Pact Group Holdings Ltd
Annual Report 2018

Plain-text annual report

L A U N N A T R O P E R b PAC T 2018 A NNUA L R EP OR T c OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION2 11 27 Overview 3 6 10 A Message from the Chairman About Pact Group Financial and Operational Highlights Performance Review of Operations & Financial Performance 11 22 Growth Initiatives 26 Innovation and Awards Governance 28 Sustainability 28 Corporate Governance Overview Financial Reports 38 Directors' Report — Remuneration Report 49 Auditor's Independence Declaration 50 Financial Statements 94 Directors' Declaration 95 Independent Auditor's Report Shareholder Information 102 FY18 Shareholder Calendar 105 Corporate Directory 29 101 “The Group has a solid platform for the future. Our diversification strategy has positioned the business well to take advantage of the significant growth opportunities we see ahead of us.” Raphael Geminder Executive Chairman PAC T 2018 A NNUA L R EP OR T 1 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION2 A MESSAGE FROM THE cHAIRMAN Dear Shareholder Dividends On behalf of the Board of Directors of Pact Group, I am delighted to present to you our 2018 Annual Report following what has been another transformational but also challenging year. Despite the challenges of the macro environment the Group has continued to deliver strong operating cashflows and disciplined balance sheet management, and consequently remains able to deliver strong cash returns to our shareholders. The Board of Group Performance and business Review Directors has declared a final dividend of 11.5 cents per share, Group sales revenue of $1.7 billion increased 13.5% compared to the prior year, driven primarily by transformational growth initiatives franked to 65%, in-line with the prior year. The total dividend declared in respect of FY18 was 23.0 cents per share, also in-line including the Group’s new crate pooling business in Australia and with the equivalent from FY17. the Asian acquisition completed in the second half of the year. Both of these strategic initiatives are performing well. Underlying sales were also ahead with organic growth in the contract manufacturing, Executing Our Strategy The Group’s strategy focusses on maximising long-term shareholder sustainability and infrastructure sectors, along with improved value through: rigid packaging volumes in health and wellness. These were partly • Organic growth — by protecting our core and growing offset by lower materials handling volumes along with lower rigid organically over the longer term; packaging volumes in dairy and agriculture. Group EBITDA before significant items of $237 million was 2% • Efficiency — by embedding a culture of operational excellence and targeting the lowest cost of production; and ahead of the prior year. • M&A — delivering growth through a disciplined approach EBIT for the year of $165 million was 3% lower than the prior year to M&A. with higher depreciation and amortisation from acquisitions and We have continued to deliver on this strategy in FY18. the new crate pooling business. Net profit after tax (NPAT) before significant items was $94.7 million, 5% lower than FY17, and statutory NPAT was $74.5M compared to $90.3 million in the prior year Through our organic growth pillar our new crate pooling business in Australia was commissioned on schedule in August 2017 — the largest organic growth project ever undertaken by the business. Underlying volumes have been stable and we have remained We also delivered stable underlying volumes in the period, focussed on driving efficiency and improvements in our business supported by our enhanced portfolio diversity. through operational excellence. However, raw material and energy input costs have been particularly challenging in FY18 and this is Efficiency benefits continue to be delivered through our operational reflected in our earnings for the year. Earnings were impacted by excellence programs, and during FY18 we also commenced the time lags in the recovery of those raw material price movements, transformation of our Australian rigid packaging business. with the impact exacerbated by significant and rapid movements late in the year. Recovering sharply higher energy costs in the second half of the year also proved difficult. PAC T 2018 A NNUA L R EP OR T 3 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONWhilst we enjoy scale and geographic advantages in this sector, We have a successful and growing business dedicated to recycling the network includes a number of acquisitions completed over a and assisting our customers to meet their sustainability targets. We long period of time and as such it is critical that we are constantly are also proud to have developed and manufactured a variety of challenging ourselves to ensure that we are making the right sustainable packaging solutions for our customers utilising recycled products, in the right place and on the right equipment. The aim is to materials. create an integrated supply network with opportunities for improved productivity, utilisation and quality driving significant cost benefits. Through the Pact 2025 Promise, the Group intends to extend its commitment to sustainability, by delivering on ambitious goals by The Group has also continued to drive growth and transformation 2025 to: through our disciplined approach to M&A. In the second half of the 1. Reduce — eliminate all non-recyclable packaging that we year the Group completed the strategic acquisition of the Asian packaging operations of Closure Systems International and the Guangzhou China facility of Graham Packaging Company — the largest acquisition undertaken by the Group since IPO — and completed the acquisition of ECP Industries, building scale and providing attractive growth opportunities in their sectors. The acquisition of TIC Retail Accessories will further enhance those opportunities. The TIC acquisition, which is expected to complete on 1 October 2018, adds further scale to the Group’s portfolio, expands our Asian platform and leverages our capability in asset pooling and plastics manufacturing. TIC has transformed the garment hanger industry eliminating significant waste by providing a sustainable and innovative service solution and furthers Pact’s sustainability credentials. Sustainability Sustainability remains a core pillar of Pact’s commitment to its customers, employees and the communities in which we operate. Our vision is to enrich lives everyday through sustainable packaging solutions, and through our long-standing War on Waste program we have remained at the forefront with our commitment to reducing waste throughout the supply chain. produce 2. Reuse — have solutions to reduce, reuse and recycle all single use secondary packaging in supermarkets 3. Recycle — offer 30% recycled content across all of our packaging portfolio Innovation Innovation is a key advantage and our ability to differentiate through innovation, deliver innovation excellence and provide end-to-end customer solutions remains critical to our success. We are Australasia’s most innovative packaging company, having been included on the Australian Financial Review’s Most Innovative Companies List for the sixth consecutive year — the only packaging company to achieve such recognition. Our innovation team includes award winning product development, process, technical and design managers and market specialists. We are extremely proud of their achievements. Our People The people across our businesses are also critical to our success. Employees from across the organisation continue to submit innovative and original ideas for process and productivity improvements through our reward and recognition program Applause. The program fosters a culture of engagement, motivates and rewards employees and provides a central digital platform that creates a knowledge sharing community. We remain committed to providing a safe and sustainable work environment for all our employees. Safety outcomes were improved in the year, supported by our operational excellence programs and through a variety of ongoing cultural change initiatives. We will continue to focus on driving an improved safety culture across all our sites through these initiatives, with further benefits expected as we progress our rigid packaging network transformation. 4 board changes Thank You I would like to take this opportunity to highlight changes to your Board of Directors since our last Annual Report. In September we announced the resignation of Malcolm Bundey, the Group’s Chief Executive Officer and Managing Director. Mal achieved a great deal during his time with Pact, leading the transition of the business into a more diversified Group and overseeing our expansion into contract manufacturing, pooling On behalf of the Board of Directors I would like to thank all our shareholders for your continued support and to express our appreciation also to our customers, suppliers and other stakeholders. I would also like to convey our thanks to our committed management team and employees across the business for their dedication in driving results and the Group’s continued transformation in what has been a challenging year. services and Asia. The Board and I would like to extend our thanks Notwithstanding these challenges, we are confident that we have to Mal for his tireless efforts and contribution to the business and the right platform and strategies in place to drive the business we wish him well as he embarks on the next stage of his career. forward, deliver growth in FY19 and continue to reward all of our Whilst the Board conducts a search for a new Chief Executive, I have stakeholders. I look forward to updating you on our progress. Raphael Geminder Executive Chairman temporarily been appointed to the role of Executive Chairman until such time as an appointment is made. Following our recent acquisitions and growing presence in Asia, the region has become more important to the Group and is likely to continue to increase in significance with opportunities to grow locally and also in relation to supply into our core markets in Australia and New Zealand. In order to be in a position to fully realise these exciting opportunities, it was deemed critical to add someone with executive and operational experience in Asia to the Board. In that context, after an extensive search, we were delighted to confirm the appointment of Carmen Chua as a Non-executive Director of Pact from 1 September 2018. Carmen is based in Hong Kong and has been the President of Laird China since 2017. Prior to that Carmen was VP and GM Materials at Avery Dennison Corporation from 2008 to 2017 and has also held positions across sales, marketing and business development with organisations such as Worldmark International, Dell Corporation, Don Print and Adampak. We welcome Carmen to Pact and look forward to the benefit of her energy, experience and insight across China and South East Asia. Outlook The Group has a solid platform for the future. Our diversification strategy has positioned the business well to take advantage of the significant growth opportunities we see ahead of us. Our strategic growth initiatives are performing in-line with expectations, we remain focussed on efficiency and will continue to challenge cost headwinds. The business today is more complex and of far greater scale than it has ever been and we are undertaking a review of our operating model to ensure that we have the correct management structure, transparency and organisational capability in place to deliver the greatest potential returns going forward. PAC T 2018 A NNUA L R EP OR T 5 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONAbOUT PAcT GROUP Pact is a leading provider of specialty packaging solutions servicing both consumer and industrial sectors. Pact specialises in the manufacture and supply or rigid plastic and metal packaging, materials handling solutions, contract manufacturing services, recycling and sustainability services. Diversity and Scale The Group has a highly diversified product and service portfolio with broad end-market reach and an attractive customer base, including supply to major regional and global brand owners. 6% 59% 2018 Revenue1 by product 22% 13% Rigid plastic and metal packaging Materials handling products and solutions Contract manufacturing services Other2 Rigid plastic and metal packaging • Market leader in rigid plastic Contract manufacturing services packaging in Australia and • A leading supplier of contract Materials handling and infrastructure products and solutions Recycling and sustainability services • Leading supplier of New Zealand with a growing position in Asia • Leader in select rigid metals packaging sectors in Australia manufacturing services in Australia for the home, personal care and health and wellness categories and New Zealand • Manufacturing capability for liquid powder, aerosol and therapeutic nutraceutical products • Leading supplier of polymer sustainability, environmental, materials handling products reconditioning and recycling services • Largest provider of returnable produce crate (RPC) pooling services in Australia and New Zealand • Leading supplier of custom moulded products used in infrastructure and other projects 1 Assumes full year contribution from Asia and ECP Acquisition. 2 Other includes recycling services, infrastructure and other custom moulded products. 6 OPERATIONS IN 10 COUNTRIES China South Korea Nepal Thailand India Singapore Philippines Indonesia Australia New Zealand The Group benefits from regional scale, supported by approximately 5,500 team members and an extensive manufacturing and supply network across Australia, New Zealand and Asia. AUSTRALASIA'S MOST INNOVATIVE PACKAGING COMPANY Innovation Pact differentiates through world class innovation, delivering high quality solutions to customers, supported by global licencing arrangements. Widely recognised for our innovation excellence, Pact has been included on the Australian Financial Review’s (AFR) Most Innovative Companies List for 6 consecutive years — the only packaging company to receive such recognition. Strategy Our strategy is to deliver long-term value through focus on three key pillars: Protect our core and grow organically Operational excellence and efficiency Growth through a disciplined approach to M&A PAC T 2018 A NNUA L R EP OR T 7 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONVision Our vision is to enrich lives everyday through sustainable packaging and manufacturing solutions. Pact is committed to sustainable packaging and through its War on Waste program targets waste reduction throughout the entire supply chain. Pact’s 2025 Promise extends the Group’s commitment to become the number one partner of sustainable choices for our customers. T H E PACT 2025 P R O M I S E 1 . R E D U C E 2 . R E U S E 3 . R E C Y C L E BY 2025 PACT GROUP BY 2025 PACT GROUP BY 2025 PACT GROUP WILL WILL ELIMINATE ALL NON- WILL HAVE SOLUTIONS RECYCLABLE PACKAGING TO REDUCE, REUSE AND OFFER 30% RECYCLED CONTENT ACROSS ITS THAT WE PRODUCE RECYCLE ALL SINGLE USE PACKAGING PORTFOLIO SECONDARY PACKAGING IN SUPERMARKETS 8 8 Case Study Reuse Lewis Road’s 100% rPET milk bottle range Pact is proud to have designed and manufactured a range of 750ml and 1.5 litre milk bottles from 100% recycled polyethylene terephthalate (rPET) for iconic New Zealand dairy brand – Lewis Road. based on Lewis Road’s current volumes, this equates to saving 343.4 tonnes of virgin PET per annum. PAC T 2018 A NNUA L R EP OR T 9 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFINANcIAL AND OPERATIONAL HIGHLIGHTS Strategic initiatives delivering growth in- line with expectations — New crate pooling business commissioned — Integration of Asian Acquisition progressing to schedule Sales revenue up 13% to $1.7 billion EBITDA1 up 2% to $237 million NPAT1 of $95 million, 5% lower than FY17 Earnings impacted by significantly higher input costs and higher depreciation and amortisation Stable Strong focus on efficiency Continued strong cash generation underlying volumes and operational and balance sheet effectiveness management Total dividends of 23.0 cps TIC acquisition announced 5 Year Financial History 3 4 1 1 9 4 2 1 1 8 3 1 5 7 4 1 4 7 6 1 8 9 1 9 0 2 0 2 2 3 3 2 7 3 2 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 Sales revenue $m EBITDA1 $m 7 4 1 3 5 1 3 6 1 9 6 1 5 6 1 0 6 5 8 4 9 0 0 1 5 9 FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18 EBIT1 $m NPAT1 $m 1 Before significant items. 10 E c N A M R O F R E P PAC T 2018 A NNUA L R EP OR T 11 PAC T 2018 A NNUA L R EP OR T 11 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONREVIEW OF OPERATIONS AND FINANcIAL PERFORMANcE The Group has reported sales revenue of $1,674.2 million for the year ended 30 June 2018, up 13% compared to the prior corresponding period (pcp). Statutory net profit after tax (Statutory NPAT) for the year was $74.5 million, compared to $90.3 million in the pcp. NPAT before significant items (NPAT)3 for the year was $94.7 million (pcp: $100.0 million). Summary • Sales revenue up 13.5% to $1,674.2 million (pcp: $1,475.3 million) • EBITDA1 up 1.8% to $237.3 million (pcp: $233.1 million) • EBIT2 of $164.5 million (pcp: $169.4 million) impacted by higher depreciation and amortisation of $9.0 million • Stable underlying volume supported by portfolio diversity — Solid underlying revenue growth in the contract manufacturing, sustainability and infrastructure sectors — Lower materials handling volumes due to raw material shortages and timing of government projects — Lower rigid packaging volumes impacted by a major customer • NPAT3 of $94.7 million (pcp: $100.0 million) plant closure and drought conditions in Australia • EBITDA impacts of $13.0 million from higher raw material input • Strong focus on efficiency and operational effectiveness costs and Australian energy costs in the second half, partially — Transformation of the Australian rigid packaging network mitigated by cost recovery in the market commenced with two plants closed and management • Strong revenue and earnings growth from strategic growth structures realigned initiatives, in-line with expectations — Efficiency benefits from operational excellence programs — Australian crate pooling business fully commissioned with delivered financial returns in line with expectations • Adverse impact from foreign exchange movements — Integration of Asian acquisition well advanced and progressing to schedule • Continued strong cash generation and a robust balance sheet — gearing4 of 2.5x and interest cover5 of 7.4x • Final ordinary dividend of 11.5 cents per share, franked to 65% — total dividends for the year of 23.0 cents per share, in-line with the pcp Footnotes within Review of Operations and Financial Performance are set out on page 21. 12 Key Financial Highlights – $millions $millions Sales Revenue EBITDA1 EBIT2 NPAT3 Statutory NPAT Total Dividends — cents per share 2018 1,674.2 237.3 164.5 94.7 74.5 23.0 2017 1,475.3 233.1 169.4 100.0 90.3 23.0 Change % 13.5% 1.8% (2.9%) (5.3%) (17.5%) — Note: EBITDA, EBIT and NPAT are non-IFRS financial measures and have not been subject to audit by the Company’s external auditor. Refer to page 21 for definitions. business Highlights • Strong revenue and earnings growth delivered from transformational growth initiatives, including contributions from the Asian Acquisition (acquired 15 February 2018, with CSI Nepal completed on 25 May 2018); the acquisition of ECP — Acquisition completed of ECP Industries, a West Australian based intermediate bulk container (IBC) and tank reconditioning business, providing national coverage and attractive growth opportunities in the Group’s sustainability businesses. Industries (completed 30 November 2017); the new Australian — Strategic growth in asset pooling with the announcement crate pooling business supporting fresh produce supply to of the acquisition of TIC Retail Accessories Pty Ltd (TIC), a Woolworths (commissioned August 2017); and incremental provider of innovative and sustainable closed loop plastic contributions from the acquisition of contract manufacturers garment hanger and accessories re-use services. This APM and Pascoe’s made in the prior year. • Continued diversification in the Group’s product and service portfolio and geographic reach through acquisition: — Enhancement of the Group geographic diversity following the completion of the acquisition of the Asian packaging acquisition leverages the Group’s demonstrated capability in closed loop asset pooling and plastics manufacturing, adding further scale to the Group’s portfolio and expanding its Asian platform. The acquisition is expected to complete on 1 October 2018, subject to customary conditions. operations (excluding Japan) of CSI and the Guangzhou China • Organic growth delivered in Australia in the contract facility of Graham Packaging Company. The acquisition is manufacturing, sustainability and infrastructure sectors. strongly aligned with the Group’s capability in rigid packaging, builds scale to the existing footprint in Asia and significantly enhances customer diversity, manufacturing, technology and management capability to accelerate growth within the region. • Despite challenging macro conditions, the Group demonstrated disciplined management of significantly higher raw material and energy costs in the second half of the year. • Efficiency benefits delivered through operational excellence programs in-line with expectation. • Continued strong operating cash flow and disciplined balance sheet management. PAC T 2018 A NNUA L R EP OR T 13 PAC T 2018 A NNUA L R EP OR T 13 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONGroup Results $’000 Sales revenue Other revenue (excluding interest revenue) Expenses EBITDA1 EBITDA margin Depreciation and amortisation EBIT2 EBIT margin Significant items (before tax) EBIT Net finance costs Income tax expense Significant tax items Statutory NPAT 2018 1,674,188 12,739 (1,449,676) 237,251 14.2% (72,745) 164,506 9.8% (23,305) 141,201 (32,076) (37,769) 3,132 74,488 2017 1,475,336 9,621 (1,251,841) 233,116 15.8% (63,700) 169,416 11.5% (13,040) 156,376 (30,197) (39,216) 3,378 90,341 Change % 13.5% 1.8% (2.9%) (9.7%) (17.5%) Sales Revenue Group sales revenue of $1,674.2 million increased 13.5% ($198.9 million) compared to the pcp, driven by transformational growth initiatives and higher underlying sales. Acquisitions delivered $130.8 million. This included contributions from the acquisitions of the Asia acquisition and ECP Industries in FY18, along with incremental impacts from the acquisitions of Pascoe’s and Australian Pharmaceutical Manufacturers (APM) completed in FY17. Excluding the contribution from acquisitions, sales revenue was 4.6% ahead of the pcp. Underlying sales growth was driven by the new Australian crate pooling business, supporting fresh produce supply for Woolworths, which was commissioned in August 2017. In addition, solid volume growth was delivered in the Group’s contract manufacturing, sustainability and infrastructure sectors. Rigid packaging volumes were down. Improved demand in the health and wellness sector was offset by lower volumes in the dairy, food and beverage sector in Australia, adversely impacted by a major customer plant closure, weakness in the agricultural sector due to drought conditions in Australia and weak industrial demand in China. Materials handling volumes were down on the prior year due to the timing of government projects in New Zealand and raw material shortages in Australia following a major supplier plant outage across May and June. from contract extensions in the prior year and foreign exchange. Efficiency benefits from operational excellence programs and lower costs following the start-up of new contracts in Jalco in the prior year mitigated continued higher costs to serve in the Australian rigid packaging businesses. EBIT of $164.5 million for the year was $4.9 million or 2.9% lower than the pcp with higher depreciation and amortisation from acquisitions and the new crate pooling business. EBIT margins of 9.8% were 1.7% lower than the pcp due to lower margins from contract extensions, higher input costs and changes in the portfolio mix following the Asia acquisition. Significant Items Pre-tax significant items for the year were an expense of $23.3 million. This included deferred settlement costs ($8.8 million) due primarily to a higher earn-out for the Pascoe’s acquisition, which performed ahead of expectations, acquisition costs ($4.4 million) due mainly to the Asian acquisition, and business reorganisation costs ($10.1 million) related primarily to the rigid packaging network transformation and two site closures. The pre-tax significant items of $13.0 million in the prior year related to costs associated with the 2015 Efficiency Program ($3.0 million), other business restructuring activities completed in the year ($4.5 million), acquisition costs ($2.2 million) and start-up costs related to the new crate pooling business in Australia ($3.3 million). Pricing was generally higher in the period, due largely to the pass Net Finance costs through of higher input costs, partly offset by the impact of contract extensions in the prior year. EbIT Group EBITDA of $237.3 million was 1.8% ahead of the pcp, with a solid contribution from growth initiatives that was partially offset by the adverse impact of time lags in recovering higher raw material costs following a significant and rapid increase in input prices in the second half, higher Australian energy costs, lower pricing Net financing costs for the year of $32.1 million were $1.9 million higher than the pcp. The net expense for FY18 excludes $0.1 million in capitalised interest compared to $1.0 million in the pcp. Excluding the impact of capitalised interest, net financing costs were $1.0 million higher. Underlying financing costs and debt levels were stable, with the increase in the net expense primarily related to higher losses on derecognition of financial assets (due to increased utilisation of the securitisation program) along with higher sundry interest costs. 