impact upon the attendance frequency of patients. Patients at Pacific Smiles Dental Centres are a mix of privately insured and non-insured individuals and there are payment plans and treatment payment options available. Competition-induced fee pressure – An increase in the number of practicing dentists could increase competition for patients and the degree to which dentists compete on the basis of fee levels. Termination of Service and Facility Agreements by dentists – Under the Service and Facility Agreements between Pacific Smiles and dentists, the dentists may terminate without cause, on a few months’ notice. Reputational damage – Actions by employees or dentists could give rise to reputational damage to Pacific Smiles and its brands. Pacific Smiles Dental Centres are usually differentiated from other local providers and compete on the basis of convenience, value, access and overall patient experience. Pacific Smiles views the dentists as a key customer group and focuses resources accordingly, with increased focus on this area in FY18. There is a close focus on internal procedures and clinical governance by management and the Board. This has been further enhanced with new internal and external appointments to the Dental Advisory Committee. Supply of skilled dentists – Should the availability of appropriately skilled and aligned dentists become restricted, then growth and expansion of Pacific Smiles could be slowed, and/or the cost of dentists could escalate. The focus on training and development of dentists, including a structured mentoring program for new graduate dentists, is building a platform of appropriately skilled and aligned dentists for the long term. John Gibbs Managing Director and CEO 16 PACIFIC SMILES GROUP ANNUAL REPORT 2018Managing Director’sReview 17 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Australian Capital Territory Belconnen Gungahlin* Manuka Tuggeranong Woden nib Woden* Dental Centre Locations Queensland Bribie Island nib Brisbane CBD Browns Plains Buddina* Burleigh Heads Capalaba Deception Bay Helensvale Morayfield Mt Gravatt Mt Ommaney North Lakes Redbank Plains Runaway Bay* Strathpine Victoria Bairnsdale Bendigo Cranbourne Park Drysdale Glen Waverley* Greensborough* Leopold* Melbourne nib Melbourne Melton Mill Park Mulgrave Point Cook Ringwood Sale Torquay Traralgon Warragul Waurn Ponds Werribee QLD 15 ACT 6 * New centres in FY2018. 18 VIC 20 New South Wales Balgowlah* Bateau Bay Belmont Belrose Blacktown Brookvale Campbelltown Charlestown nib Chatswood Erina nib Erina Figtree* Forster Gladesville nib Glendale Greenhills Jesmond Kotara Lake Haven Marrickville Morisset Narellan nib Newcastle nib North Parramatta Nowra Parramatta Penrith Queanbeyan Rutherford Salamander Bay Shellharbour* Singleton nib Sydney Toronto Town Hall Tuggerah Wagga Wagga Warilla nib Wollongong NSW 39 PACIFIC SMILES GROUP ANNUAL REPORT 2018 “A feature of the year was strong investment in dentist development and training to provide industry leading value- added skills to assist dentists in building their practice at Pacific Smiles.” 19 PACIFIC SMILES GROUP ANNUAL REPORT 2018 COMMUNITY “ With a strong commitment to our true purpose of improving the oral health of ALL Australians to world’s best, our employees and dentists willingly donate their time to various community programs and organisations to help those most in need.” 20 PACIFIC SMILES GROUP ANNUAL REPORT 2018 21 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Corporate Governance Pacific Smiles Group Limited and the Board of Directors are committed to achieving and demonstrating the highest standards of corporate governance. Pacific Smiles Group Limited has reviewed its corporate governance practices against the Corporate Governance Principles and Recommendations (3rd edition) published by the ASX Corporate Governance Council. The 2018 corporate governance statement is dated as at 30 June 2018 and reflects the corporate governance practices in place for the 2018 financial year. The 2018 corporate governance statement was approved by the Board on 22 August 2018. A description of the Group’s current corporate governance practices is set out in the Group’s corporate governance statement which can be viewed at www.pacificsmilesgroup.com.au/Investors/CorporateGovernance. 22 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Directors’ Report Your Directors present their report on the consolidated entity (referred to hereafter as “the Group”) consisting of Pacific Smiles Group Limited (“the Company”) and the entities it controlled at the end of, or during, the year ended 30 June 2018. Directors The following persons were Directors of Pacific Smiles Group Limited during the whole of the financial year and up to the date of this report: Mr Robert Cameron AO Mr John Gibb Dr Alex Abrahams Mr Grant Bourke (resigned 5 March 2018) Mr Ben Gisz Mr Simon Rutherford Ms Zita Peach (appointed 18 August 2017) Principal Activities Pacific Smiles Group principally operates dental centres at which independent dentists practice and provide clinical treatments and services to patients. Revenues and profits are primarily derived from fees charged to dentists for the provision of these fully serviced dental facilities. Review of Operations Information on the operations and financial position of the Group and its business strategies and prospects is set out in the Operating and Financial Review accompanying this report. Dividends Dividends paid to members during the financial year were as follows: Interim dividend for the year ended 30 June 2018 of 2.30 cents (2017 – 2.20 cents) per share, fully franked Final dividend for the year ended 30 June 2017 of 3.70 cents (2016 – 3.50 cents) per share, fully franked 2018 $’000 2017 $’000 3,496 3,344 5,624 9,120 5,320 8,664 Subsequent to the end of the financial year, the Directors declared a final dividend of 3.80 cents per share in relation to the financial year ended 30 June 2018. The dividend, which totals $5.776 million, will be paid on 5 October 2018. 23 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Robert Cameron AO HONDENG UNSW, BE MIN (HONS) MBA GRAD. DIP. GEOSCIENCE, FAICD, FAIM, FAUSIMM Non-Executive Chairman, appointed in 2003 Member of the Nomination and Remuneration Committee John Gibbs B.BUS, M.BUS. (INT. MKG.), AFAIM, GAICD Dr Alex Abrahams BDS (SYD UNI) GAICD Managing Director and Chief Executive Officer, appointed in 2008 Founder and Executive Director, appointed in 2002 until 30 June 2017 Non-Executive Director, appointed 1 July 2017 Bob is the founder of Centennial Coal Company Limited and was its Managing Director and Chief Executive Officer until 2011 and Chairman from then until 31 March 2017. He is currently Chairman of County International Limited, Chairman of Hunter Valley Training Company, and a Trustee of the University of NSW Foundation and the Museum of Applied Arts and Sciences. In addition to his extensive business career, he has served on many community, educational, industry and government bodies. John commenced as General Manager in 2004. His background experience includes the development and management of private health facilities and business development roles in medical and surgical device markets. He was involved in establishing new private hospitals in the Asia-Pacific region and private hospital projects in Australia. John has undergraduate and postgraduate business and marketing degrees. Alex has overseen the development of the Company from a group of partnerships to an incorporated entity on 1 January 2003. Alex is a dentist with a special interest in dental implants. Alex is a member of the Australian Dental Association and a member of the Australian Osseointegration Society (Implants). He is a Director of Group Homes Australia Pty Limited and a Director of the Trustees of Canyon Property Trust and Key Health Unit Trust. 24 PACIFIC SMILES GROUP ANNUAL REPORT 2018Directors’Report continued Ben Gisz B.COMM., CA, FFIN, CFA Non-Executive Director, appointed in 2012 Zita Peach BSC, FAICD, FAMI Non-Executive Director, appointed 18 August 2017 Simon Rutherford B. COMM., CA, FAICD Non-Executive Director, appointed in 2003 Chairman of the Nomination and Remuneration Committee Member of the Nomination and Remuneration Committee Chairman of the Audit and Risk Management Committee Member of the Audit and Risk Management Committee Ben is a partner at TDM Asset Management, a Sydney based private investment firm. Ben has extensive financial markets experience, including roles in investment banking and private equity/principal investments with Investec Group in Sydney and London. Prior to this, Ben was an equities analyst with Credit Suisse. Ben holds a Bachelor of Commerce degree from the University of Sydney and is a fellow of the Financial Services Institute of Australasia. Ben is also a chartered accountant and a CFA charter holder. Ben is a Non-Executive Director of specialty retailer kikki.K Holdings Pty Ltd. Zita has more than 25 years of commercial experience in the pharmaceutical, biotechnology, medical devices and health services industries. Zita is a Non-Executive Director of the ASX-listed AirXpanders, Inc., Monash IVF Group Limited, Starpharma Holdings Limited and Visioneering Technologies, Inc. Zita is also a member of the Hudson Institute of Medical Research Board. Simon is a chartered accountant and partner with PKF working in business advisory services. He is a Director and Responsible Manager with PKF Corporate Finance Pty Limited and specialises in strategy, governance, structuring, business sales, mergers and acquisitions. In this role Simon has assisted various companies with capital raising, listing requirements and transactions. Simon is a Director of Haemokinesis Pty Limited and the Trustee of Canyon Property Trust and is involved with other syndicated investments. He has also served on a number of boards including National Brokers Group and Vow Financial Group. 