ANNUAL REPORT 2019 PACIFIC SMILES GROUP 2019 Highlights ......................................... Chairman’s Review ................................... Managing Director’s Review .................... 1 2 6 Auditor’s Independence Declaration ....... 31 Financial Statements ................................ 32 Notes to the Financial Statements .......... 36 Dental Centre Locations .......................... 12 Directors’ Declaration .............................. 60 Corporate Governance ............................ 16 Independent Auditor’s Report ................. 61 Directors’ Report ...................................... 17 Shareholder Information .......................... 68 Remuneration Report .............................. 21 Corporate Directory .................................. 70 1 2019 HIGHLIGHTS $187.4m Patient Fees – Up 13.9% 8.6% Same Centre Growth – Up 350bps 5.8cps Ordinary Dividends – Down 4.9% 89 Dental Centres – Up 11.3% $22.8m Underlying EBITDA – Up 6.0% $8.9m Underlying NPAT – Down 3.5% Our True Purpose To improve the oral health of ALL Australians to world’s best. ANNUAL REPORT 2019 2 CHAIRMAN’S REVIEW It has been another year of solid growth with the roll-out of 10 new centres taking the total to 89. Over 770,000 patient appointments were provided by the respected dentists who choose to practice from the centres provided by Pacific Smiles Group. In FY2019 Phil McKenzie was appointed as Chief Executive Officer and Managing Director, succeeding John Gibbs. The Board and myself would like to thank John for his leadership across 14 years with Pacific Smiles Group. His integrity and hard work have made this one of the most successful dental roll-out models in the world. Phil McKenzie’s experience in allied healthcare and his strong consumer background has already lent itself well to the Pacific Smiles “play to win” culture. Phil’s drive for results through purposeful empowerment and team support delivered record patient fees in June 2019. This strong finish to the year helped achieve a year-on-year patient fee increase of 13.9%. The Board was also bolstered with the appointment of Non-Executive Director Hilton Brett. Hilton brings deep operational experience building teams, systems and processes across large multi-site businesses including Accent Group. We are a business founded by dentists for dentists PACIFIC SMILES GROUP 3 In a market with such opportunity we must also acknowledge the complexities of competition with some of our competitors rushing for growth at the risk of damaging consumers’ expectations and the integrity of the dental industry. More than ever we need to lead with our point of differentiation. We are a business founded by dentists for dentists. Our proven greenfield roll-out model will see dentists continue to choose Pacific Smiles to support their practices and the healthcare we provide patients is demonstrated by an unwavering net promoter score of 86% and above. Supporting the clinical confidence of dentists and patients is the roll-out of Quality Innovation Performance (QIP) Accreditation with the Australian Dental Association. QIP is independent recognition that our centres not only meet governing industry standards but also commit to best practice and continuous improvement. I am also pleased to announce our continued partnership with the Australian Dental Health Association helping to improve the oral health of disadvantaged Australians. In the past three years the Association has co-ordinated $3,000,000 worth of life changing treatment, positively impacting the quality of life for many people. I would like to thank the dentists who choose to practice from our centres and our patients for their continued patronage. Thanks also to the Pacific Smiles support team, my fellow Directors and the Executive Leadership Team for their commitment and dedication to driving a sustainable and successful business. The last financial year’s work in quality and innovation will see Pacific Smiles show continued and successful growth in the coming year. A final dividend of 3.5 cents per share has been declared in relation to FY2019 and this will be paid in October 2019. Total dividends in relation to FY2019 represented 98.8% of underlying net profit after tax. Thank you to our shareholders for your continued support. Robert Cameron AO Chairman ANNUAL REPORT 2019 4 PACIFIC SMILES GROUP 5 Assists graduates transition from University to private practice The Graduate Program is well structured, which is perfect for me coming straight out of University. I have a mentor to support me, show me the ropes, introduce me to more people and assist me in achieving high clinical standards. Everyone you work with knows you are a new graduate and understands you need the extra support. All the staff have been so welcoming and I’ve found the program to be really rewarding. Joshua Massad Dentist – nib Dental Care Centre, Glendale ANNUAL REPORT 2019 6 MANAGING DIRECTOR’S REVIEW This start to my tenure with Pacific Smiles has consolidated my belief of what this business is capable of achieving. Both the Board and the Executive Team have been incredibly supportive during this leadership transition. I also acknowledge the dedication of the dentists, centre and support teams in building our momentum. My family and I have been warmly welcomed to life in the Hunter Valley in the Pacific Smiles Group heartland. I am honoured to lead this Australian success story into its next phase of growth. I would also like to thank Mr John Gibbs in assisting in my transition to CEO/MD. His passion and drive took the Pacific Smiles Group from 3 centres to over 80 in 14 years. Operational Overview and Insights Pacific Smiles Group opened 10 new centres in FY2019 and closed out June with our highest patient fees month of all time. We continue to grow in operational efficiency, targeted patient marketing, and solid support of the dentists who choose to practice with us, providing the highest standards of clinical care to patients. We are a proud dental services organisation that is focused on our true purpose – to improve the oral health of all Australians to world’s best. Pacific Smiles continues to achieve as it grows; enabling successful dentists, cared for patients and positively engaged employees, all ensuring financial success. Prioritising the service and support of our dentists, so they can do their best work, is the common thread that entwines our dental services organisation. It links dentists, patients and employees together. The dentists that choose us are highly engaged. I’m pleased to report a 12-month rolling retention rate of 90%. Combined with our patient Net Promoter Score of greater than 80%, we have the foundation in place to grow this business effectively and efficiently, improving the oral health of all Australians. Patient Fees $m FY 19 18 17 16 15 14 13 12 11 10 187 165 147 134 121 96 95 86 70 60 Number of Centres FY 19 18 17 16 15 14 13 12 11 10 34 31 28 25 89 80 70 58 49 41 PACIFIC SMILES GROUP 7 With efficiency in mind over the past 12 months, we have focused on infrastructure cost reductions delivering savings to our operational cost base. In our centres we have taken the same focus to matching patient demand with dentist availability and have increased chair utilisation by 12%. Commissioning 43 new chairs across the network will see Pacific Smiles capitalise on these changes, reducing the time to profitability for our new centres. As we continue to live our true purpose, we do so knowing we have laid the foundations for growth that will be both sustainable and industry leading. Cementing the Pacific Smiles Group way across an expanding network will see dentists and patients continue to choose and trust us. We will maintain a dominant growth momentum in FY2020. Statutory Results The Group achieved statutory net profit after tax of $8.6 million, an increase of 29.8% from $6.6 million in 2018. The statutory results in 2018 were impacted by the one- off restructuring and impairment costs for the Parramatta Group Financial Performance dental centre and one-off costs associated with dental chair write-offs. These one-off items make year-on-year performance comparisons more difficult. As such, the Operating and Financial Review discussions will focus on the underlying results for 2019 and the comparative period. Underlying and Statutory Results For the financial year the underlying EBITDA increased by 6.0% to $22.8 million compared with 2018. Underlying Net Profit After Tax decreased by 3.5% to $8.9 million compared to $9.3 million for the prior year due to the roll-out strategy of new centres increasing depreciation costs by 20%. Group revenue was $122.2 million, up by 16.9% 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 focus on their patients and offering exceptional patient care. $ millions Revenue Gross profit EBITDA EBIT Net profit after tax Operating metrics Number of Dental Centres Commissioned Dental Chairs Patient Fees ($m) 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 2019 Underlying 2018 Change 122.2 110.3 22.8 13.4 8.9 89 351 187.4 8.6% 5.9 18.7% 12.2% 11.0% 104.5 96.5 21.5 13.7 9.3 80 308 164.5 5.1% 16.9% 14.4% 6.0% (2.2%) (3.5%) 11.3% 14.0% 13.9% 6.1 (3.5%) 20.6% 13.1% 13.1% 2019 $ million 2018 $ million 8.6 0.6 – – – (0.1) (0.2) 8.9 6.6 0.2 2.4 0.1 0.4 0.1 (0.4) 9.3 ANNUAL REPORT 2019 8 Revenue growth is achieved through the combination of our existing dental centres and our new dental centres opened in recent years. Patient Fees increased 13.9% over the previous year to $187.4 million due to same centre fee growth of 8.6%, plus the full-year effect from new centres opened in 2018 and part-year impact of new centre openings in 2019. The 2019 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. The Group’s underlying EBITDA to Patient Fees margin declined in 2019 to 12.2%. The year saw strong top line growth across our network of centres, which was largely driven by an increase in the volume of appointments. The fee per appointment declined during the year, along with higher than expected telecommunications costs, both impacting the EBITDA to Patient Fees margin. The new Pacific Smiles dental centres are typically not profitable in the first year of operation. This means the accelerated dental centre roll-out strategy also impacts Group profitability, and therefore margins, in the short term. Corporate costs increased in 2019 due to investment in new roles and practitioner development to support future growth. Financial Position In line with Pacific Smiles long term growth strategy, total capital expenditure for 2019 was $16.6 million. This included $9.3 million for new dental centres, $1.8 million in upgrades for existing centres, $1.4m for the commissioning of 23 additional surgeries, along with equipment replacements in existing centres and additional IT infrastructure. Borrowings increased by $5.0 million to $17.0 million in the current year to support the expansion of the dental centre network and upgrades of existing facilities, equipment and systems. Ordinary dividends of $9.3 million were paid to shareholders in 2019, compared with $9.1 million in the prior year. A final dividend of 3.5 cents per share was declared and will be payable in October 2019. The dividend payout ratio decreased to 98.8% of underlying Net Profit After Tax (2018 was 100.2% of underlying Net Profit After Tax). The Market The market for dental services in Australia is approximately $10 billion – $11 billion per annum and continues to grow 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 42 million dental services were funded by health funds in the 12 months ending March 2019, with health funds paying more than $2.7 billion per annum in dental benefits. 