14 Income Tax Expense and Significant Tax Items balance Sheet The income tax expense for the year of $37.8 million represents an effective rate of 28.5% of net profit before tax and significant items, broadly in line with statutory tax rates payable by the Group across its main operating jurisdictions. This compares to $39.2 million in the pcp at an effective tax rate of 28.2%. The significant tax item for the year is a benefit of $3.1 million relating to the significant items noted above. In the prior year the significant tax item was a benefit of $3.4 million. Net Profit After Tax Statutory NPAT for the year was $74.5 million compared to $90.3 million in the pcp. Excluding significant items, NPAT was $94.7 million compared to $100.0 million in the pcp. $’000 Cash Other current assets Property plant & equipment Intangible assets Other assets Total assets Interest bearing liabilities Other liabilities, payables & provisions Total liabilities Net assets Net debt6 2018 67,980 385,636 755,413 584,193 57,365 2017 39,592 310,988 677,132 547,333 55,345 1,850,587 1,630,390 686,210 667,253 600,134 539,072 1,267,387 1,225,282 405,108 646,618 583,200 599,273 Change % 71.7% 24.0% 11.6% 6.7% 3.6% 13.5% (2.8%) 11.3% 3.4% 44.0% (7.3%) 2019 Outlook The Group expects to achieve higher revenue and earnings (before significant items) in FY19, subject to global economic conditions. Net debt at the end of the financial year was $599.3 million, a reduction of $47.3 million compared to the pcp. The reduction in net debt was supported by continued strong underlying operating cash flows and the proceeds of an equity raising of $176 million The following is also relevant to earnings expectations in FY19. completed in the first half of the year. Disciplined cash and balance Including the impact to earnings from the acquisition of TIC, which is sheet management have enabled the funding of successful anticipated to complete on 1 October 2018, the Group expects: acquisition and capital related growth initiatives. • EBITDA (before significant items) between $270 million and $285 million; The Group has several revolving debt facilities and a working capital facility with total commitments of $1,001.1 million. The facilities are • Depreciation and amortisation between $84 million and $86 spread across multiple maturities, with the working capital facility million; • Net finance costs between $38 million and $40 million, subject to changes in market interest rates; and • An effective tax rate (% of net profit before tax and significant items) between 29.0% and 29.5%. The completion of the acquisition of TIC remains subject to customary conditions. revolving with an annual review. The debt facilities include a $378.6 million loan facility maturing in July 2020, a $183.5 million loan facility maturing in January 2023, a $297.6 million loan facility maturing in March 2023 and a $120 million loan facility maturing in November 2024. Average tenor has been increased to 3.9 years. The increase in the Group’s other current assets of $74.7 million relates primarily to receivables and inventory held by newly acquired businesses, along with underlying higher raw material inventory levels impacted by higher raw material input costs. The increase in property plant and equipment of $78.3 million predominantly relates to acquisitions. The increase in the Group’s intangible assets of $36.9 million is due primarily to goodwill recognised on acquisitions arising in FY18 ($46.4 million) less foreign exchange translation of $6.2 million relating to New Zealand dollar denominated goodwill and amortisation of $3.5 million. The increase in the Group’s other liabilities, payables and provisions of $61.1 million relates primarily to increased trade and other payables, impacted by acquisitions and higher input costs. Financing metrics Gearing4 Interest cover5 2018 2.5x 7.4x 2017 2.8x 7.7x Change (0.3) (0.3) The Group maintains robust financing metrics. As at 30 June 2018 gearing was 2.5x, an improvement from 2.8x in the pcp, driven by a combination of EBITDA growth and lower net debt. Both gearing and interest cover remain within the Group’s targeted levels. PAC T 2018 A NNUA L R EP OR T 15 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION cash Flow $’000 — Key items Net cash flow provided by operating activities Payments for property, plant and equipment Purchase of businesses and subsidiaries, net of cash acquired Net proceeds from share issue Payment of dividend 2018 150,423 (90,180) (127,863) 172,573 (72,648) 2017 171,466 (116,390) (138,245) — (67,056) Change % (12.3%) (22.5%) (7.5%) — 8.3% Statutory net cash flow provided by operating activities, including proceeds from securitisation of trade debtors, was $150.4 million in FY18, $21.0 million lower than the pcp. The inflow from securitisation of trade debtors was $3.2 million in the financial year compared to $16.2 million in the pcp. Excluding securitisation inflows, statutory operating cashflow was $7.8 million lower than the pcp. Higher underlying operating cash flows were more than offset by higher tax and interest cash payments in the period compared to the pcp. Payments for property, plant and equipment were $90.2 million in the financial year compared to $116.4 million in the pcp. The decrease of $26.2 million reflects lower capital expenditure relating to the establishment of the crate pooling business in Australia, and lower expenditure relating to the investment in a new health and wellness packaging facility in Australia, which was largely completed in the prior year. These reductions were partly offset by an investment in facilities in New Zealand to support a new contract with a key customer in the dairy sector, to be commissioned in FY19, and investments in efficiency related projects. Payments for purchase of businesses and subsidiaries, net of cash acquired, in FY18 was $127.9 million. This includes $122.4 million for the Asia acquisition (representing provisional cash consideration paid of $142.5 million less $20.1 million cash acquired) and $10.3 million for the acquisition of ECP Industries, less final adjustments relating to prior year acquisitions of $4.8 million. Other key cash flows during the year were the receipt of net proceeds from the share issues completed in the first half of the year of $172.6 million and ordinary dividend payments of $72.6 million. 16 Review of operations Pact Australia Pact International Pact Australia comprises the Group’s operations in Australia where it has operating sites in New South Wales, Victoria, Tasmania, Queensland and Western Australia. Pact International comprises the Group’s operations in New Zealand, china, the Philippines, Indonesia, Singapore, Thailand, South Korea, India, Nepal and Hong Kong. Pact Australia contributed 76% of the Group’s total sales revenue in Pact International contributed 24% of the Group’s total sales revenue the year ended 30 June 2018. in the year ended 30 June 2018. $’000 Sales revenue EBIT2 EBIT margin % 2018 1,279,880 103,421 8.1% 2017 1,117,829 99,529 8.9% Change % 14.5% 3.9% (0.8%) $’000 Sales revenue EBIT2 EBIT margin % 2018 394,308 61,085 15.5% 2017 357,507 69,887 19.5% Change % 10.3% (12.6%) (4.0%) Pact Australia achieved growth in both sales revenue and EBIT in Pact International delivered sales revenue growth in FY18, whilst FY18. EBIT and margins were lower than the pcp. Sales revenue of $1,279.9 million was up $162.1 million or 14.5% Sales revenue of $394.3 million was up $36.8 million, or 10.3%, compared to the pcp. Sales benefitted from acquisition impacts of compared to the pcp. The Asia acquisition, completed in February $64.1 million relating to the acquisition of ECP Industries in FY18 2018, contributed $66.6 million. Excluding the acquisition, sales and the full year effect of the acquisitions of Pascoe’s and APM. were $29.8 million lower than the pcp, partly due to adverse foreign Excluding acquisitions, underlying sales in the Australian segment exchange translation impacts of $10 million. were $98.0 million higher than the pcp, driven by crate pooling Underlying sales were lower than the pcp due mostly to lower revenues and organic growth in the contract manufacturing, demand in the materials handling sector, impacted by the timing sustainability and infrastructure sectors. Rigid packaging volumes were down. Improved demand in the health and wellness sector of government projects in New Zealand, and lower industrial demand in China. Rigid packaging volumes were generally flat. Sales was offset by lower volumes in the dairy, food and beverage sector, were also adversely impacted by lower pricing following contract adversely impacted by a major customer plant closure, and lower extensions. sales into the agricultural sector due to drought conditions. Materials handling volumes, excluding crate pooling, were down, due to raw material shortages following a major supplier plant outage in May and June. EBIT of $61.1 million was $8.8 million or 12.6% lower than the pcp, with the Asia acquisition delivering an incremental $3.0 million to EBIT. Earnings were bolstered by the realisation of benefits from operational excellence programs and strong controllable cost EBIT of $103.4 million was up $3.9 million or 3.9% compared to the management, but these benefits were more than offset by the pcp. Benefits from stronger volumes and efficiency improvements short-term time lag in recovering raw material input costs, the delivered through operational excellence programs were partly impact of the lower volumes in China and New Zealand Government offset by lower pricing following contract extensions in the prior projects, lower pricing following contract extensions in the prior year year, higher costs to serve in the rigid packaging businesses, and and unfavourable foreign exchange impacts. unrecovered energy and raw material costs. Disciplined pricing actions partially mitigated the impact of significantly higher raw material input costs in the period, but inherent time lags between raw material cost movements and pricing actions adversely impacted earnings following a rapid increase in input prices in the second half. As anticipated only around 25% of energy cost increases could be recovered in the market through pricing. The EBIT margin of 8.1% was down 0.8% on the pcp. The EBIT margin of 15.5% was down 4.0% on the pcp. PAC T 2018 A NNUA L R EP OR T 17 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONOn 15 August 2018, the Group announced that it had entered into an agreement to acquire TIC Retail Accessories Pty Ltd (TIC), a division of the TIC group of companies, for $122.5 million. TIC is a closed loop plastic garment hanger and accessories re-use business. In addition, the agreement contains provisions for earn-out payments of up to $30 million, payable on the delivery of specific financial hurdles for the 2019 and 2020 financial years. Completion is expected to occur on 1 October 2018, subject to customary conditions. Other Events of Significance Acquisitions On 30 November 2017, the Group purchased the net assets of ECP Industries Pty Ltd, a West Australian based intermediate bulk container (IBC) and bulk liquid tank container reconditioning business for a consideration of $10.7 million. The acquisition provides the Group with the capability to offer national coverage for these services and opportunities for further growth in the sustainability sector. On 15 February 2018, the Group acquired shares and assets in CSI International (CSI) and Graham Packaging Group (GPC) and completed the acquisition of Closure Systems International Nepal on 25 May 2018. For the total acquisition the Group recognised gross consideration of $149.3 million. CSI is a leader in plastic closure design, manufacturing, and high-speed capping equipment and application systems. GPC produces plastic bottles via injection blow moulding and extrusion blow moulding. The acquisition complements Pact's existing capability and customer footprint in Asia, and includes seven manufacturing sites across China, South Korea, Nepal, India and the Philippines. 18 Overview of business Strategy A key element of the Group’s strategy is to maximise long- term shareholder value. The Group seeks to deliver long- term value through focus on three core areas: • Organic Growth — by protecting our core and growing organically over the longer-term; • Efficiency — by embedding a culture of operational excellence and targeting the lowest cash cost of production; and • M&A — growth through disciplined, accretive M&A in existing sectors and close adjacencies. Mergers & Acquisitions Growth through a disciplined approach to M&A PACT STRATEGY Organic Growth Protecting our core and growing organically Efficiencies Operational excellence and efficiency Organic Growth The Group’s core business benefits from: • leading sector positions; • a diverse customer base with long-term relationships; • a highly diversified product portfolio; • broad end-market reach; • an extensive manufacturing and supply network; and • world-class innovation. Key to the Group’s ability to grow organically is its ability to leverage these differentiating characteristics to create a The Group will continue to review all areas of the business for efficiency opportunities in the pursuit of operational excellence. In-line with this element of the Group’s strategy, the Board has endorsed a broad program of work targeting transformational change through an organisational redesign of the Group’s rigid packaging network. The program is intended to comprise eight interdependent workstreams targeting the creation of a single integrated supply network. Initial phases of this program were implemented in FY18 resulting in the closures of two plants and the implementation of a more focussed management structure aligned to an integrated supply network. The remaining workstreams remain subject to further financial and stakeholder analysis. competitive advantage. A core focus of the Group is innovation. Pact is widely recognised for our dedication to supplying some M&A of the most innovative products in the market, supported by our in-house innovation capability and extensive global licencing arrangements. The Group’s commitment to innovation has been recognised through multiple industry and customer awards. Pact are the only packaging company to have achieved recognition for six consecutive years on the Australian Financial Review’s (AFR) prestigious Most Innovative Companies List, from 2013 to 2018. During FY18 the Group delivered organic growth through the successful commissioning of the new crate pooling business, through strong demand in key contract manufacturing segments The Group has a track record of success in identifying value accretive acquisition opportunities, executing transactions in a disciplined and systematic manner, and delivering cost synergies and operational efficiencies through integration. Acquisitions have driven earnings growth and enabled the Group to expand and diversify its product and customer portfolio. All M&A opportunities must meet strict assessment and evaluation criteria. Opportunities must be low risk and aligned with the Group’s core sectors or close adjacencies and expected returns must meet a minimum financial hurdle of 20% return on investment and with a stable rigid packaging portfolio, supported by contract in year three. extensions in the prior year. Efficiency The Group is committed to delivering operational excellence and the lowest cost of production. In the period, the Group continued to progress the implementation of its operational excellence programs which focus on the adoption of lean manufacturing techniques across the Group’s manufacturing footprint. The program has delivered earnings benefits in-line with expectations in FY18, mitigating higher input costs, and is expected to drive further improvements in FY19 and beyond. Discipline in deal execution is provided by a centrally managed acquisition and integration process. A strict timeline for transition and the centralisation of common operational and back-office functions ensures cost synergies and efficiencies are realised early. The acquisition of CSI Asia (excluding Japan) and Graham Packaging (China) has materially enhanced the Group’s Asian footprint and customer diversity, providing the Group with a broader range of opportunities to drive growth in the region. In addition, the acquisition of TIC will expand the Group’s asset pooling capability and geographic reach in the materials handling sector. PAC T 2018 A NNUA L R EP OR T 19 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONbusiness Risks There are various internal and external risks that may have a material impact on the Group’s future financial performance and economic sustainability. The Group makes every effort to identify material risks and to manage these effectively. Material financial risks, not in order of significance, are listed below. Details of the Group’s environmental and social sustainability risks are reported in the Group’s Sustainability Review. Customer Risks Customers are fundamental to the success of the business and, in recognition of this, Pact invests in the quality of its relationships with key material customers, and in producing products to customers' required specification and standard. The loss of key material customers, a reduction in their demand for Pact’s products or a claim for non-performance can have a negative effect on the future financial performance of the Group. People Risks Future financial and operational performance of the Group is significantly dependant on the performance and retention of key personnel, in particular Senior Management. The unplanned or unexpected loss of key personnel, or the inability to attract and retain high performing individuals to the business may adversely impact the Group’s future financial performance. In line with the manufacturing industry, Pact has an exposure to health and safety management incidents in the manufacturing operations. Failure to comply with health and safety legislation and industry good practice may result in harm to a person or persons, which may lead to negative operational, reputational and financial impacts. Competitor Risks Consumer Preferences Changes in consumer preference for Pact’s products or adverse Pact operates in a highly competitive environment due to factors activities in key industry sectors which Pact and its customers including actions by existing or new competitors, price, product service may be influenced by various factors. These industry selection and quality, manufacturing capability, innovation and sectors include consumer goods (eg. food, dairy, beverages, the ability to provide the customer with an appropriate range of personal care and other household consumables) and industrial products and services in a timely manner. Any deterioration in the (eg. surface coatings, petrochemical, agriculture and chemicals) Group's competitive position as a result of actions from competitors industry sectors. Factors which may influence these sectors include may result in a decline in sales revenue and margins, and an climate conditions, seasonality of foods, an increased focus in adverse effect on the Group's future financial performance. Australian and New Zealand supermarket chains on private brands, and reputation of products, substrates (eg. plastics, recycled and recyclable materials) or technology in the wider industry sector. Demand for Pact's products may materially be affected by any of these factors which could have an adverse effect on the Group's future financial performance. 20 Foreign Exchange Rates Pact’s financial reports are prepared in Australian dollars. However, a substantial proportion of Pact’s sales revenue, expenditures and cashflows are generated in, and assets and liabilities are denominated in, New Zealand dollars. Pact is also exposed to a range of other currencies including the US dollar, Chinese yuan, the Philippines peso, the Indonesian rupiah, the Thai baht, the South Korean won, the Indian rupee, the Nepalese rupee and the Hong Kong dollar in relation to Pact’s business operations. Any depreciation of the Australian dollar and adverse movement in exchange rates would have an adverse effect on the Group's future financial performance. Supply Chain The ability for the supply chain to meet the Group’s requirements including the sourcing of raw materials, is reliant on key relationships with suppliers. The price and availability of raw materials, input costs, and future consolidation in industry sectors could result in a decrease in the number of suppliers or alternative supply sources available to Pact. Additionally, Pact may not always be able to pass on changes in input prices to its customers. Any of these factors may have an adverse effect on the Group's future financial performance. Interruption to Operations Pact operates across a diverse geographical footprint and situations may arise in which sites are not able to operate. Factors include emergency situations such as natural disasters, failure of information technology systems or security, or industrial disputes. Any of these factors may lead to disruptions in production or increase in costs and may have an adverse effect on the Group’s financial performance. Compliance Risks Pact is required to comply with a range of laws and regulations, and those of particular significance to Pact are in the areas of employment, including modern slavery, work health and safety, property, environmental, competition, anti-bribery and corruption, customs and international trade, taxation and corporations. Strategic Acquisitions Pact’s strong growth over time has been aided by the acquisition of numerous businesses and assets. This growth has placed, and may continue to place, significant demands on management, information reporting systems and financial and internal control systems. Effective management of Pact’s growth, including identification of suitable acquisition candidates and effective management of integration costs will be required on an ongoing basis. If this does not occur then there may be an adverse effect on the Group's future financial performance. Large capital projects are also scrutinised to ensure the associated risks are appropriately managed to ensure return on capital investment and project milestones are achieved. Footnotes This report includes certain non-IFRS financial information which have not been subject to audit by the Company’s external auditor. This information is used by Pact, the investment community and Pact’s Australian peers with similar business portfolios. Pact uses this information for its internal management reporting as it better reflects what Pact considers to be its underlying performance. (1) EBITDA refers to EBITDA before significant items and is a non-IFRS financial measure which is calculated as earnings before significant items, finance costs (net of interest revenue), tax, depreciation and amortisation. (2) EBIT refers to EBIT before significant items and is a non-IFRS financial measure which is calculated as earnings before significant items, finance costs (net of interest revenue) and tax. (3) NPAT refers to NPAT before significant items and is a non-IFRS financial measure which is calculated as net profit after tax before significant items. (4) Gearing is a non-IFRS financial measures which is calculated as net debt divided by rolling 12 months EBITDA. Net debt is calculated as interest bearing liabilities less cash and cash equivalents (5) Interest cover is a non-IFRS financial measures which is calculated as rolling 12 months EBITDA divided by rolling 12 months net interest expense. (6) Net debt is a non-IFRS financial measure and is calculated as interest bearing liabilities less cash and cash equivalents. PAC T 2018 A NNUA L R EP OR T 21 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONGROWTH INITIATIVES Pact has grown from a rigid packaging business generating $200 million in sales revenue in 2002 to a diversified provider of speciality packaging and materials handling solutions generating almost $1.7 billion in sales revenue in FY18. In the last two years in particular, the Group has diversified its product and service portfolio through transformational investments in areas offering attractive growth opportunities. We have grown our contract manufacturing portfolio through the acquisitions of Australian Pharmaceutical Manufacturers (APM) and Pascoe’s and have enhanced our materials handling platform, establishing leading closed loop pooling positions in Australia and New Zealand for the supply of returnable produce crates. During FY18 the Group continued to pursue transformational growth initiatives, including: • the completion of a strategic acquisition in Asia, enhancing the Group’s geographical footprint and providing a strong platform for growth in the region; • further investment in Australia in the materials handling and sustainability sectors through the acquisition of ECP Industries, an intermediate bulk container (IBC) and tank reconditioning business; • an agreement to acquire TIC Retail Accessories, providing an opportunity to further leverage the Group’s demonstrated capability in asset pooling and plastics manufacturing; and • a program to redesign our rigid packaging network, providing opportunities to improve productivity, utilisation and quality and to significantly reduce costs. 22 Expanding in Asia In February 2018 the Group completed the acquisition of the Asian packaging operations (excluding Japan) of Closure Systems International (CSI)1 and the Guangzhou China facility of Graham Packaging Company (GPC). This acquisition has expanded our footprint in Asia and significantly enhances customer diversity, manufacturing, technology and management capability in the region. Other International 22% Australia 75% Other International 17% Australia 70% Asia 3% 2013 Revenue by Geography Asia 13% Today Revenue1 by Geography Investment highlights Leading positions Strong, long- Multiple Delivers a step Strategic Pact’s largest in regions with term customer opportunities for change in our acquisition in acquisition since positive market relationships with future growth, customer base and complementary core IPO — aligning dynamics large global FMCG including: scale in the Asia competencies with our strategy customers and — Provides a greater region — from ~$50 emerging local Asian platform for million revenue to manufacturers expansion ~$200 million p.a. to grow via disciplined M&A — New closures opportunities in water an dairy sectors 1 Assumes full year contribution from Asia Acquisition and ECP Industries. PAC T 2018 A NNUA L R EP OR T 23 PAC T 2018 A NNUA L R EP OR T 23 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONGrowing our Asset Pooling Platform • TIC RA’s re-use program is a global closed loop supply chain In August 2017 the Group successfully commissioned, on schedule, our new crate pooling business in Australia supporting fresh produce supply to Woolworths. This has been the largest organic growth initiative undertaken by the Group to date, complements existing which supplies plastic garment hangers and accessories to garment manufacturers. The hangers and accessories are collected from retail stores after the sale of the garments, sorted and then distributed back to the garment manufacturers crate pooling operations in Australia and New Zealand and provides for re-use a significant opportunity to leverage the platform for future growth • The re-use program provides customers with a sustainable opportunities. TIC Retail Accessories In August 2018 the Group announced the acquisition of TIC Retail Accessories, a provider of innovative and sustainable closed loop plastic garment hanger and accessories re-use services. This strategic acquisition expands the Group’s closed loop asset pooling capability, adds scale to our portfolio and further enhances our Asian platform. It is also strongly aligned with the Group’s commitment to provide sustainable packaging and supply chain solutions to our customers. Overview of TIC RA • TIC RA, established in 1989, transformed the garment hanger industry, eliminating significant waste from single-use plastic hangers and accessories by pioneering a closed loop re-use program. TIC RA is now the leading supplier of re-use services in Australia supply chain solution which significantly reduces waste, with re- use rates of up to 80% • Attractive client portfolio includes major retail brands and leading department stores in Australia, New Zealand, UK and USA supplied through garment manufacturers located largely in Asia. • Strong global team of over 800 employees supporting sales, manufacturing, sorting and warehousing • FY18 sales of $95 million Today Pact enjoys leading positions not only in the supply of rigid packaging, but also in materials handling, sustainability solutions and contract manufacturing services across Australia, New Zealand and Asia. The acquisition of TIC will complement our offering. 