25 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Effective from the 28 October 2018, Mr John Gibbs will step down as the CEO and Managing Director, a role he has held for 11 years. Mr Gibbs will assist with the leadership transition for up to six months following his departure. Company Secretary Mark Licciardo and Belinda Cleminson of Mertons Corporate Services (Mertons) are joint company secretaries. Mark is the founder of Mertons and a Director of various Australian Stock Exchange (ASX) listed public and private companies. Belinda has extensive experience as a Company Secretary of Australian listed and unlisted companies including providing support to ASX 200 clients. Meetings of Directors The number of meetings of the Company’s Board of Directors held during the year ended 30 June 2018, and the attendances by each Director, were: Meetings of Committees Full Meetings of Directors Audit and Risk Management Nomination and Remuneration Held Attended Held Attended Held Attended 12 12 12 12 12 7 10 12 12 12 12 12 7 10 – – – 3 3 2 – – – – 3 3 2 – 2 – – 2 – 1 1 2 – – 2 – 1 1 Robert Cameron AO John Gibbs Alex Abrahams Ben Gisz Simon Rutherford Grant Bourke Zita Peach – Not a member of the relevant committee. Matters Subsequent to the End of the Financial Year Other than the declaration of a final dividend subsequent to the end of the financial year, no other matter or circumstance has arisen since 30 June 2018 that has significantly affected, or may significantly affect: a. the Group’s operations in future financial years, or b. the results of those operations in future financial years, or c. the Group’s state of affairs in future financial years. Likely Developments and Expected Results of Operations The Group will continue to pursue opportunities to enhance the growth and prosperity of its business. Refer to the Operating and Financial Review accompanying this report for further detail. Further information on likely developments in the operations of the Group and the expected results of operations have not been included in this annual financial report because the Directors believe it would be likely to result in unreasonable prejudice to the Group. Environmental Regulation The Group’s operations are not regulated by any significant environmental regulation. Insurance of Officers and Auditors During the financial year, the Group paid a premium in respect of a contract insuring the Directors and officers of the Group against liability incurred as such a Director or officer, other than conduct involving a wilful breach of duty in relation to the Group, to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. No such insurance contracts entered into by the Group apply to insure auditors of the Group. 26 PACIFIC SMILES GROUP ANNUAL REPORT 2018Directors’Report continued Remuneration Report (Audited) This Directors 2018 Remuneration Report sets out remuneration information for Pacific Smiles Group Limited’s Non-Executive Directors, Executive Directors and other Key Management Personnel for the year ended 30 June 2018. The Remuneration Report is set out under the following headings: a. Key Management Personnel disclosed in this report b. Remuneration governance c. Executive remuneration policy and framework d. Relationship between remuneration and Pacific Smiles Group’s performance e. Non-Executive Director remuneration policy f. Details of remuneration g. Employment contracts h. Details of share-based compensation i. Equity instruments held by Key Management Personnel. The information provided in this Remuneration Report has been audited as required by section 308(3C) of the Corporations Act 2001. a. Key management personnel disclosed in this report The Key Management Personnel are all the Directors of the Group and the executive managers within the Group who report directly to the Board or Chief Executive Officer, and have prime responsibility for significant functional areas within the Group. These directors and executives have been identified as having the greatest authority for the strategic direction and management of the Group. Non-Executive Directors Robert Cameron AO Grant Bourke Ben Gisz Simon Rutherford Dr Alex Abrahams Zita Peach Executive Directors John Gibbs Other Executives Allanna Ryan Paul Robertson Dr Alison Hughes Emma McKenny Nadia Henry David Williams Andrew Streat Non-Executive Chairman Non-Executive Director (resigned 5 March 2018) Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director (appointed 18 August 2017) Managing Director and Chief Executive Officer Chief Financial Officer Chief Operating Officer Principal Dental Officer Executive Manager – People and Culture Chief Marketing Officer (appointed 29 January 2018) Chief Information Officer (appointed 10 July 2017) Executive Manager – Business Development (resigned 8 September 2017) Where relevant, Executive Directors and other executives may hereafter be referred to collectively as executives within this Remuneration Report. 27 PACIFIC SMILES GROUP ANNUAL REPORT 2018 b. Remuneration governance The Nomination and Remuneration Committee is a committee of the Board. It is primarily responsible for making recommendations to the Board on: • the over-arching executive remuneration framework; • operation of the incentive plans which apply to the senior management team, including key performance indicators and performance hurdles; • remuneration packages for the Chief Executive Officer, Executive Director and senior management; and • remuneration arrangements for Non-Executive Directors. The Committee’s objective is to ensure that remuneration policies and structures: • are fair and competitive; • are aligned with the long-term interests of the Group; • attract and reward; and • retain the best people. The Nomination and Remuneration Committee Charter, included on the Company’s website at www.pacificsmilesgroup.com.au provides further information on the role of this committee. c. Executive remuneration policy and framework In determining executive remuneration, the Board aims to ensure that remuneration practices are: • competitive and reasonable, enabling the Group to attract and retain key talent; • aligned to the Group’s strategic and business objectives and the creation of shareholder value; • transparent; • acceptable to shareholders; and • rewarding for performance. The executive remuneration framework has three components: • base salary and benefits, including superannuation; • short-term performance incentive (‘STI’) plan; and • a long-term equity incentive (‘LTI’) plan. Base salary and benefits Base salaries are reviewed and benchmarked annually or upon any substantial changes to positions. There are no guaranteed pay increases included in any key management personnel contracts. Base salary includes any elected salary sacrifice arrangements as individually nominated. Base salary is inclusive of required superannuation contributions. Short-term performance incentives Executives have the opportunity to earn an annual short-term incentive (STI) linked to the achievement of performance hurdles. The actual level of STI paid to each executive is determined at the end of the financial year based on the executive’s achievement of specific KPIs and an annual performance review. Targets are reviewed annually. 28 PACIFIC SMILES GROUP ANNUAL REPORT 2018Directors’Report continued The executive STI plan performance criteria are summarised below: Achieve Group net profit before tax targets Individual performance metrics (financial and non-financial) Maximum STI for full achievement of targets Exceptional performance bonus for over-achievement of net profit before tax target Total maximum STI % of Base Salary Up to 12.3% Up to 13.7% Up to 26.0% Up to 9.0% Up to 35.0% Ongoing participation by executives in the STI plan is at the discretion of the Board. With reference to recommendations from the Nomination and Remuneration Committee, the Board will approve all executive STI payments, and may use its discretion to adjust STI remuneration up or down, to prevent any inappropriate reward outcomes. The STI amounts are paid in cash, and are those earned during the financial year and provided for in the annual financial statements. STI cash bonuses are generally payable in September following the end of the financial year, and once the financial results of the year have been subject to independent external audit. Long-term equity incentives The Group has a LTI plan to assist in the motivation, retention and reward of executives. The LTI plan is designed to align the interests of senior management more closely with the interests of shareholders by providing an opportunity for senior management to receive an equity interest in the Company through the granting of performance rights. Performance rights have been issued to selected senior managers pursuant to the LTI plan in financial years from 2015 to 2018. Vesting of the performance rights on issue is subject to: • satisfaction of earnings per share (EPS) performance hurdles for a four-year performance period. The number of performance rights vesting will be determined on a sliding scale from nil vesting for an EPS compound annual growth rate (CAGR) of 15.0% per annum or less and 100% vesting for an EPS CAGR of 25.0% per annum; and • the participant remaining employed by Pacific Smiles Group (or its subsidiaries) on the vesting date, subject to certain “good leaver” exemptions. Performance rights that do not vest on the relevant vesting date will lapse. Performance rights will also lapse if total shareholder return (TSR) does not reach a minimum of 10.0% per annum over the relevant performance period. In the event of serious misconduct or a material misstatement in the Group’s financial statements, the Board may determine that certain performance-based remuneration (including STIs and/or LTIs) should not have been paid and may claw back performance- based remuneration paid in the preceding three financial years. 29 PACIFIC SMILES GROUP ANNUAL REPORT 2018 d. Relationship between remuneration and Pacific Smiles Group’s performance The following table shows key performance indicators for the Group over the last five years. Revenue EBITDA (statutory) Net profit after tax (statutory) Dividends per share – ordinary (cps) Dividends per share – special (cps) Earnings per share (cents) 2018 $’000 104,528 18,439 6,604 6.1 – 4.3 2017 $’000 91,471 20,552 10,037 5.9 – 6.6 2016 $’000 83,337 19,306 9,903 5.5 – 6.5 2015 $’000 74,898 16,409 8,360 5.0 1.6 5.7 2014 $’000 59,081 15,069 7,752 4.0 7.3 5.7 e. Non-Executive Director remuneration policy Non-Executive Directors receive fees reflective of Board roles and market levels. These fees are inclusive of their relevant responsibilities as part of the main Board and on the various Board committees. Fees are inclusive of any applicable superannuation. These fees exclude any additional fees for special services which may be determined from time to time. No additional retirement benefits are payable. Non-Executive Directors do not receive performance-based compensation. The Non-Executive Directors fees are reviewed annually to ensure that the fees reflect market rates. There are no guaranteed annual increases in any Directors’ fees. Non-Executive Directors are entitled to be reimbursed for their reasonable expenses incurred in connection with the affairs of the Company. The constitution of the Company provides that Non-Executive Directors are entitled to receive compensation for their services as determined by approval at a general meeting. The current Directors’ fees pool is an aggregate sum of $800,000. Any change to this aggregate annual amount is required to be approved by shareholders. The Board may approve additional remuneration for special exertions and additional services performed by a Director outside of the aggregated pool. Remuneration paid to Directors in their capacity as employees also falls outside of the aggregated pool. 30 PACIFIC SMILES GROUP ANNUAL REPORT 2018Directors’Report continued f. Details of remuneration Details of the remuneration of the Directors and other key management personnel of the Group for the current and prior financial year are set out in the following table. Short-term employee benefits Long-term benefits Share -based payments 2018 Salary and fees $ Bonus $ Super- annuation $ Other* $ Long service leave $ Non-Executive Directors Robert Cameron 109,589 Grant Bourke (resigned 5 March 2018) Ben Gisz Simon Rutherford Alex Abrahams Zita Peach (appointed 18 August 2017) Executive Director 46,667 70,000 70,000 