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 18.7% in 2016-17, according to Australian Institute of Health and Welfare. The proportion by the Australian Government has decreased from 16.3% in 2009-10 to 14.9% in 2016-17, with expenditure by State and Local Governments maintained at 8.2% in 2009-10 and in 2016-17. 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. Dividends EBITDA (underlying) $m Interim Dividend Final Dividend Special Dividend 12.0 10.0 8.0 6.0 4.0 2.0 0.0 FY 22.8 21.5 20.9 16% CAGR 19.7 18.4 15.1 13.3 10.2 8.0 6.8 5.0 4.4 13 14 15 16 17 18 19 FY 08 09 10 11 12 13 14 15 16 17 18 19 PACIFIC SMILES GROUPMANAGING DIRECTOR’S REVIEW 9 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 attendance. The other major feature of the market is the continued growth in the number of registered dentists. The increase in recent years has been the combined impact of overseas trained dentists and local graduates. The number of registered dentists was 17,659 in March 2019, up 5.8% on the prior year. The demographic shift in the dental workforce continues with females making up 52% of registered dentists, increasing 1% on the year earlier. 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 various 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. Pacific Smiles’ dental centres are usually differentiated from other local providers and compete on the basis of convenience, value, access and overall patient experience. 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 views the dentists as a key customer group and focuses resources accordingly. There is a close focus on internal procedures and clinical governance by management and the Board. This has been further enhanced by the 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. Phil McKenzie CEO and Managing Director ANNUAL REPORT 2019 10 DENTAL HEALTH EDUCATION 160 Preschools/ Childcare centres visited 9,300 children seen across the Hunter this year I’ve been with Pacific Smiles Dental for 21 years, visiting preschools and daycare centres to teach children the importance of looking after their dental health. I really enjoy being out in the community talking to children about the importance of looking after their teeth, as well as introducing them to a lifelong habit of visiting the Dentist. Margo Biddles Dental Health Educator PACIFIC SMILES GROUP 11 ANNUAL REPORT 2019 12 DENTAL CENTRE LOCATIONS Victoria Bairnsdale Bendigo Caroline Springs* Chirnside Park* Cranbourne Drysdale Glen Iris* Glen Waverley Greensborough Keysborough* Leopold Melbourne CBD nib Melbourne Melton Mill Park Mulgrave Point Cook Preston* Ringwood Sale Torquay Traralgon Warragul Waurn Ponds Werribee Queensland Aspley* Birtinya* Bribie Island nib Brisbane Browns Plains Buddina Burleigh Heads Capalaba Deception Bay Helensvale Morayfield Mt Gravatt Mt Ommaney North Lakes Redbank Plains Runaway Bay Strathpine New South Wales Balgowlah Bateau Bay Baulkham Hills* Belmont Belrose Blacktown Brookvale Campbelltown nib Chatswood Charlestown Erina nib Erina Figtree Forster Gladesville nib Glendale Greenhills Jesmond Kotara Lake Haven Marrickville Morisset Mount Hutton* Narellan nib Newcastle Nowra Parramatta nib Parramatta Penrith Queanbeyan Rutherford Salamander Bay ShellharbourI Singleton nib Sydney Toronto Town Hall Tuggerah Tweed Heads* Wagga Wagga nib Wollongong QLD 17 NSW 41 ACT 6 VIC 25 ACT Belconnen Gungahlin Manuka Tuggeranong Woden nib Woden * New centres in FY2019. I Warilla merged with Shellharbour PACIFIC SMILES GROUP 13 Cementing the Pacific Smiles Group way across an expanding network will see dentists and patients continue to choose and trust us. ANNUAL REPORT 2019 14 PACIFIC SMILES GROUP DELIVERING A LOYAL PATIENT EXPERIENCE As a growing family, Pacific Smiles Dental caters to us perfectly. Online bookings and weekend appointments make things easy, and we’ve always had great experiences with the Dentists we’ve seen. Over the past few years we’ve started coming back to see one particular Dentist – she always greets us with a smile, takes her time and talks us through what she is doing. It gives us peace of mind that our whole family will be looked after well into the future. The Hoover Family Patients of Pacific Smiles Dental, Greenhills ANNUAL REPORT 2019 15 16 PACIFIC SMILES GROUP CORPORATE GOVERNANCE For the year ended 30 June 2019 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 2019 corporate governance statement is dated as at 30 June 2019 and reflects the corporate governance practices in place for the 2019 financial year. The 2019 corporate governance statement was approved by the Board on 21 August 2019. 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. PACIFIC SMILES GROUP 17 DIRECTORS’ REPORT For the year ended 30 June 2019 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 2019. Directors The following persons were Directors of Pacific Smiles Group Limited during the financial year and up to the date of this report: Mr Robert Cameron AO Mr Phil McKenzie (appointed 29 October 2018) Mr John Gibbs (resigned 28 October 2018) Dr Alex Abrahams Mr Hilton Brett (appointed 24 August 2018) Mr Ben Gisz Ms Zita Peach Mr Simon Rutherford 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 2019 of 2.30 cents (2018 – 2.30 cents) per share, fully franked Final dividend for the year ended 30 June 2018 of 3.80 cents (2017 – 3.70 cents) per share, fully franked 2019 $’000 2018 $’000 3,496 3,496 5,776 9,272 5,624 9,120 Subsequent to the end of the financial year, the Directors declared a final dividend of 3.50 cents per share in relation to the financial year ended 30 June 2019. The dividend, which totals $5.320 million, will be paid on 4 October 2019. ANNUAL REPORT 2019 18 ROBERT CAMERON AO HonDEng UNSW, BE Min (Hons), MBA, Grad. Dip. Geoscience, FAICD, FAIM, FAusIMM Non-Executive Chairman Appointed: 2003 Member of the Nomination and Remuneration Committee Background and experience: 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 March 2017. Bob has held past roles as Chairman of the Australian Coal Association Ltd, ACA Low Emissions Technology Ltd, the NSW Minerals Council, Maitland Private Hospital Board and Hunter Valley Grammar School. He is currently Chairman of County International Limited and Hunter Valley Training Company. He is a Trustee of the University of NSW Foundation and a Member of the State Library Council. PHIL McKENZIE B.Bus (Auckland Uni) Chief Executive Officer and Managing Director Appointed: October 2018 Background and experience: Prior to joining Pacific Smiles, Phil was Chief Executive Officer for Audiology Management Group (AMG), a leading audiology services business with a network of more than 200 clinic locations across the USA. During his time at AMG, Phil balanced and transitioned the model from acquisition driven to greenfield expansion and delivered strong financial performance for the Group. Prior to his role as CEO of AMG, Phil was CEO of Widex Australia, New Zealand, Singapore, Hong Kong and India retail where he successfully turned around and grew those operations. Phil has also held leadership positions at Apple Retail as Australian Market Director and was a driver of Apple’s retail entry into the Australian market from 2008 to 2011; and Luxottica as National Operations Manager from 2005 to 2007. DR ALEX ABRAHAMS BDS (Syd Uni) GAICD Founder and Non-Executive Director Appointed: July 2017 Member of the Audit and Risk Management Committee from April 2019 Executive Director 2002 to June 2017 Background and experience: Alex has overseen the development of the Company from a group of partnerships to an incorporated entity in January 2003. Alex is a dentist with a special interest in dental implants. Alex is a member of the Australian Dental Association (ADA) and is on both the ADA (NSW) Advocacy committee, and the Australian Dental Health Foundation Advisory committee. 