24 Transforming our Rigid Packaging Network Pact’s business today is of greater scale than it has ever been. Rapid growth through acquisition has created a complex rigid packaging distribution network in Australia. The Group is assessing opportunities for further transformational changes through an organisational redesign of this network. The first phase of this program was implemented in FY18, resulting in the closures of two manufacturing facilities and the realignment of management structures. Further workstreams are subject to financial and operational analysis. Investment and Returns Potential • Investment payback hurdle of <3.5 years • Potential ongoing cash benefits of up to $50 million annually, subject to financial and operational analysis T H E F U T U R E : A N I N T E G R A T E D S U P P L Y N E T W O R K T H E O P P O R T U N I T Y • Reduced manufacturing footprint • Improved operations management and higher asset • • Integrated sales and operations planning Increased automation • Focussed centre of excellence • Import supply chain that leverages the Asian Acquisition • A portfolio strategy driving future investment • Period to achieve future state of 3–5 years utilisation • • Improved productivity Improved quality • Lower freight costs • Improved inventory control and reduced warehousing costs • Improved training and safety PAC T 2018 A NNUA L R EP OR T 25 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONINNOVATION In 2018 Pact Group was honoured to be recognised as one of Australasia’s Most Innovative Companies for the sixth consecutive year. The prestigious annual list, published by The Australian Financial Review, is based on a rigorous assessment process. More than a thousand companies enter these awards every year and Pact is honoured to be the only packaging company, and one of only three companies in all of Australasia to make the prestigious list for the past six consecutive years. Pact has invested in two dedicated Innovation Centres that comprise cross-functional teams from industrial designers and engineers, to marketing and sustainability specialists. They come together with the sole purpose of challenging conventional thinking and identify opportunities that drive transformational change for our customers. Awards Our five strategic values are the backbone of our business and inform all our decisions and the way we behave: • We walk in our customers’ shoes to serve them better • We are committed to sustainability and providing an honest, safe and respectful environment • We are passionate about driving results • We pursue opportunities for transformational change • We act with speed and purpose We’re very proud that throughout the past year we’ve received awards and recognition for the work that we’ve been done to reflect these priorities. corporate Industry customer Australian Financial Reviews (AFR’s) Most Innovative Companies Lists — 2018, 2017, 2016, 2015, 2014, 2013 Wealth & Finance International Global Excellence Awards — 2018 Most Innovative Packaging Company of the Year Acquisition International Leading Advisor Awards 2018 — Leading Creative Packaging Solutions Provider of the Year — Australia 2018 Worldstar Winner — Moisturelock rPET Meat Tray 2018 Supplier of the Year — Blackmores 2018 Product of the Year — ALDI Almat Laundry Liquid (Laundry) 2018 Product of the Year — ALDI Power Force Pro Bath and Shower Cleaner (Household Cleaning) 2018 Product of the Year ALDI Lacura Naturals Verde Hand Wash (Hand and Body Corporate USA Today Annual Awards — 2018 Company of the Year (Manufacturing) Care) Australia 26 E c N A N R E V O G PAC T 2018 A NNUA L R EP OR T 27 PAC T 2018 A NNUA L R EP OR T 27 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONSUSTAINAbILITY Pact’s vision defines our behaviour, shapes our culture, and guides the way we do business. Sustainability is a central part of our vision; to enrich lives every day through sustainable packaging and manufacturing solutions. We recognise that our business operations impact many people, including our employees, customers, shareholders, suppliers, and the broader communities in which we operate. Our annual Sustainability Review sets out our performance across a range of indicators covering the environmental, social, people and governance aspects of our business can be access from: https://pactgroup.com.au/sustainability/ cORPORATE GOVERNANcE The board recognises the importance of good corporate governance and its role in ensuring the accountability of the board and management to shareholders. The Board is concerned to ensure that the Group is properly managed to protect and enhance shareholder interests and that the Company, its Directors, officers, and employees operate in an appropriate environment of corporate governance. The Board has adopted a corporate governance framework comprising principles and policies that are consistent with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (third edition) (ASX Recommendations). The Corporate Governance Statement outlines the key aspects of the Group’s corporate governance framework and is available on the Company’s website at www.pactgroup.com. au/investors/corporate-governance/corporate-statement. The Board considers that the Company’s corporate governance framework and practices have complied with the ASX recommendations for the financial year, except as otherwise detailed in the Corporate Governance Statement. 28 S T R O P E R L A I c N A N I F PAC T 2018 A NNUA L R EP OR T 29 PAC T 2018 A NNUA L R EP OR T 29 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION FINANcIAL REPORT consolidated Financial Report For the year ended 30 June 2018 Introduction This is the Consolidated Financial Report of Pact Group Holdings Ltd (“Pact” or the “Company”) and its subsidiaries (together referred to as the “Group”) and including the Group’s jointly controlled entities at the end of, or during the year ended 30 June 2018. This Consolidated Financial Report was issued in accordance with a resolution of the Directors on 15 August 2018. Information is only included in the Consolidated Financial Report to the extent the Directors consider it material and relevant to the understanding of the financial statements. A disclosure is considered material and relevant if, for example: • • the dollar amount is significant in size and/or by nature; the Group’s results cannot be understood without the specific disclosure; • it is critical to allow a user to understand the impact of significant changes in the Group’s business during the year; and • it relates to an aspect of the Group’s operations that is important to its future performance. Preparing this financial report requires management to make a number of judgements, estimates and assumptions to apply the Group’s accounting policies. Actual results may differ from these judgements and estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods. Key judgements and estimates, which are material to this report, are highlighted in the following notes: • Note 1.2 Taxation • Note 2.1 Business acquired • Note 2.2 Control and significant influence • Note 3.2 Estimation of useful lives of assets • Note 3.2 Recoverability of property, plant and equipment • Note 3.2 Impairment of goodwill and other intangibles • Note 3.4 Business restructuring • Note 5.1 Defined benefit plans To assist in identifying key accounting estimates and judgements, they have been highlighted as follows: contents Directors' Report Auditor’s Independence Declaration Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Section 1: Our Performance 1.1 Group results 1.2 Taxation 1.3 Dividends Section 2: Our Operational Footprint 2.1 Businesses acquired 2.2 Controlled entities 2.3 Associates and joint ventures Section 3: Our Operating Assets 3.1 Working capital 3.2 Non-current assets 3.3 Commitments and contingencies 3.4 Other provisions Section 4: Our Capital Structure 4.1 Net debt 4.2 Contributed equity and reserves 4.3 Managing our financial risks Section 5: Remunerating Our People 5.1 Defined benefit plans 5.2 5.3 5.4 Employee benefits expenses and provisions Share based payments Key management personnel Section 6: Other Disclosures 6.1 Basis of preparation 6.2 Other gains/(losses) 6.3 Pact Group Holdings Ltd — Parent entity financial statements summary 6.4 Auditors remuneration 6.5 Deed of Cross Guarantee 6.6 Segment assets and segment liabilities 6.7 Revenue from services rendered 6.8 Geographic sales 6.9 Subsequent events Directors’ Declaration Independent Auditor’s Report 31 49 50 51 52 53 54 56 57 58 60 62 64 66 71 72 73 75 76 82 84 85 85 87 90 90 91 91 93 93 93 93 94 95 30 DIREcTORS' REPORT The Directors present their report on the consolidated entity consisting of Pact Group Holdings Ltd (“Pact” or the “Company”) and the entities it controlled (collectively the “Group”) at the end of, or during, the year ended 30 June 2018. DIREcTORS The following persons were Directors of the Company from their date of appointment up to the date of this report*: Non-Executive Raphael Geminder Non-Executive Chairman Member of the Board since 19 October 2010 Member of the Nomination and Remuneration Committee Raphael founded Pact in 2002. Prior to this, Raphael was the co-founder and Chairman of Visy Recycling, growing it into the largest recycling company in Australia. Raphael was appointed Victoria’s first Honorary Consul to the Republic of South Africa in July 2006. He also holds a number of other advisory and Board positions. Raphael holds a Masters of Business Administration in Finance from Syracuse University, New York. Other current directorships Director of several private companies. Lyndsey Cattermole AM Independent Non-Executive Director Member of the Board since 26 November 2013 Member of the Audit, Business Risk and Compliance Committee Member of the Nomination and Remuneration Committee Lyndsey founded Aspect Computing Pty Limited and remained as Managing Director from 1974 to 2001, before selling the business to KAZ Group Limited, where she served as a Director from 2001 to 2004. Lyndsey has held many board and membership positions including with the Committee for Melbourne, the Prime Minister's Science and Engineering Council, the Australian Information Industries Association, the Victorian Premier’s Round Table and the Women’s and Children’s Health Care Network. Lyndsey holds a Bachelor of Science from the University of Melbourne and is a Fellow of the Australian Computer Society. Other current directorships Non-Executive Director of Melbourne Rebels Rugby Union Ltd, and the Florey Institute of Neuroscience and Mental Health and several private companies. Former listed company directorships in last three years Non-Executive Director of Treasury Wine Estates Limited (2011–2017), Tatts Group Limited (2005–2017). * The date of this report is August 15 2018. Since the date of this report Mr Malcolm Bundey has tendered his resignation and will depart the Company after a period of leave. The Board has appointed Mr Raphael Geminder as Executive Chairman effective from 9 September 2018 until such time as a new CEO has been appointed. PAC T 2018 A NNUA L R EP OR T 31 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report Ray Horsburgh AM Independent Non-Executive Director Member of the Board since 5 October 2015 Member of the Audit, Business Risk and Compliance Committee Ray has extensive management experience in the glass and steel manufacturing sectors and in mergers and acquisitions. He was Managing Director and Chief Executive Officer of Smorgon Steel Group Limited (1993–2007) and held various senior roles in packaging company ACI Limited including Chief Executive Officer of ACI Glass Group. Ray has a Bachelor of Chemical Engineering, Hon DUniv, is a fellow of the Australian Institute of Company Directors and a Fellow of the Institute of Engineers Australia. Other current directorships Ray is currently the Chairman of AFL Victoria. He is also a Director of the Ricky Ponting Foundation. Former listed company directorships in last three years Chairman of Calibre Global Limited (2012–2015), Chairman of Toll Holdings Limited (2007–2016). Peter Margin Independent Non-Executive Director Member of the Board since 26 November 2013 Chairman of the Audit, Business Risk and Compliance Committee Member of the Nomination and Remuneration Committee Peter has many years of leadership experience in major Australian and international food companies. He is currently the Executive Chairman of Asahi Beverages ANZ, and previously was Chief Executive Officer of Goodman Fielder Limited. Prior to that Peter was Chief Executive Officer and Chief Operating Officer of National Foods Limited. Peter has also held senior management roles in Simplot Australia Limited, Pacific Brands Limited (formerly known as Pacific Dunlop Limited), East Asiatic Company and HJ Heinz Company Australia Limited. Peter holds a Bachelor of Science from the University of New South Wales and a Master of Business Administration from Monash University. Other current directorships Non-Executive Director of Bega Cheese Limited, Nufarm Limited and Costa Group Holdings Limited. Former listed company directorships in last three years Non-Executive Director of Ricegrowers Limited (2012–2015), PMP Limited (retired August 2016), Huon Aquaculture Limited (retired August 2016). 32 Directors’ Report Jonathan Ling Independent Non-Executive Director Member of the Board since 28 April 2014 Chairman of the Nomination and Remuneration Committee Jonathan has extensive experience in complex manufacturing businesses. Jonathan was the Chief Executive Officer and Managing Director of GUD Holdings Limited, and has previously held leadership roles with Fletcher Building Limited, Nylex, Visy and Pacifica. He was the Chief Executive Officer and Managing Director of Fletcher Building Limited (2006–2012). Jonathan has a Bachelor of Engineering (Mechanical) from the University of Melbourne and a Masters of Business Administration from the Royal Melbourne Institute of Technology. Other current directorships Nil. Executive Malcolm Bundey Former Managing Director and Chief Executive Officer Member of the Board from 1 December 2015 to 9 September 2018. Malcolm was the Managing Director and Chief Executive Officer of Pact. Malcolm resigned from the Board effective 9 September 2018. He joined Pact in December 2015. Malcolm previously held several senior executive leadership positions for The Rank Group (a privately owned NZ group), based in both Australia and the USA. After joining them as CFO of Goodman Fielder in 2003, and then transferring to the United States as a Company Executive in 2007, he became the President and CEO of Evergreen Packaging, a global paper and packaging company. In 2011 he took on the concurrent roles of President and CEO of Closure System International (CSI), a global closure packaging business and Graham Packaging, a global rigid packaging and machinery business. Prior to this Malcolm was a partner at Deloitte, where he worked from 1987 to 2003. Other current directorships No other external directorships company Secretary Jonathon West Company Secretary Jonathon West was appointed to the positions of General Counsel and Company Secretary as well as Head of Corporate Development of Pact on 1 June 2016. Prior to this appointment, Jonathon was most recently at Goodman Fielder Limited where he held a variety of roles over a 10 year period, including Group Strategy and Corporate Development Officer, Group General Counsel and Company Secretary and Group Commercial Director. Prior to that Jonathon worked in both private practice and industry in Australia and the UK, including with Burns Philp Limited, Sportal.com, AOL Europe, Linklaters and Herbert Smith Freehills. Jonathon holds Bachelor of Laws (Honours) and Bachelor of Science degrees from the University of Melbourne. PAC T 2018 A NNUA L R EP OR T 33 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report Directors’ shareholding As at the date of this report, the relevant interests of the Directors in the shares of the Company or a related body corporate were as follows: Raphael Geminder Lyndsey Cattermole Peter Margin Jonathan Ling Ray Horsburgh Malcolm Bundey Directors’ meetings Relevant Interest in Ordinary Shares 131,668,287 276,705 29,436 20,052 42,261 — The table below shows the number of Directors’ meetings (including meetings of Board committees), and the number of meetings attended by each Director in their capacity as a member during the year: Raphael Geminder Lyndsey Cattermole Peter Margin Jonathan Ling Ray Horsburgh Malcolm Bundey Directors’ Meetings Audit, Business Risk and Compliance Committee Nomination and Remuneration Committee Meetings held 11 11 11 11 11 11 Meetings attended 11 11 11 11 9 11 Meetings held NM 6 6 NM 6 NM Meetings attended NM 6 6 NM 6 NM Meetings held 4 4 4 4 NM NM Meetings attended 4 4 4 4 NM NM NM — Not a member of the relevant committee Principal activities Pact is a leading provider of specialty packaging solutions in Australasia, servicing both consumer and industrial sectors. Pact specialises in the manufacture and supply of rigid plastic and metal packaging, materials handling solutions, contract manufacturing services, recycling and sustainability services. 34 Directors’ Report Operating and financial review A review of the operations of the Group during the year and of the results of those operations is contained on pages 12 to 21 of this Annual Report. Dividends On 15 August 2018, the Directors determined to pay a final dividend of 11.5 cents per share partially franked to 65%. The dividend is payable on 4 October 2018. The record date for entitlement to the dividend is 23 August 2018. The table below shows dividends paid (or payable) during the year ended 30 June 2018. Dividends current year to 30 June 2018 Final Dividend (per ordinary share) Interim Dividend (per ordinary share) Prior Year to 30 June 2017 Final Dividend (per ordinary share) Interim Dividend (per ordinary share) Amount per security Franked amount per security Unfranked amount per security sourced from the conduit foreign income account Date paid / payable 11.50 cents 11.50 cents 7.48 cents 7.48 cents 4.02 cents 4.02 cents 4 October 2018 5 April 2018 11.50 cents 11.50 cents 7.48 cents 7.48 cents 4.02 cents 4.02 cents 5 October 2017 5 April 2017 The dividend pay out ratio of the Company’s net profit after tax before significant items attributable to shareholders for the 12 months ended 30 June 2018 is 81% (2017 69%). Other events of significance Please refer to the Review of Operations and Financial Performance in the ASX announcement on 15 August 2018. Significant events after balance date On 15 August 2018 the Group announced it had entered into an agreement to acquire TIC Retail Accessories Pty Ltd (TIC), a division of the TIC group of companies, for $122.5 million. TIC is a closed loop plastic garment hanger and accessories reuse business. In addition, the agreement contains provisions for earn-out payments of up to $30 million, payable on the delivery of specific financial hurdles for the 2019 and 2020 financial years. Completion is expected to occur on 1 October 2018, subject to customary conditions. Other than the matter mentioned above, in the opinion of the Directors, there have been no other material matters or circumstances which have arisen between 30 June 2018 and the date of this report that have significantly affected or may significantly affect the operations of the Group, the results of those operations and the state of affairs of the Group in subsequent financial periods. Workplace health, safety and environmental regulation The Group operates under an integrated Workplace Health, Safety and Environment (WHSE) Management System, with a goal of Towards Zero Harm to both people and the planet. The system is aligned with ISO 14001 and operates under an Environmental Policy and a Workplace Health and Safety Policy. The system is fundamental to achieving compliance with WHSE regulations in all jurisdictions in which we operate and is implemented at all of our sites. Where applicable, licences and consents are in place in respect of each site within the Group. An interactive database is used to ensure compliance and completion of all required actions. On occasions, the Group receives notices from relevant authorities pursuant to local WHSE legislation and in relation to the Group’s WHSE licences and consents. The Group takes all notices seriously, conducting a thorough investigation into the cause and ensures that there is no reoccurrence. Pact works with the appropriate authorities to address any requirements and to proactively manage any obligations. The Group is also subject to the reporting and compliance requirements of the Australian National Greenhouse and Energy Reporting Act 2007 (Cth). The National Greenhouse and Energy Reporting Act 2007 requires that Pact reports its annual greenhouse gas emissions and energy use. Pact has submitted all annual reports, and is due to submit its next report in September 2018. PAC T 2018 A NNUA L R EP OR T 35 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report Share options and rights Refer to the Remuneration Report (Section 3) for further details on share rights on issue. There are no share options on issue in the Company. Indemnification and insurance of officers The Company’s Constitution requires the Company to indemnify current and former Directors, alternate Directors, executive officers and such other officers of the Company as the Board determines on a full indemnity basis and to the full extent permitted by law against all liabilities incurred as an officer of the Group. Further, the Company’s Constitution permits the Company to maintain and pay insurance premiums for Director and Officer liability insurance, to the extent permitted by law. Consistent with (and in addition to) the provisions in the Company’s Constitution outlined above, the Company has also entered into deeds of access, indemnity and insurance with all Directors of the Company and the Company Secretary which provide indemnities against losses incurred in their role as Directors or Company Secretary, subject to certain exclusions, including to the extent that such indemnity is prohibited by the Corporations Act 2001 (the Act) or any other applicable law. In addition, a wholly owned subsidiary of the Company has entered into deeds of indemnity in 2015 for five years with its then current and former Directors and Secretaries involved in a transaction which was being contemplated at the time, to provide indemnities against losses incurred in the event of breaches of their obligations under confidentiality deeds entered into by them for the purpose of such transaction, and in the course of their employment, subject to certain exclusions including to the extent that such indemnity is prohibited by the Act. The deeds stipulate that the Company will meet the full amount of any such liabilities, costs and expenses (including legal fees). During the financial year the Company paid insurance premiums for a Director's and officer's liability insurance contract that provides cover for the current and former Directors, alternate Directors, secretaries, executive officers and officers of the Group. The Directors have not included details of the nature of the liabilities covered in this contract or the amount of the premium paid, as disclosure is prohibited under the terms of the contract. Indemnification of auditors Pursuant to the terms of the Company’s standard engagement letter with Ernst & Young (EY), it indemnifies EY against all claims by third parties and resulting liabilities, losses, damages, costs and expenses (including reasonable legal costs) arising out of, or relating to, the services provided by EY or a breach of the engagement letter. The indemnity does not apply in respect of any matters finally determined to have resulted from EY’s negligent, wrongful or wilful acts or omissions nor to the extent prohibited by applicable law including the Act. Proceedings on behalf of the company No person has applied to the court under section 237 of the Act for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Company with the leave of the court under section 237 of the Act. 36 Directors’ Report Non-audit services During the year, EY, the Company’s auditor, performed other assignments in addition to their statutory audit responsibilities. Details of the amounts paid or payable to EY for non-audit services provided in respect of the Group during the year are as follows: $'000 Tax services Other assurance related services Total 2018 356 302 658 2017 538 573 1,111 The Board has considered the position and, in accordance with the advice received from the Audit, Business Risk and Compliance Committee, is satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Act. The Directors are satisfied that the provision of non-audit services by EY, given the amounts paid and the type of work undertaken, did not compromise the auditor independence requirements of the Act for the following reasons: • all non-audit services have been reviewed by the Audit, Business Risk and Compliance Committee to ensure they do not impact the impartiality and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in APES 110: Code of Ethics for Professional Accountants, including reviewing or auditing the auditor's own work, acting in a management or decision-making capacity for the Group, acting as advocate for the Group or jointly sharing economic risk and rewards. PAC T 2018 A NNUA L R EP OR T 37 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report — Remuneration Report Remuneration report (audited) This Remuneration Report for the year ended 30 June 2018 outlines the remuneration arrangements of the Group in accordance with the requirements of the Act and its regulations. This information has been audited as required by section 308(3C) of the Act. The Remuneration Report is presented under the following sections: 1. Introduction 2. Governance 3. Executive remuneration arrangements 4. Executive remuneration outcomes for 2018 5. Executive KMP contracts 6. Non-Executive Directors’ remuneration arrangements 7. Equity holdings of KMP 8. Related party transactions with KMP 1. Introduction The Remuneration Report details the remuneration arrangements for key management personnel (KMP) who are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any director (whether executive or otherwise) of the Company. For the purposes of this report, the term KMP includes all non-executive Directors of the Board, the Managing Director and Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) of the Company and the Group. Key Management Personnel Name Non-Executive Directors (NEDs) Raphael Geminder Lyndsey Cattermole Peter Margin Jonathan Ling Ray Horsburgh Other KMP Malcolm Bundey Richard Betts Position Term as KMP in 2018 Non-Executive Chairman Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Managing Director and CEO Chief Financial Officer Full Year Full Year Full Year Full Year Full Year Full Year Full Year There have been no other changes to KMP after the reporting date and before the date the Financial Report was authorised for issue. 