70,000 54,338 – – – – – – 10,411 – – – – 5,162 John Gibbs 417,378 30,085 20,049 Other Key Management Personnel Allanna Ryan Paul Robertson Alison Hughes Emma McKenny Nadia Henry (appointed 29 Jan 2018) David Williams (appointed 10 Jul 2017) Andrew Streat (until 15 Sep 2017) 231,746 258,185 178,493 172,173 19,179 20,571 15,666 15,926 19,543 20,049 17,874 17,310 94,112 5,997 8,097 177,895 18,375 16,732 49,656 – 4,385 – – – – – – – – – – – – – – Rights $ Total $ – – – – 798 120,000 46,667 70,000 70,000 70,798 – 59,500 – – – – – – 7,250 24,378 499,140 4,175 4,552 3,273 3,225 1,582 19,092 16,261 11,937 15,253 293,735 319,618 227,243 223,887 – 109,788 3,333 15,701 232,036 – – 54,041 31 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Short-term employee benefits Long-term benefits Share- based payments Salary and fees $ Bonus $ Super- annuation $ Other* $ Long service leave $ – – – – Rights $ Total $ – – – – 120,000 70,000 70,000 70,000 6,667 31,227 (18,056) (9,860) 409,633 210,168 – – – – 10,411 – – – 16,400 6,750 19,616 15,659 – – – – – – – – 12,975 10,979 8,182 – – 22,046 225,000 3,654 (12,710) 495,264 5,111 19,604 16,195 16,292 – – – – 1,123 4,441 3,111 3,141 5,025 (7,743) (2,770) 7,468 72,798 278,274 193,831 206,555 7,540 67,500 1,419 (23,536) 130,848 658 – 126 – 8,290 2017 Non-Executive Directors Robert Cameron Grant Bourke Ben Gisz Simon Rutherford Executive Directors John Gibbs Alex Abrahams Other Key Management Personnel Jane Coleman (until 3 Mar 2017) Allanna Ryan (appointed 3 Mar 2017) Paul Robertson Alison Hughes Emma McKenny Peter McKinney (until 18 Oct 2016) Andrew Streat (appointed 13 Jun 2017) 109,589 70,000 70,000 70,000 385,006 166,392 257,274 61,539 248,997 166,316 171,472 77,925 7,506 * Other benefits include termination benefits paid to Jane Coleman and Peter McKinney in 2017. There were no termination benefits paid or payable to Key Management Personnel during 2018. STI awarded For each STI bonus included in the 2018 table above, the percentage of the available bonus that was earned in the financial year and the percentage that was forfeited because the person did not meet the target performance criteria are set out below. Name John Gibbs Allanna Ryan Paul Robertson Alison Hughes Emma McKenny Nadia Henry1 David Williams % of Maximum STI Awarded Forfeited 20% 22% 22% 22% 23% 17% 26% 80% 78% 78% 78% 77% 83% 74% 1 Nadia Henry commenced as Key Management Personnel with effect from 28 January 2018, and was only eligible for a pro-rated STI in her capacity as Key Management Personnel during 2018. 32 PACIFIC SMILES GROUP ANNUAL REPORT 2018Directors’Report continued g. Employment contracts Remuneration and other terms of employment for the executives are formalised in employment contracts. The employment contracts specify the remuneration arrangements, benefits, notice periods and other terms and conditions. Participation in the STI and LTI arrangements is subject to the Board’s discretion. The current executive contracts do not have fixed terms. Contracts may be terminated by the executive with notice, or by the Company with notice or by payment in lieu of notice, or with immediate effect in circumstances involving serious or wilful misconduct. Executive John Gibbs Allanna Ryan Paul Robertson Alison Hughes Emma McKenny Nadia Henry David Williams Termination Notice by Executive Termination Notice or Payment in Lieu of Notice by Company 9 months 6 months 3 months 3 months 3 months 3 months 3 months 12 months 6 months 3 months 6 months 3 months 3 months 3 months h. Details of share-based compensation Performance Rights Under the LTI plan, performance rights have been granted to the Executive Directors and certain executives. These performance rights will vest after four years (the performance period), and are conditional on the achievement of relevant performance and service conditions. Grant Date Number of Rights Granted Fair Value per Right at Grant Date 21 November 2014 30 November 2015 30 November 2016 1 December 2017 2,137,500* 1,725,000 2,200,000 2,100,000 * 1,631,250 rights were revoked on 31 January 2018. $0.51 $0.89 $0.76 $0.62 Vesting Date 21 November 2018 30 November 2019 30 November 2020 1 December 2021 33 PACIFIC SMILES GROUP ANNUAL REPORT 2018 i. Equity instruments held by Key Management Personnel The tables below show the number of shares and performance rights in the Company that were held during the financial year by Key Management Personnel, including their close family members and entities related to them. No amounts remain unpaid in respect of ordinary shares at the end of the financial year. There were no shares granted during the reporting period as compensation, or on exercise of an option or right. Ordinary Shares 2018 Robert Cameron AO Grant Bourke (resigned 5 March 2018) Ben Gisz Simon Rutherford John Gibbs Alex Abrahams Paul Robertson Alison Hughes Balance at start of year Net change Balance at end of year 3,383,258 150,000 3,533,258 1,538,462 (1,150,000) 388,462 19,712,581 4,892,494 24,605,075 1,741,017 6,500,000 38,173,361 300,000 15,860,190 – – – – – 1,741,017 6,500,000 38,173,361 300,000 15,860,190 Zita Peach (appointed 18 August 2017) – 5,155 5,155 Balance at start of year Net change 3,383,258 1,538,462 19,712,581 1,741,017 6,500,000 – – – – – Balance at end of year 3,383,258 1,538,462 19,712,581 1,741,017 6,500,000 39,913,361 (1,740,000) 38,173,361 1,400,000 300,000 15,860,190 – – – 1,400,000 300,000 15,860,190 2017 Robert Cameron AO Grant Bourke Ben Gisz Simon Rutherford John Gibbs Alex Abrahams Jane Coleman Paul Robertson Alison Hughes 34 PACIFIC SMILES GROUP ANNUAL REPORT 2018Directors’Report continued Performance Rights 2018 John Gibbs Alex Abrahams Paul Robertson Alison Hughes Emma McKenny Allanna Ryan David Williams 2017 John Gibbs Alex Abrahams Jane Coleman Paul Robertson Alison Hughes Emma McKenny Peter McKinney Allanna Ryan Balance at start of year Net change Balance at end of year (all unvested) 1,675,000 (175,000) 1,500,000 787,500 (337,500) 1,043,750 (68,750) 400,000 550,000 100,000 100,000 – 325,000 400,000 325,000 450,000 975,000 400,000 875,000 500,000 425,000 Balance at start of year 1,175,000 562,500 906,250 693,750 225,000 300,000 450,000 Balance at end of year (all unvested) Net change 500,000 225,000 400,000 350,000 175,000 250,000 1,675,000 787,500 1,306,250 1,043,750 400,000 550,000 (450,000) – – 100,000 100,000 This concludes the Remuneration Report, which has been audited. Non-audit Services Details of the amounts paid or payable to the auditor for non-audit services providing during the financial year by the auditor are outlined in Note 22 to the financial report. Auditor’s Independence Declaration A copy of the Auditor’s Independence Declaration as required under section 307C of the Corporations Act 2001 is set out on page 36. Rounding of Amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 (Rounding Instrument). Pursuant to this instrument, amounts in the Directors’ Report and financial report have been rounded off to the nearest thousand dollars, or in certain cases, to the nearest dollar. This report is made in accordance with a resolution of the Board of Directors. Robert Cameron AO Chairman Greenhills 22 August 2018 35 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Auditor’s Independence Declaration 36 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 ProfessionalStandards Legislation.Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Pacific Smiles Group Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Pacific Smiles Group Limited for the financial year ended 30 June 2018 there have been: i.no contraventions of the auditor independence requirements as set out in theCorporations Act 2001 in relation to the audit andii.no contraventions of any applicable code of professional conduct in relation to the audit.KPMG Sarah Cain Partner Sydney 22 August 2018 KPM_INI_01 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2018 Revenue Direct expenses Other income Expenses Consumable supplies expenses Employee expenses Occupancy expenses Marketing expenses Administration and other expenses Depreciation and amortisation expense Net finance costs Profit before income tax Income tax expense Profit for the year Other comprehensive income Total comprehensive income for the year Earnings per share Basic earnings per share Diluted earnings per share Notes 2 3 4 4 5 2018 $’000 104,528 (8,318) 96,210 2017 $’000 91,471 (5,559) 85,912 1,217 1,181 (8,374) (44,162) (11,960) (1,819) (12,673) (7,833) (393) 10,213 (7,416) (38,373) (10,224) (1,757) (8,771) (6,042) (172) 14,338 (3,609) (4,301) 6,604 10,037 – – 6,604 10,037 Cents Cents 20 20 4.3 4.3 6.6 6.6 The above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. 37 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Consolidated Balance Sheet As at 30 June 2018 ASSETS Current Assets Cash and cash equivalents Receivables Current tax receivable Inventories Other Total Current Assets Non-Current Assets Property, plant and equipment Intangible assets Deferred tax assets Total Non-Current Assets Total Assets LIABILITIES Current Liabilities Payables Provisions Total Current Liabilities Non-Current Liabilities Payables Borrowings Provisions Total Non-Current Liabilities Total Liabilities Net Assets EQUITY Contributed equity Reserves Retained profits Total Equity Notes 2018 $’000 2017 $’000 7 8 16 9 10 11 12 13 14 17 14 15 17 18 19 6,683 5,880 869 771 3,260 465 972 67 2,891 693 12,048 10,503 47,324 11,004 4,964 63,292 41,930 11,409 4,353 57,692 75,340 68,195 11,042 3,301 14,343 149 12,000 6,970 19,119 9,842 3,018 12,860 – 5,000 6,046 11,046 33,462 23,906 41,878 44,289 35,053 35,053 277 6,548 172 9,064 41,878 44,289 The above Consolidated Balance Sheet should be read in conjunction with the accompanying notes. 