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. HILTON BRETT BCom PGDA Non-Executive Director Appointed: August 2018 Member of the Audit and Risk Management Committee from August 2018 until April 2019 Background and experience: Hilton is an Operating Advisor at TDM Growth Partners, a private investment firm founded in 2004, which invests in fast growing companies run by passionate management teams. Up until March 2018, Hilton was co-Chief Executive Officer of Accent Group Limited (formerly RCG Corporation Ltd) which is the regional leader in the retail and distribution of performance and lifestyle footwear with over 420 stores across 10 retail banners and exclusive distribution rights for 10 international brands across Australia and New Zealand. Accent’s brands include the Athlete’s Foot, Hype DC, Platypus Shoes, Podium Sports, Skechers, Merrell, CAT, Vans, Dr. Martens, Saucony, Timberland, Sperry Top-Sider, Palladium and Stance. Hilton joined Accent in 2006 when the business had a market capitalisation of $8 million. Over the 12 years, the team grew the business to $800 million market capitalisation and delivered total shareholder returns in excess of 25% CAGR. Hilton is a Non-Executive Director of Guzman Y Gomez Mexican Taqueria. PACIFIC SMILES GROUPDIRECTORS’ REPORTFor the year ended 30 June 2019 19 BEN GISZ B.Comm., CA, FFin, CFA Non-Executive Director Appointed: 2012 Chairman of the Nomination and Remuneration Committee Member of the Audit and Risk Management Committee Background and experience: Ben is a partner at TDM Growth Partners, a Sydney-based private investment firm. Ben has extensive financial markets experience, including prior roles in private equity investing and investment banking. Ben is a Non-Executive Director of specialty retailer kikki.K Holdings Pty Ltd. ZITA PEACH BSc, FAICD, FAMI Non-Executive Director Appointed: August 2017 Member of the Nomination and Remuneration Committee Background and experience: Zita has more than 25 years of commercial experience in the pharmaceutical, biotechnology, medical devices and health services industries. She has extensive sales and marketing experience across a broad range of sectors in healthcare, locally and internationally, as well as leading international expansions and conducting major business transactions. At leading global healthcare company Fresenius Kabi, Zita was Executive Vice President for South Asia Pacific, Managing Director for Australia and New Zealand and Chair of the Boards for Malaysia, Australia and New Zealand. Zita was Vice President of Business Development at CSL Limited and has an extensive track record in mergers and acquisitions deals, licensing and commercialising products and technologies on a global scale. Zita is a Non-Executive Director of 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 RUTHERFORD B. Comm., CA, FAICD Non-Executive Director Appointed: 2003 Chairman of the Audit and Risk Management Committee Background and experience: 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. ANNUAL REPORT 2019 20 Company Secretaries 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 2019, 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 7 4 12 9 12 12 12 12 7 4 12 9 12 12 12 – – – 1 2 4 – 4 – – – 1 2 4 – 4 2 – – – – 2 2 – 2 – – – – 2 2 – Robert Cameron AO Phil McKenzie John Gibbs Alex Abrahams Hilton Brett Ben Gisz Zita Peach Simon Rutherford – 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 2019 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 has 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 willful 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. PACIFIC SMILES GROUPDIRECTORS’ REPORTFor the year ended 30 June 2019 21 Remuneration Report (Audited) This Directors’ 2019 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 2019. 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 (j) Key management personnel transactions 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 Dr Alex Abrahams Hilton Brett Ben Gisz Zita Peach Simon Rutherford Executive Directors Phil McKenzie John Gibbs Other Executives Allanna Ryan Paul Robertson Dr Alison Hughes Emma McKenny Ciara Rocks Nadia Henry David Williams Non-Executive Chairman Non-Executive Director Non-Executive Director (appointed 24 August 2018) Non-Executive Director Non-Executive Director Non-Executive Director Chief Executive Officer/Managing Director (appointed 29 October 2018) Chief Executive Officer/Managing Director (resigned 28 October 2018) Chief Financial Officer Chief Operating Officer Principal Dental Officer Executive Manager – People and Culture Chief Marketing Officer (appointed 11 March 2019) Chief Marketing Officer (resigned 2 January 2019) Chief Information Officer (resigned 17 December 2018) Where relevant, executive directors and other executives may hereafter be referred to collectively as executives within this remuneration report. ANNUAL REPORT 2019 22 (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 directors 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 using the National Salary Survey published by the Australian Institute of Managers and Leaders, or upon any substantial changes to positions to ensure that the base pay is set to reflect the market for a comparable role. 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 Group’s financial performance and non-financial key performance indicators (KPIs). Financial performance is assessed based on Group underlying Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) meeting or exceeding Board approved targets. Non-financial KPIs are group KPIs, rather than individual KPIs, and relate to Net Promoter Score (NPS) for patients, dentists and employees for the Group exceeding specific NPS targets. Targets are reviewed annually. PACIFIC SMILES GROUPDIRECTORS’ REPORTFor the year ended 30 June 2019 The executive STI plan performance criteria are summarised below: Underlying EBITDA targets Non-financial performance metrics Maximum STI for full achievement of targets Exceptional performance bonus for over-achievement of underlying EBITDA Total maximum STI 23 % of Base Salary Chief Executive Officer Other Executive Managers Up to 24.0% Up to 16.8% Up to 10.0% Up to 7.0% Up to 34.0% Up to 23.8% Up to 16.0% Up to 11.2% Up to 50.0% 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 the Chief Executive Officer and selected senior managers, at the absolute discretion of the Board, pursuant to the LTI plan in financial years from 2015 to 2019. Vesting of the performance rights on issue for the years 2018, 2017, 2016 and 2015 are 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 to 100% vesting for an EPS CAGR of 25.0% per annum; and • the participant remaining employed by Pacific Smiles Group (or its subsidiaries) over a four-year period through to the vesting date, subject to certain “good leaver” exemptions. Vesting of the performance rights on issue for the year 2019 are 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 10.0% per annum or less to 100% vesting for an EPS CAGR of 25.0% per annum; and • the participant remaining employed by Pacific Smiles Group (or its subsidiaries) over a four-year period through to 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 threshold 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. ANNUAL REPORT 2019 24 (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) 2019 $’000 2018 $’000 122,156 104,528 22,300 8,573 18,439 6,604 5.8 – 5.6 6.1 – 4.3 2017 $’000 91,471 20,552 10,037 5.9 – 6.6 2016 $’000 83,337 19,306 9,903 5.5 – 6.5 Increase/(decrease) in share price ($) (0.40) (0.24) (0.28) (0.26) 2015 $’000 74,898 16,409 8,360 5.0 1.6 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 director 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. The base fee payable to the Chairman is $120,000 per annum, and the base fee payable to other non-executive directors is $70,000 per annum. 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. PACIFIC SMILES GROUPDIRECTORS’ REPORTFor the year ended 30 June 2019 25 (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 years are set out in the following table. Short-term employee benefits Post- employment benefits Long- term benefits Share- based payments Salary and fees $ Bonus $ Super- annuation $ Other* $ Long service leave $ Rights $ Total $ Perform- ance related % 109,589 70,000 53,109 70,000 63,927 70,000 331,653 168,127 236,718 251,772 175,583 194,159 65,061 111,300 95,078 – – – – – – – – – – – – – – – 10,411 – 5,045 – 6,073 – 14,665 – – – – – – – – – – – – – – 120,000 (14,521) 55,479 – – – – 58,154 70,000 70,000 70,000 5,449 39,167 390,934 7,505 450,000 9,760 (67,164) 568,228 20,540 23,845 16,693 18,133 5,146 – – – – – 10,823 88,161 8,813 35,538 4,115 3,498 264,871 4,581 (14,092) 266,106 3,208 (997) 194,487 3,487 (11,927) 203,852 989 – – – – 71,196 210,284 (2,315) 137,114 – – – – – – – – – – – – – – – 2019 Non-Executive Directors Robert Cameron Alex Abrahams Hilton Brett (appointed 24 August 2018) Ben Gisz Zita Peach Simon Rutherford Executive Directors Phil McKenzie (appointed 29 October 2018) John Gibbs (resigned 28 October 2018) Other Key Management Personnel Allanna Ryan Paul Robertson Alison Hughes Emma McKenny Ciara Rocks (appointed 11 March 2019) Nadia Henry (resigned 2 January 2019) David Williams (resigned 17 December 2018) ANNUAL REPORT 2019 26 (f) Details of remuneration (continued) Short-term employee benefits Post/ employment benefits Long/ term benefits Share/ based payments 2018 Salary and fees $ Bonus $ Super- annuation $ Other* $ Long service leave $ Rights $ Total $ Perform- ance related % 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 John Gibbs 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) – – – – – – 10,411 – – – – 5,162 46,667 70,000 70,000 70,000 54,338 417,378 30,085 20,049 231,746 19,179 258,185 20,571 178,493 15,666 172,173 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 – – – – – – – – – – – – – – – – – – – – – – – – 798 120,000 70,000 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 – – – – – – 6 7 6 7 7 5 7 – * Other benefits include termination benefits paid to John Gibbs, Nadia Henry and David Williams in 2019. There were no termination benefits paid or payable to key management personnel during 2018. Termination benefits paid were in accordance with employment contracts. ** Alex Abrahams was an executive director until June 2017, becoming a non-executive director at that time. STI awarded For each STI bonus included in the 2019 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 Phil McKenzie Allanna Ryan Paul Robertson Alison Hughes Emma McKenny Ciara Rocks1 % of Maximum STI Awarded Forfeited 0% 0% 0% 0% 0% 0% 100% 100% 100% 100% 100% 100% 1 Ciara Rocks commenced as key management personnel with effect from 11 March 2019, and was only eligible for a pro-rated STI in her capacity as key management personnel during 2019. PACIFIC SMILES GROUPDIRECTORS’ REPORTFor the year ended 30 June 2019 27 (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 are 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 willful misconduct. Executive Phil McKenzie Allanna Ryan Paul Robertson Alison Hughes Emma McKenny Ciara Rocks Termination Notice by Executive Termination Notice or Payment