38 Directors’ Report — Remuneration Report (cont.) 2. Governance Nomination and Remuneration Committee The Nomination and Remuneration Committee (the Committee) is delegated responsibility by the Board for managing appropriate remuneration policy and governance procedures including to: • review and recommend to the Board appropriate remuneration policies and arrangements including incentive plans for the CEO and CFO; • review and approve short-term incentive plans, long-term incentive plans, performance targets and bonus • • payments for the CEO and CFO; review the performance of the CEO; review the Senior Executives’ performance assessment processes to ensure they are structured and operate to realise business strategy; and • review and recommend to the Board, remuneration arrangements for the Chairman and NEDs. The Committee comprises four Non-Executive Directors and meet as often as the Committee members deem necessary to fulfil the Committee’s obligations. It is intended they meet no less than three times a year. A copy of the Committee’s charter is available at www.pactgroup.com.au. Use of Remuneration Consultants To ensure the Committee is fully informed when making remuneration decisions it will seek remuneration advice where required. Decisions to engage remuneration consultants are made by the Committee or the Board. Contractual engagements and briefing of the consultants is undertaken by the Chairman of the Committee and the remuneration recommendations of the consultants are to be provided directly to the Chairman of the Committee. During the year EY provided advice on the share acquisition rules for Directors to sacrifice fees, and also provided guidance on the tax implications of the CEO’s LTIP offer letter. The Company paid EY $23,051 for these services. The CEO or CFO had no involvement in the engagement or any ongoing instruction of EY. The Group did not engage any other remuneration consultants during the year. Accordingly the Board is satisfied that remuneration advice and recommendations received during the year were free from undue influence by the KMP to whom the advice or recommendation relates. The appointment of EY for the provision of these services did not impact on the independence of EY as auditors of the Company and the Group, because EY was not involved in the final design of LTIP offer letters and share acquisition plan rules. PAC T 2018 A NNUA L R EP OR T 39 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report — Remuneration Report (cont.) 3. Executive Remuneration Arrangements Remuneration Principles and Strategy Pact’s executive remuneration strategy is designed to attract, retain, reward and motivate high performing individuals through remuneration arrangements that are based on performance and experience, are competitive for companies of a similar size and nature, and are aligned with the interests of shareholders. Remuneration for executive KMP includes fixed remuneration, and benefits that are at risk, awarded only on the achievement of performance conditions. This includes a short-term incentive plan (STI) and a LTIP for both the CEO and CFO. Fixed Remuneration Comprises base salary and company superannuation contributions. The Group’s strategy is to provide competitive fixed remuneration to attract high quality executives with the right experience, qualifications and industry expertise to manage the business. STI An “at risk” component of remuneration paid in cash, awarded on the achievement of performance conditions (financial and non-financial) over a 12 month period, that is intended to drive performance against the Group’s short-term objectives. LTIP An “at risk” component of remuneration comprising the issue of performance rights to acquire fully paid ordinary shares in the Company for nil consideration, awarded on the achievement of performance conditions over a three year period, that is intended to drive performance against the Group’s long-term objectives. Approach to setting remuneration Remuneration levels are considered annually through a remuneration review that considers market data, insights into remuneration trends, the performance of the Group and individual, and the broader economic environment. The target remuneration mix for the 2018 year was as follows(1): Executive KMP remuneration component at target Fixed remuneration Short-term incentives Long-term incentives (LTIP) Long-term incentives (Initial Share Grant) (2) Total Malcolm Bundey % 36% 35% 19% 10% 100% Richard Betts % 65% 31% 4% — 100% (1) Target remuneration is calculated as Fixed Remuneration, plus STI at target, plus long-term incentives at target (based on the fair value of Performance Rights at grant date). (2) The initial share grant will form part of Mr Bundey’s total remuneration for the first three years of employment (refer to pages 42 and 45 in the Remuneration Report). 40 Directors’ Report — Remuneration Report (cont.) Detail of Incentive Plans STI Both the CEO and CFO participate in a STI which is paid in cash and dependent on achieving agreed performance targets for the following: • EBITDA before significant items; • cash conversion and working capital management; and • non-financial measures that include safety, risk management, diversity targets and talent management. Participation in the STI is dependent on the Group exceeding an EBITDA hurdle equal to 95% of target EBITDA. If this hurdle is not achieved no rewards are required to be paid to the CEO and CFO under the STI. The Board considers these measures to be appropriate as they are strongly aligned with the interests of shareholders. Group EBITDA, cash conversion and working capital targets are key indicators of the underlying growth of the business, enabling the payment of dividends to shareholders. The table on page 43 provides additional information on these performance measures, including an overview of performance versus target in the current year. LTIP Both the CEO and CFO participate in the LTIP, with an entitlement to performance rights to acquire fully paid shares in the Company, equal to 100% of annual base salary (ABS) for the CEO and 30% of fixed annual remuneration for the CFO with a vesting period of three years. Key features of the LTIP are outlined below: Grant Value Performance rights are granted based on the volume weighted average price (VWAP) of the Pact Group share price over the five day period following the Company’s announcement of its full year financial results. The number of performance rights granted represents the CEO and CFO’s entitlement for that full year. For details on the performance rights granted for the FY2017 LTIP and FY2016 LTIP please refer to the respective Annual Reports. Share based payments expense is based on the fair value of the performance rights over the performance period. Performance Period The performance period for the FY2016 LTIP is from 1 December 2015 to 30 November 2018. For all subsequent fiscal years, the performance period commences on the first day of that fiscal year and is measured over three years. PAC T 2018 A NNUA L R EP OR T 41 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report — Remuneration Report (cont.) Performance Hurdles Vesting of each LTIP tranche will be subject to the Company achieving its relative Total Shareholder Return (TSR) hurdle: • This hurdle was selected by the Committee as it is clearly aligned with returns to shareholders. TSR is calculated by measuring the return to shareholders based on the Company’s share price growth combined with the value of dividends declared and paid over the three year performance period. • The TSR is then ranked on a relative basis with the TSR performance measured against the S&P/ASX 200 comparator group, excluding companies in the Financials, Metals and Mining sectors. The peer group has been selected by the Board at the time of the grant. • The percentage of rights that vest, if any, will be determined by the Committee with reference to the percentile ranking achieved by the Company over the relevant Performance Period, compared to other entities in the relative TSR comparator peer group, as follows: Vesting Schedule TSR Relative to peer group At or above the 75th percentile Vesting % 100% Between the 50th and 75th percentile pro rata vesting between 50% to 100% At the 50th percentile Below the 50th percentile 50% Nil Cessation of Employment If an executive resigns or is terminated for cause, any unvested LTIP awards are forfeited, unless otherwise determined by the Board. A “good leaver” will retain a pro rata number of performance rights based on time elapsed since the initial grant date. Any such performance rights will be subject to the original terms and conditions, and discretion of the Board. Rights Attaching to Performance Rights Performance rights do not carry any dividend or voting entitlements prior to vesting. Shares allocated upon vesting of performance rights will carry the same rights as other ordinary shares. Clawback 100% of the award can be forfeited where there has been any fraud, dishonesty, or breach of obligations, including a material misstatement of the Financial Statements. Change of Control Provisions In the event of change of control, the performance period end date will be brought forward to the date of change of control, and awards will vest based on performance over this shortened period (subject to Board discretion). Initial Share Grant The CEO was entitled to receive an initial share grant of $1 million on his appointment as Managing Director and CEO on 1 December 2015. This share grant was approved at the AGM on 16 November 2016, and 209,205 performance rights were granted to the CEO. These shares will vest after three years of employment, being 1 December 2018. Should the CEO cease employment during this time the shares will be forfeited. 42 Directors’ Report — Remuneration Report (cont.) 4. Executive remuneration outcomes for FY2018 Business performance in FY2018 The Group’s FY2018 financial performance reflects the execution of recent strategic growth initiatives and disciplined management of a challenging input cost environment. Over the last five financial years: • compound growth in net profit after tax1 (before significant items) was 12%; • compound earnings per share growth2 (before significant items) was 11%; • an average of 19 cents per ordinary share per annum has been paid (or payable) to shareholders in dividends; and • cumulative Total Shareholder Return (TSR)3, which represents the movement in the Company’s share price plus dividends received by shareholders, was 68.8%. The table below summarises key indicators of the performance of the Company and relevant shareholder returns over the past five financial years. Performance measure Statutory net profit after tax ($000) Net profit after tax (NPAT)1 ($000) NPAT growth %1 EBITDA1 ($000) EBITDA1 growth % Dividends per ordinary share (cps) Closing share price (30 June) Three month average share price (1 April to 30 June) Earnings per share1, 2 (cps) Earnings per share1 growth % Cumulative TSR % 3 2014(4) 57,689 59,725 n/a 198,226 n/a 9.5 3.43 3.41 20 n/a (10.3%) 2015 67,632 85,214 42.7% 208,678 5.3% 19.5 4.68 4.28 29 45.0% 17.6% 2016 85,051 94,310 10.7% 220,157 5.5% 21.0 6.03 5.46 32 10.3% 53.9% 2017 90,341 100,003 6.0% 233,116 5.9% 23.0 5.99 6.44 33 3.1% 85.7% 2018 74,488 94,661 (5.3%) 237,251 1.8% 23.0 5.27 5.57 30 (9.1%) 68.8% (1) Before significant items (refer to note 1.1 in the Consolidated Financial Report). (2) Earnings per share in 2014 has been calculated assuming the post IPO share capital structure existed for the entire period. The basis for the calculation is 294.1 million shares outstanding. (3) Cumulative TSR in each year has been calculated using the share issue price at 17 December, 2013 of $3.80. The three month average share price has been used in all periods. (4) The Group was listed on the ASX on 17 December 2013. STI Outcomes — Executive KMP The table below outlines the components of the STI, and how performance has been measured in fiscal year 2018. Performance measure Weighting EBITDA 64% Overview of performance v target EBITDA growth of 1.8% compared to last year, minimum EBITDA hurdle of 95% of Cash Conversion 8% target was not achieved. Cash conversion is defined as operating cash flow divided by EBITDA, with Working Capital 8% operating cash defined as EBITDA less the change in working capital, less changes in other assets and liabilities. During the year target performance was achieved. Working capital management is measured by rolling working capital as a Management Non-Financial Measures 20% percentage of sales. During the year target performance was partially achieved. This measure is based on various safety, risk management, diversity and talent management targets. During the year target performance was partially achieved. The minimum EBITDA hurdle was not achieved, therefore the KMP did not participate in the STI for fiscal year 2018. PAC T 2018 A NNUA L R EP OR T 43 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report — Remuneration Report (cont.) LTIP Outcomes — CEO and CFO The table below outlines the performance rights granted to the CEO and CFO for participating in the LTIP, and the relevant performance period for each fiscal year. CEO Grant date Year 2016 LTIP 22 June 2016 2017 LTIP 16 November 2016 2018 LTIP 15 November 2017 CFO Performance rights granted Fair value of right 146,444 192,376 228,705 $3.85 $3.54 $2.65 Performance period 1 December 2015 to 30 November 2018 1 July 2016 to 30 June 2019 1 July 2017 to 30 June 2020 Year Grant date 2018 LTIP 15 November 2017 Performance rights granted Fair value of right 33,182 $2.65 Performance period 1 July 2017 to 30 June 2020 The performance measure for the LTIP is achievement of relative TSR targets. The vesting conditions have been outlined on page 42. Executive KMP remuneration for the year ended 30 June 2018 Executive Year Short term benefits Post- employment benefits Long- term benefits Salary and fees $ Mr Malcom Bundey 2018 1,230,000 1,200,000 2017 (CEO) Mr Richard Betts 530,485 2018 498,750 2017 (CFO) Total Executive KMP 2018 1,760,485 2017 1,698,750 remuneration STI $ Non- monetary benefits (1) $ — 91,437 — 62,641 — 49,584 — 8,884 — 141,021 — 71,525 Other Benefits (2) Super- annuation $ (16,346) 84,676 10,351 11,887 (5,995) 96,563 $ 25,000 25,000 25,000 25,000 50,000 50,000 Long Service Leave(3) $ Share based payments LTIP (4) Initial Grant Total Performance related % $ $ $ — 647,275 333,334 2,310,700 — 445,253 333,333 2,150,903 — 644,731 — 29,311 — — 544,521 — — 676,586 333,334 2,955,431 — 445,253 333,333 2,695,424 % 28% 21% 5% — 23% 17% (1) Non—monetary benefits includes motor vehicle lease payments and FBT payments made by the Company on behalf of Mr Bundey and Mr Betts. (2) Other benefits is the movement in the annual leave provision for Mr Bundey and Mr Betts. (3) The Company policy is to provide for long service leave entitlements after five years of continuous service. (4) An independent valuation of the performance rights was performed to establish the fair value in accordance with AASB2 Share Based Payments. Valuation of the rights was done using Monte Carlo valuation simulations. The table above shows KMP remuneration in accordance with statutory obligations and accounting standards. The following table, which is audited, provides additional voluntary disclosure as the Directors believe this information is helpful to assist shareholders in understanding the benefits that the Executive KMP received during the financial year ended 30 June 2018. The table below has not been prepared in accordance with Australian accounting standards. Mr Malcom Bundey Mr Richard Betts Fixed Remuneration(1) 1,255,000 555,485 STI(2) — — Other Benefits(3) 75,091 59,935 Performance rights vested in 2018 n/a (4) n/a (5) Total 1,330,091 615,420 (1) Fixed remuneration includes salary and fees, and superannuation contributions, calculated on the same basis as the remuneration table above. (2) STI relates to the 2018 performance period and is shown on an accruals basis. (3) Other benefits include motor vehicle lease payments and FBT payments made by the Company on behalf of Mr Bundey and Mr Betts, and movement in the annual leave provision for Mr Bundey and Mr Betts, both shown on an accruals basis. (4) Not applicable as the first opportunity for performance rights to vest for the CEO will be on 30 November 2018 (the vesting of the 2016 LTIP), therefore no benefits were received during the current financial year. (5) Not applicable as the first opportunity for performance rights to vest for the CFO will be on 30 June 2020 (the vesting of the 2018 LTIP), therefore no benefits were received during the current financial year. 44 Directors’ Report — Remuneration Report (cont.) 5. Executive KMP contracts Remuneration arrangements for Executive KMP are formalised in employment agreements. The following outlines the key details of contracts relating to Executive KMP: Chief Executive Officer (CEO) The CEO, Mr Malcolm Bundey, is employed under an employment contract with a notice period for termination of six months. There is no fixed term. Mr Bundey’s remuneration package consists of the following components: • The CEO receives fixed remuneration of $1,255,000 per annum. • The CEO has a maximum STI of 100% of ABS. Please refer to section 3 of the Remuneration Report for further details of the CEO’s STI plan. • The CEO participates in an LTIP, key features of the LTIP are outlined on page 42. • The CEO received an initial share grant of $1 million (209,205 performance rights). These shares will vest after three years of employment from a starting date of 1 December 2015. • The CEO receives non-monetary benefits including motor vehicle lease payments and FBT payments made by the Company on his behalf. • There are no provisions for redundancy payments. The Company is not required to make any payment of a benefit which is not permitted by Part 2D.2, Division 2 or Chapter 2E of the Act in the absence of shareholder approval or the ASX Listing Rules. The Company must use its reasonable endeavours to try and obtain shareholder approval, if required. Chief Financial Officer (CFO) The CFO, Mr Richard Betts, is employed under an employment contract, with a notice period for termination of three months. There is no fixed term. Mr Betts’ remuneration package consists of the following components: • The CFO receives fixed remuneration of $555,485 per annum. • The CFO has a maximum STI of 50% of ABS. Please refer to section 3 of the Remuneration Report for further details of the CFO’s STI plan. • The CFO participates in an LTIP, key features of the LTIP are outlined on page 42. • The CFO receives non-monetary benefits including motor vehicle lease payments and FBT payments made by the Company on his behalf. • In the event a redundancy occurs, the CFO is entitled to receive a redundancy payment of three weeks for every year of service which is capped at 52 weeks. The Company is not required to make any payment of a benefit which is not permitted by Part 2D.2, Division 2 or Chapter 2E of the Act in the absence of shareholder approval or the ASX Listing Rules. The Company must use its reasonable endeavours to try and obtain shareholder approval, if required. 6. Non-Executive Directors’ remuneration arrangements Remuneration Policy The Committee seeks to set aggregate remuneration at a level that provides the Company with the ability to attract and retain non-executive directors (NEDs) of the highest calibre, whilst incurring a cost that is acceptable to shareholders. The amount of aggregate remuneration sought to be approved by shareholders and the fee structure is reviewed annually against fees paid to NEDs of comparable companies (S&P/ASX 200 comparator group, excluding companies in the financials, metals and mining sectors). The Company’s Constitution and the ASX Listing Rules specify that the NED fee pool shall be determined from time to time by a general meeting. Consistent with prior years, the total amount paid to NEDs must not exceed a fixed sum of $1,000,000 per financial year in aggregate. Raphael Geminder does not receive a fee for his position as Chairman and a NED of the Company. PAC T 2018 A NNUA L R EP OR T 45 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report — Remuneration Report (cont.) Structure The remuneration of NEDs consists of Directors’ fees and committee fees. The payment of additional fees for serving on a committee or being the Chair of a committee recognises the additional time commitment required by NEDs who serve on committees. The table below summarises payments made for NED fees. Responsibility Board Fees Non-Executive Directors (excluding the Chairman) Audit, Business Risk and Compliance Committee Chair Member Nomination and Remuneration Committee Chair Member 2018 2017 $112,750 $110,000 $30,750 $7,688 $30,750 $7,688 $30,000 $7,500 $30,000 $7,500 NEDs do not participate in any incentive programs. The remuneration of NEDs for the year ended 30 June 2018 is detailed in the following table. Non-Executive KMP remuneration for the year ended 30 June 2018 Ms Lyndsey Cattermole Mr Raphael Geminder Mr Jonathan Ling Mr Peter Margin Mr Ray Horsburgh Total non-Executive KMP remuneration Short-term benefits Post-employment benefits Fees $ 117,009 114,155 — — 143,500 127,854 151,187 134,703 109,989 107,306 521,685 484,018 Superannuation $ 11,116 10,845 — — — 12,146 — 12,797 10,449 10,194 21,565 45,982 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Total $ 128,125 125,000 — — 143,500 140,000 151,187 147,500 120,438 117,500 543,250 530,000 7. Equity holdings of KMP The following table shows the respective shareholdings of KMP (directly and indirectly) including their related parties and any movements during the year ended 30 June 2018: Balance 1 July 2017 117,556,458 78,948 22,092 10,455 30,100 — 4,900 Movements 14,111,829 196,471 5,988 7,012 11,532 — 681 Balance 30 June 2018 131,668,287 275,419 28,080 17,467 41,632 — 5,581 KMP Raphael Geminder Lyndsey Cattermole Peter Margin Jonathan Ling Ray Horsburgh Malcolm Bundey Richard Betts 46 Directors’ Report — Remuneration Report (cont.) 8. Related party transactions with KMP The following table provides the total amount of transactions with related parties for the year ended 30 June 2017: $’000’s Related parties — Directors' interests(1) Sales to related parties 11,469 11,061 Purchases from related parties 18,408 19,274 Other (income) / expense with related parties (138) 547 Amounts (owed to) / receivable from related parties 2,573 766 2018 2017 (1) Related parties – Director’s interests includes the following entities: P’Auer Pty Ltd, Pro-Pac Packaging Limited, Centralbridge Pty Ltd (as trustee for the Centralbridge Unit Trust), Centralbridge Two Pty Ltd, Centralbridge (NZ) Limited, Albury Property Holdings Pty Ltd, Green’s General Foods Pty Ltd and Remedy Kombucha Pty Ltd. P’Auer Pty Ltd (P’Auer) P’Auer, an entity controlled by Mr Raphael Geminder (the Non-Executive Chairman of Pact), has a supply agreement to provide label products to Pact. Pact has a Transitional Services and Support Agreement with P’Auer to provide support services. Agreements are on arm’s length terms. In addition, P’Auer provides Pact with periodic warehousing services. Pro-Pac Packaging Limited (Pro-Pac) Pro-Pac, an entity for which Mr Raphael Geminder owns 40% (2017 49%), is an exclusive supplier of certain raw materials such as flexible film packaging, flexible plastic bags and tapes to Pact. The agreement was extended in early 2017 through to 31 December 2021. Total value under this arrangement is approximately $4.3 million (2017: $4.5 million). The supply arrangement is at arm’s length terms. Terms and conditions of property leases with related parties The Group leased 13 properties (10 in Australia and 3 in New Zealand) from Centralbridge Pty Ltd (as trustee for the Centralbridge Unit Trust), Centralbridge Two Pty Ltd, Centralbridge (NZ) Limited and Albury Property Holdings Pty Ltd (“Centralbridge Entities”), which are each controlled by entities associated with Mr Raphael Geminder and are therefore related parties of the Group (“Centralbridge Leases”). The aggregate annual rent payable by Pact under the Centralbridge Leases for the year ended 30 June 2018 was $6.1 million (2017: $6.7 million). The rent payable under these leases was determined based on independent valuations and market conditions at the time the leases were entered into. Of the Centralbridge Leases in Australia: • six of the leases contain early termination rights in favour of the landlord to terminate the lease at the expiry of the ninth term; • two of the leases contain early termination rights in favour of the landlord to terminate the lease at the expiry of the eighth term; and • two of the leases do not contain standard default provisions which give the landlord the right to terminate the lease in the event of default. Except as set out above, the Centralbridge Leases in Australia are on arm’s length terms. The Centralbridge Leases in New Zealand, contain early termination rights in favour of the landlord to terminate the lease at the expiry of the ninth term. With the exception of the early termination rights, the Centralbridge Leases in New Zealand are on arm’s length terms. Terms and conditions of transactions with related parties The purchases from and sales to related parties are made on terms equivalent to those that prevail in arm’s length transactions. Outstanding balances at the end of the period are unsecured and interest free and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables or payables. For the year ended 30 June 2018, the Group has not recorded any impairment of receivables relating to amounts owed by related parties (2017: nil). PAC T 2018 A NNUA L R EP OR T 47 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Report — Remuneration Report (cont.) Auditor's Independence Declaration A copy of the Auditor's Independence Declaration as required under section 307C of the Act is set out at page 49. Rounding Is presented in Australian dollars with all values rounded to the nearest $1,000, unless otherwise stated, in accordance with the ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 dated 1 April 2016. Signed in accordance with a resolution of the Board of Directors: Raphael Geminder Malcolm Bundey Chairman Managing Director and Chief Executive Officer 15 August 2018 48 PAC T 2018 A NNUA L R EP OR T 49 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — consolidated Statement Of comprehensive Income For the year ended 30 June 2018 $’000 Sales revenue Raw materials and consumables used Employee benefits expense Occupancy, repair and maintenance, administration and selling expenses Interest and other income Other gains/(losses) Depreciation and amortisation expense Finance costs and loss on de-recognition of financial assets Share of profit in associates Profit before income tax expense Income tax expense Net profit for the year Net profit attributable to equity holders of the parent entity Notes 1.1 5.2 6.2 3.2 4.1 2.3 1.2 2018 2017 1,674,188 1,475,336 (623,818) (734,260) (364,377) (410,018) (265,162) (306,299) 8,234 11,199 (11,524) (22,404) (63,700) (72,745) (30,818) (32,695) 2,008 2,159 126,179 109,125 (35,838) (34,637) 90,341 74,488 90,341 74,488 Other comprehensive income Items that will be not be reclassified subsequently to profit or loss Remeasurements of defined benefit liability/(asset) Items that will be reclassified subsequently to profit or loss Cash flow hedges gains/(losses) taken to equity Foreign currency translation (losses)/gains Income tax on items in other comprehensive income Other comprehensive (loss)/income for the year, net of tax Total comprehensive income for the year Attributable to: Equity holders of the parent entity Total comprehensive income for the Group 125 — 2,293 (78) (692) 1,648 76,136 1,451 (4,157) (443) (3,149) 87,192 76,136 76,136 87,192 87,192 cents Basic earnings per share Diluted earnings per share 1.1 1.1 23.4 23.3 30.2 30.2 The Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 50 Financial Report — consolidated Statement of Financial Position As at 30 June 2018 $’000 Current assets Cash and cash equivalents Trade and other receivables Inventories Other current financial assets Prepayments Total current assets Non-current assets Trade and other receivables Prepayments Property, plant and equipment Investments in associates and joint ventures Intangible assets and goodwill Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Employee benefits provisions Other provisions Other current financial liabilities Total current liabilities Non-current liabilities Trade and other payables Employee benefits provisions Other provisions Interest-bearing loans and borrowings Other non-current financial liabilities Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity Notes 2018 2017 3.1 3.1 3.2 2.3 3.2 1.2 3.1 5.2 3.4 5.2 3.4 4.1 1.2 4.2 4.2 67,980 161,734 210,956 2,683 10,263 453,616 2,570 4,284 755,413 19,507 584,193 31,004 1,396,971 1,850,587 437,259 36,932 4,424 79 478,694 17,594 7,549 28,817 667,253 616 66,864 788,693 1,267,387 583,200 39,592 132,735 168,906 155 9,192 350,580 1,798 4,528 677,132 18,501 547,333 30,518 1,279,810 1,630,390 383,484 35,587 3,084 2,155 424,310 18,694 6,425 24,932 686,210 1,421 63,290 800,972 1,225,282 405,108 1,690,476 (902,984) (204,292) 583,200 1,517,097 (905,732) (206,257) 405,108 The Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. PAC T 2018 A NNUA L R EP OR T 51 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — consolidated Statement of changes in Equity For the year ended 30 June 2018 Attributable to equity holders of the Parent entity Contributed equity Common control reserve Cash flow hedge reserve Foreign currency translation reserve Share based payments reserve Retained earnings Total equity 1,517,097 (928,385) — — (1,490) — 23,043 — 1,100 (206,257) 74,488 — 405,108 74,488 — — 175,559 (2,986) 806 173,379 — — — — — — — — — — 1,601 (78) 1,601 (78) — — 125 1,648 74,613 76,136 — — — — — — — — — — — — — — — — — (72,648) — — 175,559 — (2,986) 806 — — 173,379 (72,648) 1,225 1,225 $’000 Year ended 30 June 2018 As at 1 July 2017 Profit for the year Other comprehensive income/ (loss) Total comprehensive income / (loss) Issuance of share capital Transaction costs taken to equity Tax benefit on transaction costs Total equity transactions Dividends paid Share based payments expense Transactions with owners in their capacity as owners Year ended 30 June 2018 173,379 — 1,690,476 (928,385) — 111 — 22,965 1,225 (72,648) 2,325 (204,292) 101,956 583,200 Year ended 30 June 2017 As at 1 July 2016 Profit for the year Other comprehensive income/ (loss) Total comprehensive income/ (loss) Shares issued as consideration for business acquisitions Dividends paid Share based payments expense Transactions with owners in 1,502,097 (928,385) — — (2,498) — 27,200 — 322 (229,542) 90,341 — 369,194 90,341 — — 15,000 — — — — — — — 1,008 (4,157) 1,008 (4,157) — — — (3,149) 90,341 87,192 — — — — — — — — — (67,056) — 778 15,000 (67,056) 778 their capacity as owners Year ended 30 June 2017 15,000 — 1,517,097 (928,385) — (1,490) — 23,043 778 (67,056) 1,100 (206,257) (51,278) 405,108 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. 