38 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Consolidated Statement of Changes in Equity For the year ended 30 June 2018 Contributed equity $’000 Reserves $’000 Retained profits $’000 Total equity $’000 Notes Consolidated Balance at 30 June 2016 35,053 224 7,691 42,968 Total comprehensive income for the year Transactions with owners of the Company, recognised directly in equity: Dividends provided for or paid Share-based payments charge – performance rights 6(a) 19 – – – – Consolidated Balance at 30 June 2017 35,053 Total comprehensive income for the year Transactions with owners of the Company, recognised directly in equity: Dividends provided for or paid Share-based payments charge – performance rights 6(a) 19 – – – – Consolidated Balance at 30 June 2018 35,053 – – (52) (52) 172 – – 105 105 277 10,037 10,037 (8,664) (8,664) – (52) (8,664) (8,716) 9,064 44,289 6,604 6,604 (9,120) (9,120) – (9,120) 6,548 105 (9,015) 41,878 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 39 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Consolidated Statement of Cash Flows For the year ended 30 June 2018 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest and finance costs paid Income taxes paid Notes 2018 $’000 2017 $’000 116,135 101,541 (93,379) (79,528) 22,756 22,013 33 (426) (4,912) 17,451 42 (210) (4,725) 17,120 Net cash inflow from operating activities 29(a) Cash flows from investing activities Payments for purchase of a business Payments for property, plant and equipment Proceeds from disposal of property, plant and equipment Net cash outflow from investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Dividends paid Net cash outflow from financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the end of the financial year 28 (816) – (13,769) (13,569) 57 43 (14,528) (13,526) 7,000 – (9,120) (2,120) 803 5,880 6,683 5,000 (150) (8,664) (3,814) (220) 6,100 5,880 6(a) 7 7 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 40 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Notes to the Financial Statements For the year ended 30 June 2018 1. Summary of Significant Accounting Policies (a) Corporate Information The financial statements are for the consolidated entity consisting of Pacific Smiles Group Limited (“the Company”) and its subsidiaries (“the Group”). Pacific Smiles Group Limited is a public company limited by shares, incorporated and domiciled in Australia. On 21 November 2014 the Company was listed on the ASX. Its registered office and its principal place of business are located at 6 Molly Morgan Drive, Greenhills, New South Wales. A description of the nature of the consolidated entity’s operations and its principal activities is included in the Directors’ Report on pages 23 to 35, which is not part of this financial report. The financial report is presented in Australian Dollars, which is the Company’s functional currency. The financial report was authorised for issue by the Directors on 22 August 2018. The Company has the power to amend and reissue the financial report. (b) Basis of Preparation Statement of Compliance The principal accounting policies adopted in preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. These general purpose financial statements have been prepared in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. Pacific Smiles Group Limited is a for-profit entity for the purpose of preparing the financial statements. The financial statements also comply with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB). Historical Cost Convention These financial statements have been prepared on an accruals basis and are based on historical costs, modified where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities. Critical Accounting Estimates and Judgements The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, include asset impairment testing. 41 PACIFIC SMILES GROUP ANNUAL REPORT 2018 1. Summary of Significant Accounting Policies (continued) (b) Basis of Preparation (continued) New Accounting Standards and Accounting Interpretations The Group has adopted all of the new and revised standards issued by the Australian Accounting Standards Board that are relevant to its operations and effective for the reporting period. Details of the impact of the adoption of these new accounting standards, where applicable, are set out in the individual accounting policy notes. Certain new accounting standards and interpretations have been published by the Australian Accounting Standards Board that are not mandatory for 30 June 2018 reporting periods and have not been adopted early by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below. AASB 15 Revenue from Contracts with Customers is effective for annual reporting periods beginning on or after 1 January 2018. The Group is not required to adopt this new standard until the annual reporting period ending 30 June 2019 and currently has no intention of adopting this standard earlier. The potential impact of the standard has been assessed at this stage as minimal. AASB 16 Leases is effective for annual reporting periods beginning on or after 1 January 2019. The Group is not required to adopt this new standard until the annual reporting period ending 30 June 2020 and currently has no intention of adopting this standard earlier. The Group is assessing the potential impact of the application of AASB 16 on its financial statements, including the potential impact of the various transition provisions available to the Group. Based on current lease obligations, the estimated Group impact of AASB 16 under the modified retrospective approach would result in an initial $53,388,000 right of use asset, $52,236,000 lease liability, and a reduction in existing lease assets of $1,152,000. Partially offsetting the liability increase would be the write-back of $4,572,000 in existing lease liabilities, adjusted to the opening balance of retained earnings. AASB 9 Financial Instruments is effective for annual reporting periods beginning on or after 1 January 2018. The Group is not required to adopt this new standard until the annual reporting period ending 30 June 2019 and currently has no intention of adopting this standard earlier. It includes revised guidance on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets, and new general hedge accounting requirements. The potential impact of the standard has yet to be assessed, but the impact is expected to be minimal. There are no other such standards that are not yet effective and that are expected to have a material impact on the Group in the current or future reporting periods and on foreseeable future transactions. (c) Basis of Consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Pacific Smiles Group Limited (“Company” or “parent entity”) as at 30 June 2018 and the results of all subsidiaries for the year then ended. Pacific Smiles Group Limited and its subsidiaries together are referred to in this financial report as the “Group” or the “consolidated entity”. 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 on which control commences until the date on which control ceases. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. The acquisition method of accounting is used to account for business combinations by the Group (refer to Note 1(h)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries are consistent with the policies adopted by the Group. Investments in subsidiaries are accounted for at cost in the individual financial statements of the parent entity. (d) Segment Reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker is responsible for allocating resources and assessing performance of the operating segments. 42 PACIFIC SMILES GROUP ANNUAL REPORT 2018Notes to the Financial Statements continuedFor the year ended 30 June 2018 (e) Revenue Recognition Revenue is recognised at the fair value of consideration received or receivable. Revenue from the rendering of services is recognised once the services have been provided and is measured in accordance with contractual calculation methods and rates. Revenue from the sale of goods is net of returns, discounts and other allowances, and is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer. Risks and rewards of ownership are considered to pass to the buyer at the time when control of the goods passes to the customer in the case of the supply of non-customised products, or at the time a significant monetary deposit is taken in the case of customised products. Government subsidies are recognised at their fair value where there is reasonable assurance that the subsidy will be received and the Group will comply with all attached conditions. Interest income is recognised as it accrues in profit and loss. (f) Income Tax The income tax expense for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the jurisdictions where the Company and its subsidiaries operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretations. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transactions affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates and laws that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and liabilities are offset where the entity has a legally enforceable right to offset and intends to either settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. 43 PACIFIC SMILES GROUP ANNUAL REPORT 2018 1. Summary of Significant Accounting Policies (continued) (g) Leases Leases of property, plant and equipment where the Group, as lessee, has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease inception at the lower of the fair value of the lease asset and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in borrowings. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate of the finance balance outstanding. The interest element of the finance cost is charged to the profit and loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases. Payments made under operating leases, net of incentives received from the lessor, are charged to profit and loss on a straight-line basis over the period of the lease. Lease income from operating leases where the Group is a lessor is recognised in income on a straight-line basis over the lease term. (h) Business Combinations The acquisition method of accounting is used to account for all business combinations. Cost is measured as the fair value of the assets given, equity instruments issued or liabilities incurred or assumed. The consideration also includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recorded as goodwill (refer to Note 1(n)). Where contingent consideration is classified as a financial liability and amounts are subsequently re-measured to fair value, changes in fair value are recognised in profit and loss. (i) Impairment of Assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested at least annually for impairment. Other assets, including those that are subject to depreciation or amortisation, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows which are largely independent of the cash flows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Cash inflows considered for the purposes of impairment testing are discounted to present value. Significant judgement has been used in testing assets for impairment and in determining the amounts recognised as impairment losses at reporting date. Further details of any material impairment losses recognised in the financial statements are provided in the notes dealing with the relevant asset categories. (j) Cash and Cash Equivalents Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, and other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. (k) Receivables Receivables are recognised initially at fair value and subsequently measured at amortised cost, less provision for impairment if applicable. The amount of the impairment loss is recognised in profit and loss with other expenses. When a receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in profit and loss. 44 PACIFIC SMILES GROUP ANNUAL REPORT 2018Notes to the Financial Statements continuedFor the year ended 30 June 2018 (l) Inventories Inventories held for sale and stores of consumable supplies are stated at the lower of cost and net realisable value. Costs are assigned to individual items of inventory on the basis of actual costs. Net realisable value is the estimated selling price less estimated costs associated with the sale. (m) Property, Plant and Equipment All property, plant and equipment are stated at historical cost less depreciation, amortisation and accumulated impairment losses. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to profit and loss during the reporting period in which they are incurred. Depreciation is calculated using the straight-line method to allocate the cost of assets, net of their residual values, over their estimated useful lives, as follows: Leasehold improvements Plant and equipment 10 to 20 years 3 to 10 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (refer to Note 1(i)). (n) Intangible Assets Goodwill Goodwill represents the excess of the cost of an acquisition over the fair value of the Group’s share of the net identifiable assets of the acquired business at the date of acquisition. Goodwill on acquisitions of businesses is included in intangible assets. Goodwill acquired in business combinations is not amortised. Instead, goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Goodwill is allocated to relevant cash-generating units (CGUs) for the purpose of impairment testing. Rights and Licences Contractual rights and licences have a finite useful life and are carried at cost less accumulated amortisation and impairment losses. Amortisation is calculated using the straight-line method to allocate the cost of the rights and licences over their estimated useful lives, being 15 years. (o) Payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year which are unpaid. (p) Borrowings Borrowings are measured at amortised cost. Borrowing costs are expensed as incurred. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liabilities for at least 12 months after the reporting period. (q) Employee Benefits The employee benefits provisions cover the Group’s liability for employees’ annual leave and long service leave entitlements. Short-term Obligations Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. The liabilities are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. 45 PACIFIC SMILES GROUP ANNUAL REPORT 2018 1. Summary of Significant Accounting Policies (continued) (q) Employee Benefits (continued) Long-term Obligations The Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. The benefit is discounted to determine its present value. Re-measurements are recognised in profit or loss in the period in which they arise. The obligations are presented as a current liability in the balance sheet if the Group does not have an unconditional right to defer settlement for at least 12 months after the reporting date, regardless of when the actual settlement is expected to occur. Share-Based Payments Share-based compensation benefits are provided to selected employees via a long-term equity incentive (‘LTI’) plan. Further information on the LTI plan is set out in Note 21. The fair value of performance rights granted under the LTI plan is recognised as an employee benefits expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the performance rights granted, which includes any market performance conditions and the impact of any non-vesting conditions but excludes the impact of any service and non-market performance vesting conditions. Non-market vesting conditions are included in assumptions about the number of performance rights that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are satisfied. At the end of each period, the Company revises its estimates of the number of performance rights that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. (r) 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. Make Good Provision The Group is required to restore most leased premises to their original condition at the end of their respective lease terms. A provision has been recognised for the present value of the estimated expenditure required to remove any leasehold improvements and repair any associated damage. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease or the useful life of the assets. Onerous Contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on the assets associated with that contract. Restructuring A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced. Future operating losses are not provided for. (s) Dividends Provision is made for the amount of any dividend declared on or before the end of the financial year but not distributed at balance date. 46 PACIFIC SMILES GROUP ANNUAL REPORT 2018Notes to the Financial Statements continuedFor the year ended 30 June 2018 (t) Earnings Per Share Basic earnings per share Basic earnings per share is calculated by dividing: • the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares, • by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: • the after income tax effect of interest and other financial costs associated with dilutive potential ordinary shares, and • the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. (u) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of 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 an item of expense. Receivables and payables in the balance sheet are shown inclusive of GST. Cash flows are presented in the cash flow statement on a gross basis, except for the GST components of investing and financing activities, which are disclosed as operating cash flows. (v) Rounding of Amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 (Rounding Instrument). Pursuant to this instrument, amounts in the Directors’ Report and financial report have been rounded off to the nearest thousand dollars, or in certain cases, to the nearest dollar. (w) Parent Entity Financial Information The financial information for the parent entity, Pacific Smiles Group Limited, disclosed in Note 30 has been prepared on the same basis as the consolidated financial statements, except as set out below. Investments in subsidiaries Investments in subsidiaries are accounted for at cost in the financial statements of Pacific Smiles Group Limited. Tax consolidation legislation Pacific Smiles Group Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, Pacific Smiles Group Limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a stand- alone taxpayer in its own right. In addition to its own current and deferred tax amounts, Pacific Smiles Group Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Pacific Smiles Group Limited for any current tax payable assumed and are compensated by Pacific Smiles Group Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Pacific Smiles Group Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as current amounts receivable from or payable to other entities in the Group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. 47 PACIFIC SMILES GROUP ANNUAL REPORT 2018 2. Revenue Services rendered Sale of goods 3. Other Income Rents Sundry income 4. Expenses Profit before income tax includes the following specific expenses: Employee benefits – share-based payments expense Depreciation and amortisation Plant and equipment Leasehold improvements Total Depreciation Amortisation Rights and licences Total Amortisation Net loss/(profit) on disposal of non-current assets Impairment loss on write-down of assets to recoverable amount Receivables – other entities Goodwill Fixed Assets Net finance costs Interest and finance charges paid/payable Interest received/receivable Total net finance costs 2018 $’000 2017 $’000 104,019 90,967 509 504 104,528 91,471 2018 $’000 1,090 127 1,217 2018 $’000 105 3,893 3,874 7,767 66 66 376 25 1,002 642 426 (33) 393 2017 $’000 1,168 13 1,181 2017 $’000 (52) 3,252 2,724 5,976 66 66 (8) 25 – – 210 (38) 172 Defined contribution superannuation plans expense 3,518 3,067 48 PACIFIC SMILES GROUP ANNUAL REPORT 2018Notes to the Financial Statements continuedFor the year ended 30 June 2018 5. Income Tax Expense Current tax Deferred tax Profit before income tax expense Income tax calculated at 30% (2017: 30%) Tax effect of amounts which are not deductible/(taxable) in calculating taxable income: Impairment Share-based payments Sundry items Income tax expense 6. Dividends (a) Dividends paid during the year: Interim dividend for the year ended 30 June 2018 of 2.30 cents (2017 – 2.20 cents) per share, fully franked Final dividend for the year ended 30 June 2017 of 3.70 cents (2016 – 3.50 cents) per share, fully franked (b) Dividends declared but not recognised at the end of the year: The Directors have declared the payment of a final dividend of 3.80 cents (2017 – 3.70 cents) per share, fully franked. 2018 $’000 4,209 (600) 3,609 2017 $’000 4,674 (373) 4,301 10,213 14,338 3,064 4,301 493 32 20 – (16) 16 3,609 4,301 2018 $’000 2017 $’000 3,496 3,344 5,624 9,120 5,320 8,664 5,776 5,624 It is expected to be paid on 5 October 2018 out of retained earnings at 30 June 2018, but not recognised as a liability at year end. (c) Franking credits available for subsequent financial years: Based on tax rate of 30% (2017: 30%) 10,408 10,045 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for franking credits that will arise from the payment of the amount of income tax payable or collection of income tax receivable. The consolidated amount includes franking credits that would be available to the parent entity if distributed profits of subsidiaries were paid as dividends. 49 PACIFIC SMILES GROUP ANNUAL REPORT 2018 2018 $’000 2017 $’000 6,683 5,880 2018 $’000 2017 $’000 658 (52) 606 263 869 529 (81) 448 524 972 2018 $’000 2017 $’000 3,260 2,891 2018 $’000 2017 $’000 328 137 465 595 98 693 7. Cash and Cash Equivalents CURRENT Cash at bank and in hand 8. Receivables CURRENT Trade debtors Provision for doubtful debts Sundry debtors 9. Inventories CURRENT Inventories – at cost 10. Other Assets CURRENT Prepayments Other 50 PACIFIC SMILES GROUP ANNUAL REPORT 2018Notes to the Financial Statements continuedFor the year ended 30 June 2018 11. Property, Plant and Equipment NON-CURRENT Leasehold improvements – at cost Less accumulated depreciation and impairment Plant and equipment – at cost Less accumulated depreciation and impairment Total property, plant and equipment Movements in Carrying Amounts 2018 Carrying amount at the beginning of the year Additions Disposals Depreciation expense Impairment loss Carrying amount at the end of the year 2017 Carrying amount at the beginning of the year Additions Disposals Depreciation expense Impairment loss Carrying amount at the end of the year 2018 $’000 2017 $’000 48,061 40,323 (16,524) (12,008) 31,537 28,315 39,069 33,401 (23,282) (19,786) 15,787 13,615 47,324 41,930 Leasehold improvements $’000 Plant and equipment $’000 28,315 7,766 (28) (3,874) (642) 31,537 13,615 6,471 (406) (3,893) – Total $’000 41,930 14,237 (434) (7,767) (642) 15,787 47,324 Leasehold improvements $’000 Plant and equipment $’000 22,666 8,380 (7) 11,519 5,377 (29) Total $’000 34,185 13,757 (36) (2,724) (3,252) (5,976) – – – 28,315 13,615 41,930 (a) Impairment loss in relation to restructure of a Pacific Smiles Dental Centre During the year, the Group restructured the Parramatta Pacific Smiles Dental Centre. The centre continued to perform below management expectations and, as a result, actions were taken to reduce operational capacity to right-size the centre and better match the capacity at which it was operating. Accordingly, the Group has recognised an impairment loss on property, plant and equipment of $642,000, in the year ended 30 June 2018, based on the cash-generating unit’s value in use. 51 PACIFIC SMILES GROUP ANNUAL REPORT 2018 12. Intangible Assets NON-CURRENT Goodwill Less accumulated amortisation and impairment Rights and licences Less accumulated amortisation and impairment Total intangible assets Movements in Carrying Amounts 2018 Carrying amount at the beginning of the year Additions Amortisation expense Impairment expense Carrying amount at the end of the year 2017 Carrying amount at the beginning of the year Additions Amortisation expense Carrying amount at the end of the year 2018 $’000 2017 $’000 13,180 (2,894) 10,286 985 (267) 718 12,517 (1,892) 10,625 985 (201) 784 11,004 11,409 Goodwill $’000 10,625 663 – (1,002) 10,286 Goodwill $’000 10,625 Rights and licences $’000 784 – (66) – 718 Rights and licences $’000 Total $’000 11,409 663 (66) (1,002) 11,004 Total $’000 850 11,475 – 10,625 (66) 784 (66) 11,409 (a) Impairment loss in relation to restructure of a Pacific Smiles Dental Centre As described in Note 11, the Group has restructured the Parramatta Pacific Smiles Dental Centre. An impairment loss has been recognised to goodwill as a result of this restructure of $1,002,000 in the year ended 30 June 2018, based on the cash-generating unit’s value in use of $57,153,000. These costs have been included in “administration and other expenses”. Future cash flows are discounted using the Group’s weighted average cost of capital of 9.6% (2017: 9.8%). 