in Lieu of Notice by Company 6 months 6 months 3 months 3 months 3 months 3 months 6 months 6 months 3 months 6 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 21 November 2014 30 November 2015 30 November 2016 1 December 2017 4 March 2019 Number of Rights Granted Fair Value per Right at Grant Date 2,137,500* 1,725,000** 2,200,000** 2,100,000** 3,026,000 $0.51 $0.89 $0.76 $0.62 $0.47 Vesting Date 21 November 2018 30 November 2019 30 November 2020 1 December 2021 4 March 2023 * 1,631,250 rights were forfeited on 31 January 2018; the remaining 506,250 rights were forfeited on 28 October 2018. ** 500,000 rights were forfeited on 28 October 2018. ANNUAL REPORT 2019 28 (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 2019 Robert Cameron AO Ben Gisz Simon Rutherford John Gibbs (resigned 28 October 2018) Alex Abrahams Paul Robertson Alison Hughes Zita Peach 24,605,075 8,172,742 Balance at start of year 3,533,258 1,741,017 6,500,000 38,173,361 300,000 15,860,190 Purchased Sales Balance at end of year 3,533,258 32,777,817 1,741,017 3,569,235 – – – (2,930,765) – – – 300,000 15,860,190 12,340 – – – – – 194,000 (2,040,000) 36,327,361 5,155 7,185 2018 Robert Cameron AO Grant Bourke (resigned 5 March 2018) Balance at start of year 3,383,258 1,538,462 Purchased 150,000 Sales Balance at end of year – 3,533,258 – (1,150,000) 388,462 Ben Gisz Simon Rutherford John Gibbs Alex Abrahams Paul Robertson Alison Hughes 19,712,581 4,892,494 1,741,017 6,500,000 38,173,361 300,000 15,860,190 – – – – – Zita Peach (appointed 18 August 2017) – 5,155 – – – – – – – 24,605,075 1,741,017 6,500,000 38,173,361 300,000 15,860,190 5,155 Performance Rights 2019 Phil McKenzie John Gibbs* Alex Abrahams Paul Robertson Alison Hughes Emma McKenny Allanna Ryan David Williams Balance at start of year Granted as compensation Exercised Other Balance at end of year (all unvested) – 2,000,000 1,500,000 450,000 975,000 400,000 875,000 500,000 425,000 – – 296,000 224,000 224,000 282,000 – – – – – – – – – – 2,000,000 (1,500,000) – – – – – – – 450,000 1,271,000 624,000 1,099,000 782,000 425,000 * 100% of performance rights with grant dates on 30 November 2015, 30 November 2016 and 1 December 2017 have been forfeited. The amounts forfeited are due to the service criteria not being met in relation to the current financial year. PACIFIC SMILES GROUPDIRECTORS’ REPORTFor the year ended 30 June 2019 29 2019 John Gibbs Alex Abrahams Paul Robertson Alison Hughes Emma McKenny Allanna Ryan David Williams Balance at start of year Granted as compensation Exercised Other 1,675,000 787,500 1,043,750 400,000 550,000 100,000 100,000 – – – – 325,000 400,000 325,000 – – – – – – – (175,000) (337,500) (68,750) – – – – Balance at end of year (all unvested) 1,500,000 450,000 975,000 400,000 875,000 500,000 425,000 (j) Key management personnel transactions Loans to key management personnel There were no loans to key management personnel during the year. Other transactions of key management personnel and their personally related entities Transactions with key management personnel and/or related parties are detailed below. These transactions were conducted on terms no more favourable than those reasonably expected under arm’s length dealings with unrelated parties. Key management personnel or their related parties held shares in the Company during 2019 and 2018; and as such, participated in dividends. Bislab Pty Limited ATF the Canyon Property Trust, an entity related to Alex Abrahams and Simon Rutherford, leased business premises to the Company during 2019 and 2018 on normal commercial terms and conditions. Exandal Investments, an entity related to Alex Abrahams and Alison Hughes, leased business premises to the Company during 2019 and 2018 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 2019 and 2018 on normal commercial terms and conditions. The Company received fees for the provision of services to Alex Abrahams during 2019 and 2018 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 2019 and 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 This concludes the remuneration report, which has been audited. 2019 $ 2018 $ 3,945,582 4,037,250 2,535 1,177 710,611 1,230,525 80,861 80,000 ANNUAL REPORT 2019 30 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. The Board has considered the non-audit services provided during the year by the auditor and is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services were subject to the corporate governance procedures adopted by the Group and have been reviewed by the Audit and Risk Management Committee to ensure they do not impact the integrity and objectivity of the auditor; and • the non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Group, acting as an advocate for the Group or jointly sharing risks and rewards. Details of the amounts paid to the auditor of the Group, KPMG, and its network firms, for audit and non-audit services provided during the year, are set out below. Services other than audit and review of financial statements: Other services Non-audit services: tax compliance and advisory services Audit and review of financial statements Total paid/payable to KPMG Auditor’s Independence Declaration 2019 $ 40,743 128,850 169,593 A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 31. Voting of shareholders at last year’s annual general meeting The Group received more than 99% of “yes” votes on its remuneration report for the 2018 financial year. The Group did not receive any specific feedback at the annual general meeting or throughout the year on its remuneration practices. 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 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 21 August 2019 PACIFIC SMILES GROUPDIRECTORS’ REPORTFor the year ended 30 June 2019 AUDITOR’S INDEPENDENCE DECLARATION 31 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 2019 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit KPMG Sarah Cain Partner Sydney 21 August 2019 ANNUAL REPORT 2019 32 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME As at 30 June 2019 Revenue Other income Expenses Direct 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 4 5 2019 $’000 2018 $’000 122,156 104,528 1,249 1,217 (11,833) (9,430) (52,013) (13,363) (1,954) (12,512) (9,399) (662) 12,239 (8,318) (8,374) (44,162) (11,960) (1,819) (12,673) (7,833) (393) 10,213 (3,666) (3,609) 8,573 6,604 – – 8,573 6,604 Cents Cents 20 20 5.6 5.6 4.3 4.3 PACIFIC SMILES GROUPThe above Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the accompanying notes. CONSOLIDATED BALANCE SHEET As at 30 June 2019 33 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 Current tax payable 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 2019 $’000 2018 $’000 7 8 16 9 10 11 12 13 14 16 17 14 15 17 18 19 6,951 1,087 – 3,672 554 6,683 869 771 3,260 465 12,264 12,048 54,642 10,939 6,008 71,589 47,324 11,004 4,964 63,292 83,853 75,340 12,485 11,042 1,385 3,771 17,641 – 17,000 8,130 25,130 – 3,301 14,343 149 12,000 6,970 19,119 42,771 33,462 41,082 41,878 35,053 35,053 180 5,849 277 6,548 41,082 41,878 ANNUAL REPORT 2019The above Consolidated Balance Sheet should be read in conjunction with the accompanying notes. 34 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 30 June 2019 Contributed equity $’000 Notes Reserves $’000 Retained profits $’000 Total equity $’000 Consolidated balance at 30 June 2017 35,053 172 9,064 44,289 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 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 2019 35,053 – – 105 105 277 – – (97) (97) 180 6,604 6,604 (9,120) – (9,120) (9,120) 105 (9,015) 6,548 41,878 8,573 8,573 (9,272) (9,272) – (9,272) 5,849 (97) (9,369) 41,082 PACIFIC SMILES GROUPThe above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 35 CONSOLIDATED STATEMENT OF CASH FLOWS For the year ended 30 June 2019 Notes 2019 $’000 2018 $’000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest and finance costs paid Income taxes paid Net cash inflow from operating activities 30(a) 133,744 116,135 (109,501) 24,243 35 (697) (2,554) 21,027 (93,379) 22,756 33 (426) (4,912) 17,451 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 Dividends paid Net cash outflow from financing activities Net increase 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) (16,649) (13,769) 162 57 (16,487) (14,528) 6(a) 7 7 5,000 (9,272) (4,272) 268 6,683 6,951 7,000 (9,120) (2,120) 803 5,880 6,683 ANNUAL REPORT 2019The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 36 NOTES TO THE FINANCIAL STATEMENTS 30 June 2019 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 17 to 30, 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 21 August 2019. 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 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 non-financial asset impairment testing. New Accounting Standards and Accounting Interpretations adopted The Group has adopted all of the new and revised standards issued by the Australian Accounting Standards Board that are mandatory for the current reporting period. Any new and revised standards that are not yet mandatory have not been early adopted. The details of the new significant accounting policies and the nature of the changes to previous accounting policies in relation to the Group’s various services are set out below. (i) Initial adoption of AASB 15 Revenue from Contracts with Customers AASB 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced AASB 118 Revenue, AASB 111 Construction Contracts and related interpretations. Under AASB 15, revenue is recognised when a customer obtains control of the goods or services. Determining the timing of the transfer of control – at a point in time or over time – requires judgement. The Group applied AASB 15 retrospectively using the practical expedient approach in paragraph C5(c) of IFRS 15, under which the Group does not disclose the amount of consideration allocated to the remaining performance obligations or an explanation of when the Group expects to recognise that amount as revenue for all reporting periods presented before the date of initial application, being 30 June 2018. The Group’s adoption of AASB 15 did not have a significant impact on the Group’s accounting policies with respect to its revenue streams. There was no financial impact of