52 Financial Report — consolidated Statement of cash Flows For the year ended 30 June 2018 $’000 Cash flows from operating activities Receipts from customers Receipts from securitisation program Payments to suppliers and employees Income tax paid Interest received Proceeds from securitisation of trade debtors Borrowing, trade debtor securitisation and other finance costs paid Net cash flows provided by operating activities Cash flows from investing activities Payments for property, plant and equipment Purchase of businesses and subsidiaries, net of cash acquired Proceeds from sale of property, plant and equipment Sundry items Net cash flows used in investing activities Cash flows from financing activities Proceeds from borrowings Repayment of borrowings Net proceeds from share issue Payment of dividend Net cash flows provided by financing activities Net (decrease)/increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year Notes 2018 2017 4.1 2.1 998,426 874,417 (1,658,784) (33,148) 151 3,181 (33,820) 150,423 860,480 785,898 (1,436,054) (24,326) 180 16,209 (30,921) 171,466 (90,180) (127,863) 5,844 546 (211,653) 529,715 (540,053) 172,573 (72,648) 89,587 28,357 39,592 31 67,980 (116,390) (138,245) 9,785 4,289 (240,561) 515,217 (390,800) — (67,056) 57,361 (11,734) 51,885 (559) 39,592 The Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. PAC T 2018 A NNUA L R EP OR T 53 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements Section 1 — Our performance A key element of Pact’s strategy is to maximise long-term shareholder value. This section highlights the results and performance of the Group for the year ended 30 June 2018. 1.1 Group results Sales revenue $’000 Pact Australia Pact International Total 2018 1,279,880 394,308 1,674,188 2017 1,117,829 357,507 1,475,336 Pact’s chief operating decision-maker is the Managing Director and Chief Executive Officer (CEO). The CEO monitors results by reviewing two reportable segments, namely Pact Australia and Pact International, focusing on reported EBIT (earnings before finance costs and loss on de-recognition of financial assets, net of interest income, tax and significant items). As required by AASB 8: Operating Segments, the results above have been reported on a consistent basis to that supplied to the CEO. Reportable segments Pact Australia Countries of Operation Australia Pact International New Zealand China Indonesia Philippines Singapore Thailand Hong Kong South Korea Nepal India Products/services Manufacture and supply of rigid plastic and metal packaging and associated services Contract manufacturing and packing services (Pact Australia only) Manufacture and supply of materials handling products and the provision of associated services Recycling and sustainability services Supply of crate pooling services How Pact accounts for revenue Revenue from the sale of goods is recognised when there has been a transfer of risks and rewards to the customer (through the execution of a sales agreement at the time of delivery of the goods to the customer), no further work or processing is required, the quantity and quality of the goods has been determined, the price is determined and title has passed. Revenue from the sale of goods is measured at the fair value of the consideration received or receivable to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue from services rendered is recognised in income on a straight line basis over the lease term. 54 Financial Report — Notes to the Financial Statements 1.1 Group results (continued) EBIT $’000 Pact Australia Pact International EBIT Net profit after tax 2018 103,421 61,085 164,506 2017 99,529 69,887 169,416 The reconciliation of EBIT before significant items shown above and the net profit after tax disclosed in the Consolidated Statement of Comprehensive Income is as follows: $’000 EBIT (Pact Australia + Pact International) Significant items Acquisition costs(1) Deferred settlement costs (earnout)(2) New business start-up costs(2) Business restructuring programs(3) • restructuring costs • asset write downs Total significant items EBIT after significant items Finance costs(4) Net profit before tax Income tax expense Net profit after tax 2018 164,506 2017 169,416 (4,411) (8,781) (2,206) — — (3,335) (8,524) (1,589) (10,113) (23,305) 141,201 (32,076) 109,125 (34,637) 74,488 (6,711) (788) (7,499) (13,040) 156,376 (30,197) 126,179 (35,838) 90,341 (1) Acquisition costs includes professional fees, stamp duty and all other costs associated with business acquisitions. (2) Adjustments to contingent consideration provisions raised in relation to acquisitions made in the year ended 30 June 2017. (3) The business restructuring programs relate to the optimisation of business facilities across the Group. (4) Net finance costs includes interest income of $619,000 (2017: $621,000). Basic and diluted earnings per share Earnings per share (EPS) (cents) — basic Earnings per share (EPS) (cents) — diluted Calculated using: • Net profit attributable to ordinary equity holders ($’000s) • Weighted average of ordinary shares (shares) — basic • Weighted average of ordinary shares (shares) — diluted 2018 23.4 23.3 2017 30.2 30.2 74,488 90,341 318,642,850 298,705,565 319,695,783 299,253,590 Earnings per share is calculated by dividing the net profit for the year attributable to ordinary equity holders of Pact by the weighted average number of ordinary shares outstanding during the year. Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to include the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive shares. This would include items such as performance rights as disclosed in Note 5.3. PAC T 2018 A NNUA L R EP OR T 55 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION Financial Report — Notes to the Financial Statements 1.2 Taxation Reconciliation of tax expense $’000 Accounting profit before tax Income tax calculated at 30% (2017: 30%) Adjustments in respect of income tax of previous years Sundry items Income tax expense reported in the Consolidated Statement of Comprehensive Income Comprising of: • Current year income tax expense • Deferred income tax expense/(benefit) • Adjustments in respect of previous years income tax 2018 109,125 32,737 (345) 2,245 2017 126,179 37,854 (2,911) 895 34,637 35,838 35,303 (321) (345) 35,967 2,782 (2,911) Included in the above is a tax benefit on significant items of $3.1 million for the year ended 30 June 2018 (2017: $3.4 million). Recognised current and deferred tax assets and liabilities $’000 Opening balance Charged to income Adjustments in respect of income tax of previous years Charged to other comprehensive income Tax benefit on equity raising Payments Acquisitions/disposals Foreign exchange translation movement Closing balance Comprises of: Deferred tax assets • Employee entitlements provision • Provisions • Hedges • IPO transaction costs • Unutilised tax losses • Lease incentives and rent free • Other Deferred tax liabilities • Property, plant and equipment • Intangibles • Other 2018 Current Income tax (16,913) (35,303) 977 — — 33,148 (1,073) 89 (19,075) 2018 Deferred Income tax (32,772) 321 (632) (692) 806 — (3,102) 211 (35,860) 12,517 9,813 — 1,319 87 5,071 2,197 31,004 (51,587) (9,754) (5,523) (66,864) 2017 Current Income tax (4,841) (35,967) 1,942 — — 24,326 (2,359) (14) (16,913) 2017 Deferred Income tax (20,764) (2,782) 969 (443) — — (9,792) 40 (32,772) 12,420 9,503 625 1,684 — 4,334 1,952 30,518 (49,968) (10,751) (2,571) (63,290) Key estimates and judgements — taxation Pact is subject to income tax in Australia and foreign jurisdictions. The calculation of the Group’s tax charge requires management to determine whether it is probable that there will be sufficient future taxable profits to recoup deferred tax assets. Judgements and assumptions are subject to risk and uncertainty, hence if final tax determinations or future actual results do not align with current judgements, this may have an impact to the carrying value of deferred tax balances and corresponding credits or charges to the Consolidated Statement of Comprehensive Income and Consolidated Statement of Financial Position. 56 Financial Report — Notes to the Financial Statements 1.2 Taxation (continued) How Pact accounts for taxation Income tax charges: • Comprise of current and deferred income tax charges and represent the amounts expected to be paid to and recovered from the taxation authorities in the jurisdictions that Pact operates. • Are recorded in Equity when the underlying transaction that the tax is attributable to is recorded within Other Comprehensive Income. • Are recorded in equity when associated with share issue costs Pact uses the tax laws in place or those that have been substantively enacted at reporting date to calculate income tax. For deferred income tax, Pact also considers whether these tax laws are expected to be in place when the related asset is realised or liability is settled. Management periodically re-evaluate their assessment of its tax positions, in particular where they relate to specific interpretations of applicable tax regulation. Deferred tax assets and liabilities are recognised on all assets and liabilities that have different carrying values for tax and accounting, except for: • initial recognition of goodwill; and • any undistributed profits of Pact’s subsidiaries, associates or joint ventures where either the distribution of those profits would not give rise to a tax liability or the directors consider they have the ability to control the timing of the reversal of the temporary differences. Specifically for deferred tax assets: • They are recognised only to the extent that it is probable that there is sufficient future taxable amounts to be utilised against. This assessment is reviewed at each reporting date. • They are offset against deferred tax liabilities in the same tax jurisdiction, when there is a legally enforceable right to do so. • If acquired as part of a business combination, but not satisfying the criteria for separate recognition at that date, would be recognised subsequently if new information about the existing facts and circumstances at acquisition date became available. The adjustment would either be treated as a reduction to goodwill (as long as it does not exceed goodwill) if it occurred during the measurement period or in the Consolidated Statement of Comprehensive Income. Australian tax consolidated group Pact Group Holding Ltd and its wholly-owned Australian subsidiaries formed a tax consolidated group (Australian tax consolidated group), effective January 2014. A tax funding agreement is also in place such that Pact Group Holdings Ltd pays any taxes owed by the Group to the Australian Tax Office. 1.3 Dividends $’000 Dividends paid during the financial year Proposed dividend(1) 2018 72,648 38,236 2017 67,056 34,412 (1) Since the end of the financial year the Directors have determined payment of a final dividend of 11.5 cents per ordinary share 65% franked (2017: 11.5 cents, 65% franked). The amount disclosed is based on the number of shares on issue at reporting date. The final dividend is expected to be paid on 4 October 2018. Franking credit balance Franking account balance as at the end of the financial year at 30% (2017: 30%) Franking credits that will arise from the payment of income tax payable as at the end of the financial year Franking credits that will be utilised from the payment of dividends as at the end of the financial year Total franking credit available for the subsequent financial year 2018 5,038 2017 5,014 10,103 11,324 (10,651) (9,586) 4,490 6,752 PAC T 2018 A NNUA L R EP OR T 57 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION Financial Report — Notes to the Financial Statements Section 2 — Our operational footprint This section provides details of acquisitions which the Group has made in the financial year, as well as details of controlled entities and interests in associates and joint ventures. 2.1 businesses acquired Summary of 30 June 2018 acquisitions: $’000 Comprising of: • Cash consideration paid • Deferred consideration • Contingent consideration Gross consideration paid Less: cash acquired Net consideration paid Assets • Trade and other receivables • Inventory • Property, plant & equipment • Deferred tax assets • Other assets Liabilities • Trade payables and other provisions • Employee benefits provisions • Deferred tax liabilities Fair value of identifiable net assets Provisional goodwill arising on acquisition ECP Industries Pty Ltd(1) Asia acquisition(2) Total 10,281 142,453 152,734 — 406 10,687 — 10,687 — 234 1,128 184 — (130) (128) — 1,288 9,399 6,839 — 149,292 (20,063) 129,229 29,772 20,977 75,011 16 1,230 6,839 406 159,979 (20,063) 139,916 29,772 21,211 76,139 200 1,230 (31,829) (31,959) (967) (3,315) 90,895 38,334 (1,095) (3,315) 92,183 47,733 (1) On 30 November 2017 the Group purchased the net assets of ECP Industries Pty Ltd (ECP), for a consideration of $10.7 million. ECP is a Western Australian based intermediate bulk container (IBC) reconditioning business that also deals in the reconditioning, repairing and leasing of bulk liquid tanks. The acquisition provides Pact with the capability to offer national coverage for these services, and provides the opportunity for future growth. Provisional goodwill of $9.4 million has arisen as a result of the purchase consideration exceeding the fair value of identifiable net assets acquired, and represents the synergistic value with the current business. Goodwill is allocated to the Pact Australia reportable segment. This goodwill will not be deductible for tax purposes. From the date of acquisition to 30 June 2018, ECP contributed $3.3 million of revenue and $0.7 million to net profit before tax of the Group. If the combination had taken place at 1 July 2017, contributions to revenue for the period ended 30 June 2018 would have been $2.7 million higher and the contribution to profit before tax for the Group would have been $0.8 million higher. (2) On 15 February 2018, Pact Group Holdings Pty Ltd acquired shares and assets in CSI International (CSI Asia) and Graham Packaging Group (GPC Asia), and completed the acquisition of Closure Systems International Nepal on 25 May 2018. For the total acquisition (Asia acquisition) the Group recognised gross consideration of $149.3 million, comprising cash of $142.5 million and deferred consideration of $6.8 million. CSI Asia is a leader in plastic closure design, manufacturing, and high-speed capping equipment and application systems. GPC Asia produces plastic bottles via injection blow moulding and extrusion blow moulding. The acquisition complements Pact's existing capability and customer footprint in Asia, and includes seven manufacturing sites across China, South Korea, Nepal, India and the Philippines. 58 Financial Report — Notes to the Financial Statements 2.1 businesses acquired (continued) The fair value of trade and other receivables acquired amounts to $29.8 million. Provisional goodwill of $38.3 million has arisen as a result of the purchase consideration exceeding the fair value of identifiable net assets acquired, and represents the value attributed to the networks and customer relationships established within the Asia region. Goodwill is allocated to the Pact International reportable segment. This goodwill will not be deductible for tax purposes. From the date of acquisition the Asia acquisition has contributed $66.6 million of revenue and a net profit before tax of $3.0 million to the Group. If the combination had taken place at 1 July 2017, contributions to revenue for the period ended 30 June 2018 would have been $95.1 million higher and the contribution to profit before tax for the Group would have been $3.7 million higher. Key estimates and judgements — business combinations Certain assets and liabilities either given up or acquired as part of a business combination may not be normally traded in active markets, thus management judgement is required in determining the fair values. Management judgement is also required in ascertaining the assets and liabilities which should be recognised, in particular with respect to intangible assets such as brand names, customer relationships, patents and trademarks and contingent liabilities. How Pact accounts for business acquisitions When Pact acquires a business, if it satisfies the conditions of being a business combination under AASB 3: Business Combinations, then: • the cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value, and the amount of any non-controlling interest in the acquiree; • where settlement of any part of the consideration is deferred, and if the impact of discounting is significant, the amounts payable in the future are discounted to their present value. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions; • assets given, shares issued or liabilities incurred or assumed at the date of exchange are recorded at fair value; • acquisition related costs are expensed as incurred; • • transaction costs arising on the issue of any equity instruments are recognised directly in equity; if the cost of the business combination is in excess of the net fair value of the Group’s share of the identifiable net assets acquired, the difference is recognised as goodwill. For impairment testing, this goodwill has been allocated to and tested at the level of their respective CGUs, or group of CGUs, in accordance with the level at which management monitors goodwill; and • if the cost of acquisition is less than the Group’s share of the net fair value of the identifiable net assets of the subsidiary, the difference is recognised as a gain in the income statement. PAC T 2018 A NNUA L R EP OR T 59 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION Financial Report — Notes to the Financial Statements 2.2 controlled entities Australian incorporated entities that are party to the Deed of Cross Guarantee at 30 June 2018(1) Pact Group Industries (ANZ) Pty Ltd Australian Pharmaceutical Manufacturers Pty Ltd(2) Pact Group Holdings (Australia) Pty Ltd Jalco Powders Pty Ltd Jalco Group Pty Ltd Jalco Automotive Pty Ltd Pact Group Finance (Australia) Pty Ltd Power Plastics Pty Ltd Pascoes Pty Ltd(2) Bidware Pty Ltd(2) Middleton Asset Financing & Leasing Pty Ltd(2) Alto Packaging Australia Pty Ltd Summit Manufacturing Pty Ltd Astron Plastics Pty Ltd Sunrise Plastics Pty Ltd INPACT Innovation Pty Ltd Cinqplast Plastop Australia Pty Ltd Steri-Plas Pty Ltd Sulo MGB Australia Pty Ltd VIP Steel Packaging Pty Ltd VIP Drum Reconditioners Pty Ltd Vmax Returnable Packaging Systems Pty Ltd Viscount Plastics Pty Ltd Viscount Plastics (Australia) Pty Ltd Jalco Plastics Pty Ltd Jalco Australia Pty Ltd Jalco Care Products Pty Ltd Packaging Employees Pty Ltd Jalco Cosmetics Pty Ltd Jalco Promotional Packaging Pty Ltd VIP Plastic Packaging Pty Ltd Skyson Pty Ltd Brickwood (VIC) Pty Ltd Brickwood (Dandenong) Pty Ltd Brickwood (NSW) Pty Ltd Brickwood (QLD) Pty Ltd Alto Manufacturing Pty Ltd Baroda Manufacturing Pty Ltd Salient Asia Pacific Pty Ltd Plaspak Closures Pty Ltd Plaspak Pty Ltd MTWO Pty Ltd Viscount Rotational Mouldings Pty Ltd Snopak Manufacturing Pty Ltd Viscount Logistics Services Pty Ltd Viscount Pooling Company Pty Ltd Viscount Pooling Systems Pty Ltd Pact Group Industries (Asia) Pty Ltd Viscount Plastics (China) Pty Ltd Ruffgar Holdings Pty Ltd 60 Financial Report — Notes to the Financial Statements 2.2 controlled entities (continued) Entities that are not party to the Deed of Cross Guarantee, incorporated in the following jurisdictions(1) Australia Plaspak Contaplas Pty Ltd(3) Plaspak Management Pty Ltd(3) Plaspak (PET) Pty Ltd(3) Plaspak Minto Pty Ltd(4) Sustainapac Pty Ltd Hong Kong Pact Group Holdings (Hong Kong) Limited(2) (8) Roots Investment Holding Private Limited(2) (11) India Closure Systems International (I) Private Limited(2) (8) Indonesia PT Plastop Asia Indonesia Inc(6) PT Plastop Indonesia Manufacturing Inc(6) Korea Closure Systems International (Korea), Ltd(2) (11) Nepal CSI Nepal Private Limited(2) Philippines Plastop Asia Inc(7) Closure System International (Philippines), Inc(2) (8) Singapore Asia Peak Pte Ltd(8) United States of America Pact Group (USA) Inc(9) New Zealand Pact Group Holdings (NZ) Ltd Pact Group Finance (NZ) Ltd Pact Group (NZ) Ltd VIP Steel Packaging (NZ) Ltd VIP Plastic Packaging (NZ) Ltd Alto Packaging Ltd Auckland Drum Sustainability Services Ltd Viscount FCC Ltd Tecpak Industries Ltd Astron Plastics Ltd Pacific BBA Plastics (NZ) Ltd Viscount Plastics (NZ) Ltd Stowers Containment Solutions Ltd Sulo NZ Ltd(10) China Guangzhou Viscount Plastics Co., Ltd(5) Langfang Viscount Plastics Co., Ltd(5) Changzhou Viscount Oriental Mould Co., Ltd(5) Closure Systems International (Guangzhou) Co., Ltd(2) (11) CSI Closure Systems (Tianjin) Co., Ltd(2) (11) Graham Packaging (Guangzhou) Co., Ltd(2) (12) (1) All entities are wholly owned unless otherwise stated (2) Entities acquired in the 2018 financial year (see Note 2.1) (3) Owned by Skyson Pty Ltd (4) Owned by Snopak Manufacturing Pty Ltd (5) Owned by Viscount Plastics (China) Pty Ltd (6) Owned by Asia Peak Pte Ltd (7) Owned by Ruffgar Holdings Pty Ltd (8) Owned by Pact Group Industries (Asia) Pty Ltd (9) Owned by Pact Group Industries (ANZ) Pty Ltd (10) Owned by Sulo MGB Australia Pty Ltd (11) Owned by Pact Group Holdings (Hong Kong) Limited (12) Owned by Roots Investment Holding Private Limited Key estimates and judgements — control and significant influence Determining whether Pact can control or exert significant influence over an entity can at times require judgement. It requires management to consider whether Pact is exposed to, or has the rights to, variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. In making such an assessment, a range of factors are considered, including if and only if the Group has: power over the investee (ie. existing rights that give it the current ability to direct the relevant activities of the investee); exposure, or rights, to variable returns from its involvement with the investee; and the ability to use its power over the investee to affect its returns. PAC T 2018 A NNUA L R EP OR T 61 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 2.2 controlled entities (continued) How Pact accounts for controlled entities Controlled entities are fully consolidated when the Group obtains control and cease to be consolidated when control is transferred out of the Group. The Group controls an entity when it: • is exposed, or has the rights, to variable returns from its involvement with the investee; and • has the ability to affect those returns through its power over the entity, for example has the ability to direct the relevant activities of the entity, which could affect the level of profit the entity makes. 2.3 Associates and joint ventures Pact has entered into a number of strategic partnering arrangements with third parties and/or associates and jointly controlled entities. The following are entities that Pact has significant influence or joint control over: Entity $’000 Principal place of operation About Pact’s ownership interest Carrying Value 2018 2017 Changzhou Viscount Oriental Mould Co Ltd (Oriental Mould)(1) Spraypac Products (NZ) Ltd (Spraypac)(1) China New Zealand Weener Plastop Asia Inc (Weener)(1) Philippines Gempack Weener (Gempack)(1) Thailand Weener Plastop Indonesia Inc(2) Is an associate company, which is a manufacturer of moulds, of which a proportion is purchased by the local Chinese subsidiaries of Viscount Plastics (China) Pty Ltd. Is an associate company distributing plastic bottles and related spray products. A joint venture with Weener Plastik GMBH which manufactures plastic jars and bottles for the personal care, food and beverage and home care markets. A joint venture with Weener Plastik GMBH which manufactures plastic jars and bottles for the personal care, food and beverage and home care markets. A joint venture with Weener Plastik GMBH which manufactures closures and roll-on balls for the personal care 40% 202 188 50% 694 861 50% 1,997 2,909 50% 15,552 13,538 Indonesia and home care markets. 