52 PACIFIC SMILES GROUP ANNUAL REPORT 2018Notes to the Financial Statements continuedFor the year ended 30 June 2018 (b) Impairment testing for cash generating units (CGUs) For the purposes of impairment testing, the carrying amount of goodwill has been allocated to groups of CGUs as follows: New South Wales Victoria Queensland 2018 $’000 5,209 2,631 2,446 2017 $’000 5,548 2,631 2,446 10,286 10,625 The impairment assessments for each CGU are made on the basis of the assets’ expected value in use and involve the use of key assumptions. Recoverable amounts of the CGUs exceeded their carrying values, and therefore no impairment losses besides the impairment described in Note 12(a) were recorded in the year. The calculations use discounted cash flow projections covering a 10 year period, which is consistent with the typical lease term entered into for the Group’s dental centre locations, and matches the average growth profile of our dental centres. The cash flows for years one to five are based on detailed management projections, which consider historical financial results and trends, the Board-approved financial budget for the next financial year and reasonable expectations regarding future business and market circumstances. Cash flows beyond the first five year period are extrapolated using an estimated growth rate of 3%. A long term growth rate of 2.5% is used in determining the terminal values, which is considered reasonable in the context of the long term growth rates for the markets in which each CGU operates. Future cash flows are discounted using the Group’s weighted average cost of capital of 9.6% (2017: 9.8%). (c) Rights and Licences Rights and licences relate to AHM marketing rights at each Pacific Smiles Dental Centre with 11 amortisation periods remaining as at balance date. 13. Deferred Tax Assets NON-CURRENT The balance comprises temporary differences attributable to: Provision for doubtful debts Depreciation of property, plant and equipment Accrued expenses Prepayments Provisions Intangibles Deferred tax assets 2018 $’000 2017 $’000 14 2,052 222 170 2,722 (216) 4,964 29 1,658 204 339 2,358 (235) 4,353 53 PACIFIC SMILES GROUP ANNUAL REPORT 2018 14. Payables CURRENT Trade payables and accruals – related entities Trade payables and accruals – other entities Deferred consideration payable NON-CURRENT Deferred consideration payable 15. Borrowings NON-CURRENT Secured: Bank loans Total 2018 $’000 – 10,893 149 11,042 149 149 2017 $’000 14 9,828 – 9,842 – – 2018 $’000 2017 $’000 12,000 12,000 5,000 5,000 Security Bank bills, bank loans and asset finance provided by the bank are secured by registered equitable mortgage over the whole of the assets and undertakings of the Group, including uncalled capital and inter-entity guarantees. Financing Arrangements Access was available at balance date to the following lines of credit: Total bank borrowings facilities Used at balance date Unused at balance date 2018 $’000 2017 $’000 24,500 (14,664) 9,836 14,500 (7,490) 7,010 Covenants attached to bank borrowings were complied with during the year. Further details on financing facilities are included in Note 27. 16. Current Tax Receivable CURRENT Income tax receivable 54 2018 $’000 2017 $’000 771 67 PACIFIC SMILES GROUP ANNUAL REPORT 2018Notes to the Financial Statements continuedFor the year ended 30 June 2018 2017 $’000 2,848 170 3,018 935 3,255 1,856 6,046 Total $’000 9,064 39 3,504 (2,336) 17. Provisions CURRENT Employee benefits Straight-line operating lease adjustment NON-CURRENT Employee benefits Straight-line operating lease adjustment Make good provision Movements: 2018 $’000 3,110 191 3,301 810 4,180 1,980 6,970 Employee Benefits $’000 Straight- line Lease Adjustment $’000 Make Good Provision $’000 3,783 39 2,230 (2,132) 3,920 3,425 – 1,150 (204) 4,371 Balance at the beginning of the year Amounts recognised in connection with business combinations Additional provisions charged Amounts used Balance at the end of the year 18. Contributed Equity (a) Share Capital Ordinary shares – fully paid (b) Movements in Share Capital Balance 30 June 2017 Balance 30 June 2018 1,856 – 124 – 1,980 10,271 2018 $’000 2017 $’000 35,053 35,053 Number of Shares 151,993,395 151,993,395 $’000 35,053 35,053 (c) Ordinary Shares Fully paid ordinary shares – Ordinary shares participate in dividends and the proceeds on winding up of the Company in proportion to the number of shares held. At shareholders’ meetings, each ordinary share is entitled to one vote when a poll is called; otherwise each shareholder has one vote on a show of hands. (d) Capital Management The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern so that it can continue to provide returns for shareholders and benefits for other stakeholders, maintain sufficient financial flexibility to pursue its growth objectives, and maintain an optimal capital structure to reduce the cost of capital. 55 PACIFIC SMILES GROUP ANNUAL REPORT 2018 19. Reserves Share-based payments reserve 20. Earnings Per Share Profit attributable to the ordinary equity holders of the Company used in calculating basic and diluted earnings per share 2018 $’000 277 2017 $’000 172 2018 $’000 2017 $’000 6,604 10,037 Shares Shares Weighted average number of ordinary shares used as the denominator in calculating basic and diluted earnings per share 151,993,395 151,993,395 Basic earnings per share Diluted earnings per share Cents Cents 4.3 4.3 6.6 6.6 Information Concerning the Classification of Shares (i) Performance Rights Performance rights granted to employees under the Company’s long term incentive plan are considered to be potential ordinary shares and are only included in the determination of diluted earnings per share to the extent to which they are dilutive. The total 6,531,250 performance rights on issue are not included in the calculation of diluted earnings per share because they are contingently issuable ordinary shares and conditions were not satisfied at 30 June 2018. These performance rights could potentially dilute basic earnings per share in the future. 21. Share-Based Payments (a) Long-Term Incentive Plan Overview The Group has established a LTI plan to assist in the motivation, retention and reward of senior management. The LTI plan is designed to align the interests of senior management more closely with the interests of shareholders by providing an opportunity for senior management to receive an equity interest in the Company through the granting of performance rights. Performance rights have been issued to selected senior managers pursuant to the LTI plan in financial years 2018, 2017, 2016 and 2015. The performance rights will vest for a set term (the performance period), and are conditional on the achievement of relevant performance and service conditions. Vesting of the performance rights will be subject to: • satisfaction of earnings per share (EPS) performance hurdles for a four year performance period. The number of performance rights vesting will be determined on a sliding scale from nil vesting for an EPS compound annual growth rate (CAGR) of 15.0% per annum or less and 100% vesting for an EPS CAGR of 25.0% per annum; and • the participant remaining employed by Pacific Smiles Group (or its subsidiaries) on the vesting date, subject to certain “good leaver” exemptions. Performance rights that do not vest on the relevant vesting date will lapse. Performance rights will also lapse if total shareholder return (TSR) does not reach a minimum of 10.0% per annum over the relevant performance period. 56 PACIFIC SMILES GROUP ANNUAL REPORT 2018Notes to the Financial Statements continuedFor the year ended 30 June 2018 (b) Performance Rights 21 November 2014 30 November 2015 30 November 2016 1 December 2017 Total Balance at 1 July 2017 Granted 2,137,500 1,725,000 2,200,000 – 6,062,500 – – – 2,100,000 2,100,000 Forfeited, lapsed or vested (1,631,250) – – – (1,631,250) Balance at 30 June 2018 506,250 1,725,000 2,200,000 2,100,000 6,531,250 (c) Fair Value of Performance Rights Granted The fair values at grant dates have been determined via pricing models which use a Monte Carlo simulation, and take into account the following inputs: 2018 2017 1 December 2017 30 November 2016 Grant Date Fair value of right Share price at grant date Exercise price Term Expected price volatility Expected dividend yield Risk free interest rate 22. Remuneration of Auditors Audit and review of financial statements Other audit services Non-audit services: Tax compliance and advisory services 23. Contingencies Bank guarantees The bank guarantees at the end of the financial year relate to security provided under operating leases for premises. $0.62 $1.79 Nil 4 years 30% 4.0% 2.00% 2018 $’000 129 15 27 171 2018 $’000 2,664 $0.76 $2.15 Nil 4 years 30% 4.0% 2.00% 2017 $’000 119 – 22 141 2017 $’000 2,490 57 PACIFIC SMILES GROUP ANNUAL REPORT 2018 24. Commitments (a) Capital Commitments Capital expenditure contracted for at the reporting date but not recognised as liabilities is as follows: Property, plant and equipment Payable within one year 2018 $’000 2017 $’000 390 2,172 (b) Operating Lease Commitments Non-cancellable operating leases contracted for at the reporting date but not recognised as liabilities are as follows: Payable within one year Payable later than one year but not later than five years Payable later than five years 2018 $’000 10,474 37,432 23,478 71,384 2017 $’000 9,629 35,200 26,721 71,550 Operating leases relate to rented premises. Leases have various terms, including some options to extend the terms. 25. Subsidiaries The parent entity within the Group is Pacific Smiles Group Limited. The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 1(c): Name of Entity Dentist Smiles Group Pty Limited Dental Assistant Training Solutions Pty Limited* Pacific Eyes Pty Limited* Everything Dentures Pty Limited** Country of incorporation Class of shares Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Equity holding 2018 % 100 100 100 100 2017 % 100 100 100 100 * No longer trading. ** Name changed from Pacific Medical Care Pty Limited to Dentalwise Pty Limited 5 September 2016. Name changed to Everything Dentures Pty Limited 14 April 2018. 