transition to AASB 15 on the opening balance of retained earnings. PACIFIC SMILES GROUP 37 (ii) Initial adoption of AASB 9 Financial Instruments AASB 9 sets out requirements for recognising and measuring financial assets, financial liabilities and some contracts to buy or sell non-financial items. This standard replaces AASB 139 Financial Instruments: Recognition and Measurement. There was no impact of transition to AASB 9 on the opening balance of retained earnings. The details of this new significant accounting policy are set out below. Financial assets Under AASB 9, on initial recognition, a financial asset is classified at amortised cost, fair valued through other comprehensive income (“FVTOCI”) or fair value through profit or loss (“FVTPL”). The classification under AASB 9 is based on the Group’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. A financial asset is measured at amortised cost only if: (i) it is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and (ii) the contractual terms of the financial asset represent contractual cash flows that are solely payment of principal and interest, and are not designated as at FVTPL. The following accounting policy applies to the subsequent measurement of financial assets. All of the Group’s financial assets meet the AASB 9 requirements to be measured at amortised cost. Financial assets at amortised cost A financial asset at amortised cost is initially recognised at fair value plus unallocated transaction cost. Subsequent to initial recognition measurements these assets are measured at amortised cost using the effective interest method. The amortised cost is reduced by impairment losses (see impairment of financial assets). The following table and accompanying notes below explain the original measurement categories under AASB 139 and the new measurement categories under AASB 9 on the opening balance of each class of the Group’s financial assets and liabilities. Financial assets Original classification New classification Change in carrying amount Trade and other receivables Loans and Receivables Amortised cost Cash and cash equivalents Loans and Receivables Amortised cost There was no impact on the carrying amount from the transition to AASB 9 There was no impact on the carrying amount from the transition to AASB 9 Interest income, foreign exchange gains and losses and impairment are recognised in profit or loss. Any gain or loss on derecognition is recognised in profit or loss. Impairment of financial assets AASB 9 replaces the “incurred loss” model in AASB 139 with an “expected credit loss” (ECL) model. Impairment of receivables The Group has elected to measure loss allowances on trade receivables using a life-time expected loss model. The Group has also used the practical expedient of a provisions matrix using a single loss rate approach to approximate the expected credit losses. These provisions are considered representative across all business and geographic segments of the Group based on historical credit loss experience. The Group has determined that the application of AASB 9’s impairment requirement at 1 July 2018 did not result in a material change to the impairment allowance. ANNUAL REPORT 2019 38 (b) Basis of Preparation (continued) New Accounting Standards and Accounting Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group for the annual reporting period ended 30 June 2019. The Group’s assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the Group, is set out below. (iii) Initial adoption of AASB 16 Leases AASB 16 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. AASB 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right of use asset representing the right to use the underlying asset and a lease liability representing the lease payment obligations. Leases that are short term and low value are exempt under the standard and continue to be accounted for as operating leases. On transition to AASB 16, the Group elected to apply the practical expedient to grandfather the assessment of which transactions are leases. The Group will recognise new assets and liabilities for its operating leases of dental centres. The nature of expenses related to those leases will now change because the Group will recognise a depreciation charge for right of use assets and interest expense on lease liabilities. Previously, the Group recognised operating lease expense on a straight-line basis over the term of the lease At 1 July 2019, it is expected that the Group will recognise a net post-tax reduction in opening retained earnings for $3,761,000 represented by the following: • A right of use asset for $54,243,000 for former operating leases; • A $64,970,000 lease liability related to the same operating leases; • Derecognition of $5,515,000 in lease liabilities existing at 30 June 2019 due to the write back of straight-line lease liability; • Derecognition of $1,110,000 in leased assets existing at 30 June 2019 due to a reduction in existing make good assets; • A lease receivable of $949,000 relating to sub leases which have been classified as finance leases; and • A net increase in deferred tax assets of $1,612,000 due to the above adjustments. There are no other 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 2019 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 Group’s Chief Executive Officer (the chief operating decision maker). The chief operating decision maker is responsible for allocating resources and assessing performance of the operating segments. PACIFIC SMILES GROUPNOTES TO THE FINANCIAL STATEMENTS30 June 2019 39 (e) Revenue Recognition Service and facility fees The Group provides services and facilities to dentists practicing out of Group-owned dental centres. Services and facilities include the use of fully equipped surgeries, staff, marketing and other support infrastructure. The monthly fee the Group invoices the dentists is a percentage of patient receipts net of direct costs, which are costs directly incurred by the dentists. The percentage is determined based on monthly patient receipts and the hours worked in accordance with a Services and Facilities Agreement. Revenue is recognised over time as the service is provided to the dentists. The Services and Facilities Agreement with the dentists allows the dentists the right to cancel the arrangement with one to three months of notice without penalty. Professional dental fees Employed and contracted dentists provide a range of dental services to patients. Revenue is recognised once the service is provided for the amount charged to the patient, based on standard list price. Prosthetist fees Prosthetist fees include the manufacture and fitting of custom-made dental prosthesis such as dentures. Upon completion and receipt of the product, control is passed to the customer and invoicing occurs. Revenue is recognised when the prosthesis is provided to the customer as although a denture is produced to a customer’s specification, if the contract is terminated by the customer the Group is not entitled to payment for services performed to date. Sale of dental products The Group sells a range of dental products. Revenue is recognised when the product is provided to and paid for by the customer as this is when control transfers. (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. ANNUAL REPORT 2019 40 (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 lease liability and finance charges. 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. 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 business combinations. The consideration transferred is usually 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 inflows which are largely independent of the cash inflows 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 the key judgements and estimates along with any impairment loss 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 expected credit losses if applicable. The Group has applied the simplified approach to measuring expected credit losses, which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables have been grouped based on days overdue. PACIFIC SMILES GROUPNOTES TO THE FINANCIAL STATEMENTS30 June 2019 41 (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 consideration transferred 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. ANNUAL REPORT 2019 42 (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 Incentive plan (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. PACIFIC SMILES GROUPNOTES TO THE FINANCIAL STATEMENTS30 June 2019 43 (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 differences 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. ANNUAL REPORT 2019 44 2. Revenue Revenue from contracts with customers is disaggregated by type of revenue as follows: Dental services fees Dental product sales Total Revenue 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 Defined contribution superannuation plans expense Direct expenses 2019 $’000 2018 $’000 121,656 104,019 500 509 122,156 104,528 2019 $’000 1,207 42 1,249 2018 $’000 1,090 127 1,217 2019 $’000 2018 $’000 (97) 105 4,649 4,685 9,334 65 65 (15) 64 – – 697 (35) 662 4,151 11,833 3,893 3,874 7,767 66 66 376 25 1,002 642 426 (33) 393 3,518 8,318 Direct expenses relate to the cost of the sale of dental products and dental practitioner employment costs. PACIFIC SMILES GROUPNOTES TO THE FINANCIAL STATEMENTS30 June 2019 45 2019 $’000 4,710 (1,044) 3,666 2018 $’000 4,209 (600) 3,609 12,239 10,213 3,672 3,064 – (29) 23 493 32 20 3,666 3,609 2019 $’000 2018 $’000 3,496 3,496 5,776 9,272 5,624 9,120 5,320 5,776 5. Income Tax Expense Current tax Deferred tax Profit before income tax expense Income tax calculated at 30% (2018: 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 2019 of 2.30 cents (2018 – 2.30 cents) per share, fully franked Final dividend for the year ended 30 June 2018 of 3.80 cents (2017 – 3.70 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 3.50 cents (2018 – 3.80 cents) per share, fully franked. It is expected to be paid on 4 October 2019 out of retained earnings at 30 June 2019, but not recognised as a liability at year end. (c) Franking credits available for subsequent financial years: Based on tax rate of 30% (2018: 30%) 11,848 10,408 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. ANNUAL