50% 1,063 1,005 (1) Ownership interest at 30 June 2018 and 30 June 2017. Summary of associates and joint venture financial information at 30 June $’000 Carrying value of investment Current assets Non-current assets Current liabilities Net assets Carrying amount of the Group’s investment Group’s share of profit for the year Revenue Expense Net profit after tax Group’s share of profit for the year 2018 2017 18,604 27,351 (7,575) 38,380 19,507 34,745 (30,426) 4,319 2,159 15,396 25,942 (5,004) 36,334 18,501 30,666 (26,656) 4,010 2,008 Dividends received from associates and joint ventures during the year was $2.0 million (2017: $2.8 million). The joint ventures and associates had no contingent liabilities or significant capital commitments at 30 June 2018 (2017: nil). 62 Financial Report — Notes to the Financial Statements 2.3 Associates and joint ventures (continued) How Pact accounts for investment in associates and joint ventures and jointly controlled entities An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control over those policies. A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control. The Group uses the equity method to account for its investments in associates and joint ventures, where it considers they have significant influence but they do not have control. Generally significant influence is deemed if Pact has more than 20% of the voting rights. Under the equity method: • Investments in the associates are carried at cost plus post-acquisition changes in the Group’s share of associates’ net assets. • Goodwill relating to an associate is included in the carrying amount of the investment and is not tested for impairment separately. • The Group’s share of its associates’ post-acquisition profits or losses is recognised in the Consolidated Statement of Comprehensive Income, and its share of post-acquisition movements in reserves is recognised in reserves. • When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured long-term receivables and loans, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. After application of the equity method, the Group determines whether it is necessary to recognise any impairment loss with respect to the Group’s net investment in associates. Goodwill included in the carrying amount of the investment in associates is not tested separately, rather the entire carrying amount of the investment is tested for impairment as a single asset. The Group applies AASB 139: Financial Instruments: Recognition and Measurement to determine whether there is an indicator that the Group’s net investment in associates is impaired, after first applying equity accounting in accordance with AASB 128: Investments in Associates. The Group must apply judgement to determine whether there is objective evidence that one or more events have had an impact on the estimated future cash flows of its associates. PAC T 2018 A NNUA L R EP OR T 63 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements Section 3 — Our operating assets This section highlights the primary operating assets used and liabilities incurred to support the Group’s operating activities. Liabilities relating to the Group’s financing activities are disclosed in Note 4.1 Net Debt, Deferred tax assets and liabilities are disclosed in Note 1.2 Taxation and employee benefits provisions are disclosed in Note 5.2 Employee Benefits Expenses and Provisions. 3.1 Working capital Trade and other receivables Trade and other receivables at 30 June comprise of: $’000 Trade receivables(1) Allowance for impairment loss Other receivables(2) Total current trade and other receivables (1) Below is a breakdown of the ageing of trade receivables: Ageing of trade receivables as at 30 June ($’000) 1 8 2 6 6 , 1 6 9 9 4 , 2018 107,951 (605) 54,388 161,734 2017 77,981 (117) 54,871 132,735 1 3 9 6 3 , 1 0 5 1 2 , 4 3 1 3 , 2 6 3 3 , 0 0 0 1 , 0 4 0 3 , Not due < 30 31–60 > 61 Days 2018 2017 Days (2) At 30 June 2018 $32.4 million (2017: $31.2 million) has been recognised as part of other receivables representing the Group’s participation in a securitisation program. The program requires the Group (or an entity other than the bank) to be a participant of the program. Given the short-term nature of this financial asset, the carrying value of the associated receivable approximates its fair value and represents the Group’s maximum exposure to the receivables derecognised as part of the program. At 30 June 2018, trade receivables with an invoice value of $0.6 million (2017: $0.1 million) were impaired and fully provided for. The Group has a number of mechanisms in place which assist in minimising financial losses due to customer non-payment. These include: • all customers who wish to trade on credit terms are subject to strict credit verification procedures, which may include an assessment of their independent credit rating, financial position, past experience and industry reputation; • individual risks limits, which are regularly monitored in-line with set parameters; • monitoring receivable balances on an ongoing basis; and • a debtors securitisation program which allows Pact to sell receivables, at a discount to a third party on a non- recourse basis. The securitisation program has a committed facility limit of $115.0 million (2017: $125.0 million). 64 Financial Report — Notes to the Financial Statements 3.1 Working capital (continued) How Pact accounts for trade and other receivables Pact’s trade receivables are non-interest bearing, are recorded at the amount on the sales invoice and include Goods and Services Tax (GST). Trade receivables generally have 30 day terms from the end of the month. If there is a concern over the collectability of a specific receivable and objective evidence exists, then the amount recorded may be reduced by management’s best estimate of the potential impairment loss. Impairment losses incurred which were specifically provided for in previous years are eliminated against the provision for impairment. In all other cases, impairment losses are written off as an expense in the Consolidated Statement of Comprehensive Income. Under the Group’s debtors securitisation programs: • The Group transfers substantially all the risks and rewards of receivables within the programs to a third party. • Receivables are sold at a discount and at the date of sale the receivable is derecognised and the discount is included as part of the loss on derecognition of financial assets in the Consolidated Statement of Comprehensive Income. The costs associated with establishing the program are also recognised on a pro rata basis within the same account (refer to Note 4.1). • The Group may act as a servicer to the programs to facilitate the collection of receivables. Income received for being a servicer is recorded as an offset to the loss on derecognition of receivables. • At balance date, a liability is recognised if received collections have not been paid to other participants of the programs. Inventories Inventories at 30 June comprise of: $’000 Raw materials and stores Work in progress Finished goods Total inventories 2018 98,886 22,844 89,226 210,956 2017 75,421 18,944 74,541 168,906 How Pact accounts for inventories Inventories are recorded at cost, which for Pact includes: • Raw materials: the invoice price of the product, net of any discount, rebates, duties and taxes, as well as the cost of internal freight. • Work in progress and finished goods: cost of raw materials, direct labour and a proportion of manufacturing overheads based on a normal level of operating capacity, but excluding costs that relate to general administration, finance, marketing, selling and distribution. If the estimated selling price in the ordinary course of business, less estimated cost of completion and making the sale, is less than the cost of the inventory, the carrying value of inventory is reduced to this lower amount. PAC T 2018 A NNUA L R EP OR T 65 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION Financial Report — Notes to the Financial Statements 3.1 Working capital (continued) Trade and other payables Current trade and other payables at 30 June comprise of: $’000 Trade payables Other payables Income tax payable Total current trade and other payables 2018 341,077 77,107 19,075 437,259 2017 294,100 72,471 16,913 383,484 How Pact accounts for trade and other payables Trade and other payables are carried at their principal amounts, are not discounted and include GST. They represent amounts owed for goods and services provided to the Group prior to, but were not paid for, at the end of the financial year. The amounts are generally unsecured and are usually paid within 30 to 90 days of recognition. 3.2 Non-current assets The below outlines the geographical location of Pact’s property, plant and equipment, intangible assets and goodwill. $’000 Australia New Zealand Other Total 2018 851,994 303,205 2017 848,504 304,234 184,407 1,339,606 71,727 1,224,465 66 Financial Report — Notes to the Financial Statements 3.2 Non-current assets (continued) Property, plant and equipment The key movements in property, plant and equipment over the year were: $’000 Estimated useful life Year ended 30 June 2018 At 1 July 2017 net of accumulated depreciation Additions and transfers Acquisition of subsidiaries and businesses Disposals Asset write downs Foreign exchange translation movement Depreciation charge for the year At 30 June 2018 net of accumulated depreciation Represented by: At cost Accumulated depreciation Year ended 30 June 2017 At 1 July 2016 net of accumulated depreciation Additions and transfers Acquisition of subsidiaries and businesses Disposals Asset write downs Foreign exchange translation movement Depreciation charge for the year At 30 June 2017 net of accumulated depreciation Represented by: At cost Accumulated depreciation Property(1) Plant and equipment Capital work in progress Total Freehold: 40–50 years Leasehold: 10–15 years 3–20 years n/a 33,193 — 15,882 (3,376) — 1,371 (3,218) 43,852 517,662 108,067 58,098 (1,602) (1,551) (2,750) (66,023) 611,901 126,277 (28,578) 2,159 — — (198) — 99,660 677,132 79,489 76,139 (4,978) (1,551) (1,577) (69,241) 755,413 79,882 (36,030) 1,325,056 (713,155) 99,660 1,504,598 — (749,185) 38,916 5,506 778 (7,832) — (1,008) (3,167) 33,193 502,689 50,534 23,931 (289) (788) (719) (57,696) 517,662 41,118 84,018 1,259 — — (118) 582,723 140,058 25,968 (8,121) (788) (1,845) — (60,863) 677,132 126,277 52,234 (19,041) 1,035,590 (517,928) 126,277 1,214,101 — (536,969) (1) Property consists of the following: leasehold improvements of $20.6 million (2017: $19.0 million) and accumulated depreciation of $9.9 million (2017: $8.4 million), and freehold property of $59.3 million (2017: $33.2 million) and accumulated depreciation of $26.1 million (2017: $10.6 million). Key estimates and judgements — estimation of useful lives of assets The estimation of the useful lives of assets has been based on historical experience and lease terms. In addition, the condition of the assets is assessed at least once per year and considered against the remaining useful life. Adjustments to useful lives are made when considered necessary. Key estimates and judgements — recoverability of property, plant and equipment The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. These include product and manufacturing performance, technology, social, economic and political environments and future product expectations. If an impairment trigger exists the recoverable amount of the asset is assessed. PAC T 2018 A NNUA L R EP OR T 67 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 3.2 Non-current assets (continued) Property, plant and equipment (continued) How Pact accounts for property plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Cost includes expenditure directly attributable to the acquisition of the item and subsequent costs incurred to replace parts that are eligible for capitalisation. Depreciation is calculated on a straight line basis over the estimated useful life of the assets. Where assets are in the course of construction at the reporting date they are classified as capital works in progress. Upon completion, capital works in progress are reclassified to plant and equipment and are depreciated from this date. The Group assesses at each reporting date whether there is an indication that an asset with a finite life may be impaired. If any such indication exists, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of its fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset generates cash inflows that are largely dependent on those from other assets or groups of assets and the asset’s value in use cannot be estimated to approximate its fair value. In such cases the asset is tested for impairment as part of the CGU to which it belongs. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset or CGU is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses relating to continuing operations are recognised in the Consolidated Statement of Comprehensive Income. An assessment is also made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the recoverable amounts are estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If this is the case the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. 68 Financial Report — Notes to the Financial Statements 3.2 Non-current assets (continued) Goodwill and other intangibles Intangible assets are comprised of the following: $’000 Year ended 30 June 2018 At 1 July 2017 net of accumulated amortisation and impairment Additions Intangible asset arising on acquisition(2) Foreign exchange translation movements Amortisation At 30 June 2018 net of accumulated amortisation and impairment(3) Represented by: At cost Accumulated amortisation and impairment Customer contracts(1) Other intangibles(1) Goodwill Total 25,881 — — — (2,811) 10,395 145 — (4) (693) 511,057 547,333 145 46,392 (6,173) — (3,504) — 46,392 (6,169) 23,070 9,843 551,280 584,193 28,106 (5,036) 12,684 (2,841) 551,280 592,070 — (7,877) (1) Customer contracts are recognised at cost and amortised over 10 years. Other intangibles includes a balance of $1.8m which has an indefinite life and is not amortised, all other intangibles are recognised at cost and amortised over their useful lives. (2) Refer to Note 2.1 for goodwill recognised in the current financial year. A decrease of $4.9 million in goodwill has been recognised during the year in relation to contingent consideration adjustments on prior year acquisitions, and a $3.6m increase in goodwill has been recognised on the finalisation of fair values acquired on prior year acquisitions. (3) There are $nil impairment charges against the goodwill balance at 30 June 2018 (2017: $nil). $’000 Year ended 30 June 2017 Customer contracts(1) Other intangibles (1) Goodwill Total At 1 July 2016 net of accumulated amortisation and impairment Intangible asset arising on acquisition Foreign exchange translation movements Amortisation At 30 June 2017 net of accumulated amortisation and impairment(3) Represented by: At cost Accumulated amortisation and impairment — 28,106 — (2,225) 25,881 2,472 8,544 (9) (612) 10,395 415,472 417,944 95,760 132,410 (184) — (2,837) 511,057 547,333 (175) 28,106 (2,225) 12,554 (2,159) 511,057 551,717 — (4,384) $’000 Goodwill and intangible assets with indefinite lives are allocated to the following group of CGUs and segments(4): Pact Australia Pact International 2018 2017 310,834 242,208 304,460 208,359 (4) This is the lowest level where goodwill is monitored. Key estimates and judgements — impairment of goodwill and other intangibles The recoverable amount of each of the CGUs has been determined based on value in use calculations using cash flow projections contained within next year’s financial budget approved by management and other forward projections up to a period of five years. Management has used its current expectations and what is considered reasonably achievable when assigning values to key assumptions in their value in use calculations. PAC T 2018 A NNUA L R EP OR T 69 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION Financial Report — Notes to the Financial Statements 3.2 Non-current assets (continued) Goodwill and other intangibles (continued) The calculations of value in use (VIU) for both Pact Australia and Pact International CGUs are sensitive to the following assumptions: • Gross margins and raw material price movement — Gross margins are based on average budgeted (next year’s) margins which reflect current gross margins adjusted for any expected (and likely) efficiency improvements or price changes. • Cash Flows — Cash flows beyond the one year period are extrapolated using growth rates which are a combination of volume growth and price growth. Rates are based on published industry research and economic forecasts relating to GDP growth rates. The long-term growth rates are in the range of 2.1%–7.7% (2017: 2.0%–5.6%). • Discount rates — The discount rates for each CGU are calculated using rates based on an external assessment of the Group’s pre-tax weighted average cost of capital in conjunction with risk factors specific to the countries in which the CGUs operate. Foreign currency cash flows are discounted using the functional currency of the CGUs and then translated to Australian dollars using the closing exchange rate. The pre-tax discount rates applied to cash flow projections are in the range of 9.8%–20.5% (2017: 11.8%–19.8%). At 30 June 2018 the recoverable amount of Pact Australia was 1.11 times the carrying amount of $1.08 billion, including non-current assets and net working capital. This CGU is most sensitive to assumptions in relation to GDP growth rates and discount rates. Using external forecasts, the Group expects the Australian long-term growth rate to be 2.2% per annum, and pre- tax VIU cash flows are discounted utilising a 12.0% pre-tax discount rate over the projection period, however these assumptions are uncertain. To illustrate sensitivity to these assumptions, if they were to differ such that the expected growth rates for Pact Australia were to decrease by 0.7% or discount rates were to increase by 1.0%, across the forecast period, without implementation of mitigation plans, the recoverable amount would be equal to the carrying amount. For the prior year, no reasonable possible change in key assumptions used in the determination of recoverable amounts for Pact Australia would have resulted in an impairment. No reasonable possible change in key assumptions used in the determination of recoverable amounts for Pact International would result in an impairment for both the current year and prior year. How Pact accounts for goodwill and intangibles Goodwill is: • initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquired identifiable assets, liabilities and contingent liabilities; • subsequently measured at cost less any accumulated impairment losses; and • reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. Impairment is determined by assessing the recoverable amount of the CGU (or group of CGUs), to which the goodwill relates. When the recoverable amount of the CGU (or group of CGUs) is less than the carrying amount, an impairment loss is recognised. When goodwill forms part of a CGU (or group of CGUs) and an operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed of and the portion of the CGUs retained. Intangible assets with: • finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. • indefinite useful lives are not amortised, but are tested for impairment annually, either individually or at the cash- generating unit level. The assessment of indefinite life is reviewed annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite is made on a prospective basis. 70 Financial Report — Notes to the Financial Statements 3.3 commitments and contingencies Operating leases $’000 Operating lease and rental expense(1) 2018 61,501 2017 51,991 (1) The Group leases buildings and plant and equipment such as office equipment and motor vehicles. The Group has determined that it does not obtain all the significant risks and rewards of the leased property and has thus classified the leases as operating leases. Rental payments are generally fixed, but with inflation escalation clauses. Where the escalation clauses are fixed they are accounted for through the fixed rent provision. Property leases generally provide the Group with a right of renewal at which time terms are renegotiated. There are no restrictions placed upon the lessee by entering into these leases. The future minimum lease payments under non-cancellable operating leases contracted for but not capitalised in the financial statements are payable as follows: $’000 Within one year After one year but not more than five years More than five years Total lease expenditure commitments 59,774 180,773 125,712 366,259 56,184 179,364 151,532 387,080 How Pact accounts for Operating lease commitments Operating lease payments are recognised as an expense in the Consolidated Statement of Comprehensive Income on a straight-line basis over the lease term. Lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments between rental expense and reduction of the liability. Other expenditure commitments Other expenditure commitments contracted for at reporting date, but not provided for are: $’000 Payable within one year Payable after one year but not more than five years Total Contingencies 17,061 16 17,077 11,887 27 11,914 From time to time, the Group may be involved in litigation relating to claims arising out of its operations. The Group is not party to any legal proceedings that are expected, individually or in the aggregate, to have a material adverse effect on its business, financial position or operating results. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to the taxation authority. PAC T 2018 A NNUA L R EP OR T 71 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION Financial Report — Notes to the Financial Statements 3.4 Other provisions Total other provisions at 30 June comprise of: $’000 Current Business restructuring Total current provisions Non-current Fixed rent Make good on leased premises Total non-current provisions Movement in provisions $’000 Year ended 30 June 2018 At 1 July 2017 Acquisition of subsidiaries and businesses Provided for during the year Utilised Transfers Foreign exchange translation movement At 30 June 2018 2018 2017 4,424 4,424 19,233 9,584 28,817 Business restructuring(1) Fixed rent provision(2) Make good on leased premises(3) 3,084 — 8,524 (7,290) 106 — 4,424 16,169 — 3,175 — — (111) 19,233 8,763 170 885 (70) (106) (58) 9,584 3,084 3,084 16,169 8,763 24,932 Total 28,016 170 12,584 (7,360) — (169) 33,241 (1) Business restructuring — The business restructuring programs relate to the optimisation of business facilities across the Group. (2) Fixed rent — Annual rentals for some of the property operating leases increase annually by fixed increments. The provision has been recognised to apportion these increments on a straight line basis over the lease term. (3) Make good on leased premises — In accordance with the form of lease agreements, the Group may be required to restore leased premises to their original condition at the end of the lease term and upon exiting the site. The provision is based on the costs which are expected to be incurred using historical costs as a guide. Key estimates and judgements — business restructuring Business restructuring provisions are only recognised when a detailed plan has been approved and the business restructuring has either commenced or been publicly announced, or contracts relating to the business restructuring have been entered into. Costs related to ongoing activities are not provided for. How Pact accounts for other provisions Provisions are recognised when the following three criteria are met: • • the Group has a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and • a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a financing cost. 72 Financial Report — Notes to the Financial Statements Section 4 — Our capital structure This section details specifics of the Group's capital structure. When managing capital, management’s objective is to ensure that the entity continues as a going concern as well as to provide optimal returns to shareholders and other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital available to the entity. Primary responsibility for identification and control of capital and financial risks rests with the Treasury Risk Management Committee. 