58 PACIFIC SMILES GROUP ANNUAL REPORT 2018Notes to the Financial Statements continuedFor the year ended 30 June 2018 26. Related Party Disclosures (a) Key Management Personnel Compensation Short-term employment benefits Long-term benefits Termination benefits Share-based payments 2018 $ 2017 $ 2,265,643 2,050,434 27,390 54,909 – 292,500 103,420 (62,182) 2,396,453 2,335,661 Detailed remuneration disclosures are provided in the Remuneration Report within the Directors’ Report. (b) Related Party Transactions Other than remuneration for their positions as Directors and Executives of the Company, Key Management Personnel or entities related to them entered into a number of transactions with the Company. Information on these transactions is set out below. Key Management Personnel or their related parties held shares in the Company during 2018 and 2017, and as such, participated in dividends. Bislab Pty Limited ATF the Canyon Property Trust, an entity related to Alex Abrahams and Simon Rutherford, provided premises rental to the Company during 2018 and 2017 on normal commercial terms and conditions. Exandal Investments, an entity related to Alex Abrahams and Alison Hughes, leased business premises to the Company during 2018 and 2017 on normal commercial terms and conditions. 88 Park Avenue Pty Limited ATF the Key Health Unit Trust, an entity related to Alex Abrahams, leased business premises to the Company during 2018 and 2017 on normal commercial terms and conditions. The Company received fees for the provision of services to Alex Abrahams during 2018 and 2017 under normal terms and conditions of dental service and facility agreements. The Company paid fees for clinical consultancy services to Whitesail Pty Limited ATF The Whitesail Trust during 2018. The entity is related to Alex Abrahams; fees were based on an agreement approved by the Board and reflecting normal commercial terms and conditions. The aggregate amounts of each of the above types of transactions were: Dividends paid Revenues from rendering services Rental expenses Consultancy expenses 2018 $ 2017 $ 4,037,250 3,943,492 1,177 87,910 1,230,525 1,228,256 80,000 – 59 PACIFIC SMILES GROUP ANNUAL REPORT 2018 27. Financial Risk Management Financial Risk Management Objectives The Group’s activities expose it to a variety of financial risks: market risk (interest rate risk), credit risk and liquidity risk. The Board has overall responsibility for the establishment and oversight of the risk management framework, and is supported by the Board Audit and Risk Management Committee. Senior management develops and monitors risk management policy, and reports regularly to the Directors on issues and compliance matters. Risk management principles and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group’s principal financial instruments during the 2018 and 2017 financial years comprised bank and other loans, and cash. The main purpose of these instruments has been to raise finance for the Group’s operations and investments. The Group has various other financial instruments such as trade and other debtors and creditors, which arise directly from its operations. The Group does not trade in financial instruments. Market Risk The Group’s exposure to market risk for changes in interest rates at the end of the year was minimal, with bank debt partially offset by cash balances at 30 June. Cash balances are held in a combination of short-term fixed interest deposit accounts and other cheque and on-call accounts which attract variable interest rates. The weighted average interest rate on cash balances at the end of the year was 0.87% (2017: 0.97%) for the Group. Variable rate bank loans totalling $12,000,000 form part of an ongoing loan facility which was updated during the financial year. The overall facility has a confirmed two years eight months term which expires on 30 September 2020. The loans are subject to interest charged at the prevailing variable rate payable on each reset date. The weighted average interest rate on borrowings at the end of the year was 4.89% (2017: 5.12%) for the Group. Interest Rate Sensitivity Analysis Effect on profit before tax and equity: 1% increase in interest rates 1% decrease in interest rates 2018 $’000 2017 $’000 (53) 53 7 (7) Credit Risk The Group has no significant concentrations of credit risk. The Group does not have significant credit exposure to any one financial institution or customer. The credit risk on financial assets of the consolidated entity which have been recognised in the balance sheet is generally the carrying amount, net of any provision for doubtful debts. Liquidity Risk The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of working capital and bank borrowings. The Group aims to achieve this flexibility by keeping committed credit lines available. Opportunities to raise additional capital from shareholders are also considered where appropriate. Bank financing facilities are identified in Note 15. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows to ensure sufficient liquidity is always available to meet liability obligations as they fall due. The Group’s balance sheet shows an excess of current liabilities over current assets at balance date of $2,295,000. Liabilities have been classified as current where it is probable that they will be settled within 12 months or if there is a contractual obligation that may require settlement within 12 months, regardless of how likely settlement under contractual arrangements is judged to be. The Group’s current assets, available financing facilities and ongoing positive operating cash flows continue to be sufficient to satisfy all payment obligations within the timeframes required. 60 PACIFIC SMILES GROUP ANNUAL REPORT 2018Notes to the Financial Statements continuedFor the year ended 30 June 2018 Maturities of Financial Liabilities The following tables show the maturity groupings of gross (undiscounted) payment obligations under contracts for financial liabilities. Consolidated – 2018 Bank loans Payables and accruals Consolidated – 2017 Bank loans Payables and accruals Less than 6 months $’000 6 to 12 months $’000 1 to 5 years $’000 Total contractual amounts $’000 – 11,042 11,042 – 9,842 9,842 – – – – – – 12,000 – 12,000 12,000 11,042 23,042 5,000 – 5,000 9,842 5,000 14,842 Fair Value The fair value of financial assets and liabilities held by the Group approximate the individual carrying values of those assets and liabilities. 28. Business Combinations (a) Summary of Acquisitions On 7 November 2017, the Group acquired 100% of the assets and liabilities of The Prosthetic Group Pty Ltd, trading as Everything Dentures (“ETD”), a provider of prosthetic denture services and dental laboratory services. Everything Dentures consisted of three existing denture clinics – one located in Five Dock, Sydney and two located in Canberra, Australian Capital Territory as well as Sculpt Dental Laboratories in Five Dock and Canberra. An incentive payment is due at the end of the vendors’ five-year employment agreement based on a multiple of earnings incremental to an agreed target. Details of the aggregate fair value of the assets and liabilities acquired and goodwill are as follows: Purchase consideration (refer to (b) below): Cash paid/payable Fair value of net identifiable assets acquired (refer to (c) below) Goodwill 2018 $’000 1,115 (452) 663 2017 $’000 – – – 61 PACIFIC SMILES GROUP ANNUAL REPORT 2018 28. Business Combinations (continued) (b) Purchase Consideration Outflow of cash to acquire businesses, net of cash acquired Total cash consideration Cash acquired Post-completion adjustments receivable Payments/(receipts) per statement of cash flows Deferred consideration payable Total outflow (c) Assets and Liabilities Acquired The assets and liabilities arising from the acquisitions were as follows: Trade receivables Inventories Plant and equipment Deferred tax asset Provisions Net identifiable assets acquired 2018 $’000 816 – – 816 299 1,115 2017 $’000 – – – – – – 2018 $’000 2017 $’000 86 49 344 12 (39) 452 – – – – – – (d) Acquisition related costs The Group incurred acquisition related costs of $76,000 on legal and due diligence expenses. These costs have been included in “administration and other expenses”. 29. Segment Information The Group’s activities are within the dental sector. The Group’s activities are located throughout eastern Australia. The financial results from this segment are consistent with the financial statements for the Group as a whole. 62 PACIFIC SMILES GROUP ANNUAL REPORT 2018Notes to the Financial Statements continuedFor the year ended 30 June 2018 30. Notes to the Statement of Cash Flows (a) Reconciliation of Profit After Income Tax to Net Cash Inflow from Operating Activities Profit for the year Depreciation and amortisation Net loss/(profit) on disposal of non-current assets Impairment losses Share-based payments (credited)/expense Change in operating assets and liabilities Decrease in receivables (Increase) in inventories Decrease/(increase) in other operating assets (Increase) in deferred tax assets Increase in trade payables Increase in provisions (Decrease) in income tax (Decrease) in deferred tax liabilities Net cash inflow from operating activities (b) Non-cash Investing and Financing Activities Capitalisation of estimated future make-good obligations in relation to leasehold premises 2018 $’000 6,604 7,833 376 1,644 105 190 (320) 227 (599) 1,051 1,044 (704) – 2017 $’000 10,037 6,042 (8) – (52) 363 (385) (519) (118) 1,288 777 (50) (255) 17,451 17,120 2018 $’000 124 2017 $’000 187 63 PACIFIC SMILES GROUP ANNUAL REPORT 2018 31. Parent Entity Financial Information (a) Summary Financial Information The individual financial statements for the parent entity show the following aggregate amounts: Balance Sheet Current assets Total assets Current liabilities Total liabilities Shareholders’ equity Issued capital Reserves Retained earnings Profit or loss for the year Total comprehensive income (b) Contingent Liabilities of the Parent Entity Bank guarantees 2018 $’000 2017 $’000 11,043 73,205 11,852 30,822 10,480 68,092 12,558 23,603 35,053 35,053 277 7,053 171 9,265 42,383 44,489 6,908 6,908 10,193 10,193 2018 $’000 2,664 2017 $’000 2,490 The parent entity did not have any contingent liabilities or financial guarantees as at 30 June 2018 or 30 June 2017, other than bank guarantees. 