REPORT 2019 46 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 2019 $’000 2018 $’000 6,951 6,683 2019 $’000 908 (107) 801 286 1,087 2018 $’000 658 (52) 606 263 869 2019 $’000 2018 $’000 3,672 3,260 2019 $’000 2018 $’000 340 214 554 328 137 465 PACIFIC SMILES GROUPNOTES TO THE FINANCIAL STATEMENTS30 June 2019 47 2019 $’000 2018 $’000 56,439 (21,208) 35,231 46,852 (27,441) 19,411 48,061 (16,524) 31,537 39,069 (23,282) 15,787 54,642 47,324 Leasehold improvements $’000 Plant and equipment $’000 31,537 8,497 (118) (4,685) 35,231 28,315 7,766 (28) (3,874) (642) 31,537 15,787 8,302 (29) (4,649) 19,411 13,615 6,471 (406) (3,893) – Total $’000 47,324 16,799 (147) (9,334) 54,642 41,930 14,237 (434) (7,767) (642) 15,787 47,324 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 2019 Carrying amount at the beginning of the year Additions Disposals Depreciation expense Carrying amount at the end of the year 2018 Carrying amount at the beginning of the year Additions Disposals Depreciation expense Impairment loss Carrying amount at the end of the year (a) Impairment loss in relation to restructure of a Pacific Smiles Dental Centre There have been no impairment losses for the year ended 30 June 2019. During the year ended 30 June 2018, 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 recognised an impairment loss on property, plant and equipment of $642,000, based on the cash-generating unit’s value in use. ANNUAL REPORT 2019 48 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 2019 Carrying amount at the beginning of the year Amortisation expense Carrying amount at the end of the year 2018 Carrying amount at the beginning of the year Additions Amortisation expense Impairment expense Carrying amount at the end of the year 2019 $’000 2018 $’000 13,180 (2,894) 10,286 985 (332) 653 13,180 (2,894) 10,286 985 (267) 718 10,939 11,004 Goodwill $’000 Rights and licences $’000 10,286 – 10,286 10,625 663 – (1,002) 10,286 718 (65) 653 784 – (66) – 718 Total $’000 11,004 (65) 10,939 11,409 663 (66) (1,002) 11,004 (a) Impairment loss in relation to restructure of a Pacific Smiles Dental Centre As described in Note 11, the Group restructured the Parramatta Pacific Smiles Dental Centre during the year ended 30 June 2018. An impairment loss was recognised to goodwill as a result of this restructure of $1,002,000, based on the cash-generating unit’s value in use of $57,153,000. These costs were included in “administration and other expenses”. There have been no impairment losses recognised during the year ended 30 June 2019. (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 2019 $’000 5,209 2,631 2,446 2018 $’000 5,209 2,631 2,446 10,286 10,286 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 were recorded in the year. PACIFIC SMILES GROUPNOTES TO THE FINANCIAL STATEMENTS30 June 2019 49 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 to year 10 using an estimated growth rate of 3%. The cash flow projections for years one to five are based on key assumptions including dentist numbers, number of operating chairs, practitioner hours, patient demand and associated costs. A long-term growth rate of 2.5% is used beyond year 10 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 9.3% (2018: 9.6%). (c) Rights and licences As part of the Group’s acquisition of the three former AHM Dental Centres, the Group received preferential provider support from AHM. These rights and licences relate to AHM marketing rights at each Pacific Smiles Dental Centre with 10 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 Other Deferred tax assets 14. Payables CURRENT Trade payables and accruals – other entities Contingent consideration payable NON-CURRENT Contingent consideration payable 2019 $’000 2018 $’000 32 2,648 285 25 3,211 (196) 3 6,008 14 2,052 222 170 2,722 (216) – 4,964 2019 $’000 2018 $’000 12,187 298 12,485 – – 10,893 149 11,042 149 149 ANNUAL REPORT 2019 50 15. Borrowings NON-CURRENT Secured: Bank loans Total Security 2019 $’000 2018 $’000 17,000 17,000 12,000 12,000 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* 2019 $’000 2018 $’000 24,500 (19,962) 4,538 24,500 (14,664) 9,836 Covenants attached to bank borrowings were complied with during the year. Further details on financing facilities are included in Note 27. * Includes bank guarantees of $2,962,000 (2018: $2,664,000) as per Note 31(b). 16. Current Tax CURRENT Income tax receivable Income tax payable 17. Provisions CURRENT Employee benefits Straight-line operating lease adjustment Onerous contracts NON-CURRENT Employee benefits Straight-line operating lease adjustment Make good provision 2019 $’000 – 1,385 2019 $’000 3,504 234 33 3,771 814 5,186 2,130 8,130 2018 $’000 771 – 2018 $’000 3,110 191 – 3,301 810 4,180 1,980 6,970 PACIFIC SMILES GROUPNOTES TO THE FINANCIAL STATEMENTS30 June 2019 51 Straight-line Lease Adjustment $’000 Make Good Provision $’000 Onerous Contracts $’000 4,371 1,282 (233) 5,420 1,980 150 – 2,130 – 65 (32) 33 2019 $’000 2018 $’000 35,053 35,053 Number of Shares 151,993,395 151,993,395 $’000 35,053 35,053 Movements: Balance at the beginning of the year 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 at 30 June 2018 Balance at 30 June 2019 (c) Ordinary shares Fully paid ordinary shares – Ordinary shares entitle the holder to 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. The Group monitors its working capital continually and manages it within a Board- approved finance facility. Debt covenants are consistently achieved and monitored monthly. 19. Reserves Share-based payments reserve 2019 $’000 180 2018 $’000 277 ANNUAL REPORT 2019 52 20. Earnings Per Share Profit attributable to the ordinary equity holders of the Company used in calculating basic and diluted earnings per share 2019 $’000 2018 $’000 8,573 6,604 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 Information Concerning the Classification of Shares (a) Performance rights Cents Cents 5.6 5.6 4.3 4.3 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 7,551,000 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 2019. 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 the Chief Executive Officer and selected senior managers, at the absolute discretion of the Board, pursuant to the LTI plan in financial years 2019, 2018, 2017, 2016 and 2015. The performance rights will vest after a set term (the performance period), and are conditional on the achievement of relevant performance and service conditions. Vesting of the performance rights for the years 2018, 2017, 2016 and 2015 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 to 100% vesting for an EPS CAGR of 25.0% per annum; and • the participant remaining employed by Pacific Smiles Group (or its subsidiaries) over a four-year period through to the vesting date, subject to certain “good leaver” exemptions. Vesting of the performance rights for the year 2019 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 10.0% per annum or less to 100% vesting for an EPS CAGR of 25.0% per annum; and • the participant remaining employed by Pacific Smiles Group (or its subsidiaries) over a four-year period through to 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 threshold over the relevant performance period. PACIFIC SMILES GROUPNOTES TO THE FINANCIAL STATEMENTS30 June 2019 53 (b) Performance rights Grant date 21 November 2014 30 November 2015 30 November 2016 1 December 2017 4 March 2019 Total Balance at 1 July 2018 Granted 506,250 1,725,000 2,200,000 2,100,000 – – – – Forfeited, lapsed or vested Balance at 30 June 2019 (506,250) – (500,000) 1,225,000 (500,000) 1,700,000 (500,000) 1,600,000 – 3,026,000 – 3,026,000 6,531,250 3,026,000 (2,006,250) 7,551,000 The options outstanding at 30 June 2019 had a weighted average contractual life of 2.37 years (2018: 2.32 years). (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: 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 2019 2018 4 March 2019 1 December 2017 $0.47 $1.33 Nil 4 years 30% 4.0% 2.00% $0.62 $1.79 Nil 4 years 30% 4.0% 2.00% 2019 $ 2018 $ 128,850 128,775 – 40,743 15,375 26,870 169,593 171,020 2019 $’000 2,962 2018 $’000 2,664 The bank guarantees at the end of the financial year relate to security provided for leased premises. ANNUAL REPORT 2019 54 24. Commitments (a) Capital commitments Capital expenditure committed at the reporting date but not recognised as liabilities is as follows: Property, plant and equipment Payable within one year (b) Operating lease commitments Lessee 2019 $’000 2018 $’000 2,611 390 The future minimum lease payments under non-cancellable operating leases were payable at the reporting date as follows: Payable within one year Payable later than one year but not later than five years Payable later than five years 2019 $’000 11,589 39,685 23,232 74,506 2018 $’000 10,474 37,432 23,478 71,384 Lessor The future minimum lease payments under non-cancellable operating sub-leases were receivable at the reporting date as follows: Receivable within one year Receivable later than one year but not later than five years 2019 $’000 1,118 1,809 2,927 2018 $’000 1,084 2,927 4,011 Operating leases relate to rented premises and equipment. Leases and sub-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 2019 % 100 100 100 100 2018 % 100 100 100 100 * No longer trading. ** Name changed from Dentalwise Pty Limited to Everything Dentures Pty Limited on 14 April 2018. PACIFIC SMILES GROUPNOTES TO THE FINANCIAL STATEMENTS30 June 2019 26. Related Party Disclosures (a) Key Management Personnel Compensation Short-term employment benefits Post-employment benefits Long-term benefits Termination benefits Share-based payments 55 2019 $ 2018 $ 2,066,076 2,126,031 147,692 139,612 31,589 573,699 27,390 – (68,351) 103,420 2,750,705 2,396,453 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 2019 and 2018, and as such, participated in dividends. Bislab Pty Limited ATF the Canyon Property Trust, an entity related to Alex Abrahams and Simon Rutherford, leased business premises to the Company during 2019 and 2018 on normal commercial terms and conditions. Exandal Investments, an entity related to Alex Abrahams and Alison Hughes, leased business premises to the Company during 2019 and 2018 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 2019 and 2018 on normal commercial terms and conditions. The Company received fees for the provision of services to Alex Abrahams during 2019 and 2018 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 2019 and 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 2019 $ 2018 $ 3,945,582 4,037,250 2,535 1,177 710,611 1,230,525 80,861 80,000 ANNUAL REPORT 2019 56 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 2019 and 2018 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 0.67% (2018: 0.87%) for the Group. Variable rate bank loans totalling $17,000,000 form part of an ongoing loan facility which was updated during the 2018 financial year. The overall facility term 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 3.82% (2018: 4.89%) for the Group. Interest Rate Sensitivity Analysis Effect on profit before tax and equity: 1% increase in interest rates 1% decrease in interest rates Credit Risk 2019 $’000 2018 $’000 (114) 114 (53) 53 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 Group only transacts with reputable Australian banks and its credit risk on trade receivables is not considered significant. 