4.1 Net debt Debt profile Non- current Pact has the following non-current interest bearing loans and borrowings at 30 June 2018: $’000 Syndicated Facility Agreements(1) Capitalised borrowing costs Total non-current interest bearing loans and borrowings 2018 671,279 (4,026) 667,253 2017 688,500 (2,290) 686,210 (1) The Group has several revolving debt facilities and a working capital facility with total commitments of $1,001.1 million. The facilities are spread across multiple maturities, with the working capital facility revolving with an annual review. The debt facilities include a $378.6 million loan facility maturing in July 2020, a $183.5 million loan facility maturing in January 2023, a $297.6 million loan facility maturing in March 2023 and a $120 million loan facility maturing in November 2024. The Group uses interest rate swaps to manage interest rate risk. (a) Fair values All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. Fair values of the Group’s interest-bearing loans and borrowings are determined by using a discounted cash flow method, applying a discount rate that reflects the issuer’s borrowing rate at the end of the reporting period. As the underlying debt has a floating interest rate (excluding the impact of the separate interest rate swaps), the Group’s own performance risk at 30 June 2018 was assessed to be insignificant. The computation of the fair value of borrowings is derived using significant observable inputs (Fair Value Hierarchy Level 2). The carrying amount and fair value of the Group’s non-current borrowings are as follows: Syndicated Facility Agreements Total borrowings (b) Defaults and breaches 2018 $’000s 2017 $’000s Carrying Value 671,279 671,279 Fair Value 671,279 671,279 Carrying Value 688,500 688,500 Fair Value 688,500 688,500 During the current period, there were no defaults or breaches on any of the loan terms and conditions. Pact has incurred the following finance costs during the year ending 30 June: $’000 Interest expense Capitalised interest Borrowing costs amortisation Amortisation of securitisation program costs Sundry items Total finance costs Loss on de-recognition of financial assets Total finance costs & loss on de-recognition of financial assets 2018 26,152 (110) 1,260 333 1,521 29,156 3,539 32,695 2017 26,403 (1,046) 1,249 461 861 27,928 2,890 30,818 PAC T 2018 A NNUA L R EP OR T 73 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 4.1 Net Debt (continued) How Pact accounts for loans and borrowings All loans and borrowings are: • initially recognised at the fair value of the consideration received less directly attributable transaction costs; • subsequently measured at amortised cost using the effective interest method, which is calculated based on the principal borrowing amount less directly attributable transaction costs; and • are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. Fair value of the Group’s interest-bearing loans and borrowings are determined by using a discounted cash flow method, applying a discount rate that reflects the issuer’s borrowing rate at the end of the reporting period. As the underlying debt has a floating interest rate (excluding the impact of the separate interest rate swaps), the Group’s own performance risk at 30 June 2018 was assessed to be insignificant. The carrying amount of the Group’s current and non-current borrowings materially approximates fair value. The computation of the fair value of borrowings is derived using significant observable inputs (Fair Value Hierarchy Level 2). Finance costs are recognised as an expense when incurred. Finance costs which are directly attributable to the acquisition of, or production of, a qualifying asset are capitalised as part of the cost of that asset using the weighted average cost of borrowings. Reconciliation of net profit after tax to net cash flows from operations $’000 Net profit for the year Non-cash flows in operating profit: Depreciation and amortisation Gain on sale of property, plant and equipment Share of net profit in associates Share based payments expense Other Changes in assets and liabilities: (Increase)/decrease in trade and other receivables Increase in inventory Increase in deferred tax assets Increase in trade and other payables Increase in employee entitlement provisions Increase/(decrease) in other provisions Increase in current tax liabilities Increase in deferred tax liabilities Net cash flow provided by operating activities Non-cash activities 2018 74,488 2017 90,341 72,745 (866) (2,159) 1,225 (1,510) (3,684) (21,892) (196) 22,951 1,698 5,315 1,809 499 150,423 63,700 (1,664) (2,008) 778 140 8,941 (9,625) (508) 8,724 1,897 (1,329) 9,766 2,313 171,466 $’000 Acquisition of assets, liabilities and business via issue of shares Notes 2.1 2018 — 2017 15,000 74 Financial Report — Notes to the Financial Statements 4.1 Net Debt (continued) How Pact accounts for cash and cash equivalents Cash and cash equivalents in the Consolidated Statement of Financial Position comprise cash at bank and on hand and short-term deposits with a maturity of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. For the purposes of the Consolidated Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of bank overdraft balances. Bank overdrafts are included within interest-bearing loans and borrowings in current liabilities on the Consolidated Statement of Financial Position. Cash flows are included in the Consolidated Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. 4.2 contributed equity and reserves Terms, conditions and movements of contributed equity Ordinary shares are classified as equity. 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. Movements in contributed equity Ordinary shares: Beginning of the year Issued during the period(1) Transaction costs taken to equity Tax benefit on transaction costs End of the period (1) Shares issued during the year include: 2018 Number of shares 2017 $’000s Number of shares $’000s 299,234,086 33,249,804 — — 332,483,890 1,517,097 296,760,880 2,473,206 — — 1,690,476 299,234,086 175,559 (2,986) 806 1,502,097 15,000 — — 1,517,097 • On 27 November 2017 28,642,023 shares were issued for $5.28 as part of an institutional offer. On 11 December 2017 a further 4,607,781 shares were issued for $5.28 as part of a retail offer. • Details of the movement in shares issued during the comparative period are disclosed in the 30 June 2017 Pact Group Annual Report. How Pact accounts for contributed equity Issued and paid up capital is classified as contributed equity and recognised at the fair value of the consideration received by the entity. Incremental costs directly attributable to the issue of new shares or options are shown in contributed equity as a deduction, net of tax, from the proceeds. PAC T 2018 A NNUA L R EP OR T 75 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 4.2 contributed equity and reserves (continued) Reserves $’000 Foreign currency translation reserve(1) Cash flow hedge reserve(2) Common control transaction reserve(3) Share based payments reserve(4) Total reserves 2018 22,965 111 (928,385) 2,325 (902,984) 2017 23,043 (1,490) (928,385) 1,100 (905,732) (1) The foreign currency translation reserve is used to record foreign exchange fluctuations arising from the translation of the financial statements of foreign subsidiaries. (2) This reserve records the portion of the gain or loss on a hedging instrument and the related transaction in a cash flow hedge that are determined to be an effective relationship. (3) The common control reserve of $928.4 million includes a balance of $942.0 million that arose through a Group restructure in the financial year ended 30 June 2011, less $13.6 million in relation to the acquisition of Viscount Plastics (China) Pty Ltd and Asia Peak Pte Ltd in the year ended 30 June 2014. (4) The share based payments reserve records items recognised as expenses on the valuation of employee rights issues. 4.3 Managing our financial risks There are a number of financial risks the Group is exposed to that could adversely affect the achievement of future business performance. The Group’s risk management program seeks to mitigate risks and reduce volatility in the Group’s financial performance. Financial risk management is managed centrally by the Treasury Risk Management Committee. The Group’s principal financial risks are: • Interest rate risk; • Foreign currency risk; • Liquidity risk; • Credit risk; and • Commodity price risk. Managing interest rate risk Pact seeks to manage its finance costs by assessing and, where appropriate, utilising a mix of fixed and variable rate debt. When variable debt is utilised it exposes the Group to interest rate risk. What is the risk? Pact has variable How does Pact manage this risk? • Utilises interest rate Impact at 30 June 2018 At 30 June 2018, the Group hedge cover is 37% (2017: 36%) of interest rate debt, swaps to lock in the its long-term variable debt excluding working capital facilities. and therefore if interest rates amount of interest that Pact will be required to increase, the amount pay. Sensitivity analysis performed by the Group showed that a +1 percentage point movement in AUD interest rates would reduce net profit after tax by $1.2 million and increase equity of interest Pact is required to pay would also increase. • Considers alternative by $0.2 million (2017: $1.8 million reduction in net profit after financing and mix of fixed tax and increase equity by $1.0 million). and variable debt, as appropriate. Sensitivity analysis performed by the Group showed that a +1 percentage point movement in NZD interest rates would reduce net profit after tax and equity by $1.3 million (2017: $1.4 million reduction). Sensitivity analysis performed by the Group showed that a +1 percentage point movement in USD interest rates would reduce net profit after tax and equity by $0.6 million (2017: nil). (1) The impact of a +/-1% movement in interest rates was determined based on the Group’s mix of debt, credit standing with finance institutions, the level of debt that is expected to be renewed and economic forecasters’ expectations. 76 Financial Report — Notes to the Financial Statements 4.3 Managing our financial risks (continued) Managing foreign currency risk The Group’s exposure to the risk of changes in foreign exchange rates relates to the Group’s (i) operating activities which are denominated in a different currency from the entities functional currency, (ii) financing activities, and (iii) net investments in foreign subsidiaries. The Group currently operates in 10 countries outside of Australia, with the following functional currencies: Country of New Hong South domicile Functional Zealand Thailand Singapore China Philippines Indonesia Kong Nepal India Korea currency NZD THB USD RMB PHP IDR USD NPR INR KRW As Pact has an Australian dollar (AUD) presentation currency, which is also the functional currency of its Australian entities, this exposes Pact to foreign exchange rate risk. What is the risk? If transactions are How does Pact manage this risk? Utilises forward foreign currency Impact at 30 June 2018 The Group has a significant exposure to the USD denominated in contracts to eliminate or reduce against the AUD and NZD from USD purchase currencies other currency exposures of individual commitments, while the Group’s exposure to sales than the functional transactions once the Group has denominated in currencies other than the functional currency of the entered into a firm commitment for currency of the operating entity is less than 1%. operating entity, a sale or purchase. there is a risk of an unfavourable financial impact to earnings if there is an adverse currency movement. As Pact’s overseas Pact utilises borrowing in the At 30 June 2018, the Group has the majority of its foreign currency committed purchase orders hedged. Sensitivity analysis of the foreign currency net transactional exposures (including hedges) was performed to movements in the Australian dollar against the relevant foreign currencies, with all other variables held constant, taking into account all underlying exposures and related hedges. This analysis showed that a 10% movement in its major trading currencies would not materially impact net profit after tax or equity. Sensitivity analysis performed by management showed entities do not have functional currency of the that a 10% +/- movement in its major translational an Australian dollar overseas entity to naturally hedge currencies as at 30 June 2018 would have the following (AUD) functional offshore entities where considered impact on equity: currency, if currency appropriate. The foreign currency rates move adversely debt provides a balance sheet AUDNZD ($9.0) million to $11.0 million compared to the hedge of the asset, while the AUDCNY ($11.0) million to $14.0 million AUD, then the foreign currency interest cost AUDPHP Immaterial amount of AUD- provides a natural hedge of the AUDUSD Immaterial equivalent profit offshore profit. would decrease and the balance sheet net investment value would decline. Sensitivity analysis performed by management showed that a 10% +/- movement in its major translational currencies during the year, would have the following impact on net profit after tax: AUDNZD ($3.0) million to $4.0 million AUDCNY Immaterial AUDPHP Immaterial AUDUSD Immaterial PAC T 2018 A NNUA L R EP OR T 77 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION Financial Report — Notes to the Financial Statements 4.3 Managing our financial risks (continued) How Pact accounts for foreign currency transactions Transactions in foreign currencies are initially recorded in the functional currency of the individual entity by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange prevailing at reporting date. Non-monetary items that are measured at: • Historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. • Fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. As at the reporting date the assets and liabilities of the controlled entities with non-Australian dollar functional currencies are translated into the presentation currency of Pact at the rate of exchange at the reporting date and their statements of comprehensive income are translated at the weighted average exchange rate for the year (where appropriate). The exchange rate differences arising on the translation to presentation currency are taken directly to the foreign currency translation reserve, in equity. On disposal of a foreign entity, the deferred cumulative amount recognised in equity relating to that particular foreign operation is recognised in the Consolidated Statement of Comprehensive Income. Managing liquidity risk Liquidity risk arises from the financial liabilities of the Group and the Group’s ability to meet its obligations to repay these financial liabilities as and when they fall due. Pact has a range of liabilities at 30 June that will be required to be settled at some future date. What is the risk? The risk that Pact How does Pact manage this risk? • Having access to an Impact at 30 June 2018 The Group is in a net current asset deficiency of $25.1 million cannot meet its adequate amount of at balance date, however it has: obligations to committed credit facilities. • $308.4 million of unused credit within its syndicated repay its financial liabilities as and when they fall due. • Maintains a balance between facilitates; and continuity of funding and • $21.4 million unused overdraft facility. flexibility through the use of bank overdrafts, loans and debtor securitisation. The Directors have assessed that due to the Group’s access to undrawn facilities and forecast positive cash flows into the future they will be able to pay their debts as and when they fall due, and therefore it is appropriate the financial statements are prepared on a going concern basis. 78 Financial Report — Notes to the Financial Statements 4.3 Managing our financial risks (continued) Managing liquidity risk (continued) The maturity profile of the Group’s assets and liabilities based on contractual undiscounted receipt/payments terms is as follows: $’000 Year ended 30 June 2018 Financial assets(1) Cash and cash equivalents Trade and other receivables Foreign exchange forward contracts Interest rate swaps Total inflows Financial liabilities(1) Trade and other payables Foreign exchange forward contracts Interest rate swaps Syndicated Facility Agreement(2) Total outflows Net outflow Year ended 30 June 2017 Financial assets(1) Cash and cash equivalents Trade and other receivables Foreign exchange forward contracts Interest rate swaps Total inflows Financial liabilities(1) Trade and other payables Foreign exchange forward contracts Interest rate swaps Syndicated Facility Agreement(2) Total outflows Net outflow ≤ 6 months 6–12 months 1–5 years > 5 years Total 67,980 161,734 84,439 — 314,153 (418,184) (81,824) (266) (12,132) (512,406) (198,253) 39,592 132,735 72,414 — 244,741 (351,592) (74,250) (1,068) (11,232) (438,142) (193,401) — — 1,597 — 1,597 — 2,570 — — 2,570 — — — — — 67,980 164,304 86,036 — 318,320 — (17,594) — (176) (610,055) (627,825) (625,255) (1,608) (198) (11,934) (13,740) (12,143) — (435,778) (83,432) — (640) — (758,649) (124,528) (1,278,499) (124,528) (960,179) (124,528) — — 5,348 — 5,348 — 1,798 — 18 1,816 (14,979) (5,512) (452) (11,049) (31,992) (26,644) (18,694) — (53) (713,659) (732,406) (730,590) — — — — — 39,592 134,533 77,762 18 251,905 — (385,265) (79,762) — (1,573) — — (735,940) — (1,202,540) — (950,635) (1) The Group’s principal financial instruments comprise cash, receivables, payables, bank loans, bank overdrafts and derivative instruments. (2) When the Group is committed to make amounts available in instalments, each instalment is allocated to the earliest period in which the Group is required to pay. The following table represents the changes in financial liabilities arising from financing activities: $’000 Non-current interest-bearing loans and borrowings Issue of shares Total liabilities from financing activities 1 July 2017 (688,500) — (688,500) Cash flows 13,200 (172,573) (159,373) Foreign exchange movement 4,021 30 June 2018 (671,279) — (172,573) (843,852) 4,021 PAC T 2018 A NNUA L R EP OR T 79 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 4.3 Managing our financial risks (continued) Managing credit risk Credit risk represents the loss that would be recognised if counterparties failed to meet their obligations under a contract or arrangement. The Group is exposed to credit risk arising from its operating activities (primarily from customer receivables) and financing activities. The Group manages this risk through the following measures: • Operating activities: The Group has in place a number of mechanisms to manage its exposure to customer credit risk, discussed in Note 3.1, including debtors' securitisation programs where substantially all the risks and rewards of the receivables within the program are transferred to a third party. • Financial activities: Restricting dealings to counterparties with high credit ratings and limiting concentration of credit risk. The maximum exposure to credit risk by class of recognised financial assets at the end of the reporting period is equivalent to the carrying amount as presented in the Consolidated Statement of Financial Position. Commodity price risk The Group is exposed to changes in the price of raw materials and other input costs, including energy. In managing this risk the Group seeks to pass on price risk contractually through pricing adjustments. This can be subject to timing differences. In periods of significant price volatility the Group may not adequately recover input cost movements through pricing. The Group manages this risk through improving efficiency and reducing consumption of both raw materials and energy through the use of recycled materials, new technologies and automation. Utilising hedging contracts to manage risk As discussed above, the Group utilises interest rate swaps and foreign exchange forward contracts to hedge its risks associated with interest rate and foreign currency fluctuations. All of Pact’s hedging instruments are designated in cash flow hedging relationships, providing increased certainty over future cash flows associated with foreign currency purchases or interest payments on variable interest rate debt facilities. 80 Financial Report — Notes to the Financial Statements 4.3 Managing our financial risks (continued) How Pact accounts for derivative financial instruments in a cash flow hedge relationship At the inception of a hedge relationship, the Group formally designates and documents the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes: • • • identification of the hedging instrument; the hedged item or transaction; and the nature of the risk being hedged; and how the entity will assess the hedging instrument’s effectiveness in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they have actually been highly effective throughout the financial reporting period for which they were designated. Derivative financial instruments are: • Recorded at fair value at inception and every subsequent reporting date. • Classified as assets when their fair value is positive and as liabilities when their fair value is negative. The fair value of: • Forward currency contracts is calculated by using valuation techniques such as present value techniques, comparison to similar instruments for which market observable prices exist and other relevant models used by market participants. These valuation techniques use both observable and unobservable market inputs, which are not considered to be significant (Fair value hierarchy level 2). • Cross currency interest rate swaps and interest rate swap contracts is determined by reference to market values for similar instruments. The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while the ineffective portion is recognised in the Consolidated Statement of Comprehensive Income. Amounts taken to equity are transferred to the Consolidated Statement of Comprehensive Income when the hedge transaction affects the Consolidated Statement of Comprehensive Income, such as when hedged income or expenses are recognised or when a forecast sale or purchase occurs. When the hedged item is the cost of a non-financial asset or liability, the amounts taken to equity are transferred to the initial carrying amount of the non-financial asset or liability. If the forecast transaction is no longer expected to occur, amounts previously recognised in equity are transferred to the Consolidated Statement of Comprehensive Income. If the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, or if its designation as a hedge is revoked, amounts previously recognised in equity remain in equity until the forecast transaction occurs. If the related transaction to which the hedging instrument relates is not expected to occur, the amount is taken to the Consolidated Statement of Comprehensive Income. PAC T 2018 A NNUA L R EP OR T 81 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements Section 5 — Remunerating our people This section provides financial insight into employee reward and recognition designed to attract, retain, reward and motivate high performing individuals so as to achieve the objectives of the company, in alignment with the interests of the Group and its shareholders. This section should be read in conjunction with the Remuneration Report, contained within the Directors Report, which provides specific details on the setting of remuneration for Key Management Personnel. 5.1 Defined Benefit Plans The Group has Defined Benefit Plans in the following four entities: • Closure Systems International India Pvt Ltd (CSI India) • Closure Systems International Philippines Inc (CSI Philippines) • Closure Systems International Korea Ltd (CSI Korea) • Plastop Asia Inc (Plastop Asia) Under the Group’s Defined Benefit Plans, the amount of pension benefit that an employee will receive on retirement is defined by reference to the employee’s length of service and final salary. The legal obligation for any benefits remains with the Group, even if plan assets for funding the Defined Benefit Plan have been set aside. Plan assets may include assets specifically designated to a long-term benefit fund as well as qualifying insurance policies. The liability recognised in the statement of financial position for Defined Benefit Plans is the present value of the Defined Benefit Obligation (DBO) at the reporting date less the fair value of plan assets. Management uses independent actuaries to estimate the DBO annually. Estimates reflect standard rates of inflation, salary growth and mortality in those countries. Re-measurement gains and losses arising from experience adjustments and changes in actuarial assumptions are recognised directly in other comprehensive income. They are included as a separate component of equity in the Statement of Financial Position and in the Statement of Changes in Equity. Net interest expense on the net defined benefit liability is included in finance costs. Measurement assumptions The principal assumptions used in the valuation are shown in the table below Discount rate Salary increase rate India 2018 CSI India 7.75% 12.00% CSI Philippines 7.98% 6.50% CSI Korea 3.51% 5.00% Plastop Asia 7.79% 5.00% The discount rate assumption is based upon the market yields available on Government bonds at the accounting date with a term that matches that of the liabilities. The salary rate assumption takes into account the inflation seniority, promotion and other relevant factors. Philippines The discount rate assumption is based on the theoretical spot yield curve calculated from the Philippine Dealing Exchange market yields by stripping the coupons from government bonds to create virtual zero coupon bonds at the valuation date. The salary rate assumption is based on the actual salary increment during the financial year. 82 Financial Report — Notes to the Financial Statements 5.1 Defined Benefit Plan (continued) Korea The discount rate assumption is based on yields available on high quality AA- corporate bonds of suitable duration at the valuation date. The salary rate assumption is based on long-term expectations of salary increases for the employees within the plan. Plastop Asia The discount rate assumption represents the single weighted average discount rate based on Philippine Dealing Exchange rates at various tenors on valuation date. The salary rate assumption is based on expected long-term average rate of salary increase for the employees within the plan. Movement in net defined benefit liability/(asset) The following table show a reconciliation of the movement in the net defined benefit liability/(asset) and its components: $’000 Present value of the defined benefit obligation At 1 July 2017 Acquisition of subsidiaries Current service cost Net interest cost Actuarial (gains)/ losses: Changes in financial assumptions Changes in experience assumptions Benefits paid Employer contributions Foreign exchange translation movements Present value of Defined Benefit obligation at end of the year Total 89 971 92 16 (126) 1 (70) (5) 68 1,036 The following table shows a reconciliation of the DBO and the fair value of plan assets that comprises the net defined benefit liability/(asset): $’000 Defined Benefit Obligation Fair Value of plan assets Present value of net defined benefit obligation at end of the year Total 1,653 (617) 1,036 Sensitivity analysis The present value of the DBO is based on the assumptions detailed on page 82. Changes at the reporting date to one of the assumptions, holding other assumptions constant, would have affected the DBO by the amounts shown below: $’000 Discount rate Salary increase rate Increase by 1 percentage point Reduction by 1 percentage point Increase by 1 percentage point Reduction by 1 percentage point Total (145) 169 159 (141) PAC T 2018 A NNUA L R EP OR T 83 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION Financial Report — Notes to the Financial Statements 5.1 Defined Benefit Plans (continued) Key estimate and judgements — actuarial assessments In accordance with AASB 119 (Employee Benefits), Defined Benefit Obligations are recognised to cover obligations arising from current and future pension entitlements of active and (after the vesting period has expired) former employees of the Group. For each geographic location, the discount rate used to calculate the Defined Benefit Obligations at each reporting date is determined on the basis of current capital market data and long-term assumptions of future salary increases. These assumptions vary depending on the economic conditions affecting the currency in which benefit obligations are denominated and in which fund assets are invested, as well as capital market expectations. Benefit Obligations are calculated on the basis of current biometric probabilities as determined in accordance with actuarial principles. The calculations also include assumptions about future employee turnover based on employee age and years of service, probability of retirement and mortality rate. 5.2 Employee benefits expenses and provisions The Group’s employee benefits expenses for the year ended 30 June were as follows: $’000 Wages and salaries Defined contribution superannuation expense Other employee benefits expense Share based payments expense Total employee benefits expense The current employee benefits provisions as at 30 June comprise of the following: Annual leave Long service leave Total current provisions 2018 367,699 19,439 21,655 1,225 410,018 2017 324,080 17,412 22,107 778 364,377 20,602 16,330 36,932 19,149 16,438 35,587 The Group’s non-current employee benefits provisions of $7.5 million relate to long service leave entitlements of $6.5 million (2017: $6.4 million), and a Defined Benefit net liability of $1.0 million (2017: nil) How Pact accounts for employee benefits Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leave and long service leave. Benefits expected to be settled within 12 months of the reporting date are classified as current and are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. The liability for long service leave is recognised and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Under this method consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds (except for Australia where high quality corporate bond rates are used in accordance with the standards) with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows. 84 Financial Report — Notes to the Financial Statements 5.3 Share based payments Long-term Incentive Plan (LTIP) A LTIP was introduced in 2016 as a component of the CEO’s remuneration. The CEO is entitled to Performance Rights equal to 100% of annual base salary with a vesting period of three years. In the current financial year the LTIP was extended to select senior executives of the Company. Performance rights issued to these executives have performance hurdles and vesting conditions consistent with those of the CEO. Under the 2018 LTIP scheme 228,705 Performance Rights were granted to the CEO (approved by resolution at the Annual General Meeting on 15 November 2017), and 276,941 Performance Rights were granted to senior executives. These rights were independently valued to establish the fair value in accordance with AASB 2: Share Based Payments. The fair value of each right at the valuation date of 15 November 2017 is $2.65. A total share based payment expense for the Company of $892,000 (2017: $445,000) has been recognised in the current period in relation to the 2016–2018 LTIP schemes. The key assumptions in the independent valuation in relation to 2018 LTIP were as follows: Share price at valuation date Annualised volatility Annual dividend yield Risk free rate Expected life of performance right Model used Initial share grant $5.81 25.0% 4.5% 1.9% 36 months Monte Carlo Simulation Model The share based payments expense in relation to the initial share grant recognised in the current year was $334,000 (2017: $333,000), refer to page 44 of the 2018 Directors' Report. 