64 PACIFIC SMILES GROUP ANNUAL REPORT 2018Notes to the Financial Statements continuedFor the year ended 30 June 2018 Directors’ Declaration In the Directors’ opinion: a. the financial statements and notes set out on pages 37 to 64 are in accordance with the Corporations Act 2001, including: i. giving a true and fair view of the consolidated entity’s financial position as at 30 June 2018 and of its performance for the financial year ended on that date; ii. complying with Australian Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; 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. Note 1 confirms that the financial statements comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Board of Directors. Robert Cameron AO Chairman Greenhills 22 August 2018 65 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Independent Auditor’s Report 66 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 ProfessionalStandards Legislation.Independent Auditor’s Report To the shareholders of Pacific Smiles Group Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of Pacific Smiles Group 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 theGroup’s financial position as at 30 June2018 and of its financial performance forthe year ended on that date; and•complying with Australian AccountingStandards and the CorporationsRegulations 2001.The Financial Report comprises:•Consolidated balance sheet as at 30 June 2018;•Consolidated statement of profit or loss and othercomprehensive income, consolidated statement ofchanges in equity, and consolidated statement ofcash flows for the year then ended;•Notes including a summary of significant accountingpolicies; and•Directors’ Declaration.The Group consists of the Company and the entities it controlled at the year-end or 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. PACIFIC SMILES GROUP ANNUAL REPORT 2018 67 Key Audit Matters The Key Audit Matters we identified are: •Revenue recognition•Carrying value of intangible assetsKey Audit Matters are those matters that, in our professional judgment, 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. Revenue recognition ($104,528,000) Refer to Note 2 to the Financial Report. The key audit matter How the matter was addressed in our audit A substantial amount of the Group’s revenue relates to revenue from the rendering of services, being service fees charged to dentists who practice from the Group’s fully serviced dental surgeries. We focused on revenue recognition as a key audit matter due to the significant audit effort required to test the Group’s revenue, including: •The high volume of transactions recordedas revenue;•The significant value of revenue recognised;and•The opening of 10 new dental centresduring the current year.Our procedures included: •Evaluating the Group’s processes for capturingand recognising revenue in accordance withthe relevant accounting standards.•Testing the application of key controls in therevenue calculation process, including:-Daily bank account reconciliations;-Management’s review and approval ofmonthly revenue calculations;-Management’s review and authorisationof payments to dentists; and-Selecting a sample of services feescharged to dentists and agreeing them tocontractual terms.•We applied substantive procedures by:-Comparing total patient fees received ascash receipts to revenue recognisedduring the year.-Assessing revenue recognised againstbudget, prior year and historical trends fornew centres opened during the year.-Performing recalculation procedures todetermine that revenue has beenrecognised in the appropriate accountingperiod.PACIFIC SMILES GROUP ANNUAL REPORT 2018 68 Carrying value of intangible assets ($11,004,000) Refer to Note 12 to the Financial Report The key audit matter How the matter was addressed in our audit Carrying value of intangible assets, including goodwill, was identified as a key audit matter due to: •The size of the balance, being 15% of totalassets; and•The significant level of judgement involvedin forecasting and discounting future cashflows, which form the basis for assessingwhether intangible assets are impaired.We focused on the significant forward-looking assumptions the Group applied in their value-in-use model, including: •Forecast operating cash flows, growth ratesand terminal growth rates – the Group hasexperienced competitive market conditionswith varying levels of year on year salesgrowth across centres of varying maturityand geographic regions. These conditionsincrease the possibility of intangible assetsbeing impaired, plus the risk of inaccurateforecasts or a wider range of possibleoutcomes for us to consider; and•Discount rate - these are complicated innature and vary according to the conditionsand environment the Group is subject tofrom time to time and the models approachto incorporating risks into the cash flows ordiscount rates. The Group’s modelling issensitive to changes in the discount rate.The Group has a large number of individual dental centre locations, which includes 10 new centres opened during the financial year, necessitating our consideration of the Group’s determination of Cash Generating Units (CGUs), based on the smallest group of assets to generate largely independent cash inflows. The Group also completed a business combination during the year, increasing the value of goodwill recognised on balance sheet. Our procedures included: •Working with our valuation specialists, weconsidered the appropriateness of the value-in-use method applied by the Group to performthe annual impairment testing of intangibleassets against the requirements of therelevant accounting standards, including:-Assessing the integrity of the model used,including the accuracy of the underlyingcalculation formulas.-Assessing the Group’s allocation ofcorporate assets to CGUs and theallocation of corporate costs to theforecast cash flows contained in themodel, for consistency.-Comparing forecast cash flows containedin the model to Board approved forecasts.-Assessing the accuracy of previous Groupforecasts to inform our evaluation offorecasts incorporated in the model.•We considered the sensitivity of the model byvarying key assumptions, such as forecastgrowth rates, terminal growth rates anddiscount rates, within a reasonably possiblerange, to identify those CGUs at higher risk ofimpairment and to focus our furtherprocedures.•Working with our valuation specialists weindependently developed a discount rate rangeconsidered comparable using publicly availablemarket data for comparable entities, adjustedby risk factors based on the size and locationof the Group’s CGUs.•We considered the Group’s determination oftheir CGUs based on our understanding of theoperations of the Group’s business, impact ofthe business combination that occurred duringthe year and how independent cash inflowswere generated, against the requirements ofthe relevant accounting standards.PACIFIC SMILES GROUP ANNUAL REPORT 2018IndependentAuditor’s Report continued 69 •We assessed the disclosures in the financialreport using our understanding of the issueobtained from our testing and against therequirements of the relevant accountingstandards.Other Information Other Information is financial and non-financial information in Pacific Smiles Group 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. The Other Information we obtained prior to the date of this Auditor’s Report was the Director’s Report, the Chairman’s Review, the Remuneration Report, the Shareholder Information and the Corporate Directory. The Highlights and the Managing Director’s Review are expected to be made available to us after the date of the Auditor’s Report. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will 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 the Directors for the Financial Report The Directors are responsible for: •preparing the Financial Report that gives a true and fair view in accordance with AustralianAccounting Standards and the Corporations Act 2001;•implementing necessary internal control to enable the preparation of a Financial Report that givesa true and fair view and is free from material misstatement, whether due to fraud or error; and•assessing 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 theyeither intend to liquidate the Group or to cease operations, or have no realistic alternative but todo 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 frommaterial 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 PACIFIC SMILES GROUP ANNUAL REPORT 2018 70 aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this 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_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. Report on the Remuneration ReportOpinion In our opinion, the Remuneration Report of Pacific Smiles Group Limited for the year ended 30 June 2018, complies with Section 300A of the Corporations Act 2001. Directors’ responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in pages 23 to 35 of the Directors’ report for the year ended 30 June 2018. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPM_INI_01 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 KPMG Sarah Cain Partner Sydney 22 August 2018PACIFIC SMILES GROUP ANNUAL REPORT 2018IndependentAuditor’s Report continued Shareholder Information As at 1 August 2018 Distribution of Equity Security Holders Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total There were 103 holders of less than a marketable parcel of ordinary shares. Twenty Largest Shareholders Name HSBC Custody Nominees (Australia) Limited Alexander John Abrahams Alison Jane Hughes Susan Louise Abrahams National Nominees Limited BNP Paribas Noms Pty Ltd JP Morgan Nominees Australia Limited Just Paddling Pty Ltd Robert G Cameron and Paula S Cameron John Gibbs Channings Holdings Pty Ltd Karen Wright BNP Paribas Nominees Pty Ltd Mirrabooka Investments Limited Lodka Pty Ltd Sudemo Pty Ltd Amanda Taylor Joseph Nominees Pty Limited Sterling Surgical Pty Ltd William Mcillwraith Pty Ltd Total Other holders Total quoted equity securities Number of equity security holders 223 296 139 186 68 912 Number of ordinary shares held Percentage of issued shares % 25,044,245 19,936,010 15,860,190 13,268,269 8,382,947 7,248,204 5,379,217 3,789,082 3,533,258 3,337,265 3,090,150 2,022,000 1,906,352 1,817,048 1,748,914 1,741,017 1,647,735 1,637,793 1,515,000 1,244,000 124,148,696 27,844,699 151,993,395 16.48 13.12 10.43 8.73 5.52 4.77 3.54 2.49 2.32 2.20 2.03 1.33 1.25 1.20 1.15 1.15 1.08 1.08 1.00 0.82 81.58 18.32 100.00 71 PACIFIC SMILES GROUP ANNUAL REPORT 2018 Unquoted Equity Securities Performance rights issued under the Company’s LTI plan Substantial Shareholders Name Alexander John Abrahams and his associates TDM Asset Management Pty Ltd and its associates Alison Jane Hughes Voting Rights Number on issue Number of holders 6,531,250 9 Number of ordinary shares held Percentage of issued shares % 38,173,361 24,605,075 15,860,190 25.12 16.19 10.43 Each ordinary share carries the right to one vote. No voting rights are attached to performance rights. 72 PACIFIC SMILES GROUP ANNUAL REPORT 2018ShareholderInformation continuedAs at 1 August 2018 Corporate Directory Principal Registered Office Level 1, 6 Molly Morgan Drive Greenhills NSW 2323 T: 02 4930 2000 F: 02 4930 2099 W: www.pacificsmilesgroup.com.au Directors Robert Cameron AO Non-Executive Chairman John Gibbs Managing Director and Chief Executive Officer Dr Alex Abrahams Non-Executive Director Ben Gisz Non-Executive Director Simon Rutherford Non-Executive Director Zita Peach Non-Executive Director Company Secretaries Mark Licciardo and Belinda Cleminson Auditor KPMG Tower Three, 300 Barangaroo Avenue Sydney NSW 2000 Share Registry Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Locked Bag A14 Sydney South NSW 1235 T: 1300 554 474 F: 02 9287 0303 E: registrars@linkmarketservices.com.au Stock Exchange Listing Pacific Smiles Group Limited shares are listed on the Australian Security Exchange under the code “PSQ”. PACIFIC SMILES GROUP ANNUAL REPORT 2018RM PSQ-18001 www.pacificsmilesgroup.com.au