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 $5,377,000. 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. PACIFIC SMILES GROUPNOTES TO THE FINANCIAL STATEMENTS30 June 2019 57 Maturities of Financial Liabilities The following tables show the maturity groupings of gross (undiscounted) payment obligations under contracts for financial liabilities. Less than 6 months $’000 6 to 12 months $’000 1 to 5 years $’000 Total contractual amount $’000 Carrying amount $’000 136 12,485 12,621 124 11,042 11,166 136 – 136 124 – 124 17,067 – 17,067 12,062 – 12,062 17,339 12,485 29,824 12,310 11,042 23,352 17,000 12,485 29,485 12,000 11,042 23,042 Consolidated – 2019 Bank loans Payables and accruals Consolidated – 2018 Bank loans Payables and accruals Fair Value The fair values 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 The Group made no acquisitions in 2019. 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, ACT as well as Sculpt Dental Laboratories in Five Dock and Canberra. An incentive payment may be payable at the end of the vendors’ five-year employment agreement based on a multiple of earnings incremental to an agreed target, however a liability has not been taken up in the financial statements as the liability is not probable at reporting date. 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 (b) Purchase consideration Outflow of cash to acquire businesses, net of cash acquired Total cash consideration transferred Contingent consideration payable Total outflow 2019 $’000 – – – 2019 $’000 – – – 2018 $’000 1,115 (452) 663 2018 $’000 816 299 1,115 ANNUAL REPORT 2019 58 (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 (d) Acquisition-related costs 2019 $’000 2018 $’000 – – – – – – 86 49 344 12 (39) 452 The Group incurred acquisition–related costs of $76,000 in 2018 on legal and due diligence expenses. These costs have been included in “administration and other expenses”. 29. Segment Information The Group is organised into one operating segment being activities within the dental sector throughout Eastern Australia. This operating segment is based on the internal reports that are reviewed and used by the Group’s Chief Executive Officer, who is identified as the chief operating decision maker, in assessing performance and in determining the allocation of resources. The Group’s operation inherently has one profile and performance assessment criteria. The financial results from this segment are consistent with the financial statements for the Group as a whole. 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/(Increase) in receivables (Increase) in inventories (Increase) in other operating assets (Increase) in deferred tax assets Increase in trade payables Increase in provisions Increase/(Decrease) in income tax 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 2019 $’000 8,573 9,399 (15) – (97) (218) (412) (89) (1,044) 1,294 1,480 2,156 2018 $’000 6,604 7,833 376 1,644 105 190 (320) 227 (599) 1,051 1,044 (704) 21,027 17,451 2019 $’000 150 2018 $’000 124 PACIFIC SMILES GROUPNOTES TO THE FINANCIAL STATEMENTS30 June 2019 59 2019 $’000 11,914 82,171 15,473 40,603 2018 $’000 11,043 73,205 11,852 30,822 35,053 35,053 180 6,335 277 7,053 41,568 42,383 8,554 8,554 6,908 6,908 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 2,962 2,664 The parent entity did not have any contingent liabilities or financial guarantees as at 30 June 2019 or 30 June 2018, other than bank guarantees. ANNUAL REPORT 2019 60 DIRECTORS’ DECLARATION In the Directors’ opinion: (a) the financial statements and notes set out on pages 32 to 59 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 2019 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 21 August 2019 PACIFIC SMILES GROUP INDEPENDENT AUDITOR’S REPORT 61 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 the Group’s financial position as at 30 June 2019 and of its financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion The Financial Report comprises: Consolidated balance sheet as at 30 June 2019; Consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity, and consolidated statement of cash flows for the year then ended; Notes including a summary of significant accounting policies; 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. We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. PACIFIC SMILES GROUP LIMITED ANNUAL REPORT 2019 52 ANNUAL REPORT 2019 62 Key Audit Matters The Key Audit Matters we identified are: Carrying value of intangible assets Revenue recognition Disclosure of expected impact of AASB 16 Leases Key Audit Matters are those matters that, in our professional judgment, were of most significance in our audit of the Financial Report of the current 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. Carrying value of intangible assets ($10,939,000) 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 the Group’s annual testing of goodwill for impairment was identified as a key audit matter due to: Size of the balance; Significant level of judgement we applied to assess the Group’s forecasts and discounted future cash flows. We focused on the significant forward-looking assumptions the Group applied in their value-in- use model, including: Forecast operating cash flows, growth rates and terminal growth rates – the Group has experienced competitive market conditions with varying levels of year on year sales growth across centres of varying maturity and geographic regions. These conditions increase the possibility of intangible assets being impaired, plus the risk of inaccurate forecasts or a wider range of possible outcomes for us to consider; and Discount rates - these are complicated in nature and vary according to the conditions and environment the CGUs are subject to from time to time, and the models approach to incorporating risks into the cash flows or discount rates. The Group’s modelling is sensitive to changes in the discount rate. Complex modelling, particularly those containing highly judgemental allocations of corporate assets and costs to CGUs, using Our procedures included: We considered the appropriateness of the value-in-use method applied by the Group to perform their annual impairment testing of intangible assets against the requirements of the relevant accounting standards. We: - - - - Assessed the Group’s underlying methodology and documentation for the allocation of corporate costs to the forecast cash flows in the value in use model, for consistency with our understanding of the business and the criteria in the accounting standards. Assessed the Group’s determination of their CGUs based on our understanding of the operations of the Group’s business, impact of the 10 new centres opened during the financial year and how independent cash inflows were generated, against the requirements of the relevant accounting standards. Assessed the Group’s allocation of corporate assets to CGUs for reasonableness and consistency based on the requirements of the accounting standards. Assessed the Group’s determination of CGU assets for consistency with the assumptions used in the forecast cash flows and the requirements of the accounting standards. PACIFIC SMILES GROUP LIMITED ANNUAL REPORT 2019 53 PACIFIC SMILES GROUPINDEPENDENT AUDITOR’S REPORT forward-looking assumptions tend to be prone to greater risk for potential bias, error and inconsistent application. These conditions necessitate additional scrutiny by us. - - 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. 63 Compared forecast cash flows in the model to Board approved forecasts. Assessed the accuracy of previous Group forecasts to inform our evaluation of forecasts incorporated in the model. We considered the sensitivity of the model by varying key assumptions, such as forecast growth rates, terminal growth rates and discount rates, within a reasonably possible range, to identify those CGUs at higher risk of impairment and to focus our further procedures. Working with our valuation specialists we: - - - Developed a discount rate range using publicly available market data for comparable entities, adjusted by risk factors based on the size and location of the Group’s CGUs. Assessed the integrity of the model used, including the accuracy of the underlying calculation formulas. Challenged the Group’s significant forecast cash flow and growth assumptions in light of the competitive market conditions. We compared forecast growth rates and terminal growth rates to published studies of industry trends and expectations, and considered differences for the Group’s operations. We used our knowledge of the Group, their past performance, business and customers, and our industry experience. We assessed the disclosures in the financial report using our understanding obtained from our testing and against the requirements of the relevant accounting standards. Revenue recognition ($122,156,000) 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 Our procedures included: We evaluated the appropriateness of the Group’s revenue recognition policies against PACIFIC SMILES GROUP LIMITED ANNUAL REPORT 2019 54 ANNUAL REPORT 2019 64 who practice using the Group’s dental surgeries. Service fees represent the