5.4 Key management personnel Compensation of key management personnel (KMP) of the Group The amounts disclosed in the table below are the amounts recognised as an expense during the year relating to KMP: $’000 Short-term employee benefits Post-employment benefits Share based payments expense Total compensation 2018 2,417 72 1,010 3,499 2017 2,351 96 778 3,225 PAC T 2018 A NNUA L R EP OR T 85 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 5.4 Key management personnel (continued) The following table provides the total amount of transactions with related parties for the year ended 30 June 2018: $’000 Related parties — Directors' interests(1) Sales to related parties 11,469 11,061 Purchases from related parties 18,408 19,274 2018 2017 Other (income)/ expense with related parties (138) 547 Amounts (owed to)/ receivable from related parties 2,573 766 (1) Related parties — Director’s interests includes the following entities: P’Auer Pty Ltd, Pro-Pac Packaging Limited, Centralbridge Pty Ltd (as trustee for the Centralbridge Unit Trust), Centralbridge Two Pty Ltd, Centralbridge (NZ) Limited, Albury Property Holdings Pty Ltd, Green’s General Foods Pty Ltd and Remedy Kombucha Pty Ltd. P’Auer Pty Ltd (P’Auer) P’Auer, an entity controlled by Mr Raphael Geminder (the Non-Executive Chairman of Pact), has a supply agreement to provide label products to Pact. Pact has a Transitional Services and Support Agreement with P’Auer to provide support services. Agreements are on arm’s length terms. In addition, P’Auer provides Pact with periodic warehousing services. Pro-Pac Packaging Limited (Pro-Pac) Pro-Pac, an entity for which Mr Raphael Geminder owns 40% (June 2017 49%), is an exclusive supplier of certain raw materials such as flexible film packaging, flexible plastic bags and tapes to Pact. The agreement was extended in early 2017 through to 31 December 2021. Total value under this arrangement is approximately $4.3 million (2017: $4.5 million). The supply arrangement is at arm’s length terms. Terms and conditions of property leases with related parties The Group leased 13 properties (10 in Australia and 3 in New Zealand) from Centralbridge Pty Ltd (as trustee for the Centralbridge Unit Trust), Centralbridge Two Pty Ltd, Centralbridge (NZ) Limited and Albury Property Holdings Pty Ltd (“Centralbridge Entities”), which are each controlled by entities associated with Mr Raphael Geminder and are therefore related parties of the Group (“Centralbridge Leases”). The aggregate annual rent payable by Pact under the Centralbridge Leases for the year ended 30 June 2018 was $6.1 million (2017: $6.7 million). The rent payable under these leases was determined based on independent valuations and market conditions at the time the leases were entered into. Of the Centralbridge Leases in Australia: • six of the leases contain early termination rights in favour of the landlord to terminate the lease at the expiry of the ninth term; • two of the leases contain early termination rights in favour of the landlord to terminate the lease at the expiry of the eighth term; and • two of the leases do not contain standard default provisions which give the landlord the right to terminate the lease in the event of default. Except as set out above, the Centralbridge Leases in Australia are on arm’s length terms. The Centralbridge Leases in New Zealand, contain early termination rights in favour of the landlord to terminate the lease at the expiry of the ninth term. With the exception of the early termination rights, the Centralbridge Leases in New Zealand are on arm’s length terms. Terms and conditions of transactions with related parties The purchases from and sales to related parties are made on terms equivalent to those that prevail in arm’s length transactions, except as detailed above. Outstanding balances at the end of the year are unsecured and interest free and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables or payables. For the year ended 30 June 2018, the Group has not recorded any impairment of receivables relating to amounts owed by related parties (2017: nil). 86 Financial Report — Notes to the Financial Statements Section 6 — Other disclosures This section includes additional financial information that is required by the accounting standards and the Corporations Act 2001. 6.1 basis of preparation Basis of preparation and compliance This Financial Report: • Comprises the financial statements of Pact Group Holdings Ltd, being the ultimate parent entity, and its controlled entities as specified in Note 2.2. • Is a general purpose Financial Report. • Has been prepared in accordance and complies with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. • Complies with International Financial Reporting Standards (IFRS) and Interpretations as issued by the International Accounting Standards Board. • Has been prepared on a historical cost basis except for derivative financial instruments, which are measured at fair value. • Has revenues, expenses and assets recognised net of GST except where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case GST is recognised as part of the acquisition of the asset or as part of the expense item to which it relates. The net amount of GST recoverable from or payable to the taxation authority is included as part of receivables or payables in the Consolidated Statement of Financial Position. • Has research and development costs of $430,000 (2017: $345,000). • Is presented in Australian dollars with all values rounded to the nearest $1,000, unless otherwise stated, in accordance with the ASIC Corporations (rounding in Financial/Directors' Reports) Instrument 2016/191 dated 1 April 2016. • Has all intercompany balances, transactions, income and expenses and profit and losses resulting from intra- group transactions eliminated in full. The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. New accounting standards and interpretations There were no standards that were adopted during the year ended 30 June 2018 that have had a material impact on the Group. The Group applied for the first time an amendment to AABS 107: Statement of Cash Flows. The amendment requires the Group to provide a disclosure of changes in their liabilities arising from financing activities, including both changes arising from cash flows and non-cash changes. The Group has provided this information for the current year in Note 4.3 on page 79. PAC T 2018 A NNUA L R EP OR T 87 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 6.1 basis of preparation and compliance (continued) There are a number of Australian Standards and Interpretations that have been issued but are not yet effective and have not been adopted by the Group at 30 June 2018. The following has been identified as those which may impact the Group in the period of initial application: New standards, interpretations or amendments AASB 15: Revenue from Contracts with Customers (will replace AASB 118: Revenue and AASB 111: Construction Contracts) Pact financial year that it is effective if not early adopted Commencing 1 July 2018 During the current year a detailed review of AASB 15 and Impact on Pact financial results customer contracts was undertaken by the Group’s internal project team and revenue subject matter specialists. One of the most significant changes identified to date in the way revenue is recognised will be for products manufactured for customers that are branded goods and with no alternative use. Under AASB 15, revenue is expected to be recognised earlier as the over-time revenue recognition model will apply. Under current guidance, the Group currently recognises revenue when the established criteria of revenue recognition have been met, generally upon shipment or delivery of goods. Under the new guidance, revenue for products that follow an over-time revenue recognition model will be recognised prior to delivery dependent upon contract-specific terms. The full financial impact of AASB 15 will be presented in the financial statements for the six months ended 31 December 2018. The Group will adopt the standard on a modified retrospective basis effective from 1 July 2018. AASB 16: Leases Commencing 1 July 2019 During the year, the Group established an internal project team supported by external subject matter specialists to undertake a high-level impact assessment of AASB 16. The Group is currently reviewing the findings. A decision whether to apply the standard using either a full retrospective or a modified retrospective approach and the implementation changes to processes, systems and controls will be considered during the year ended 30 June 2019. The AASB16 standard sets out the principles for the recognition, measurement, presentation and disclosures of leases and requires lessees to account for all leases under a single on-balance sheet model similar to accounting for finance leases under AASB17. It will require a lessee to recognise a liability to make the payments (ie. the lease liability) and an asset representing the right to use the underlying asset during the lease term (i₧e. the right-of-use asset). Lessees will be required to separately recognise the interest expense on the lease liability and the depreciation expense on the right-of-use asset. The principle component of lease payments will be reclassified in the Statement of Cash Flows from operating to financing activities. 88 Financial Report — Notes to the Financial Statements 6.1 basis of preparation and compliance (continued) New standards, interpretations or amendments AASB 9: Financial Instruments Pact financial year that it is effective if not early adopted Commencing 1 July 2018 AASB 9 replaces AASB 139: Financial Instruments: Recognition Impact on Pact financial results and Measurement, and simplifies the classification and measurement of financial instruments, introduces a new expected credit loss model for calculating the impairment of financial assets, and aligns hedge accounting more closely with an entity’s risk management practices. The adoption of AASB 9 will not have a material impact on the financial statements of the Group. The impacts from the adoption of AASB 9 will result in the following changes in the Group’s accounting and reporting: • The calculation of the discount arising on sale of trade and other receivables (securitisation) will be brought forward to balance date. The treatment will continue to be recognised through profit and loss. • Hedge effectiveness testing will now be performed on a prospective basis with no defined numerical range of effectiveness applied in this testing. • For the Group’s financial liabilities that are measured at fair value through profit or loss (FVTPL), the element of gains or losses attributable to changes in the Group’s own credit risk will now be recognised in other comprehensive income (OCI) instead of profit or loss. Comparatives Comparative figures can be adjusted to conform to changes in presentation for the current financial year where required by accounting standards or as a result of changes in accounting policy. Where necessary, comparatives have been reclassified and repositioned for consistency with current year disclosure. No material reclassifications have been made to prior year disclosures. PAC T 2018 A NNUA L R EP OR T 89 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 6.2 Other gains/(losses) The amounts disclosed in the table below are the amounts recognised in the Statement of Comprehensive Income: $’000 Significant items Acquisition costs Deferred settlement costs (earnout) New business start-up costs Business restructuring programs • restructuring costs • asset write downs Business restructuring programs total Total significant items before tax Other gains/(losses) Unrealised (losses)/gains on revaluation of foreign exchange forward contracts Gain on sale of property, plant and equipment Realised net foreign exchange gains/(losses) Total other gains Total losses before tax 6.3 Pact Group Holdings Ltd — Parent Entity Financial Statements Summary $’000 Current assets Total assets Net assets Issued capital Reserves Retained earnings Profit reserve Total equity Profit of the parent entity Total comprehensive income of the parent entity 2018 2017 (4,411) (8,781) — (8,524) (1,589) (10,113) (23,305) (81) 866 116 901 (22,404) (2,206) — (3,335) (6,711) (788) (7,499) (13,040) 3 1,664 (151) 1,516 (11,524) 2018 367,809 2017 162,307 1,653,344 1,377,543 1,653,344 1,377,543 1,510,477 1,337,098 1,100 64 39,281 1,653,344 1,377,543 70,317 70,317 2,325 64 140,478 173,845 173,845 The above is a summary of the individual financial statements for Pact Group Holdings Ltd at 30 June. Pact Group Holdings Ltd: • • • is the ultimate parent of the Group; is a for-profit company limited by shares; is incorporated and domiciled in Australia; • has its registered office at Level 1, Building 6, 650 Church Street, Richmond, Victoria, Australia; and • is listed on the Australian Stock Exchange (ASX) and its shares are publicly traded. How Pact accounted for information within parent entity financial statements The financial information for the Company has been prepared on the same basis as the consolidated financial statements, except as set out below: • Investments in subsidiaries are accounted for at cost in the financial statements of Pact Group Holdings Ltd. 90 Financial Report — Notes to the Financial Statements 6.4 Auditors remuneration During the year, the following fees were paid or payable for services provided by Pact Group Holdings Ltd’s external auditors Ernst & Young: $’000 Ernst & Young Audit and assurance services Audit and review of financial statements Other assurance related services Total remuneration for audit and other assurance services Other services Tax compliance services and reviewing of company income tax returns Tax consulting services and advice Total remuneration for other services Total auditor’s remuneration of Ernst & Young 6.5 Deed of cross Guarantee $’000 Closed group consolidated income statement Profit before income tax Income tax expense Net profit for the year Retained earnings at beginning of the year Net profit for the year Dividends provided for or paid Retained earnings at end of the year 2018 2017 1,614 302 1,916 140 216 356 2,272 1,267 573 1,840 136 402 538 2,378 2018 2017 57,964 (20,252) 37,712 60,797 37,712 (36,856) 61,653 63,529 (17,427) 46,102 34,920 46,102 (20,225) 60,797 PAC T 2018 A NNUA L R EP OR T 91 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFinancial Report — Notes to the Financial Statements 6.5 Deed of cross Guarantee (continued) $’000 Closed group consolidated balance sheet Current assets Cash and cash equivalents Trade and other receivables Inventories Loans to related parties Other financial assets Prepayments Total current assets Non-current assets Trade and other receivables Property, plant and equipment Investments in subsidiaries Investments in associates Intangible assets and goodwill Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Loans from related parties Current tax liabilities Provisions Other current financial liabilities Total current liabilities Non-current liabilities Trade and other payables Provisions Interest bearing loans and borrowings Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total equity 2018 2017 25,829 88,894 147,691 80,539 2,684 15,592 361,229 19,728 85,676 134,279 78,671 156 12,073 330,583 1,319 511,852 569,658 17,581 340,143 31,831 1,798 509,830 363,322 16,700 338,673 27,637 1,472,384 1,257,960 1,833,613 1,588,543 279,392 80,311 9,655 32,871 695 402,924 17,593 34,174 473,374 54,368 579,509 982,433 851,180 261,887 77,010 12,668 31,587 3,576 386,728 18,694 29,288 498,000 49,999 595,981 982,709 605,834 1,760,773 1,517,097 (972,060) (971,246) 60,797 61,653 605,834 851,180 Pact has a number of Australian entities that are party to a Deed of Cross Guarantee (Deed), representing the ‘Closed Group’, entered into in accordance with ASIC Class Order 98/1418. This Deed grants these entities relief from preparing and lodging audited financial statements under the Corporations Act 2001. The Closed Group is in a net current asset deficiency at balance date, however the Directors have assessed that due to the Group’s access to undrawn facilities and forecast positive cash flows into the future they will be able to pay their debts as and when they fall due (refer to Note 4.3 Managing our liquidity risks). 92 Financial Report — Notes to the Financial Statements 6.6 Segment assets and segment liabilities Segment assets $’000 Pact Australia Pact International Total segment assets Segment liabilities $’000 Pact Australia Pact International Total segment liabilities 2018 2017 1,175,138 1,140,472 489,918 1,850,587 1,630,390 675,449 2018 924,907 342,480 2017 926,877 298,405 1,267,387 1,225,282 6.7 Revenue from services rendered Revenue from services rendered of $70.3 million was recognised for the year ended 30 June 2018 (2017 $30.7 million), which is included in Group sales of $1,674.2 million for the year ended 30 June 2018 (2017 $1,475.3 million). 6.8 Geographic sales Australia is Pact’s largest sales region with $1,279.9 million sales made to Australian based customers during the year ended 30 June 2018 (2017: $1,117.8 million). Pact’s second largest region is New Zealand, with $285.3 million sales made to New Zealand based customers during the year ended 30 June 2018 (2017: $286.0 million). Pact’s other remaining region is Asia with $109.0 million sales made to Asian based customers during the year ended 30 June 2018 (2017: $71.5 million). 6.9 Subsequent events On 15 August 2018 the Group announced it had entered into an agreement to acquire TIC Retail Accessories Pty Ltd (TIC), a division of the TIC group of companies, for $122.5 million. TIC is a closed loop plastic garment hanger and accessories re-use business. In addition, the agreement contains provisions for earn-out payments of up to $30 million, payable on the delivery of specific financial hurdles for the 2019 and 2020 financial years. Completion is expected to occur on 1 October 2018, subject to customary conditions. Other than the matter mentioned above, in the opinion of the Directors, there have been no other material matters or circumstances which have arisen between 30 June 2018 and the date of this report that have significantly affected or may significantly affect the operations of the Group, the results of those operations and the state of affairs of the Group in subsequent financial periods. PAC T 2018 A NNUA L R EP OR T 93 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONDirectors’ Declaration In the Directors’ opinion: 1. The consolidated financial statements and notes, and the Remuneration Report included in the Directors’ report are in accordance with the Corporations Act 2001 including: (a) giving a true and fair view of the Group’s financial position as at 30 June 2018 and of its performance for the year ended on that date; (b) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (c) complying with International Financial Reporting Standards as disclosed in Note 6.1; 2. There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and 3. As at the date of this Declaration, there are reasonable grounds to believe that the members of the Closed Group identified in Note 6.5 will be able to meet any obligations or liabilities to which they are or may become subject by virtue of the Deed of Cross Guarantee described in Note 6.5. This Declaration has been made after receiving the declarations required to be made to the Directors by the Chief Executive Officer and Chief Financial Officer in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2018. This Declaration is made in accordance with a resolution of the Directors. Raphael Geminder Chairman Malcolm Bundey Managing Director and Chief Executive Officer Dated 15 August 2018 94 PAC T 2018 A NNUA L R EP OR T 95 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION96 PAC T 2018 A NNUA L R EP OR T 97 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION98 PAC T 2018 A NNUA L R EP OR T 99 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION100 R E D L O H E R A H S N O I T A M R O F N I PAC T 2018 A NNUA L R EP OR T 101 PAC T 2018 A NNUA L R EP OR T 101 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATION SHAREHOLDER INFORMATION The shareholder information set out below is based on the information in the Pact Group Holdings Ltd share register as at 10 September 2018. Ordinary shares Pact has on issue 332,483,890 fully paid ordinary shares. Voting rights The voting rights attaching to the only class of equity securities, being fully paid ordinary shares, are on a show of hands every member present at a meeting in person or by proxy, attorney or representative has one vote and on a poll has one vote for each fully paid ordinary share held. Substantial shareholders The following is a summary of the current substantial shareholders in the Company pursuant to notices lodged with the ASX in accordance with section 671B of the Corporations Act as at 10 September 2018: Name Kin Group Pty Ltd Investors Mutual Ltd Ubiqe Asset Management Pty Ltd Date of interest 17/12/13 29/02/16 28/08/18 Number of ordinary shares 128,032,358 31,413,888 17,666,421 % of issued capital 38.51 9.45 5.31 On market buy-back There is no current on-market buy-back in respect of the Company’s ordinary shares. Distribution of securities held Analysis of number of ordinary shareholders by size of holding. Range 1-1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Ordinary Shares Number of holders Number of securities 1,524,733 9,171,677 5,495,239 12,178,357 304,113,884 332,483,890 2,943 3,609 751 535 42 7880 There were 281 holders of less than a marketable parcel of ordinary shares (minimum of $500 which is equivalent to 132 ordinary shares based on a market price of $3.81 at the close of trading on 10 September, 2018). 102 Top 20 largest shareholders The names of the 20 largest quoted equity security holders as they appear on the Pact Group Holdings Ltd share register are listed below: Name Kin Group Pty Ltd HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Limited National Nominees Limited Citicorp Nominees Pty Limited Citicorp Nominees Pty Limited Argo investments limited Salvage pty ltd Custodial Services Limited S&J Capital Pty Limited HSBC Custody Nominees (Australia) Limited MR Russell Stanley Barber Sandhurst Trustees Ltd Gaja Consolidated PTY LTD BNP Paribas Noms (NZ) Ltd BNP Paribas Noms Pty Ltd BNP Paribas Nominees Pty Ltd BKI Investment Company Limited Perpetual Corporate Nominees Pty Ltd Australian Executor Trustees Limited Total: Top 20 holders of fully paid ordinary shares (Total) Total Remaining Holders Balance Ordinary Shares Number of shares % of total shares 38.51 24.09 10.06 5.01 4.56 1.11 1.10 1.09 0.62 0.46 0.46 0.44 0.43 0.38 0.36 0.32 0.26 0.26 0.25 0.19 89.96 10.04 128,032,358 80,110,342 33,456,877 16,665,982 15,149,964 3,690,570 3,672,314 3,635,929 2,048,675 1,514,339 1,513,245 1,476,520 1,439,000 1,250,482 1,193,729 1,051,985 878,713 867,000 847,073 623,121 299,118,218 33,365,672 Unquoted equity securities There are no unquoted equity securities on issue. Restricted equity securities There are no restricted equity securities in the Company. However, there are 1,236,603 ordinary shares which are subject to voluntary escrow. The 1,236,603 shares will cease to be subject to voluntary escrow on 16 September 2018. Manage your shareholding online To view and update your details online and access all your holdings and other valuable information, visit the Computershare Investor Centre www.investorcentre.com. PAC T 2018 A NNUA L R EP OR T 103 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONFY18 SHAREHOLDER cALENDAR Event Half-year results announcement Ex-dividend Record date Dividend payment Full year results announcement Ex-dividend Record date Dividend payment Annual General Meeting All dates may be subject to change. Dates 20 February 2019 28 February 2019 1 March 2019 4 April 2019 14 August 2019 21 August 2019 22 August 2019 3 October 2019 20 November 2019 104 cORPORATE DIREcTORY Registered and Principal Administrative office in Australia Pact Group Holdings Limited Level 1, Building 6, 650 Church Street Richmond, Victoria 3121, Australia Telephone: + 61 3 8825 4100 ABN: 55 145 989 644 Website Address www.pactgroup.com.au Australian Securities Exchange (ASX) Listing Pact Group Holdings Ltd shares are listed on the ASX under the code PGH. Directors Refer to profiles on pages 31–33. General counsel, company Secretary & Head of corporate Development Jonathon West Auditor Ernst & Young 8 Exhibition Street Melbourne, Victoria 3000, Australia Share Registry Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford, Victoria 3067, Australia Telephone within Australia: 1300 850 505 Telephone outside of Australia: +61 3 9415 5000 Fax: +61 3 9473 2500 PAC T 2018 A NNUA L R EP OR T 105 OVERVIEWPERFORMANCEGOVERNANCEFINANCIAL REPORTSSHAREHOLDER INFORMATIONwww.pactgroup.com.au 6/650 Church Street, Richmond VIC 3121 Australia Telephone +61 3 8825 4100 106 

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