net amount the Group is entitled to after paying the dentists a share of total patient billings (dentist payments). Dentist payments are based on percentages agreed with each dentist per underlying Service Facility Agreements (agreed dentist percentages) which are variable based on the following drivers: Monthly total patient billings; and Actual time spent by the dentists at the Group’s dental surgeries for the month per timesheet reports. We focused on revenue recognition of service fees as a key audit matter due to the significant audit effort to test the: High volume of transactions recorded as revenue and significant value of revenue recognised; Largely manual nature of the Group’s calculation of dentist payments and therefore service fee revenue. This increases the risk of potential bias, error and inconsistent application due to the number of different agreed dentist percentages and drivers, in particular around the last month of the year; and The opening of 10 new dental centres during the current year, which necessitated us to assess the new Service Facility Agreements and increased our audit effort in this key area. the requirements of the accounting standard. We tested key controls in the services fee revenue recognition process, including: - Management review and approval of monthly bank account reconciliations. - Management’s check of the monthly total patient billings, monthly timesheet reports, and agreed dentist percentages used by the Group in the monthly dentist payment calculations. - Management’s dual authorisation of dentist payments and the monthly dentist payment calculations. For a sample of the agreed dentist percentages in the Group’s monthly dentist calculations, we used the monthly total patient billings derived from the Group’s bank statements, and the Group’s dentists’ monthly timesheet reports to check the consistency of the agreed dentist percentages to the underlying Service Facility Agreements. We developed an expectation of service fees recognised during the year, being total patient billings less dentist payments. We checked total patient billings and dentist payments throughout the year to the Group’s bank statements. We compared our expectation to the amount recorded by the Group. We developed an expectation of the current year service fees by applying the prior year ratio of dentist payments to service fees to the current year dentist payments. We considered the impact of the 10 new dental centres opened during the current year. We assessed service fees recognised in the last month of the financial year by multiplying the weighted average agreed dentist percentages based on the relevant underlying Service Facility Agreements and total patient billings from the Group’s bank statements for the month. PACIFIC SMILES GROUP LIMITED ANNUAL REPORT 2019 55 PACIFIC SMILES GROUPINDEPENDENT AUDITOR’S REPORT 65 Disclosure of expected impact of AASB 16 Leases Refer to Note 1 b) to the Financial Report. The key audit matter How the matter was addressed in our audit In preparation for the adoption of the new accounting standard AASB 16 Leases (“AASB 16”) from 1 July 2019, the Group has disclosed the expected financial impact. In particular, we focused on the Group’s expected recognition of a right-of-use asset of $54,243,000, lease liability of $64,970,000, deferred tax asset of $1,612,000 and adjustment to opening retained earnings of $3,761,000 on 1 July 2019. AASB 16 will drive a significant change in the Group’s accounting policy for leases when it becomes effective in the Group’s 30 June 2020 financial report. Disclosure of the expected impact of AASB 16 was a key audit matter due to the: Relative magnitude – due to the size of balances disclosed and significant expected financial impact on the Group’s financial position and performance thereafter; High volume of leases – significant proportion of audit effort applied to gather audit evidence for the multiple and varied inputs into the Group’s AASB 16 lease calculation model, across a high volume of individualised lease agreements used to calculate the estimated amount of the lease liability, right-of-use asset, deferred tax asset, and retained earnings. These include key terms of the lease agreements, such as key dates, fixed and variable rent payments, renewal options, incentives and make good obligations; Judgement applied by us to assess the Group’s incremental borrowing rates used – these are judgmental in nature and meant to reflect the Group's entity specific credit risk and varies based on each lease term. We involved our debt advisory specialist in our assessment. Our procedures included: Considered the appropriateness of the Group’s expected new and revised accounting policies and its AASB 16 lease calculation model against the requirements of the AASB 16 and our understanding of the business. Obtained an understanding of the Group’s new processes and systems used to calculate the lease liability, right-of-use asset, deferred tax asset and retained earnings adjustment. Compared the Group’s inputs in the AASB 16 lease calculation model, such as, key dates, fixed and variable rent payments, renewal options, incentives, and make good obligations to the relevant terms of the underlying signed lease agreements for consistency. Assessed the Group’s determination of lease terms based on the probability of the Group exercising the lease renewal options. We considered the Group’s assessment of the financial incentives to exercise the lease renewal options, and compared to board approved plans and strategies. Working with our debt advisory specialists, we independently developed a series of point estimates for the incremental borrowing rates applied to the leases using the S&P Healthcare indicative credit rating and corporate yield curve, adjusted by risk factors specific to the Group, the industry it operates in, and each lease term. We compared it to the incremental borrowing rates used by the Group. Assessed the integrity of the AASB 16 lease calculation model used, including the accuracy of the underlying calculation formulas. For a sample of leases in the Group’s AASB 16 lease calculation model, we recalculated the amount of lease liability, right-of-use asset, deferred tax asset and retained earnings using the relevant terms of the underlying signed lease agreements. We compared the recalculated amounts against the amounts recorded by the Group. PACIFIC SMILES GROUP LIMITED ANNUAL REPORT 2019 56 ANNUAL REPORT 2019 66 Assessed the completeness of leases included in the Group’s AASB 16 lease calculation model. We compared the number of leases included in the model to the number of dental centres as at year end. We inspected lease related expense accounts for routine payments during the year to identify existence of lease agreements not included in the model. Assessed the disclosures in the financial report using our understanding obtained from our testing and against the requirements of the accounting standard. 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 Remuneration Report, the Shareholder Information and the Corporate Directory. The Highlights, the Chairman’s Review 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 Australian Accounting Standards and the Corporations Act 2001; implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error; and assessing Group’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. PACIFIC SMILES GROUP LIMITED ANNUAL REPORT 2019 57 PACIFIC SMILES GROUPINDEPENDENT AUDITOR’S REPORT 67 Auditor’s responsibilities for the audit of the Financial Report Our objective is: to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of Pacific Smiles Group Limited for the year ended 30 June 2019, complies with Section 300A of the Corporations Act 2001. 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 21 to 30 of the Directors’ report for the year ended 30 June 2019. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 KPMG Sarah Cain Partner Sydney 21 August 2019 PACIFIC SMILES GROUP LIMITED ANNUAL REPORT 2019 58 ANNUAL REPORT 2019 68 SHAREHOLDER INFORMATION As at 1 August 2019 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 National Nominees Limited Susan Louise Abrahams JP Morgan Nominees Australia Limited Just Paddling Pty Limited Citicorp Nominees Pty Limited Robert G Cameron and Paula S Cameron Channings Holdings Pty Limited Karen Wright Sudemo Pty Limited Lodka Pty Limited Amanda Taylor Sterling Surgical Pty Limited BNP Paribas Nominees Pty Limited Levigrad Pty Limited William McIllwraith Pty Limited Trevor Collins and Dianne Collins Anthony William John Coleman Total Other holders Total quoted equity securities Number of equity security holders 206 273 135 215 64 893 Number of ordinary shares held Percentage of issued shares % 34,313,705 20,436,010 15,860,190 13,625,925 11,439,269 5,205,213 4,019,082 3,567,813 3,533,258 3,090,150 2,022,000 1,741,017 1,728,081 1,647,735 1,515,000 1,376,494 1,212,695 1,185,000 1,128,480 1,000,000 129,647,117 22,346,278 151,993,395 22.58 13.45 10.43 8.96 7.53 3.42 2.64 2.35 2.32 2.03 1.33 1.15 1.14 1.08 1.00 0.91 0.80 0.78 0.74 0.66 85.30 14.70 100.00 PACIFIC SMILES GROUP 69 Unquoted Equity Securities Performance rights issued under the Company’s LTI plan 7,551,000 9 Number on issue Number of holders Substantial Shareholders Name Alexander John Abrahams and his associates TDM Asset Management Pty Ltd and its associates Alison Jane Hughes Number of ordinary shares held Percentage of issued shares % 36,327,361 32,777,817 15,860,190 23.90 21.57 10.43 Voting Rights Each ordinary share carries the right to one vote. No voting rights are attached to performance rights. ANNUAL REPORT 2019 70 CORPORATE DIRECTORY Principal Registered Office Level 1, 6 Molly Morgan Drive Greenhills NSW 2323 T: 02 4930 2000 F: 02 4930 2099 W: pacificsmilesgroup.com.au Directors Robert Cameron AO Non-Executive Chairman Phil McKenzie Managing Director and Chief Executive Officer Dr Alex Abrahams Non-Executive Director Hilton Brett Non-Executive Director Ben Gisz Non-Executive Director Zita Peach Non-Executive Director Simon Rutherford Non-Executive Director Company Secretary 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 Securities Exchange under the code “PSQ”. PACIFIC SMILES GROUP ANNUAL REPORT 2019